Partial Barron's Vodafone Excerpt
...Notwithstanding Friday's strong rally, probably one of the most difficult decisions investors face these days is the valuation of European telecom stocks.
On the one hand, these companies face the tremendous costs of the new third generation, or 3G, licenses in Europe. The $80 billion or so already pledged for 11 licenses in the U.K. and Germany makes up the biggest share, but when all is said and done the European total will be far higher. Then, the infrastructure costs will add around $5 billion or more per license in each large country.
There has been pressure on the fixed line margins for a while, and more recently on wireless margins. That will continue. With Standard & Poor's having recently downgraded a raft of European telco debt, these companies face higher capital costs as well. Even after the summer swoon in these shares, they remain among the most highly rated stocks.
The plus side is more nebulous, but it could very well be outstanding. Cellular phones will be the dominant form of personal communications this decade. Mobile data and mobile commerce will likely become important revenue generators, as margins on wireless voice communications shrink. There are services yet to be invented that will be offered and popular. The timing, though, is unclear. The question, of course, is which telecom providers will win and which will lose.
Analysts and investors have their opinions on telecom stocks but here's a consultant who says, "Let's take a step back and away from 3G and costs of infrastructure and debt loads and look at what these companies have to do in the way of internal cultural changes to win."
First, the age of the engineer at telecoms firms will have to give way to the age of the "marketeer," says Fred Knops, a London-based telecommunications consultant at Booz Allen & Hamilton. Telecoms used to be about rolling out large networks of equipment at the lowest cost, essentially a utility play. "In the near future, it will be about content and innovation," he says.
A "promising carrier" in this respect is Vodafone, says Knops. Having little of the kind of fixed-line assets that hold back other European incumbents, Vodafone isn't afflicted with the bureaucratic baggage of some of its main competitors. Vodafone starts from a more efficient, focused and large base of wireless subscribers, Knops asserts.
Vodafone has already developed a significant network of content and innovation engines -- like Vizzavi -- well before the 3G era is established, says Knops. Vizzavi, a global mobile portal joint venture with France's Vivendi, places within the reach of its subscribers a large international music portfolio, a film library and an Internet games portal, among other things, he notes.
The goal is to provide these and other services to customers in a consistent format throughout Europe, across different platforms including mobile handsets, personal computers, TVs and personal digital assistants, so that each user can get the type of content desired and in the desired format, says Knops.
If Friday's activity foreshadows a turnaround in sentiment on European telecoms, chances are good that Vodafone shares will be in the vanguard, as they were in the November 1999-March 2000 rally. |
