Outlook: Watch out. There's a telco bubble on the line

WHEN BRITISH Telecom was privatised in the mid-1980s, the government's advisers attempted to market the company not as the monopoly utility it was, but as a whizzo hi-tech industry with outstanding growth prospects. They failed utterly, and for most of BT's life in the private sector, the company's dividend yield has consistently been a utility rating of 5 per cent or more.

Until a couple of years ago, that is. Today, the telecommunications sector is the hottest investment proposition in town and even the clumsy old giant of BT has been able to capture some of the frenzy. Up an astonishing 9 per cent yesterday after another set of buoyant results, the shares now yield just 1.6 per cent and it is clear the market is finally buying the growth-stock story with a vengeance.

It is easy to see why the breakdown of national monopoly in telecommunications should prompt a boom in the shares of new entrant companies, but can the same boom be justified for existing incumbents? Only if you believe they will gain along with newcomers from the anticipated explosive growth in Internet and other data traffic. This type of traffic long ago overtook voice in terms of volume, and according to some estimates it is doubling approximately every three months.

For the time being the volume is growing far faster than the prices can fall, and despite intense competition at all levels, national incumbents like BT with legacy customer bases and networks are as a consequence coining it as never before. A quarter of BT's local phone call volume is now Internet based, traffic that barely existed just four years ago.

With greatly enhanced competition from higher-tech newcomers, this cannot last. BT starts off with the crippling disadvantage of an old technology network and a comparatively high cost base. In its own national market, BT is in any case moving far too slowly to defend the dyke, even as, like all practiced monopolists, it attempts to throw as many barriers in the way of progress as it thinks it can get away with.

But it is a moot point as to how quickly this erosion in margins and customers might take place, or the degree to which it will be compensated for by higher volume. For the time being, there seems to be enough food in the forest to keep both the old dinosaurs and the new, smaller-fast moving reptiles running forward in equal measure.

Furthermore, away from these shores, BT is itself hunter rather than hunted, the alternative svelte newcomer stabbing at the soft under belly of the national incumbent. In the three months to the end of September, BT's overseas interests showed revenue growth of more than 150 per cent over the same period last year to pounds 627m. Because of its potential for growth, this revenue ought by rights to be valued on the same basis as that of Energis, Colt or other newcomers in the UK market, ie on approaching a double-figure multiple.

So, yes, if the boom in telecom stocks is justified at all, it is reasonable for BT to be sharing in it. As for the rest of the sector, the stock market's approach seems to be that since at this stage it is hard to tell who's best placed to exploit the explosion in data, then why not support them all. Even unloved Cable & Wireless was in demand yesterday.

This is roughly the same approach as is being applied to pure Internet plays. The winners are hard to pick, so investors have collectively decided to bet on the lot. At least with telecommunications there's revenue to be seen and an easily understood business model, but even so the sector seems to be showing the same bubble like characteristics as the Net. This is particularly so in Britain, where even stocks like BT are now viewed as a passable substitute for the lack of a proper high-technology sector.

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