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.

Start your day with The Independent, sign up for daily news emails
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own