Five Reasons Why Telecoms Shares Aren't Doomed

Is the business model of the telecoms sector destroyed? Should you dump your telecoms shares? Is the market changing so fundamentally that BT (LSE: BT.A), O2, now owned by Telefonica, Orange, owned by France Telecom and Vodafone (LSE: VOD) are actually worthless?

It's a view you hear often. The bears are encouraged by the slump in share prices of telecoms firms and reports in the press saying that Arun Sarin, CEO of Vodafone, has to prove himself.

The argument for gloom goes like this. The wired operators are having their margins slashed by voice-over-IP and the likes of Skype, on the one hand, and flat-rate broadband, on the other. As for the mobile operators, they're under attack from the legions of Wi-Fi hotspots and the imminent arrival of WiMAX, a wireless broadband technology.

So am I selling my Vodafone shares? No. Here's why:

1. Incumbency

The telecoms incumbents have a huge installed base and infrastructure to service their clients. They will be able to exploit this for a long time yet.

2. They have technology that is proven to work

The existing GPRS, 3G and CDMA networks work well. They were designed to offer a guaranteed quality of service quality which is essential when selling capacity to other firms and provisioning big business. They are also properly mobile which neither Wi-Fi nor WiMAX, in its current incarnation, are.

3. Wi-Fi hotspots are an opportunity not a threat

The Wi-Fi hotspot business model has been shown not to be viable at least once already when Cometa Networks closed its doors in 2004. This was a joint venture between heavyweights IBM (NYSE: IBM), Intel (Nasdaq: INTC) and AT&T (NYSE: T). If that lot can't make it work, it is unlikely anyone else can.

Wi-Fi is great if you are in an office, at home or sitting in a cafe. But it is cheap and cheerful technology. Its range is limited to 300ft, the signals are weakened by rain and thick walls and connecting to a hotspot is not always easy - it is different at every hotspot. Besides, it's not truly mobile because, if you walk to far away from a hotspot, the signal will drop.

While the hotspot operators are trying to make their businesses work, the incumbents can provision them with broadband and charge for it.

4. WiMAX is a great opportunity

WiMAX provides a cheap way for telecoms firms to link up their disparate sites without having to lease and install expensive wired cables. WiMAX also offers a way for the incumbents to provision capacity to the hotspot operators and bring the data traffic into their own networks.

5. The incumbents own radio spectrum

WiMAX works best in licensed radio spectrum so that it doesn't suffer the interference problems that can plague Wi-Fi in big cities like London. The telecoms firms own a lot of this spectrum and so are in prime position to exploit WiMAX. Often they didn't pay a lot for it and sometimes they don't even know they own it. One ISP, Pipex Communications (LSE: PXC) found itself with a bundle of spectrum suitable for WiMAX, it is now trialling it in Stratford-upon-Avon.

Besides, the two big British telecoms firms are cheap. Vodafone is on a forward price-earnings ratio of 11.5, BT is on 11.2. At these prices why wouldn't you buy?

Paul owns shares in Vodafone.

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