We take a look at the valuation of broadband providers as they embark on a land-grab strategy to acquire customers.
A recent report from the Office of Communications or Ofcom makes interesting reading for investors in the telecom industry. The regulator said there are dramatic and accelerating changes across the communications industry that are estimated to be worth some £50b or 4% of the UK economy.
Perhaps the most startling revelation was evidence of consumers shunning television, radio and newspapers in favour of online services. It seems that television is now of declining interest to many 16 to 24 year olds, who watch the box for less than an hour a day. By comparison, the Internet plays a central role in their daily lives as broadband take-up grows in popularity.
According to Ofcom household usage and adoption of broadband has continued to gather speed. It is reckoned that broadband connections increased by 63% between 2004 and 2005, and over 9 million households are now connected to broadband.
The Ofcom report goes some way to explain why broadband providers have recently embarked on land-grab tactics to acquire customers. After all, broadband players will be keen to acquire as many customers as possible ahead of the shakeout phase in a largely undifferentiated market. But significantly for broadband customers, their aggressive acquisition strategy has driven down broadband prices from an average of £41 a month in 2004 to just £16 a month in 2005.
Carphone Warehouse
(LSE: CPW)
was the first provider to lure broadband customers by offering a "free" service. By innovatively bundling broadband with its fixed-line telecom package, the company cleverly marketed its broadband service as free of charge. But while its product bundle may appear cheap, its shares aren't. Valued on a P/E of 20, Carphone Warehouse shares are amongst the most expensive.
Thanks to its acquisition of Easynet for £211m last year, BSkyB
(LSE: BSY)
effectively transformed itself from a pure-play satellite broadcaster into a multi-channel communications company. Customers of its satellite package, which total some 8m, can subscribe to its entry-level broadband free of charge. BSkyB shares, which are valued at 18 times earnings, are quite dear, too.
Pipex Communications
(LSE: PXC)
, which is regarded as the first commercial Internet Service Provider in the UK, is another interesting player in the broadband market. The company recently acquired Bulldog's broadband customer base from Cable & Wireless
(LSE: CW.)
for £12m, and it has also bought Toucan, which provides fixed, mobile and broadband services, for £24m. Despite its established presence in the Internet world, Pipex lost money in 2001, 2002 and 2003 though it is now profitable. Presently Pipex is valued at 17 times earnings, which is also quite expensive.
Without question, BT Group
(LSE: BT.A)
is the biggest broadband provider in the UK. Interestingly, it appears unconcerned by the impact of increased competition in the sector. Earlier this year BT said it had almost 8 million broadband end users on its network. But whilst only a third uses BT as their supplier, the rest are connected to its network through more than 200 service providers that offer services under another brand. Currently, BT is valued at 11 times earnings, which makes it the cheapest broadband provider. Of course, there's a reason for BT's cheapness -- investors are concerned about prospects for the company's declining voice business.
But in a rapidly accelerating industry, the threat of Vodafone
(LSE: VOD)
should not be ignored. The mobile phone company said it plans to enter the enter the broadband market after it struck a deal with BT. The agreement is expected to enable Vodafone customers to benefit from bundled packages of mobile and broadband services nationwide.
The shakeout phase in any market is, perhaps, one of the most exciting periods of development for any industry. But it may also be one of the most fraught for the weakest competitor as they get shaken out of the sector. The departure of Bulldog and Toucan are just two recent examples of companies that have bowed out gracefully, but more may follow.
> Find out how to cut your phone and broadband bills in this recent podcast.
David owns shares in BT and Vodafone.
