Disruption is now probably the biggest threat facing established businesses of all shapes and sizes. New businesses, launched with the specific goal of disrupting a particular industry are springing up almost every day.
And it’s not just the start-ups that are disrupting already established industries. Vodafone (LSE: VOD) has now decided it wants to take on BT (LSE: BT.A) by eliminating line rental charges, which have become an important source of income for BT over the past decade.
Line rental war
In today’s world where almost all of the population uses a mobile phone and just under a fifth of UK homes no longer make landline calls, line rental charges seem like an unnecessary expense for many consumers.
BT charges other firms who use the Openreach network it provides, which is used for the last leg of the journey to your home. Unfortunately, this means BT has a monopoly over the line rental market, and consumers have no choice but to pay their internet provider of choice line rental fees, which then passes the cost on to BT.
Most of the UK’s smaller broadband providers have spoken out against this model in the past, and calls for change are growing louder. After problems with the Openreach network cut off around 20m households in July, Baroness Harding, the boss of Talktalk, struck out at BT claiming that Talktalk’s customers pay BT’s £700m a year to maintain Openreach but the service provided is often poor quality.
The cost of line rental is another big issue for many users and BT has been hiking line rental charges to squeeze every last bit of income from customers. The price of BT’s line rental has jumped from around £15 in 2014 to just under £20 today. Other providers have also had to hike their costs as a result.
Now Vodafone is aiming to shake up the line rental market, or so it seems. The company is advertising high-speed fibre with no line rental costs. While this is something of a marketing gimmick as the company has started including line rental fees in the advertised cost of its broadband packages, it does at least include the full price as the headline price, rather than line rental being in the small print.
But this isn’t the only assault Vodafone is making on the UK’s entrenched broadband providers. The company also offers 4G broadband, which requires no line rental and makes use of the company’s existing mobile infrastructure to beam the internet into people’s homes.
A better company?
BT won’t disappear overnight Vodafone’s initiatives to disrupt the company’s dominance of the UK’s telecommunications market makes Vodafone look like the better choice for investors. Indeed, as well as the company’s disruptive abilities, Vodafone has a presence in emerging markets such as India and South Africa, two key growth markets that are helping it drive up sales while mature markets such as Europe and the UK struggle.
City analysts expect Vodafone to report earnings per share growth of 38% this year and 13% for the year ending 31 March 2018. BT’s earnings are projected to fall 10% this year before rebounding by 8% the year after. Vodafone’s shares offer a dividend yield of 5.1% compared to BT’s 4%.
All in all, with its international exposure, disruptive attitude, higher projected growth rate and more attractive dividend yield, Vodafone appears to be a better investment than BT.
