Risks growing to telecom operators’ defensive models, Citi says

FRANKFURT. Caught between regulators and competitive threats by Internet players, telecom operators globally face harsh choices that could upset their favoured status with investors as defensive, dividend-rich stocks, Citi said on Wednesday.

Citi research analysts say in a 146-page report that mobile and fixed line operators must choose between investing to become digital players to fend off Internet foes or streamlining their businesses and acting as “dumb pipes” for digital players.

The global, comparative survey finds dozens of promising examples of telecom network operators testing the waters to become digital players in their own right, but no successful examples of complete digital makeovers.

A major factor in telecoms’ resistance to change is that most investors prize them for their stability and consistent dividends, while assigning little value and mostly big risks to the deal-making and restructuring needed for digital makeovers.

“A majority of investors are still sceptical that such transformation with a fundamental industry impact would even happen,” Citi analysts write. “That said, a growing number of investors are already starting to see digitally-driven structural changes as a possibility”.

Among many issues raised, operators may be required to make investments on an “unprecedented scale” in next-generation 5G wireless networks due around 2020, the authors warn.

The benefits of embracing new digital strategies beyond providing basic network access is that these tend to come with lower burdens from local or national regulators.

Concrete moves in this direction include Verizon’s push to buy web properties like Yahoo, NTT DoCoMo and SingTel investments in media, advertising and big data, Safaricom’s move into financial services and BT ownership of football broadcast rights.

Still, Citi notes, the idea of telecoms expanding into adjacent industries is nothing new: “A similar idea about telecoms expanding into Internet, advertising, e-commerce etc. was in fact one of the drivers which fuelled the 1990s stock market bubble in the sector.”

The report is called “Re-Birth of Telecoms into a New Digital Industry” and is available at www.citivelocity.com/citigps/

Two years ago, a similarly hefty Citi report entitled “Re-Birth Of Telecom Monopoly” anticipated the rebound of incumbent telecom operators as powerful national players, reversing years of deregulation and efforts to foster telecom competitors. (Reporting by Eric Auchard; Editing by Ruth Pitchford)