A Bruising From Broadband
Investors were quick to celebrate upbeat news on Oct. 27 from the Nordic region's largest phone company. Third-quarter revenues at Stockholm-based TeliaSonera grew 3%, to a record $2.9 billion. Cost-cutting spurred a doubling of net income, to $609 million. And sales of broadband hookups surged 18%, to $97 million. TeliaSonera shares are up 13% since the announcement, to $5.68.
But reading between the lines tells a more troubling story. Revenues from TeliaSonera's Swedish fixed-line voice business -- still a quarter of its top line -- sagged 5% year over year. The company has lost 150,000 fixed-line customers since the end of 2002, many of them defectors to mobile phones. Those who remain spend only 80% as much time gabbing on the phone, and all the while rates continue to drop. Add it all up, and TeliaSonera will see fixed-line revenues fall by $290 million over the next two years, predicts analyst Rikard Rosenbacke of Stockholm brokerage Alfred Berg (ABN ).
The Nordic giant isn't alone in its predicament. Across Europe, established telcos such as BT Group PLC (BTY ) and France Telecom (FTE ) face a decline in traditional voice services as customers switch to mobile phones and calls over the Internet. Market researcher Ovum Ltd. in London figures revenues for traditional fixed-line voice calls in Western Europe will fall from $27.8 billion this year to $22.8 billion in 2007. At the same time, revenues from digital subscriber line dsl) broadband connections and voice-over-Internet services will soar from $9 billion to $23.8 billion. Only by grabbing a big chunk of that booming market can telcos stave off further decline. "It's essential for the future of these companies that they not lose this business," says Ovum senior analyst Michael Philpott.
The problem for TeliaSonera and its ilk is that broadband is far more competitive than traditional voice service. TeliaSonera faces 130 broadband rivals in Sweden alone. In June, 2003, its share of the retail DSL market in Sweden stood at 72%; a year later it fell to 63.3%, even as the market as a whole grew 45%, according to the European Competitive Telecommunications Assn. That trend is playing out across Europe.
Telcos are in a quandary because they own and operate 90% of the local phone lines in Europe. So while they continue to book billions in revenues from leasing those lines to independent DSL providers, stiff competition has pulled down broadband rates for telcos and startups alike by an average of about 30% in the past year, estimates Gartner Research (IT ). To top it off, upstarts such as Sweden's Bredbandsbolaget are starting to offer voice over DSL. That hits telcos where it really hurts. Bredbandsbolaget has signed up 60,000 customers since it began offering voice service in April. Telecom researcher Analysys figures a shift to voice-over-Net calls could wipe out more than $10 billion in Western European voice revenues in the next three years.
TeliaSonera is fighting back hard. It's boosting its DSL coverage to 90% of Sweden by the end of this year, which could give it an edge over rivals focused just on big cities. And it's using selective pricing deals to fend off competitors. One recent campaign offered an 8-megabit-per-second DSL line for $61.50 per month, vs. $81 per month for a 10-megabit line from Bredbandsbolaget. Such promotions helped Telia add a record 32,000 DSL customers in the third quarter. "We don't want to sit still and just let the market develop," says TeliaSonera CEO Anders Igel.
Competition is so fierce that it is even forcing consolidation among startups. In August, Bredbandsbolaget snapped up Bostream for $123 million, while Denmark's TDC (TLD ) paid $780 million for Sweden's Song Networks in October.
The field of contestants may be shrinking, but that doesn't spell relief for the telecom giants. The countries where rivals are strongest -- Sweden, France, Britain -- are also the ones where prices are falling fastest and consumers are piling into DSL in the greatest numbers. Looks as though Europe's old-guard telecoms have a long fight on their hands.
By Ariane Sains in Stockholm and Andy Reinhardt in Paris