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PTO Redux?

Monday, 04 October 2004

Telcos around the world are still reeling from the aftermath of the ambush engineered by the dot.coms. But were they ‘putsched’ or did they jump?

To coincide with the launch of the R-100 ‘PTO Tracker’, which brings together 25 major telcos from 20 countries around the world (for a list of them, click here), it’s worth wondering how the network-operating core of the ICT industry got into its present state.

It has been a turbulent three decades for these carriers. They have witnessed the acceleration of the pace of technological change, spearheaded by the shift from analogue to digital but accompanied by a proliferation of new technologies in every direction. Then of course they have endured privatisation and competition (although not necessarily in that order). On top of that, they were exposed during the brief fluttering of the dot.com butterfly, caught between the exigencies of the old economy and the challenge of the new..

They’ve been written off as ‘dinosaurs’ and ridiculed as ‘boring’, yet still they stand. In fact, the 25 companies on the R-100 'PTO Tracker' stand tall, with a combined market capitalisation of more than US$783bn as of 01 October, 2004. That in itself can be seen as disappointing, since the last three months have seen some US$30bn wiped off the value of R-100 PTO shares in Asia (especially in Japan), although this has been more than offset by gains totalling US$35bn in Europe and North America in the same period (for a full report, click here).

Give and take stock
The relationship between such telcos and the stock market has long been a complex one. It’s just one reason why the new 'PTO Tracker' is so fascinating.

In the US, today’s telcos grew up under the Bell System and functioned as classic utilities and as ‘widows and orphans’ stocks until the AT&T break-up of 1984 unleashed competition in some areas and consolidation in others. Telco strategies (and public policy) are arguably still being pursued in the context of the breaking up of ‘Ma Bell’ some 20 years ago. In Europe and Asia, the picture developed differently, with the spectre of state ownership and control looming until the 1980s, and in many cases the 1990s, and in some cases (certainly where control is concerned) until today.

Whether due to US private utility traditions, or the mass privatisations of the 1990s in Europe and beyond, telco stocks the world over are typically among the largest and most widely-held on any given national bourse. One result is that they are a target for vented anger whenever equity markets get up to their periodic tricks (like the one in which they suddenly fall without warning). Telcos tend to follow, rather than lead, bourse-wide trends and other national or global economic currents.

Damned if you don’t…
At no time was this clearer than during the dot.com boom. With that enviable lack of logic which characterised the era, it was decided by many, including brokers and analysts (some with axes to grind, admittedly), some institutions and small investors, that the PTOs were getting left behind by the rise of the Internet.

Choosing to ignore the fact that telcos, some of them indeed a century old, were actually operating the Internet – in a physical rather than a cyber-tantric – the PTOs were marked down as laggards. To be fair, against the fleetingly inter-galactic performance of new economy growth stocks, the old-style telco looked earthbound (and, if anything heading down from there).

Had carriers ignored the hysteria and got on with the ‘day job’ they might have been OK. The Internet in all its excessive flavours was fuelling traffic volumes across the planet, after all. But, since the dot.com phenomenon overlapped with the infusion of ‘thrusting new management blood’ into the ‘moribund ex-monopolies’ and a degree of paranoia about the effect of ‘competition’, the majority of telcos forgot where they’d come from and blinked.

Armed with loads of utility-earned cash and eager not to miss anything, they wandered onto the dot-com dancefloor like break-dancing octogenarians, to the embarrassment of everyone present. Of course, they stumbled and in some cases they fell. But they survived. A glance at the ISP business in regions such as Europe shows that it is the telcos who dominate, arguably because of their ability to gobble up over-extended dot.coms but also, perhaps, because of a lingering sense that the notion of ‘utility’ applies to Internet service provision, too. File that one under ‘old paradigm’…

Along the way, they also watched as the fallout from the divine dot.comedy saw many of their fiercest rivals fall over. The dominance of the consumer broadband market by incumbent network owners is proof of the extent to which the ‘great pretenders’ were living in a land of ‘make believe’ – and telcos are the beneficiaries.

…and damned because they didn’t
What may be harder for the telcos to stomach is the way in which, having failed to ride at the very crest of the dot.com wave – marked down as being too flabby – they were still sucked out on the receding tide when the ‘new economy’ went belly up. Having been pilloried for their apparent failure to control the technology boom, they were then dragged down by a sequence of events which, as the earlier sentiment implies, were beyond their control.

That has more or less been the essence of relations between carriers and the investment world ever since. There’s mutual suspicion and, on the part of investors, distrust of initiatives such as the reintroduction of dividends which are in many ways an attempt to distinguish PTOs from the now-vapourised ‘growth stocks’ of the dot.com yesteryear.

Along the way the telcos have paid a price, cutting jobs and scrapping some of their more self-aggrandising plans and conceits – although arguably this should have been done far before the dot.coms arrived, when the PTOs insisted upon preserving their analogue organisations and structures and practices into the digital age. Nowadays, they are ‘ever so humble’.

Won’t get fooled again?
The problem now facing the telcos is that while trying to appear as islands of stock market stability, in front of an audience of investors which remains sceptical, to say the least, they risk being left behind in the ‘slow lane’ once more. Too much is happening at too great a pace for the PTOs to think of sitting back to argue that increased efficiency atop a strong core business is a guarantee of future safe haven status,

It is also in the cyclical nature of corporate strategy that on riding out a storm, sooner or later someone will pipe up and suggest that another be actively sought. It seems to be irresistible to modern managers: ‘the call of the C-level’, as it were. As part of the R-100, the ‘PTO Tracker’ may help TelecomRedux readers keep a weather eye on developments.
Jim Chalmers