S&P downgrades growth prospects for European telecoms

Ratings agency Standard and Poor's downgraded its outlook for growth in the increasingly "fragile" European telecoms sector, notably for 2018. In its 2017-18 outlook paper, S&P highlighted the threat of increased competition, accelerated commoditization of service offerings and higher debt in response to pressure for both dividends and investment.

S&P said its forecast is based on expectations that economic growth and a relatively benign regulatory environment should largely maintain current conditions but warned that that the possible arrival of nationalist parties in power in Europe could damage revenues.

For full-year 2017, the researchers forecast flat revenue growth for the incumbent telecoms companies and mid-single-digit growth for cable companies, with growth for both gradually converging thereafter.

Downgrading the 2018 outlook for incumbents to flat, S&P said it also expects challenging growth prospects ahead as the European telecoms market moves toward maturity.

Turning to specific markets, the ratings agency expects modest growth in the eurozone to boost discretionary consumer spending but a decline in GDP growth in the UK, coupled with a modest rise in unemployment.

While it does not view GDP growth as the primary revenue driver for the telecoms sector, S&P believes current macroeconomic trends will likely support stable consumer and corporate spending on telecoms services.

However, the researchers believe the European region faces political risks that led them to revise downward almost all of their macroeconomic assumptions for European economies. The risk of nationalist parties winning elections in France in May, the UK in June and Germany in the autumn could draw policy-making away from the European framework, increasing uncertainty related to regulation and corporate spending, they said.

At the sectoral level, S&P said that while consolidation has helped ease competition in recent years it remains intense and that as technologies mature, differentiation between carriers is likely to shrink.

With neither 3G nor 4G as profitable as initially expected, the prospects for new revenue growth appear relatively weak and rely on growth through alternative channels, the researchers said. These include acquisitions, new and unproven businesses such as content provision or banking services and a jump in the number of connected devices related to the Internet of Things and 5G, due to arrive in 2020.

S&P also suggested revenues could be extracted by charging content providers for use of network resources, but none of these possibilities are currently factored into its outlook.