MOBILE phone operators came under pressure yesterday amid fears that the introduction of third-generation technology will put the squeeze on margins.
With Vodafone planning to begin rolling out its 3G product by the end of the year, concerns were raised that growth in customer numbers could take precedence over maintaining margins.
The launch of 3G services will allow providers to offer more value-added services, such as video clips. However, analysts at Citigroup Smith Barney fear that the launch could push operators’ fixed costs up to 50 per cent of total costs, from 40 per cent currently. In a note to clients the broker said it expected operators to fight aggressively for customers in an effort to maximise the utility of their new 3G networks. That aggression is thought likely to take the form of price-cutting.
Deflationary pressure would be good news for customers. But analysts fear that rather than stimulate volumes to compensate for the lower margins, a gradual slowdown in the growth of call volumes snatched from fixed-line operators will result in customers holding on to the savings.
Vodafone took the brunt of selling after the US broker downgraded its recommendation from “hold” to “sell” on the perceived risk to margins. The shares lost 4p at 129¼p. The same downgrade for mmO2 left its shares unchanged at 94½p, supported by takeover hopes.
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With Vodafone out of favour, the benchmark FTSE 100 was dragged lower. It closed off 12.9 points at 4,545.6. Next gave support, adding 41p to £15.58, with WPP 12p higher at 520p as investors continued to take in its takeover of Grey Global.
A reassessment of GlaxoSmithKline’s fortunes prompted an upgrade from Lehman Brothers. The broker changed its stance from “equal weight” to “overweight”, highlighting the stock’s underperformance relative to its peers. Glaxo shares have underperformed the sector by 15 per cent during the past 12 months.
The shares put on 15p to £11.81 as analysts said they expected an improvement in performance in the second half, after a disappointing second quarter. Risks to the company’s patents are also thought to have diminished.
British Airways came under pressure as Hurricane Ivan threatened oil supplies from the Gulf of Mexico, potentially resulting in higher fuel costs. Its shares fell 5½p to 221¼p.
Mixed data from the US sent Allied Domecq lower. Figures from AC Nielsen, the researcher, showed Allied’s spirits volumes outpacing rival Diageo in the four weeks to August 28. But its more established growth brands were not the main drivers. Allied’s shares fell 1¾p to 469p, while Diageo added 5½p to 707½ as CSFB reiterated its “outperform” rating.