Sentiment remains negative on internet service providers with European fund managers expressing litt...
Sentiment remains negative on internet service providers with European fund managers expressing little optimism about their earnings going forward.
Some analysts have delayed forecasts for when ISPs will become profitable, while others are further downgrading their earnings estimates, for example, doubling projections for Freeserve's losses this year from £27m to £60m.
The woes of the ISP sector came to the fore last month when web portal Alta Vista, owned by CMGI of the US, revealed it could not afford to provide unlimited internet access in the UK. Meanwhile, a shakeout in European ISPs is expected to follow due to fierce competition in the market.
Both Credit Suisse Asset Management and SG Asset Management are underweight ISPs and hold no direct exposure to companies in this sector.
Raj Shant, European fund manager at Credit Suisse, says: "People have overestimated the prospects of these companies and their valuations are overly optimistic given the low barriers to entry and high level of competition."
Andrew Jackson, European fund manger at SG Asset Management, says ISPs need to add value to attract and retain customers. He says web users shop around among ISPs, with price being the ultimate selling point, therefore giving little pricing power to these companies. To become competitive they need to offer some additional service.
Jackson says: "The cheapest price is often the deciding factor, whereas quality of services should become far more important. For example, when downloading film, the digital based network is not fast enough. To upgrade this network and make downloading faster would add value to an ISP service."
He agrees with Shant that the value of ISPs is currently quite ludicrous, given they are still loss making ventures and the worst performing part of the technology market.
Initially, ISPs made a lot of money carrying traffic and split healthy revenues with telecom providers, but these revenues diminished as internet access became cheaper.
With little to distinguish between company A from company B, users became primarily concerned with who could offer the cheapest service.
To gain a competitive edge, the companies then tried to mutate into internet portals by trying to draw industry groups or ethnic groups into specific areas. If done successfully meant they could attract advertising revenues.
Halfway through 1999, ISPs and portals were valued on the number of subscribers and visits they had to sites.
Shant says: "The monetisation of this was difficult, even though they hoped to convert hits on the web site into hard cash. The companies had to convert their visits from customers on their web sites and portals into sales and transactions. This is one of the reasons why they suffered more than others."
Although not an ISP, the demise of the online retailer Boo.com earlier this year demonstrated that it was more difficult to convert website hits into hard cash than widely expected.
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