Costs cut into telecom industry profits

Already plagued by weak pricing and sales growth, telecom services industry profits are also taking a beating from increased costs, according to the Conference Board of Canada.

Telecom profits are up 3.2 per cent in 2007 to $6 billion, figures in the Conference Board’s Canadian Industrial Outlook: Canada’s Telecommunications Industry — 2007 report. Last year’s growth rate was 24 per cent, said principal economist Michael Burt.

“It’s been pretty volatile” on the growth rate front for the last few years, Burt said. In 2003, the industry racked up $3.4 billion in profit; in 2004, that plunged to $1.1 billion, before recovering in 2005 to $4.7 billion.

Burt is forecasting continuing cost growth. They’re up 5.4 per cent for this year, and will continue to rise at 3.6 per cent for the next four years.

Labour costs are increasing, Burt said. With an unemployment rate in the six per cent range, the strong labout market is having an impact on all industries.

Telecom is a capital-intensive industry, so companies spend a larger proportion on debt servicing than those in other industries, Burt said. This makes telecom companies particularly vulnerable to fluctuations in interest rates.

Cost isn’t the only pressure on telecom profits.

“There’s a lot going on in terms of competitive pressure and (changing) market share,” Burt said. Deregulation of local voice services and the advanced wireless services spectrum auction slated for next year, which could create one or even two new national wireless carriers, will increase those competitive pressures.

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