The UKs broadband market is getting more competitive, andTalktalk Telecom(LSE: TALK) is starting to get worried.
As sector giantsBT(LSE: BT-A) andSKY(LSE: SKY) use their size and financial firepower to undercut each other on price and offer customers dealsthey cant refuse, smaller players likeTalktalkare at risk of falling behind.
Indeed, alongside its trading update for the3 months to 30 June 2015,Talktalkwarned today that recent demand for its broadband services was softer than we have seen in recent quarters, with higher promotional activity in the sector.
And it seems as if BTs war with pay-tv giant Sky can be blamed for this market weakness.
Turf war
Over the past year or two, BT and Sky have started to encroach on each others turf. For example, BT hasploughedmoney into its pay-tv offering, a market Sky has dominated for some time. On the other hand, Sky has pushed into the broadband market, using its presence in households across the UK to cross-sell its offering.
This battle for customers has reached fever pitch within the past few months.
In an attempt to attract customers, BT is now offering its sports channels to broadband customers for free. Meanwhile, Sky has announced that it will now offerits basic fibre-optic broadband package, which typically costs 120 for 12 months, for free.
In addition to cutting prices, the two companies have been calling for Ofcom to investigate each others dominance over respective areas of the market. BT claims that Sky is overcharging customers to the tune of 500m per year, while Sky claims that BT has a dominant position in the UK telecommunications market and has called for the company to broken up.
Unfortunately, the turf war between Sky and BT is bad news forTalktalkand the companys shareholders.
Bad news
Talktalks growth over the past five years has been nothing short of impressive. The companys shares have risen by 206% excluding dividends since the end of June 2010.
Whats more, if the company hits its targets for growth during the next two years, by 2017 pre-tax profit will have jumped 370% in just seven years.However, the company is currently trading at a forward P/E of 26.5, which does not leave much room for error ifTalktalkfails to hit its targets.
And the company is already struggling. In todays trading update,Talktalkannounced that revenue for the period expanded by3.5% year-on-year, below analysts forecasts, which were calling for growth of 6.5%. Still, the company remains confident that it can deliver full-year revenue growth of 5%.
Nevertheless, City analysts are now starting to express concern that with competition increasing, and margins coming under pressure across the broadband market,Talktalkwill struggle to meet its long-term growth targets.
Management expects revenue to grow at 5% per annum from 2017 onwards. The group is also targetingan EBITDAmargin of 25% by 2017.
Foolish summary
Sooverall, as competition in the broadband market increases Talktalkcould struggle going forward. However, before you make a tradingdecision, I strongly recommend that you do your own research you may come to a different conclusion.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Sky. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.