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FB, Skype dare telcos’ free cash flows, Indian companies safe for now!

Fitch ratings

Mumbai: Ratings agency Fitch today warned that the procurement of WhatsApp by Facebook and the former’s plans to cleave its forays into voice calls will further dent global telcos’ ability to increase free cash flows, but ruled out serious impact on the Indian players in the near-term.

‘Over-the-top’ (OTT) operators which also read in the order of Skype, Twitter and Google, apart from WhatsApp, afford a cheaper substitute for telcos’ traditional voice and text messaging services. But then again the resulting surge in data use is not translating into proportionally higher Ebitda for telcos as data services have lower margins than traditional services they replace.

“Thus, while investment in data networks is still economically justified, weakening cash flows from traditional services means that telcos have to spend more capital simply to maintain Ebitda at the same level,” Fitch stated in a report.

Characteristically, OTT operators tend to substitute texts first and then voice as quality of data improves in excess of time.

Conversely, it said, “Markets including India, Indonesia and Sri Lanka are currently less exposed as voice and text pricing is relatively low and smartphones have yet to reach significant penetration.”

Nevertheless, it said that, the threat of OTT operators is more pronounced in some Asian markets like the Philippines, where telcos derive a significantly high portion (30 per cent) of their revenue from text.

It can be noted that for the domestic telcos, which have one of the lowest Arpus and lowest call rates, the going may get tough as entry of deep-pocket Reliance Jio into both voice and data will have a more debilitating sway on their revenue as Reliance is estimated to offer deep discounted tariffs.

Fitch accredited its pessimism to the ever-increasing proliferation of smartphones which will help OTT operators ride telcos’ infrastructure for free and generally have a resilient brand connection with their customers than that of telcos.

Internationally, almost all telcos are facing declining margins due to these trends as few have a strong enough market position to price data high enough to be able to maintain margins. But the impact can vary significantly, it furthered.

Though, the report said those telcos which have anticipated the changing market by moving to integrated tariffs, where calls, texts and data are all included for a single price, face less pressure as it is mainly their out-of-bundle revenues, like metered calls and texts, which are at risk.

For instance, the report stated that in the Netherlands, in 2011, KPN saw its consumer revenue fall 13 percent in Q4, and had warned of a poor 2012, while Vodafone’s Dutch business saw a much smaller impact due to its early introduction of integrated tariffs.

On the other hand, it warned that not investing in data networks is not an option, though, as telcos will have to continue to spend on capex to increase network capacity as data use rises.

All will face the challenge of retaining a cut of the telecom value chain to avoid becoming what may be rounded off in red as a `dumb pipe’  for OTT operators with stronger brands, it cautioned.

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Jawed Akhtar

A Journalist by interest and a Music Enthusiast by passion. Wedded to Mother Nature, Jawed indulges his aesthetics in travelling and reading books of varied genres. Having covered News stories for top Dailies in his formative years, that is, he is game for tryst with Technology at Techmagnifier.

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