Facebook, Skype challenge telcos' free cash flows: Fitch

Written by Press Trust of India | Mumbai | Updated: Mar 1 2014, 01:00am hrs
FacebookFitch warned that acquisition of WhatsApp by Facebook and former's plans to enter voice calls will further dent global telcos' ability. Reuters
Ratings agency Fitch today warned that the acquisition of WhatsApp by Facebook and the former's plans to enter 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 include Skype, Twitter and Google, apart from WhatsApp, provide a cheaper substitute for telcos' traditional voice and text messaging services. But 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 said in a report.

Typically, OTT operators tend to substitute texts first and then voice as quality of data improves over time.

However, 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."

But, it said, 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 impact on their revenue as Reliance is expected to offer deep discounted tariffs.

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

Globally, 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 maintain margins. But the impact can vary significantly, it added.

However, 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 said in the Netherlands, in 2011, KPN saw its consumer revenue fall 13 per cent 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.

However, 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 share of the telecom value chain to avoid becoming a 'dumb pipe' for OTT operators with stronger brands, it warned.