Light Reading

OTTs Challenge Telcos' Free Cash Flows: Fitch

Light Reading
News Wire Feed
Light Reading
2/28/2014
50%
50%

LONDON -- Facebook's acquisition of WhatsApp, and the messaging service's plans to expand to include voice calls, will put further pressure on telcos' ability to increase free cash flows, Fitch Ratings says.

'Over-the-top' (OTT) operators, which also include Skype, Twitter and Google, 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 telco EBITDA, because data services are lower margin than the 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.

As smartphones proliferate, OTT operators ride the telcos' infrastructure for free and generally have a stronger brand connection with their customers than telcos. 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. However, the impact can vary significantly.

Telcos that 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. This is because it's mainly their out-of-bundle revenues, such as metered calls and texts, which are at risk. In the Netherlands, for example, KPN saw a 13% fall in consumer mobile service revenue in 4Q11, and warned of a poor 2012 outlook, while Vodafone's Dutch business saw a much smaller impact because of its earlier introduction of integrated tariffs.

Similarly in Asia the threat of OTT operators is more pronounced in some markets. Philippines telcos are exposed as they derive a significantly high portion (30%) of their revenue from text. Typically, OTT operators tend to substitute text first and then voice as the quality of data improves within a market. However, 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.

Singaporean telcos including SingTel have also tried to limit the impact by introducing pay-as-you-go data tariffs and are building their own OTT brands, such as Amobee - for mobile advertising - and Hungry-go-where - a Singaporean based restaurant reviewer. However, these steps are small and unlikely to turn back the tide.

Not investing in data networks is not an option for telcos, which face continuing capex to increase network capacity as data use rises. All will face the challenge of retaining a share of the telecommunications value chain to avoid becoming a 'dumb pipe' for OTT operators with stronger brands. Use of OTT services will also make coverage levels an increasingly important differentiator, as consumers will not put up with patchy data coverage. This can already be seen in the US market, where Verizon Wireless has had some success with its marketing campaign highlighting its better coverage than AT&T.

Fitch's telco ratings reflect our conservative expectations of lower margins and additional investment required as data substitutes for voice and text. The trends highlighted here indicate that the rating risks are almost all on the downside.

Fitch Ratings Ltd.

(0)  | 
Comment  | 
Print  | 
Newest First  |  Oldest First  |  Threaded View        ADD A COMMENT
Educational Resources
sponsor supplied content
Educational Resources Archive
Flash Poll
From The Founder
Anshul Sadana answers questions from Steve Saunders, Light Reading's founder and CEO, about Arista's CloudVision, a global cloud network controller for workload orchestration and workflow automation delivering a turnkey solution for cloud networking.
Live Streaming Video
CLOUD / MANAGED SERVICES: Prepping Ethernet for the Cloud
Moderator: Ray LeMaistre Panelists: Jeremy Bye, Leonard Sheahan
Between the CEOs
Video Exclusive With Basil Alwan, Alcatel-Lucent

7|24|15   |   26:44   |   (2) comments


Basil Alwan, President of IP Routing & Transport at Alcatel-Lucent, discusses virtualization, cultural challenges, the capex crunch and more with Light Reading founder and CEO Steve Saunders.
LRTV Custom TV
VDF: Enable the Financial With Mobile Money

7|20|15   |   06:53   |   (0) comments


Ian Ravenscroft discusses how operators can expand to occupy the entire digital services value chain through service innovation.
LRTV Custom TV
Telefónica on OSS Transformation

7|20|15   |   06:01   |   (0) comments


Jose Gonzales discusses the details of Telefónica's operation transformation program.
LRTV Custom TV
Judi Achmadi on Huawei's Cloud Storage Solution

7|20|15   |   03:33   |   (0) comments


Judi discusses the key business goals of TelekomSigma's public cloud service and how Huawei's solution helps them address challenges.
LRTV Custom TV
KPN Enlightening Digital Business & IT Transformation

7|20|15   |   06:19   |   (0) comments


Rob de Beer discusses the changes that operators need to make with service innovation now coming from the Internet world.
LRTV Custom TV
Stratus Telco-Grade Cloud Solutions & NFV

7|20|15   |   07:34   |   (0) comments


Ali Kafel from Stratus Technologies addresses high-availability concerns within the telco industry with a solution that enables telcos to provide high-availability and stateful fault-tolerance using a software-based approach.
LRTV Documentaries
The Six Million Dollar Business Man

7|20|15   |   01:52   |   (0) comments


Steve Saunders, publisher. A man barely alive after an acquisition malfunction imploded the company he founded. Gentlemen, we can rebuild Light Reading. Better, faster, stronger.
Between the CEOs
CEO Chat With Anukool Lakhina, Guavus

7|20|15   |   38:51   |   (1) comment


Guavus CEO Anukool Lakhina talks to Light Reading founder and CEO Steve Saunders about the role of operational analytics in the communications services and networking sectors, particularly in relation to IoT.
LRTV Custom TV
IBM's Flash Storage With Intel QuickAssist

7|20|15   |   03:18   |   (0) comments


Intel's Bev Crair and IBM's Eric Herzog discuss how IBM's V9000 Flash Storage System has helped customers around the world. Featuring real-time compression powered by Intel QuickAssist Technology, the V9000 is a next-gen flash storage solution.
LRTV Huawei Video Resource Center
Thailand's AIS: Transforming to an FMC Operator

7|17|15   |   4:53   |   (0) comments


Saran Phaloprakarn, Senior VP of Fixed Broadband Business Management of Thailand's AIS, was a keynote speaker at the first Asia-Pacific Ultra Broadband Summit in Bangkok. In this video, he talks to Heavy Reading about transforming into an FMC (FBB+MBB+Content) operator.
LRTV Huawei Video Resource Center
Cambodia's TRC Discusses Its Plans for National Broadband

7|17|15   |   10:33   |   (0) comments


In this video, Chakyra Moa, Chairman of Telecommunication Regulator of Cambodia (TRC), talks in in-depth with Heavy Reading about the Cambodia's current telecom market and TRC's goals and expectations for the future.
LRTV Documentaries
5G Phone

7|16|15   |   2:09   |   (4) comments


A man has an opportunity to purchase the world's first working 5G phone. Imagine the possibilities...
Upcoming Live Events
September 16-17, 2015, The Westin Galleria Dallas, Dallas, TX
September 16, 2015, The Westin Galleria Dallas, Dallas, TX
September 16, 2015, The Westin Galleria Dallas, Dallas, TX
September 29-30, 2015, The Westin Grand Müchen, Munich, Germany
October 14-15, 2015, New Orleans Ernest N. Morial Convention Center, New Orleans, LA
November 5, 2015, Hilton Santa Clara, Santa Clara, CA
December 1, 2015, The Westin Times Square, New York City
All Upcoming Live Events
Infographics
Network operators start seeing savings from NFV in the first year, according to a study by Affirmed Networks and ACG.
Hot Topics
T-Mobile Launches RCS Messaging
Sarah Thomas, Editorial Operations Director, 7/22/2015
Huawei Working Hard for Rural Success
Carol Wilson, Editor-at-large, 7/22/2015
AT&T U-verse TV Hits the Skids
Alan Breznick, Cable/Video Practice Leader, 7/24/2015
Eurobites: Alcatel-Lucent, Vodafone Test TWDM-PON
Paul Rainford, Assistant Editor, Europe, 7/22/2015
Robbins Succeeds Chambers as Cisco Changes CEOs
Mitch Wagner, West Coast Bureau Chief, Light Reading, 7/27/2015
Like Us on Facebook
Twitter Feed
Webinar Archive
BETWEEN THE CEOs - Executive Interviews
Basil Alwan, President of IP Routing & Transport at Alcatel-Lucent, discusses virtualization, cultural challenges, the capex crunch and more with Light Reading founder and CEO Steve Saunders.
Guavus CEO Anukool Lakhina talks to Light Reading founder and CEO Steve Saunders about the role of operational analytics in the communications services and networking sectors, particularly in relation to IoT.