Light Reading

OTTs Challenge Telcos' Free Cash Flows: Fitch

Light Reading
News Wire Feed
Light Reading

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
From The Founder
Steve Saunders provides an overview of white box networking and introduces a new "slim line" version of the OSI 7-layer model.
Flash Poll
Live Streaming Video
CLOUD / MANAGED SERVICES: Prepping Ethernet for the Cloud
Moderator: Ray LeMaistre Panelists: Jeremy Bye, Leonard Sheahan
Between the CEOs
Centec on Ethernet Switching

11|26|15   |   09:58   |   (0) comments

Centec CEO James Sun talks to Steve Saunders about Ethernet switching and the white box revolution.
LRTV Custom TV
Delivering Service Agility in the Virtualization Era

11|25|15   |   5.41   |   (0) comments

Interview with Massimo Fatato, WW OSS Business Lead, Hewlett Packard Enterprise.
Wagner’s Ring
How Might Open Source Fail?

11|24|15   |     |   (10) comments

Open source, SDN, and NFV are looking inevitable – but performance, standards proliferation and regulatory capture could derail the movement.
LRTV Custom TV
NFV Lifecycle Orchestration – a Fresh Vision for Telco

11|23|15   |   6.40   |   (0) comments

Simon Osborne, CTO Comptel, and Heavy Reading's Caroline Chappell reveal the business impacts of new SDN and NFV, and what the term service orchestration actually means. Together they define Lifecycle Service Orchestration and how the virtualized future will look for telecoms operators.
Between the CEOs
Cisco's Virtual Role in Saudi

11|20|15   |   12:15   |   (2) comments

Light Reading founder and CEO Steve Saunders talks with Zayan Sadek, Regional Manager at Cisco Systems, about the competitive communications services market and advance of virtualization in Saudi Arabia.
LRTV Huawei Video Resource Center
Huawei Leads With Kubernetes for Cloud PaaS

11|19|15   |   08:26   |   (0) comments

Huawei is looking to Kubernetes as a key tool for building robust open source technologies for customers and partners, said Ying Xiong, chief architect of cloud platform at Huawei, in an interview with Light Reading West Coast Bureau Chief Mitch Wagner at the recent Kubecon conference.
Women in Comms Introduction Videos
WiC in London: The Highlight Reel

11|19|15   |   5:33   |   (1) comment

NetCracker's Mervat El Dabae headlines an inspiring morning in London with help from leading women from Vodafone, TalkTalk, Hyperoptics and Ciena.
LRTV Documentaries
Why Saudi's So Hot for New Tech

11|19|15   |   05:07   |   (0) comments

Light Reading's Steve Saunders reports from Saudi Arabia, a hyper-competitive market desperate to embrace the next generation of communications technologies and services.
LRTV Custom TV
Why Data Models Deliver More Value Than Information Models

11|19|15   |   5.08   |   (0) comments

Stefan Vallin argues that more automation is needed to manage end-to-end services and the hybrid networks they run on, and that data models are key to achieving this.
Telecom Innovators Video Showcase
SDN Management & Orchestration in the WAN

11|17|15   |   7.20   |   (0) comments

Carol Wilson and Packet Design CTO Cengiz Alaettinoglu discuss CSPs' SDN service delivery and assurance requirements. Learn about a modular approach to building automated control, orchestration and management functions for the WAN that are policy- and analytics-driven.
LRTV Custom TV
Flash Networks: Optimizing for Radio Spectral Efficiency

11|17|15   |   3:34   |   (0) comments

Today most optimization vendors only focus on optimizing voice or data. Ofer Gottfried, Flash Networks' CTO, shows how improving data throughput and maximizing spectral efficiency reduces capital and operating expenses while also providing a platform for user engagement.
LRTV Custom TV
Making Pay-TV User Experiences Millennial-Friendly

11|16|15   |   6:42   |   (0) comments

The unique challenge of reaching and engaging Millennials is driving pay-TV video experience transformation that can include higher quality UIs, viewing of multiple content streams at once and seamless transitions between handheld devices and the television.
Allot MobileTrends Report H2/2015 reveals how daily online behavior can be used to discover smarter ways to profile customers and propose valuable, real-time offers to them.
Hot Topics
Samsung to Sell Wireless Networking Unit?
Dan Jones, Mobile Editor, 11/23/2015
Samsung: No Sale of Wireless Unit
Dan Jones, Mobile Editor, 11/25/2015
How Might Open Source Fail?
Mitch Wagner, West Coast Bureau Chief, Light Reading, 11/24/2015
Sprint to Get $1.2B From New Leasing Venture
Dan Jones, Mobile Editor, 11/23/2015
Networking Shines in HP's Gloomy Final Earnings
Mitch Wagner, West Coast Bureau Chief, Light Reading, 11/25/2015
Like Us on Facebook
Twitter Feed
December 15, 2015
Virtualizing Cable Services
Webinar Archive
BETWEEN THE CEOs - Executive Interviews
Centec CEO James Sun talks to Steve Saunders about Ethernet switching and the white box revolution.
Light Reading founder and CEO Steve Saunders talks with Zayan Sadek, Regional Manager at Cisco Systems, about the competitive communications services market and advance of virtualization in Saudi Arabia.
Cats with Phones
Can't Find the Phone on Thanksgiving? Click Here
Check under the cat! (hint: bottom right)
Live Digital Audio

Broadband speeds are ramping up across Europe as the continent, at its own pace, follows North America towards a gigabit society. But there are many steps to take on the road to gigabit broadband availability and a number of technology options that can meet the various requirements of Europe’s high-speed fixed broadband network operators. During this radio show we will look at some of the catalysts for broadband network investments and examine the menu of technology options on offer, including vectoring and for copper plant evolution and the various deployment possibilities for FTTH/B.