Facebook, Skype challenge telcos' free cash flows: Fitch

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.