In the age of apps, telcos risk irrelevance—study

Telco companies in Southeast Asia should invest more and expect returns to shrink if they intend to survive and even thrive in the ongoing digital shift, according to S&P Global Ratings.

S&P, which issued a statement accompanying its report that tackled investments and the “smartphone dilemma”, outlined the broad direction telcos in the region should take or “face irrelevance.”

“To meet explosive data and bandwidth demand in the smartphone era, regional operators have had to invest heavily in spectrum and new service portfolios. And they’ve had to do so while confronting intense competition and shrinking margins,” said S&P Global Ratings credit analyst Wei Kiat Ng.

S&P said 2017 “will be the watershed year,” during which revenues from data platforms would surpass traditional voice calls and text messaging. The shift is happening as consumers’ communication habits are moving to social media and instant messaging apps.

S&P said revenues from traditional services would shrink to less than a quarter of combined revenues over the next five years.

“In our view, margins and returns on capital are unlikely to revert to historical highs for most operators in Southeast Asia,” Ng said.

S&P said all companies rated under its coverage, which included PLDT Inc., have been affected by the digital shift.

Among expenditures, it said investments on spectrum “is one [of] the biggest strains on balance sheets.” Moreover, S&P cited regulatory risk and intense discounting to gain market share.

S&P said it has already downgraded the credit scores of some companies that once had very stable credit profiles.

“While the new landscape offers rare opportunities to gain market share in a previously static industry, the structural shift in telecommunications has also been tough on balance sheets,” Ng said.