Fitch sees shrinking margins for telcos

Philippine telecom firms have enjoyed “unsustainably high” levels of profits over the last decade, but these good times are at an end as more Filipinos choose “unlimited” promo offerings to avoid expensive service rates.

In a new report, global debt watcher Fitch Ratings said margins would continue to shrink for local phone companies as demand switches from lucrative call and text messaging services to low-margin broadband Internet products.

“Fitch believes that price competition will continue to affect average revenue per user in 2012, despite the creation of a duopoly following PLDT’s [Philippine Long Distance Telephone Co.] acquisition of the third-largest telco, Digital Telecommunications Philippines,” the firm said in the report.

PLDT’s acquisition of Digitel, operator of mobile brand Sun Cellular, solidified the group’s dominance in the telecom market, increasing its market share from just 50 percent to around 70 percent.

Fitch said the biggest challenge for Philippine telecom firms today remained to be the adoption of “all-you-can-eat” packages, which have deteriorated revenues from the traditional bread and butter voice call and text messaging services.

“This is due to the agency’s expectations that PLDT will continue [Digitel’s] unlimited tariff offerings, which have been disruptive to the market in general,” Fitch said.

Nitin Soni, associate director of Fitch’s Asia-Pacific Telecommunications team, said operating “ebitdar,” or earnings before income tax, depreciation, amortization and rent, margins have been “unsustainably high” for Philippine telecom companies. Call and text rates in the Philippines remain one of the highest in the Southeast Asian region.

Soni said these high margins would likely “deteriorate due to an increasing adoption of ‘all you can eat plans,’ and from an unfavorable change in revenue mix toward low-margin data services.”

A recent directive by the National Telecommunications Commission has also forced phone companies to reduce text messaging rates between networks, benefiting millions of subscribers.

The increasing popularity of broadband data services for both households and mobile users has also forced local companies to dip deeper into their pockets and increase capital spending to expand their networks.

Earlier this year, the country’s largest telco, PLDT, announced a plan to increase investments in its network by about 20 percent year on year for 2011 and 2012 to improve services.

Last month, Globe Telecom followed suit, announcing an $800-million network expansion plan over the next five years.

These moves are in anticipation of the higher demand for bandwidth and faster connection speeds from household and business Internet users.

But Soni said the increase in spending for both firms would not likely affect PLDT or Globe’s capability to repay obligations.

Fitch said PLDT and Globe were expected to continue posting healthy income levels, although lower than in previous years. About nine out of 10 Filipinos have mobile phones today.

Last week, Fitch upgraded the rating on Globe’s long-term foreign currency obligations from junk status to the minimum investment grade of “BBB-”, the same rating for PLDT.