Asian telecom competition increasing

Competition: Fitch Ratings said that the slowing pace of subscriber growth coupled with increasing competition in the Asian telecommunications sector is likely to exacerbate the effect of evolving industry risks over time.

The agency still considers the credit outlook for most emerging markets to be stable to positive for the time being, but notes that they tend to be laggards with respect to trends that afflict the developed markets, where the outlook is broadly stable to negative. Rising business risk, already having a greater effect on developed market operators, is expected to become more pronounced by 2008 across the emerging markets.

"The pressures from rising penetration rates, fixed-to-mobile substitution and convergence are driving lower operating margins, in particular for fixed-line operators," said Jonathan Cornish, head of Fitch's Asia-Pacific Telecoms, Media & Technology team, in a report entitled "Asia-Pacific Telecom Sector - Regional Update".

The report also highlights that despite mobile having underpinned growth throughout the region in recent years, operators are also experiencing margin contraction on account of aggressive price-based competition and increased subsidies as they either migrate customers to 3G from 2G (typically the case in developed markets) or rapidly expand their network capacity in anticipation of further liberalisation (as is the case in some emerging markets).

"Furthermore, regulation has emerged as more of a concern in markets such as Australia and New Zealand, while there is still ongoing uncertainty in emerging markets, though none more than in China where the government is yet to announce what changes and sector restructuring it may implement, including the number and type of 3G licences," Cornish added.

Lower revenue growth combined with the squeezing of margins impeded organic operating cash flow growth and, in fact, contributed to lower EBITDA for most developed market incumbents and alternative network operators ("ANOs") in FY05. With rapid changes in technology prone to increase investment in new services and further fragment the industry, Fitch expects continued margin deterioration over the next two years.

An increasing number of operators content with their financial positions and FCF have used this to justify higher shareholder returns. Operators in markets such as Hong Kong, Australia, Korea and Japan (regarded as being among the most competitive) are expected to feel the greatest pressure over the next 18 months in relation to the competitive landscape.