Web Phones Pose Little Threat to Telcos

Posted 08 July 2006 @ 01:46 am EET     Print     Reprint     E-Mail     Comments

Frankfurt (Reuters) - The ratings outlook for incumbent European telecom companies is stable and new technology, like Internet-based telephone services, poses little threat to the sector, according to a Moody's Investors Service report released yesterday. European telecom firms are seeing their traditional fixed-line telephone business shrink as more people switch to mobile phones. They are also under pressure from smaller rivals offering cheaper phone and Internet services.

But Moody's said that while voice over Internet Protocol (VOIP) would erode revenues, the effect would be small, and any losses would be offset by broadband Internet products and services and mobile telephony. "The percentage of traffic which will be on VOIP is going to be marginal, meaning somewhere between 5% to 10% in 2010," said Carlos Winzer, senior VP at Moody's and author of the report.

"For an integrated operator, the upside of wireless plus the contribution of broadband overall will compensate for the marginal threat of VOIP," Winzer told Reuters. Asked when VOIP could begin to become a threat to incumbents, Winzer said: "It is certainly beyond our rating horizon and [we are] probably looking at 2010 and thereafter."

Moody's has an average rating for the European telecoms sector of Baa1 ?three notches above speculative-grade status. The report said that because most incumbents had strong balance sheets after cutting debt, they were able to withstand pressure on revenues and margins in the short-term.

It said France Telecom, Spain's Telefonica and Telecom Italia, for whom cutting debt was still a priority, were exceptions. European telecoms firms spent billions in the late 1990s upgrading networks and investing in new technologies, some of which were slow to deliver the expected revenues, resulting in a slump in the market at the turn of the century.

Thanks to cost-cutting plans in anticipation of dwindling fixed-line business, telecom firms would continue to generate strong operating cash flows, the report said. Moody's said it expected dividend increases, share buybacks and selective mergers and acquisitions.

Many European telecom firms are upgrading their networks to offer fast broadband connections together with Internet television and their own VOIP offers, Winzer said in the report. He said that despite investments in infrastructure, incumbents would have relatively low capital expenditure levels of between 15% to 18% of revenues as a result of the big investments made at the end of the last decade.