The WhatsApp risk for Indian telcos

Alternative modes of are communication already quickly gaining traction, adding to list of risks faced by telcos 

A Bloomberg report says social messaging apps like WhatsApp have cost telcos around the world $32.5 billion in texting fees in 2013. Photo: Pradeep Gaur/Mint

With Facebook Inc.’s purchase of WhatsApp Inc., big money is backing the most popular over-the-top (OTT) communications services. Whether the bet will pay off is a 19 billion-dollar question. But then the social networking giant is known to chase growth rather than profit.

This is worrisome for not only competitors such as WeChat and Viber, but also telecom services providers whose revenue models get skewed with the increased adaption of such data-based services. Simply put, OTT services cannibalize voice and short messaging services (SMS) of telecom companies. A Bloomberg report says social messaging apps like WhatsApp have cost telcos around the world $32.5 billion in texting fees in 2013.

In a 10 December note, analysts at Nomura Research provide interesting data for the Indonesian market, which has witnessed a surge in data traffic in the past few years. “Our case study on Indonesia highlights: with rising data (20% of revenues now versus 6-7% in 2009), Indonesian telcos saw Ebitda margins fall from 52-53% (on an average) in 2009 to 48%; and telcos’ capex rose by 25% in 2011, then 35% in 2012, and is expected to remain high for the next 2-3 years in our view.”

The analysts added that there is the risk of this trend repeating for Indian telcos, albeit at a slower pace owing to relatively lower level of smartphone penetration and significantly lower proportion of SMS revenues (6-7%). Besides, Indian telcos have managed to restrict capital expenditure by using vendor financing. Even so, it must be noted that data revenues entail lower margins vis-à-vis voice and SMS revenues. Besides, Indian telcos have bet big on data by bidding large amounts in the recent spectrum auction. The return on these investments might get hurt if OTT service providers gain scale and benefit from the surge in data usage.

A pertinent question here is if the growth of OTT services will get expedited with big money now backing these service providers. Facebook isn’t the only one betting big on OTT communications service providers. Just last week, Rakuten Inc., a $19 billion worth Japanese online retailer, bought the Viber Internet messaging and calling service for $900 million. WeChat, a Chinese messaging service, is owned by Asia’s largest Internet company, Tencent Holdings Ltd, which has a market capitalization of $139 billion. With big money now backing OTT service providers, telcos would need to be on their toes to protect their revenues.

OTT services thrive on a large-sized network. As of December, Facebook was estimated to have over 90 million users in India, while WhatsApp had about 25 million users. A recent report by Citigroup Research based on a visit to the state of Uttar Pradesh stated, “The pervasive presence (adoption, usage and familiarity) of WhatsApp—the (free) messaging service—was the highlight of our UP drive. This phenomenon, cutting across socio-economic and age strata, reflected awareness/accessibility/affordability of smartphones—and people’s knowledge of/comfort with data plans.”

NITESH KUMAR SINGH 

PGDM 2ND

SOURCE-- LIVEMINT NEWS