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A recent earnings warning by Singapore Telecom, its first since being listed in 1993, has underscored the tough times facing Asian telecommunications companies.
Deregulation has led to increased competition, resulting in falls in service fees at a time when customer growth is slowing in maturing regional markets. Unfortunately for the telcos, there is a new popular technology that threatens to cut revenues further: cheap internet-based phone systems, such as Skype.
The prospect that phone calls could soon become nearly free with the widespread use of "voice over internet protocol" (VoIP) services poses a danger to those Asian telcos that are heavily dependent on voice calls to generate most of their sales and earnings.
The test for the telcos will be how they adapt to a new environment where data and video services, rather than voice, will be the main source of profits.
The growing use of VoIP is already hurting business for Hong Kong's PCCW and Japan's NTT among others. Revenues will erode further with the growth of broadband internet networks and the introduction of 3G mobile phones that allow the use of VolP.
"Telcos are cannibalising their voice business by promoting broadband and 3G," said Nirgunan Tiruchelvam at Phillip Securities in Singapore. "There is a direct correlation between the growth of VoIP and these services."
The telecoms ministry in Japan, Asia's most advanced telecoms market, says the number of subscribers to VoIP services has jumped from 3.1m in 2003 to 8.3m at the end of March 2005, compared with more than 60m regular fixed-line phone subscribers.
More than half of them have signed up with Yahoo Broadband, whose main shareholder, Softbank, has conducted an expensive advertising campaign to promote VoIP.
PCCW's dominance of Hong Kong's fixed-line market has come under pressure after smaller rivals launched VoIP services, which charge about half of PCCW's rates that are already among the world's lowest.
In Australia, Telstra's fat margins from fixed-line services, which account for 38.5 per cent of revenue, are under threat as the number of VoIP providers grows to around 40, including 15 new ones in the past three months.
It is not all smooth sailing for VoIP.
Fussy Japanese consumers complain about poor voice quality offered by VoIP services.
Moreover, personal computers must be switched on to use VoIP, which represents a cultural barrier in a country where PCs are not used as regularly as in western countries.
Some telcos have also resorted to erecting regulatory barriers against VoIP. In China, a local arm of China Telecom, the country's biggest fixed-line operator, recently blocked access to Skype's VolP service, saying it was illegal.
However, there are estimates that more than 200m minutes of "underground" VoIP calls worth Rmb190m (US$23.5m) were made in China in the first half of 2005.
VoIP providers in Singapore complain that high connection costs and slow responses from the city-state's three telcos are hindering the roll-out of services.
But telcos also realise that the shift to VoIP is inevitable in countries with advanced telecoms networks.
"There has been a natural technical migration to internet protocol, for which we have been preparing for the last decade," said Wong Soon Nam, head of corporate business marketing at SingTel.
SingTel is building a local next-generation network based on internet technologies that will be able to offer various fee-generating data and video services in addition to VoIP.
SingTel has reduced its dependence on voice services to around 60 per cent of total revenues.
This is in spite of investing heavily in regional mobile operators. Mr Wong believes that VoIP represents less of a threat in some countries where SingTel has invested, such as India and Indonesia, because internet use is not widespread.
Norio Wade, NTT president, has said that NTT must focus its capital spending on building a new optical fibre network, which would promote the use of VoIP to counter the decline in its fixed-line business. NTT plans to shift half of its 60m subscriber lines to the new network by 2010.
Although NTT would like to hang on to its legacy network services for as long as possible, "unless they [expand fibre connections], will be threatened", said Hitoshi Hayakawa, an analyst at CSFB in Tokyo.
Even Chinese fixed-line operators are exploring VoIP opportunities, with China Telecom and China Netcom having been given approval to test VoIP services similar to Skype.
By embracing VoIP big telcos may gain revenues by encouraging more consumers to sign up for broadband and 3G mobile services. "Falls in international call revenues will be balanced by the consumer shift towards broadband and 3G," said Mr Tiruchelvam.
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Under syndication arrangement with FE
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