"Deregulation, pressures on profitability from the change in the revenue mix to lower margin new services, higher capital-spending requirements, and declining market share are some challenges that Asia-Pacific telecom operators will face in the near to medium term," Yasmin Wirjawan, a Standard and Poor's credit analyst, wrote in a report published yesterday.

"Given their need to deliver shareholder value, these operators' ability to balance these risks and maintain their strong financial flexibility will be key to their future credit quality," she wrote in the report titled "Industry Report Card: Mixed Signals For Asia-Pacific Telecommunications Companies."

Nevertheless, most telecom operators in the region have maintained stable credit quality in the past six months, benefiting from years of solid performance backed by high entry barriers, dominant market shares, and conservative financial profiles. These operators also exhibit strong business profiles and improved financial risk profiles, placing them in a better position to weather any volatility, according to the report.

In line with global trends, Asia-Pacific telecom providers have to deal with declining growth in fixed-line services. Growth in this segment has stagnated due to substitution by wireless services and rationalisation by increased broadband penetration. This is, however, partially offset by greater earnings diversity. Standard and Poor's expects capital spending to increase in this segment as fixed-line operators replace their public switched telephone networks with next-generation networks.

Slowing wireless subscriber growth in the saturated developed markets is likely to lead to more intense pricing competition in countries such as Japan, Singapore, and Australia. On the other hand, emerging Asia-Pacific markets, including India, China, and Indonesia, will offer greater growth prospects, as their penetration rates remain relatively low.

The Asia-Pacific telecom industry has witnessed major consolidation over the past few years. Standard and Poor's expects merger and acquisition activity to remain brisk in the near term, given the importance of economies of scale, particularly in fragmented markets, such as wireless operators in India and cable television companies in Korea.

"Some operators are also seeking opportunities for expansion in the region, given their significant cash balances and increasing need to diversify earnings," said Wirjawan. Such operators include Singapore Telecommunications Co. Ltd, Telekom Malaysia Berhad, and SK Telecom Co Ltd.