India’s 470 million-plus mobile subscribers are the biggest gainers from the competitive anxiety that is building up in the telecom market today. Five new brands have blazed into the sector in the past 11 months and both old and new operators have rapidly rolled out mobile services across the country, intensifying competition and bringing tariffs crashing like ninepins.
The price war was expected. The tariff cuts that had started early in the year had been gathering momentum with operators, especially the new entrants, looking to draw attention and subscribers.
Industry analysts expect tariffs to slide by as much as 25 per cent in the near future. And if communications IT minister A. Raja’s recommendation to bring down termination charges is followed through, call rates could drop to as little as Re 0.10 a minute for local calls and to Re 0.25 per minute for national long distance (NLD) calls.
Already, the Re 0.01 per second tariff offered by most operators has users cheering. And with four more players readying to join the telecom fray, the party promises to continue for consumers.
This is not exactly good news for telecom operators though, especially the incumbents who have been battling low ARPUs. The second quarter results for most operators show that revenue and operating profits have taken a hit consequent to the frequent rate cuts.
The only positive for operators is that the tariff game may not last long. Dr Mahesh Uppal, director, ComFirst, says that the fight will be bitter in the short term but thereafter the industry will see more consolidation. Sunil Bharti Mittal, chairman, Bharti Airtel, also reportedly stated on the sidelines of the India Economic Summit, “At the end of the day, every economic model will require returns, and if there are no returns, there will be consolidation. The world over, consolidation has taken place. Wherever there have been more operators, they have been reduced. There is empirical evidence.”
New offerings
Since the beginning of the year, the Indian mobile space started seeing a lot of activity, including extensive rural expansion, acquisitions, rebranding and increase in mobile footprint by some service providers. In January, Reliance Communications (RCOM) kicked off nationwide GSM services. As expected, it played the price card for drawing users. Targeting the below-Rs 300 ARPU segment, RCOM packaged its services with a one-time subscription charge of Rs 25 (including the GSM SIM), plus 900 minutes of talktime for local calls and SMSs to any network that could be accrued by RCOM’s GSM users in daily tranches of Rs 10 spread over 90 days.
The strategy worked. The Indian mobile sector added a record 15 million users that month with RCOM alone picking up 5 million.
Meanwhile, other operators too were busy giving the finishing touches to their rollout plans. Leading Chennai and Tamil Nadu operator Aircel made its entry on the national stage. Big spends, aggressive marketing and innovative schemes marked its rollout across the country.
Attractive pricing also played a big part in Aircel’s subscriber strategy. It offered free unlimited calls to Aircel and other local networks at fixed rates ranging from Rs 14 to Rs 250. In the Delhi circle for instance, Aircel offered recharge vouchers of Rs 14 which allowed users to make unlimited free local calls to any network for three days. The plan was a hit, as was reflected in the company’s swelling subscriber base. From January 2009 to September 2009, the company added 10 million subscribers to its network compared to 4.4 million during the corresponding period last year.
Meanwhile, MTS, the mobile telep ony service of Sistema Shyam TeleServices Limited (SSTL), having undertaken an expensive branding exercise to establish itself in the Indian telecom space, launched CDMA services in April 2009, starting with the Rajasthan circle. Thereafter, the company expanded its presence to nine telecom circles. Like its rivals, MTS too played the tariff card to the hilt. Its “One MTS, One India” plan, launched in July 2009, marked a first. For a charge of Rs 11, the plan allowed subscribers to make local and NLD calls within the network at a uniform price of Re 0.35 per minute. Since its launch, MTS has managed to double its subscriber base in Rajasthan from 500,000 to over 1 million.
By the time Tata Teleservices Limited (TTSL) was set to launch its GSM services under the TATA DOCOMO brand, the fight for market share was at its peak. To make a dent in the already crowded marketplace, Tata had to come up with a unique, stand-out product. It had the perfect offering: a “one-second billing” or “pay for as much as you use” plan that revolutionised the tariff game completely.
Naturally, users signed up in droves. TTSL reported the highest number of monthly net additions in mobile users for the last two consecutive months. Between August and October, the company added close to 7 million mobile users.
“It is extremely gratifying to emerge as the top grosser in the industry in terms of subscriber additions,” notes Anil Sardana, managing director, TTSL, with satisfaction. Clearly, this is just the beginning of the company’s larger rollout plan. Says Sardana, “We have launched GSM services under the TATA DOCOMO brand name in 11 circles. The remaining circles are set to go live by the year-end. When the impact of our innovative tariff schemes fully kicks in, our subscriber additions are sure to witness an even greater positive impact.”
Domino effect
The tariff skirmishes of the early months soon blew into a full-fledged war. TATA DOCOMO’s Re 0.01 per second billing became all the rage, forcing other operators to join in.
As it stands today, almost all the telecom majors have launched per-second billing plans, some in a few circles and others pan-India. Says Sanjeev Aga, managing director, Idea Cellular, “This is a bloodbath that has only just begun.” Aga expects the sector to undergo major restructuring over the next year as the tariff war rages.
Perhaps the most reluctant to join this race has been Bharti Airtel. Early October, Mittal said, “A war on price points is only going to put operators in the crowded telecom sector under more pressure. The prices are at rock bottom and there is very little cushion available for them to go down further.”
But go down they did. With the competition weaning away subscribers from the incumbents, Airtel announced a “payper-second” plan across the country. Called Freedom Plan, it charges Airtel customers Re 0.01 per second for local and NLD calls to Airtel numbers and Re 0.012 per second for calls to other networks. Says a senior company official, “The tariff war has not been launched by us. We have only responded as we did not have a choice.”
Meanwhile, RCOM too threw its hat into the ring and joined the per-second billing brigade by extending its Simply Reliance plan, which offers local and NLD calls for Re 0.50 per minute. State-run Bharat Sanchar Nigam Limited (BSNL) too came up with some schemes based on per-second billing.
Effective strategy
Tariff lowering is an effective entry strategy that has worked well in the past. A case in point is RCOM’s game-changing Monsoon Hungama scheme, which offered a phone and a connection for as little as Rs 500, changing the face of telecom in the country.
For SSTL, lowering tariffs was an important tactic. The company, which is aiming to garner 30 million users over the next three years to break even, opted for per-second billing while launching services in the Delhi circle in order to quickly gain traction. According to SSTL president and CEO, Vsevolod Rozanov, “The Power of One plan, combined with free 1 million seconds on our networks, will bring in high ARPUs. Revenue generation is what we are focusing on right now.”
So far, tariff lowering has worked. TTSL has been gaining hugely from it. And new telecom entrants like Etisalat, STel, Datacom and Telenor-Unitech can be expected to bring in more innovative and competitive tariff plans. According to analysts, new players have less to lose than the incumbents and in this volume game, their topmost priority is to ramp up subscriber numbers.
Aircel, for instance, believes that its aggressive tariff options have opened up new growth avenues. The company claims to have seen 15 per cent of its “switched off” customers become active in six of the circles it is present in.
“When you enter late in any circle, you end up becoming the `second SIM’ for customers. Therefore, a battle on price points is a serious strategy, especially in a country where users are extremely price sensitive,” says a senior analyst from Edelweiss.
The other factor that new players like Datacom, Etisalat and others are banking on is the high churn factor in the prepaid segment, which makes up more than 90 per cent of the Indian wireless market. Tariff drops here can make a lot of difference in tilting the scales. The prepaid segment, no doubt, consists of largely low-tomiddle-level end-users, but with the metros nearly saturated, growth is expected from these segments and from Category B and C circles.
Unitech Wireless, which is planning to launch services under the UniNor brand by the year-end, believes that with churn levels as high as 40 per cent in India, there is a huge potential subscriber base waiting to be tapped. That is where innovation and price point strategies will go a long way.
These players can absorb or have accounted for probable losses in the initial years to get subscribers. Unitech, for instance, has factored in losses of Rs 150 billion in the first few years of operations. According to Fredrick Baksaas, president and CEO of the Telenor Group, “Tariff wars happen when telecom penetration goes up from 30 per cent to over 40 per cent. The price war in India was expected. The Indian business model is different. This is the cheapest network that we will deploy and thereafter, we will go all out to make the company visible in the crowded Indian market by offering higher quality, innovative services.”
The company expects to structure its operations in such a way that it can break even in three years. According to Uppal, this is a reasonable time-frame. “The new players are not investing in infrastructure as much as the incumbents have. It may thus cost them a lot less than what they had originally planned. And since they do not have to build extensive infrastructure, they may be in a position to sustain low levels of ARPU as well. That said, the key for the new operators should be to get in high-end users and ensure that investments are recovered quickly. That would be a good base for a sustainable business model.”
Long-term impact
For incumbent operators like Vodafone Essar, Bharti Airtel, RCOM and BSNL, the going will not be easy. The tariff undercutting has naturally irked them. “The new players have nothing but tariffs to offer,” says Manoj Kohli, CEO and joint managing director, Bharti Airtel. “They will succeed in getting some customers and traffic in the initial period, but not for long.”
Till then, the revenues of the incumbents will be under pressure. Experts tracking the sector point out that in a market where ARPUs are already among the lowest, such tariff pressures can impact profitability significantly. The increasing number of subscribers with dual-SIM cards coupled with falling tariffs is bound to hurt them. “As more operators move to per-second pricing, the incumbents and the overall sector will be impacted. Analysis suggests that if competitors ?? incumbents and newcomers alike ?? switch to a similar plan, the sector will see a revenue loss of 10-15 per cent,” notes an HSBC analyst.
RCOM felt the pinch this quarter as it declared a 50 per cent year-on-year decline in net profit. “The entry of new players has led to heightened competitive activity and build-up of oversupply in the industry, leading to significant tariff rationalisation. We believe that such competitive activity will only increase over the next few quarters. These developments will accelerate the process of industry consolidation over the next two years,” notes RCOM group managing director Satish Seth.
According to Aga, the price competition will not be sustainable in the long run. “The consumers can party now. But once the shakeout of telecom operators is over, it will be back to sustainable pricing.”
Meanwhile, mobile number portability, to be implemented in 2010, is expected to spice up the competitive excitement and potentially shake up the market. Telecom operators are already preparing for a significant subscriber churn, especially among prepaid users.
In all this, the consumers are not complaining. Spoilt for choice, they are cherrypicking operators and offerings, making the most of the competition till it lasts.
Price pressures
While the cut-throat price war has helped the telecom sector in maintaining a 15-million monthly subscriber addition figure, it has put pressure on telecom companies’ earnings and share prices. Bharti Airtel has announced a lower-than-expected 13 per cent increase in quarterly net profit, the lowest in the past six years, while profits have halved for the number two operator, Reliance Communications (RCOM).
The results of other listed firms like Idea Cellular, Mahanagar Telephone Nigam Limited (MTNL) and Tata Teleservices (Maharashtra) Limited are also not that impressive.
Signs of a stressed top line can be seen in the fall in ARPU, which is down by over 20 per cent year-on-year across all telecom companies including Airtel and Vodafone Essar. The ARPU drop reflects the rock-bottom tariffs as well as the companies’ growing reliance on lower-spending rural customers as they push deeper into India’s hinterland to grow revenues.
As for stock market performance, despite the recent recovery in overall market prices, Bharti Airtel’s stock price is down by a tenth over October 2009 while RCOM’s scrip is down a third over the same period. Though the two players are best placed to tackle the situation due to their scale of operations, analysts believe that the pricing pressure will continue for at least the next two-three quarters before the dust settles down.
Operator Investment plan
TATA DOCOMO $2 billion for pan-Indian rollout of GSM services RCOM (GSM) NA Aircel $5 billion during 2009-12 in addition to $5 billion invested till date Idea Cellular $1 billion during 2009-10 SSTL $5.5 billion over the next seven years; of this, $1.5 billion already invested Loop Mobile $75 million in Mumbai operations during 2009-10 UniNor $2 billion for pan-Indian rollout Datacom $2 billion for pan-Indian rollout STel NA Swan Telecom NA
