Long Distance Race – Sector opens up to competition

Over the years the Department of Telecommunications (DoT) and the Telecom Regulatory Authority of India (TRAI) have undertaken several initiatives to boost competition and promote growth in the national and international long distance sectors. As a result, tariffs have dropped significantly and interest in the segment has increased manifold. A host of domestic private operators and international telecom majors have been queuing up to tap the segment. Today, there are as many as 26 national long distance (NLD) licence holders and 24 international long distance (ILD) licence holders in the country, all vying for a share of this lucrative market segment.

The ILD segment was opened to private players in April 2002 with no limit on the number of service providers. The initial players in this segment included Tata Communications, Data Access, Bharti Airtel and RCOM.

As expected, the NLD and ILD segments witnessed intense competition, especially with regard to tariffs. In January 2002, long distance tariffs were reduced by 30 per cent to 50 per cent. On certain routes, like Mumbai-Delhi, the charges were reduced by almost 60 per cent during peak hours.

The reduction in long distance tariffs has since continued. Calls between Delhi and Mumbai, which were priced at Rs 21 per minute in 2003, cost Re 1 per minute in 2009 on average, while ISD calls to the US, Canada, Europe and Australia fell from Rs 50 per minute to Rs 3.75 during the same period.

In 2005, a major policy change was introduced in the long distance segment. The annual licence fee payable by operators for providing ILD and NLD services was slashed from 15 per cent to 6 per cent of the gross revenue. The entry fee for NLD and ILD operators was also reduced from Rs 250 million and Rs 1 billion respectively to Rs 25 million. The sharp fee reduction resulted in a rush for licences with DoT receiving more than 20 applications. To withstand the onslaught from the new entrants, existing players like RCOM, Bharti Airtel, BSNL and Tata Communications ramped up their operations. Mahanagar Telephone Nigam Limited (MTNL) broke its age-old practice of using BSNL’s long distance network to carry its traffic. Instead, it started offering local call rates to its subscribers for calls between Delhi and Mumbai using Tata Communications’ long distance network.

On the tariff side, BSNL and MTNL launched One India plans in 2006 and slashed tariffs even further. Both players charged Re 1 per pulse for local calls and Re 1 per minute for STD calls. This triggered a tariff war in the sector, with private operators joining the fray.

In 2008, DoT scrapped the Rs 4 billion bank guarantee that operators were required to furnish and allowed entrants a three-year time period to set up their infrastructure. The new licensees were allowed to ride on the infrastructure of the existing players, thus enabling faster rollouts.

Quick to act on it, Airtel offered global long distance carriers the option of using its network within India. This move quite expectedly benefited new telecom licensees like Unitech Wireless and Etisalat DB who could now save huge costs in rolling out long distance networks by riding on the existing operators’ networks.

To give a further fillip to the sector, TRAI, in March 2008, decided to completely phase out the access deficit charge (ADC). From April 2008 onwards, the levy on all domestic calls was removed. The ADC paid by ILD operators at the rate of Re 1 per minute on all incoming calls was also halved to Re 0.50 per minute. By September 2008, it was totally done away with.

Almost all the operators passed on the benefits to their subscribers by reducing their long distance tariffs. This triggered another price war in the long distance segment in 2008 as tariffs saw a huge dip, much to the cheer of users.

Leading the way, Airtel cut its long distance rates by 30-40 per cent in April 2008. RCOM, Vodafone Essar, Idea Cellular, Tata Teleservices Limited and other private operators followed suit. BSNL too joined the long distance rate war in June 2008 and announced a 40-50 per cent reduction in mobile NLD rates. In most cases, NLD tariffs averaged Re 1 per minute while ILD tariffs for the US, Canada, Europe and Australia came down to Rs 3.75 per minute.

In August 2008, the government allowed internet telephony. This service was already available in the grey market at rock-bottom tariffs, and regularising it was an attempt to bring down long distance tariffs further.

In September 2008, DoT permitted the resale of international private leased circuits (IPLCs) or international wholesale bandwidth. According to the regulation, resellers could buy wholesale bandwidth from licensed ILD operators and sell it to end-consumers such as BPOs, banks and exporters.

While this benefited those using IPLC for data carriage, major ILD operators such as Tata Communications, Bharti Airtel and RCOM were also able to increase their target markets through channels they could not tap earlier.

The sector received another push with DoT’s move to allow prepaid calling cards for long distance services. Analysts believe the move will impact tariffs in a selective way. While call rates to leading countries like the US are already competitive at about Rs 5 per minute, the move can bring down call rates to Europe, Australia and the Gulf countries. For instance, calls to Australia cost about Rs 10 per minute even though its distance from India is almost the same as that between India and the US.

In a move that further intensified competition in the ILD segment, the government decided to award BSNL the licence to offer ILD services at the beginning of 2004. MTNL also announced its plans to join the ILD race in December 2004.

As of September 2009, the main players in the NLD segment were Bharti Airtel, followed by BSNL and Reliance Communications (RCOM). Bharti Airtel led the way in the ILD segment as well, with Tata Teleservices (Maharashtra) Limited and RCOM following close on its heels.

While the individual consumer segment is dominated by domestic operators, it is the enterprise segment that has become highly competitive with the entry of global telecom companies such as AT&T, Orange Business Services, Verizon Wireless, British Telecom, and Cable & Wireless. Most of these players entered the long distance market in 2007 after the lowering of the entry fee, with AT&T being the first foreign player to get a long distance licence and to launch services in 2008. These international operators have recently formed the Association of Competitive Telecom Operators to lobby with the Indian government on the deregulation of ILD licences, the removal of double taxation on data services and a wholesale price regime for international connectivity in order to be able to compete with domestic long distance carriers.

On the regulatory front, DoT has deferred its plan to do away with the double taxation structure that international telecom carriers are subjected to in India. At present, foreign operators are required to pay licence fees twice, while buying bandwidth from domestic operators to use the latter’s infrastructure, and while reselling it to enterprises and their customers. Operators have been demanding the removal of such a tax structure. DoT is likely to soon ask TRAI for its recommendations on the issue.

With continuous effort from operators, entry of fresh competition and a better policy framework, the long distance market is likely to scale greater heights.

Going forward, operators who can provide better quality services and have wider network reach are the ones that will stay ahead in this business.