There was a time when mobiles used to be a privilege for a few because they were so expensive, virtually a luxury item. Then came the famous offer, launched in 2003, from Reliance Communications, erstwhile Reliance Infocomm, that allowed individuals to own a mobile by paying just Rs 500 per month. It transformed the mobile from a status symbol to a mass-produced, must-have item of daily need, and importantly, quite an economical communications device.
At that time it was considered that the business model is not sustainable and hence it will collapse. But that offer set an innovative foundation that would bring about a telecom boom. With some help from regulators and several key policy decisions by two consecutive governments, in 1999 and 2004, in favour of a more open and competitive market, led India to create one of the most successful low-cost mobile service model in the world.
Now, every time a new company launches its services during festive occasions or even when college admissions are on full swing, there is a hue and cry of a new offer whereby calls are made available at ever-cheaper rates or more talk time is added to lure subscribers, even as they get to pay the same old amount of money.
When TataDoCoMo launched its service with a per-second billing plan, it was surprising how seriously it was taken. And for the investors, came the unfortunate opinion of TRAI officials, that per-second billing would be made compulsory. This felled the stock prices of telecom companies on October 6, 2009. Regardless of clarifications the damage was done and it did not get any better.
A section of the analysts is of the view that there are just too many companies in this sector. The market for each player will shrink since space needs to be created for new players that are lining up. Regulations tilted against consolidation is attracting internationally established players to India. In next 6-to-12 months many new players will be joining the fray. Etisalat from UAE, DoCoMo of Japan has already entered the market, Telenor of Norway and Sistema from Russia have intiated the process to enter, making the competition ever fiercer. The major attraction for the new players is that the Indian eco-system is highly conducive for new entrants. The well-developed tower sharing and outsourcing model helps new players reduce their capital expenditure at the expense of higher operating expenses. Though there is a question mark on how profitable these ventures are going to be, but these new entrants’ deep pockets (an average of $3-5 bn per new player) are a cause of worry for established players.
Urban markets are near saturation point and maintaining services in the rural sector is costly and that is creating more worry for established players. Although government is supporting the rural connectivity drive with subsidies, but the average revenue per user (ARPU) is thin in the hinterland. Even in the urban sector, the ARPU is stagnant. Earlier when there was a tariff rate cut it was noted that the ARPU would go up as subscribers would spend more time on their mobiles. But this is not true any more.
New challenges like mobile numbers portability (MNP), which allows shifting between operators without losing the phone number, will add to the woes of the telecom companies. This will hike the pressure on the companies as mobile users will churn service providers more regularly depending upon who is making a better offer. While this may help new entrants to gain a foot-hold, MNP does state that a customer has to stay with the new operator for least 90 days.
The sector’s cup woe was filled when the Telecom department, in September, asked for an independent audit of RCom’s books in the wake of auditor Parakh & Co. having found out in 2007-08, that the company’s actual revenue was Rs 12,298 crore, but what was unveiled was an inflated figure — by 23 per cent to Rs 15,213 crore while reporting performance to shareholders, leaving a gap of Rs 2,915 crore. For the same year, the company under-reported its revenues to TRAI, as a result of which it allegedly evaded license fees and spectrum charges worth Rs 224.79 crore. Now, SEBI and DoT have got into the act and are making an internal assessment of all telecom companies.
Shortcomings apart, none of this adds up to an industry-breaking argument, and here’s why:
Excellence Through Outsourcing
The telecom model in India is very unique in nature. It has adopted the best of the cost-effective technology that was on offer. The core of this model is outsourcing all peripheral work, while concentrating on business growth. Bharti outsources all of its information-technology (IT) operations to IBM. It does not stop there, as customer care too is outsourced to IBM. Other Indian firms have adopted the same model.
Bharti Airtel’s mobile network is operated by Ericsson and Nokia Siemens Networks (NSN). This part of the Indian model has gained phenomenal success around the world. The system’s wide adoption over the past six years has led to these two wireless equipment makers to become two of the largest mobile network operators in the world. Companies hire them to manage the flow of voice, text and data among subscribers. To improve the quality of service even the construction of the network is outsourced under the scheme known as “managed capacity”. This passes much of the risk of coping with a rapidly growing subscriber base to other parties and leaves Bharti to concentrate on marketing and strategy.
According to Capgemini, Bharti’s operating expenses are around 15 per cent lower than they would be were it to build and run its own network, while this model also drives its IT costs down by 30 per cent (Economist, September 24, 2009).
Although in some countries sharing of towers is compulsory by law, in India, it was the three leading GSM operators, Bharti, Vodafone-Essar and Idea Cellular, that came together to set up an independent tower company called Indus Towers. Bharti and Vodafone have 42 per cent equity stake each in the new company while Idea Cellular has a stake of 16 per cent. Following on similar lines even Reliance Communication and Tata Communication have spun off different companies that handle tower infrastructure. These companies provide services to other mobile operators as well.
Indian operators are also keen adopters of “green” base-station technologies, such as air cooling, solar and wind power, and hybrid diesel-electric generators, which reduce energy consumption and hence operating costs.
Other cost-cutting features adopted in the Indian model includes widespread use of paperless top-ups, thus reducing the costs of vouchers. Also, much of the equipment is turned off automatically at night, when traffic volumes fall, to reduce energy usage.
Despite an ARPU of only $6.50 and call charges of $0.02 per minute, Indian operators have operating margins of around 40 per cent, comparable with leading Western operators (Capgemini).
There are still some measures up telecom operators’ sleeves that they can use to raise margins while lowering costs. Sustainability therefore, can be the mother of all invention, meaning this is not the end of the story. For example the ‘dynamic tariff’’ model, pioneered by MTN, borderless roaming, 3G mobile can be explored for raising the profit quotient.
Also, after having had the benefit of years of experience, the time has now come for these companies to build a more customer-friendly environment that would inspire greater customer loyalty.
Every industry goes through the stages of the industry life cycle — from the development to the growth to the maturity stage. The telecom industry, in our view, is entering this maturity stage. Heightening competition and shrinking profit margins are some of the characteristics of this stage. Incorporating the new competitive environment, leads us to expectations of 33-35 per cent revenue per minute (RPM) decline from FY09 to FY12 (Credit Suisse). As a result, mobile margin estimates will show a 600-720 basis points declines over this period. Earnings per share (EPS) can go down by over 8 per cent for FY10-11. However, these estimates are for the best case scenario. In reality the decline may be much sharper than estimated.
But since this industry is very much a creation of the technological innovation of the time, you never know, whether the next big innovation (3G) might propel it into a second growth phase.
Consumers have found innovative ways to keep expenses low. Many-a-time one sees mobile phone users giving missed calls to each other as a signal that they are on their minds. Though such customers add to the subscriber base, yet rarely do they add value to the companies’ bottom-line. Unsurprisingly, coupled with market saturation, ARPU is showing a falling trend.
An innovation that may get implemented is ‘borderless roaming’, introduced by Celtel (now Zain) in late 2006. It allows customers to move between different countries without paying roaming charges to make or receive calls. They can also top-up their credit in any of these countries. Although this is an African innovation, during summer holidays Vodafone U.K. had brought this scheme for those who would be visiting countries where it has an already-established network.
This involves adjusting the cost of calls every hour, in each network cell, depending on the level of usage. Customers can check the discount they are getting on their handsets. This has been implemented in many other countries with successful result whereby better utilisation of capacity has been registered.
This article first appeared in the November, 2009 issue of Wealth Insight magazine. To subscribe click here.