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Extreme Mobility

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There has never been a better time to get a mobile phone connection. There are at least six, if not more, operators to choose from in every circle. In June this year, the convention of paying per minute of calling was broken when Tata DoCoMo started its pay-per-second facility, dramatically bringing down the cost of a call. "We made the fare fair," quips Anil Sardana, managing director of Tata Teleservices (TTSL), the Indian partner of Tata DoCoMo.

Tata DoCoMo's innovation was quickly followed by its rivals. Now, Sistema Shyam TeleServices (SSTL), under its brand MTS, is offering a half-paisa-per-second facility. Suddenly, the idea of calls being absolutely free doesn't seem outlandish any more.

The flurry of offers and counter offers is just one effect of the bitter war that has broken out in the Rs 1,60,000-crore revenues Indian mobile telephony service market. The war is being fought between new entrants — Loop Telecom, Etisalat DB, Uninor and a few others — who have procured licences last year, and the old players — Airtel and Vodafone — who have dominated the field so far. "We anticipated the price war and we adapted our business plan for it," says Sanjay Chandra, managing director of Unitech, which entered into a joint venture with Telenor to create Uninor.

The battle has been complicated by old CDMA players — Reliance Communications (RCom) and TTSL — offering GSM services aggressively. The sudden aggression of regional players — Aircel, for example — who want a national presence has increased the complication. "We are seeing a lot of flux," says Atul Bindal, president, mobile services at Bharti Airtel, the undisputed leader in the market currently.

At one level, there is intense price cutting to woo customers. At another level, there is tremendous lobbying going on to corner scarce spectrum — the one commodity that differentiates a big player from a small player. Somewhere in between, questions on suitable technology, an old boys' network in the primary telecom association and, finally, the intentions of Department of Telecommunications and the Telecom Regulatory Authority of India (Trai) are being raised.

Click here to view enlarged graph

The viciousness of the fight was apparent on the day the telecom regulator held an open house early December to discuss the spectrum allocation policy. The Cellular Operators Association of India (COAI), the body representing all the GSM service providers, was supposed to give its views. But as soon as T.R. Dua, COAI's officiating director-general, got up to present his case, several new members of the association, led by Vinod Kumar Budhiraja, chief regulatory officer of Etisalat DB, said Dua did not represent them. "COAI does not represent the majority view," said Budhiraja bluntly. He was backed by Anand Dalal, vice-president, corporate and regulatory services, TTSL, and N.K. Mangla, head of regulations of RCom. "COAI cannot be run by two companies with one or two other non-committed members," argued Dalal. "We will fight to seek equality in spectrum," vowed Mangla. As matters got heated, Trai chairman J.S. Sarma had to step in to soothe frayed tempers.

Lucrative Market
The battle is vicious because the prize is tempting. The Indian telecom market is the fastest- growing, globally. From 65 million subscribers in 2005, it grew to 146 million by end 2006, and then to 346 million by 2008. In the past few years, an average of 10 million subscribers were added per month. Since August 2009, 15 million new subscribers are getting added every month. Trai projects that India will have over 500 million subscribers by end December. (European Union-27 has only 600 million subscribers, says Sharifah Amirah, principal analyst for ICT, Frost & Sullivan, Europe. Only a million are added a month. The US adds only 2-3 million subscribers per month on a total base of 280 million. Even China adds only 7-8 million subscribers a month, though its subscriber base at 730 million is much bigger.)

Usage, too, is expected to go up. Currently, most people make only voice calls. But data transmission usage is picking up. Every player expects data usage and value-added services (such as ringtone downloads) to grow a lot.

It is not as if the Indian telecom market lacked competition earlier. Pre-2007, there were four to five players in each circle. Bharti Airtel and Vodafone Essar were national GSM players. RCom offered mobile services using the rival CDMA technology across most of India and GSM services in the North-east. TTSL had CDMA operations nationwide. Idea Cellular, managed by the Aditya Birla Group, had a GSM footprint in most states. Then there were strong regional players — Aircel, JT Mobile and Spice. Finally, there were the government-owned telecom companies — MTNL, in Delhi and Mumbai, and BSNL, which covered the rest of India.

There were price wars even in the past, most notably in 2005, when Reliance had made its debut. (It offered pre-paid customers a lifetime valid connection for a one-time payment. Everyone was forced to follow with similar schemes.) But between 2005 and 2007, things had started settling down. Some consolidation took place. Hutch Essar (now Vodafone Essar) picked up Modi Telstra, Bharti Airtel snapped up Hexacom and JT Mobile, and Idea acquired Spice.

By end of 2007, a clear hierarchy had been established. As the industry got more efficient and costs of equipment came down, profits and profitability for almost all players had started rising steadily. (State-owned players were the exception as their profits shrunk due to politically biased policies forced on them.)

Stirring The Pot
Things changed in 2008, when the government decided to issue a fresh set of licences to a number of new applicants. These included a mix of known and unknown faces — Swan Telecom (Dynamix Balwas Group); S-Tel, a joint venture between Sterling Infotech and Bahrain Telecommunications; Loop Mobile, a new subsidiary of BPL Mobile (which was one of the pioneers but lost out in the last round); and Datacom, a partnership between HFCL (another old timer bruised in the first round) and consumer electronics giant Videocon.

Older service providers are depending on market understanding and capex.
Those increasing their hold, have lower tariff and new business models in their quiver

 (from left) Manoj Kohli,CEO and joint managing director, Bharti Airtel; Marten Pieters, CEO, Vodafone Essar; Sanjeev Aga, managing director,

 (from left) Anil Sardana, managing director, Tata Teleservices; Stein-Erik Vellan, managing director, Unitech Wireless; Gurdeep Singh, chief operating officer, Aircel

Norway-based Telenor picked up a 74 per cent stake in the telecom company promoted by property developer Unitech, and the firm was renamed Unitech Wireless. Meanwhile, UAE-based Etisalat picked up a stake in the Dynamix Balwas operation to form Etisalat DB Telecom.

Meanwhile, the Tatas, who were present only in the CDMA space, entered the GSM space through a joint venture with Japanese telecom major NTT DoCoMo. Aircel, which was present only in Tamil Nadu and North-east circles earlier, decided to enter 22 new circles.

The ostensible reason for the government granting new licences was improving rural coverage, which was being shunned by established players. "If you go into the interiors, the coverage is fairly thin and only a couple of operators exist," says Kamlesh Bhatia, principal research analyst at technology research firm Gartner. The early players didn't focus on rural areas for many reasons: one, urban areas had enough growth; two, the cost of rolling out a rural network was high; and finally, the average rural usage was much less than urban usage. The rural average revenue per user (Arpu), Rs 50, was less than a third that of urban areas, Rs 175.

With the new licences, the number of networks in operation shot up from 120 to more than 250. Even the fast-growing market was not equipped to absorb the new competition without major disruption. "Thirteen operators are too much for an industry," says Bhatia.

The Battle Begins
Given that the incumbents had strong infrastructure, entrenched brands and a base of existing customers, the newcomers should have been at a disadvantage. But the new entrants had their own advantages. The first one was that the cost of entry had come down dramatically. The cost of equipment had dropped very sharply because of the market's growth. More importantly, the operating model had changed. The early players had built their own networks, infrastructure, towers, etc. In other words, the capital expenditure was high.

The new model in vogue is of outsourcing a bulk of these services. A Nokia would handle the networks, for example, while an IBM or another technology company would handle things such as maintenance and customer service, leaving the telecom service provider to focus on building its brands and subscriber base. The outsourcing model had brought down costs of entry as well as the break-even period. Unitech Wireless, for example, has outsourced its network to Nokia Siemens Network and the entire capability is being built and maintained by Wipro. Aircel has outsourced to Sparsh. S-Tel's network vendor is China-based ZTE.

In 2005-06, an operator expected to break even in six to seven years or more. In the current scenario, a new player focused towards urban markets can hope to break even in operations in three to five years. In rural areas, the break even period is very high, over 10 years. This is partly because the cost of setting up a rural operation is high while the Arpu is low.

A Matter Of Cost
Equally important is that the cost of licences for the new players, adjusted for inflation, is much lower than what the older players had paid. At present, an all-India licence costs Rs 1,651 crore plus some share of the annual gross revenue (6 per cent for circle C, remote areas; 8 per cent for circle B, mini-metros; and 10 per cent for circle A, which includes metros). In the mid-1990s, when things were restricted to only two players per circle, the cost was more than Rs 1,00,000 crore over a 15-year period.

That apart, many of the new players have come in with very deep pockets. They plan to blitz the market and are prepared to take heavy losses in the short run. Unitech Wireless' peak funding plan is close to Rs 15,000 crore, and it has planned for heavy initial losses. The amount of advertising spend in telecom has shot up from Rs 400 crore in 1996-97 to more than Rs 3,000 crore in 2008. This is expected to grow to about Rs 7,500 crore in 2010. An advertisement industry source says that the intense competition could mean normal advertisement spend in the telecom sector going up to 4-5 per cent of gross revenue from 2-2.5 per cent now.

The other big advantage that the new players have is that 80 per cent of Indian subscribers hold pre-paid connections. The pre-paid customer is prone to jumping from brand to brand in search of better bargains. This is how unleashing a price war can bring in quick gains.

Companies are also betting on mobile number portability (MNP). "Vodafone Essar has invested in technology and equipment to make MNP a reality for customers within the stipulated time frame," says Marten Pieters, Vodafone's CEO, who expects MNP to be a big factor in market dynamics in the future.

While Tata DoCoMo kicked off the new round of price wars, MTS went a step further. The salvos launched by these players have, in turn, forced each player to match them.

Though they are loath to admit it, Airtel and Vodafone were a bit slow to react when the newcomers came in. Instead of aggressively cutting prices themselves, they were followers. The hesitation was understandable — fighting on price tends to hit the bottom line. Airtel CEO Manoj Kohli says, "Today, operators are acutely focusing on tariffs, but there is much more that has to be done." Though both players have huge cash hoards, the competition is forcing them to spend more to keep their market shares intact. "It will be harmful as the margins get stretched," says Arpita Pal Agarwal associate director, telecom at PricewaterhouseCoopers.

Grabbing Spectrum
One of the few advantages that Airtel and Vodafone have is that they have an upper hand when it comes to spectrum allocation. And this is where the fight is expected to get truly nasty.

Spectrum is crucial to winning the telecom battle because the quantum of spectrum determines the number of customers you can service, the type and quality of service, and the number of value-added services that can be offered.

NEW ARENA: Very few telecom players have strong infrastructure in the rural market even though substantial increase in subscriber base is expected to come from these areas (BW pic by Tribhuwan Sharma)The government's spectrum policies have changed many times in the past, largely because of successful lobbying. As it stands now, all players get a certain minimum spectrum (4.4 Mhz) with their licences. Till 2007, the policy dictated that a company could get additional spectrum free if it could show that its subscriber base was too large to be serviced by its existing allocation. This helped both Airtel and Vodafone corner additional spectrum — 6.2 Mhz and 8 Mhz, respectively. CDMA players with similar subscriber bases were not so lucky because CDMA as a technology was supposed to be more efficient — that is, it could service more customers in the same spectrum than GSM.

This led to a lot of heartburn because RCom and TTSL felt that this gave an unfair advantage to Airtel and Vodafone. Bharti, of course, feels otherwise. "The onus is on operators who have spectrum in both technologies, the CDMA and GSM, to show efficiency of spectrum utilisation," says Narendra Gupta, chief regulatory officer of Bharti group.

"Spectrum needs a techno-political push along with regulatory intervention," says G. Krishnamurthy, vice-president of IT market research from Springboard Research India.

In 2007, shortly after Vodafone and Airtel got the additional spectrum, the government started mulling a way to get more revenues. The plan that was mooted was that while a certain minimum spectrum (4.4 Mhz) would come free with the licence, the rest would have to be bought at an auction. This has the newcomers along with Reliance and Tata up in arms because they feel that the auction is meant to increase their costs after Airtel and Vodafone have got the same additional spectrum for free. 

Click here to view enlarged imageThe fight has proved good for the customer, but bad for the industry. It has ensured that the customer is getting better bargains in voice and data transmission. Prashant Singhal, telecom industry leader and partner at Ernst & Young, says, "Services are very cheap for consumers."

Another interesting trend is that many customers have started keeping multiple SIM cards — using one for local calls, another for inter-state usage and a third for downloading, etc.

On the other hand, companies' revenues are falling steeply and all financials are coming under pressure. Gurdeep Singh, CEO of Aircel, says the price wars will hit everyone's revenues.

"Telecom operators' EBIDTA (earnings before interest, taxes, depreciation, and amortisation) is under pressure. This is expected to be more in the next two quarters," says Kunal Bajaj, India director at bda, an advisory firm for companies investing in Asia.

Little wonder, the stockmarket has started looking at telecom players with disfavour. Since the price war began in June 2009, stock prices of telecom players have underperformed the market. The industry's market cap has fallen from Rs 2,57,343.89 crore on 24 October to Rs 1,62,300.75 crore by the end of November.

The telecom industry is becoming an industry of diminishing returns. "The sector would go through a re-rating fundamentally because Arpu are already under stress. Even though the current price wars ensure width of operations, depth of revenues will be weak," says Harish Bijoor, CEO of Harish Bijoor Consultants.

Most people do not expect the war to end anytime soon. "Competition in India is intense and is likely to remain so for some time. However, in the medium term, in-market consolidation should improve returns," says Pieters of Vodafone. The players themselves are girding up for a long, hard winter.