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How telecom operators are working towards ensuring a mobile in every pocket?

Business standard / Mumbai August 28, 2007

Indians love to talk. And, these days, they can talk to their hearts’ content by paying very little: calls are getting ever cheaper, entry-level mobile handsets sell for under Rs 800, and bundled offers (talk-time and handset) mean you can be connected for next to nothing.

Not surprisingly, subscribers are only too happy with this turn of events. But even mobile operators are finding that generosity is its own reward: in a high-volume business like this, where every subscriber counts, they are selling millions of new connections every month.

Now for the bad news. Regulatory roadblocks loom ahead, the quality of service is steadily dropping, margins are getting squeezed and competition is becoming increasingly aggressive.

How are telecom operators dealing with the rapidly evolving market? the strategist takes a look.

Problems in the air

Consider the odds telecom operators are up against. For starters, they’ve hit a major regulatory roadblock — the impasse over spectrum allocation, which is imperative to take the growth story further.

The lack of spectrum and, in some cases, its inefficient utilisation is taking its toll on the quality of service and call drops are becoming exasperatingly frequent. So much so that in late 2006, a survey by the Telecom Regulatory Authority of India (Trai) revealed that only one of 128 cellular operators meets the overall customer satisfaction benchmark of 95 per cent.

“It’s beginning to hurt. The network is being affected due to lack of spectrum,” agrees Rajat Mukherjee, vice president, corporate affairs, Idea Cellular. The Aditya Birla group company’s entry into the lucrative Mumbai circle is one of those affected by the spectrum roadblock.

“We want a pan-India presence and hope to get clearances soon to have a nationwide footprint,” Mukerji says.

Meanwhile, playing the high volumes game is a threat to operators’ margins. Already, the average revenue per user (Arpu) for GSM services is falling (from Rs 316 in December 2006 to Rs 298 in March 2007) and although CDMA Arpu is increasing (from Rs 196 to Rs 202 over the same period), it is still lower than the GSM figure.

It doesn’t help, either, that pre-paid customers comprise over 85 per cent of the total cellular subscriber base and account for an overwhelming 96-97 per cent of all incremental additions.

Typically, prepaid customers run up lower bills and are a floating population with high churn levels. “It is like choosing between the devil (having pre-paid subscribers) and the deep sea (not having them at all),” says an analyst.

The churn will only increase, as will competition, if (when?) Trai introduces number portability (by which a subscriber can retain his mobile number even if he changes the service provider).

Ringing in change

How are telecom operators tackling these problems? They are reaching down the pyramid. A June 2007 CII-BDA report estimates that Indian households can spend up to 6.9 per cent of their income on communications services, and most mobile operators are determined to get their share.

Of course, it helps that handsets prices have crashed — the sub-Rs 2,000 category accounted for 50 per cent of all handset shipments nationwide last year, states the report. A mature second-hand market for refurbished handsets helps further decrease entry costs.

And to ensure that window-shoppers become buyers, operators such as Airtel, Vodafone Essar, Reliance Communications (RCom), Idea and Tata Teleservices are offering lifetime prepaid service plans. About a third of Bharti’s pre-paid subscriber base comprises “lifetime validity” customers with easy on the pocket call rates.

Still, it’s not enough. “Tariffs have to go down further,” asserts Manoj Kohli, President & CEO, Bharti Airtel. This, when call rates in India are already the lowest in the world at approximately 2 US cents (around 82 paise) a minute. Compare this with 33 cents in Japan, 11 cents in Brazil, and 24 cents in Australia.

The results are visible. According to Trai, Indian telcos (of which four — Bharti, RCom, Vodafone Essar and BSNL — account for nearly 75 per cent market share) have been adding close to 6-7 million every month, taking the current number of wireless subscribers — GSM, CDMA and Wireless in Local Loop (WLL-fixed) — to a little over 185 million by end-June 2007.

The government expects telcos to reach the 500-million mark (wireless and fixed) by 2010. By end-July, there were about 232 million telecom subscribers (mobile and landline) across India.

Room to grow

That still means only one in five Indians has a phone. This teledensity comes from an almost 50 per cent penetration in the urban areas and a mere 2 per cent in rural belts.

In developed countries where people typically have more than one telephone connection, urban teledensity is actually beyond 100 per cent — 123.47 per cent in Hong Kong, 124.28 per cent in Italy, 112 per cent in the UK and 100.76 per cent in Singapore, for instance. The potential for expansion in India, then, is immense.

That’s precisely what Indian telcos are working on. They are investing billions of dollars — an estimated $20 billion over the next two years — to upgrade their networks, add towers, and build their subscriber base. “Their strategy is simple. Get as many people on the network, try to retain them, and then look at segmentation,” notes Arpita Pal Agrawal, Associate Director, PWC.

Bharti, for instance, aims to over 75 per cent of the population by end-fiscal 2008; it currently reaches 62 per cent of the country. To do that, the company is rapidly growing its distribution network (640,000 outlets at present). Bharti’s strategy? No company-owned showrooms. Franchises help keep costs down and also make faster expansion possible. “We merely ensure our customers get the best service,” says Kohli.

RCom isn’t far behind. According to Chairman Anil Ambani, the company covers nearly 60 per cent of the population (over 10,000 towns and 300,000 villages), through 500,000 retail outlets and 2,000 distributors. By end-2007, it plans to be in 23,000 towns, all habitations with population of over 1,000, cover the entire railroads and national highways, besides 80 per cent of all state highways.

“The focus is very simple — ensure a superior network coverage; make robust investment in network capacity, which prevents call drops and congestion; and offer a package of handset and talk-time as a solution to customers,” says S P Shukla, president and CEO, personal business, RCom.

The strategic shift to the GSM platform will also help the company immensely — not only is GSM technology more widely adopted in the country, its Arpu is also higher.

Initially, RCom will enter eight cities (around 8,000 towns) across East and Central India.

Talk is cheap

In Europe, voice revenues have plateaued for 3G operators such as Vodafone, 3 and Telecom Italia Mobile. At present, voice accounts for 90 per cent of the revenue for Indian telecom services, but the country’s turn could come as quickly as 2010. Which is why telcos are turning to value-added services (VAS).

According to Frost & Sullivan, total mobile revenue (voice and data) is $11.22 billion (Rs 46,000 crore). VAS revenue accounts for 8.3 per cent of this, that is, $927.1 million (of which non-SMS revenue is $224.4 million).

Admittedly, VAS has a way to go before it catches up with voice. For instance, Bharti’s share of revenue from non-voice services is just above 10 per cent, of which SMS accounts for slightly over 6 per cent. But the company recognises the growing importance of the business. Which is why it is offering services that are likely to appeal to a broad range of customers.

There’s the partnership with Google, for instance, which allows Airtel mobile users to use Google search. An interactive radio service, downloadable songs and ringtones (available at 100,000 Airtel Music shops) apart, Airtel’s latest feature is “song catcher”, which allows mobile users to download a song by placing their handset close to the music source for 30 seconds.

In fact, mobile operators are betting big on music — next to SMS, it is the biggest money spinner under VAS. Caller ring back tones or CRBTs, for instance, have a 15-25 per cent market share, followed by ringtones with around 15-20 per cent, while the remaining can be attributed to full song downloads.

The increase in subscriber base and the availability of music compatible handsets are the major reasons for the increase in digital music sales, says BPL Mobile CEO S Subramaniam. Over 40 per cent of a telecom operator’s advertisement budget is being used for promotion of music and handsets that can support them, he adds.

Other operators, too, have begun banking on VAS. The state-owned BSNL recently awarded two contracts to Swedish equipment major Ericsson to host a mobile content download portal and a ring-back tone service.

And RCom has already launched commodity quotes on mobile phones. It has entered into a tie-up with a TV18 group firm, commoditiescontrol.com, to offer the service.

CDMA service provider Tata Teleservices (Maharashtra) Ltd, on its part, launched its toll free services to enable subscribers to access companies that are listed under 1-800 services, including firms in banking, insurance, airlines, hospitality and other sectors.

Mobile data revenues are expected to increase from 7 per cent of the total operator service revenues to approximately 20 per cent by 2009.

The introduction of advanced wireless services like 3G will drive the industry further and may, in turn, increase the subscriber base as well. Already, there are about 1 million subscribers who own 3G handsets, constituting a ready “installed base”.

According to the CII-BDA report, if operators subsidise handsets, there will be 30 million 3G subscribers by 2010.

VAS is just one way mobile operators are seeking to establish a life beyond voice. They are also becoming convergence powerhouses, too, launching Internet-protocol television and planning direct-to-home broadcast as well. MTNL, for instance, already has over 1,000 IPTV subscribers and is aiming at 50,000 in 18 months’ time.

BSNL has launched its IPTV service in four cities and Rcom and Bharti are expected to follow suit soon. RCom and Bharti are also planning to launch DTH services this year. “We cater to all three screens — mobile (small), personal computer (medium screen through broadband), and television (large screen through IPTV and DTH),” says Kohli.

Towering ambitions

Given the accelerated growth in the wireless subscriber base, telcos will require huge capital expenditure to support this growth. And, points out Alok Shende, director, ICT practice, Frost & Sullivan, it will entail massive deployment of towers, especially in the rural areas, highways and remote areas.

Besides, the government incentives, new services like 3G, WiMax (when the government finally allocates spectrum) and digital terrestrial transmission will help create new demand drivers for towers.

Macquarie Research forecasts the need for 345,000 towers across India, implying an additional 225,000 towers to be built in the next three years. Towers don’t come cheap — at around Rs 35 lakh each, that’s an additional investment of Rs 78,750 crore to be split between the telcos. (Bharti Infratel and RTIL are likely to account for 57 per cent of these towers.)

Which is why telcos are now paying serious attention to a potentially win-win strategy: sharing towers. For regional players looking for a pan-Indian presence, this is a way to keep down capital and operating expenses.

“Besides, they want to stay asset-light and crunch time-to-market as much as possible,” points out Shende. For the big player, who has already set up the tower, tower sharing becomes an additional revenue stream.

While Vodafone has already signed an MoU with Bharti for sharing its passive wireless infrastructure, including roughly 70,000 towers across India, in the future, Bharti Airtel, Reliance Communications and Tata Teleservices have hived off their tower assets into separate subsidiaries, to better focus on the new business.

 
Company        Marketshare (February 2007)         Projected marketshare (March 2010)   
Bharti                     22.3                                       22.3-22.4       Net additions to decline with competition 
RCom                     20.4                                       21.1              GSM foray will compensate for CDMA fall 
Vodafone Essar        15.9                                         15.3               Decline due to increased competition 
BSNL                       16                                         14                 Decline due to increased competition 
Aircel                      3.2                                         6.1                Pan-India coverage will help 
Tata Teleservices      9.6                                        8.4                Decline due to being a pure-CDMA player

Source: Macquarie Research (Marketshare in per cent)