Mobile Services - The Market Buzz Gets Louder !

[Arun 795]

The Hindu - Business Line

LABEL it India Calling, if you will. Riding on the entry of Reliance Infocomm and increasingly aggressive marketing pitch by Bharti and Hutch, the attractive plans, more affordable denominations in the pre-paid category and competitive tariffs, the mobile user population has more than doubled, to about 38 million, in the last year.

While such a frenetic pace of expansion is expected in an industry that is in the early stages of evolution admittedly, sustaining such a growth rate consistently is going to be difficult.

Even if the growth rate settles at 30-50 per cent over the next few years, the market for mobile services will comfortably surpass that for landlines and move closer to the target of 100 million consumers. What are the key drivers of this growth and, more important, what challenges confront it?

Before the advent of cellular services, one had to depend on what was offered by the state-owned BSNL/MTNL, and tariffs ruled high in the absence of competition. The entry of cellular services changed all that. Price cuts, especially on long-distance calls, were steep, and public sector telecom companies were forced to respond to preserve their market.

Now, however, the pricing environment appears to have stabilised and further price cuts of any appreciable magnitude look unlikely as part of a business strategy to add consumers and gain market share. Price cuts may be on the cards only if a significant regulatory change in the form of a reduction in licence fee/spectrum charges/access deficit charges is announced.

Though subscriber additions are robust, it is also important to note that the average revenue per user (ARPU), a closely observed parameter, has been on the decline over the past year. Arresting this decline or, for that matter, even jogging up the ARPU , either through a combination of deft cost management or by cross-selling value-added services to the customer set would be the industry's key challenge.

Customer convenience

Customer churn is the bane of a mobile service provider's operations; this is especially so in India given the preponderance of pre-paid customers in the total user population. Now, in an attempt to ensure greater stickiness of this user-group, cellular operators are innovating (over-the-air recharge and electronic recharge, for example).

Conveniences offered to customers could well be the next plank on which the battle for a greater share of voice could be fought. Affordability, too, is another angle to convenience; this is now being addressed by having pre-paid cards with lower denominations — as low as Rs 54. This would be a key weapon in the arsenal of mobile service providers as they get their act together in straddling a larger footprint.

Geographical expansion

With subscriber additions in both the metros and the A circle (AP, Gujarat, Karnataka, Maharashtra and Tamil Nadu) showing signs of slackening, leading operators such as Bharti and Reliance have announced expansion plans to reach more towns; conversely, BSNL is aggressively ramping up services in the metros and circle A towns.

With a strong network in the hinterland, once the additional 2.5-million lines of capacity that BSNL proposes to commission comes in, it could well turn out to be the player to watch out for.

Were BSNL to show awillingness to share its infrastructure, a player such as Bharti may not need to commission its own set up. With that not being the case, private players will be forced to take on BSNL in a territory where it istruly strong. Further, even in the highly urban markets, once BSNL gets going, its tariffs are the most competitive in the business.

Even if the access deficit charges levied on the private operators are going to be phased out over a period, BSNL would still have time to establish a beachhead in the more lucrative markets. Private operators will have to resort to fine-tuning pricing strategies, or ramp up sharply on the innovation scale, if they are to ward off BSNL's competitive threat.

As the service footprint expands into towns that are more price-sensitive, the focus would turn to reining in costs, as levers for tinkering with the existing tariff structure are limited.

Outsourcing deals, such as the one struck by Bharti with players such as IBM, Siemens and Ericsson, which aims to enhance the quality of service, apart from farming out an activity that can be classified as non-core (in the case of the deal with IBM), could well be the sign of things to come, as companies try to squeeze every cost head to remain competitive.

Consolidation trends

Over the years, there has been a whittling down in the total number of market participants through acquisitions. This should lead to a situation where the entire market is carved out between 5-6 players (on both the GSM and the CDMA platforms). In this context, the announcement in the recent Budget of a hike in FDI limit in the telecom sector from 49 per cent to 74 per cent is a positive.

In the case of Idea Cellular (where Telekom Malaysia and ST Telemedia picked up the 33 per cent stake owned by AT&T), it may open an exit window for the Birlas at a later date; though Tatas have indicated they want to invest in CDMA, theymight stick with Idea as the latter offers a platform with a critical mass of subscribers.

The hike could also mean that global players (such as Vodafone, ) might evince more than a passing interest in the Indian market now that the FDI limit has been raised to levels that offer global players control.

A reduction in the number of market participants could also mean that a regime of stable tariffs, which might over time, even display an upward bias; as spectrum issues get resolved and the data business also becomes an integral part of the mobile phone service, expect value-added services such as downloading ringtones and multimedia messaging, to name a couple, to account for a greater portion of your mobile phone bill. That might give players something to cheer about, as it would mean a thicker coat of black on the bottomline.

The investment angle

At the moment, Bharti is a favoured stock, thanks not only to the fact that it has a large subscriber base to boast of and a vast geographical footprint, but also because it is the only stock the investors can play if they are betting on the sector's prospects. But that might change as and when the initial public offers (IPO) of players such as Hutch and Idea Cellular hit the market.

Hutch would be the one to watch. For instance, a look at the ARPU numbers of the various players for FY04 reveals that Hutch's ARPU for the year was a good 18 per cent higher than that of Bharti's, which is probably reflective of a better quality of customer service.

Also, with Hutch signalling its intent about how serious it is about the Indian market with the acquisition of Aircel in Tamil Nadu, the hike in the FDI limit is also a positive. Its global parent has deep pockets and its support could lead to an even more aggressive business strategy by Hutch.

Another story that that rivals Bharti's is that of Reliance Infocomm; if it, too, decides to step into the market with an IPO, it is certain to cause a realignment of investor interest.

Other mobile service operators getting listed is in itself not a negative for the Bharti stock; what we are likely to witness is a laddering of valuation, much like what is now seen in top-tier information technology stocks.

Fresh funds, too, could flow into the sector as it does present a compelling growth story. And going by the way the Bharti stock has moved over the past year, the buzz about the sector only promises to get louder.

[Arun 795]

Make Way for Massive Mobile Adoption in India

The Indian mobile market is poised for enormous growth, according to In-Stat/MDR.

The Indian mobile market differs from many other wireless markets in a couple of ways. First of all, about 80% of cellular subscribers pre-pay for their service, which means customers incur limited expenses every month. Additionally, the average revenue per user (ARPU) in India is quite low compared to the US and other countries, meaning that having enough volume is key for operators to be successful.

The mobile market in India is competitive, with six operators claiming more than 2 million subscribers. Leading the pack is Reliance Infocomm, with about 7.6 million subscribers, followed by Bharti Televentures with 6.8 million and state-owned BSNL with 5.4 million.

Reliance and Bharti, as well as Hutchison Essar and Tata Teleservices, have plans to expand their network to cover more towns and cities. The largest expansions will be undertaken by Reliance Infocomm, which will expand from 1,100 cities and towns to 5,000 by March 2005, and Tata Teleservices, which will expand from 50 cities and towns to 1,000 by March 2005.

The Indian mobile market will see tremendous growth in the next couple of years, with 90% growth in 2004 and 79.1% growth in 2005. By 2007, year-to-year growth will slow down to under 10%, and in 2009 the market should rise by only 4%.

In-Stat/MDR believes the key drivers for subscriber growth will be affordable handsets, expanding infrastructure, competition between operators (a field which will probably consolidate), low wireless penetration (only 3%) and pent-up demand from consumers. Despite some possible obstacles ahead for the market — economic troubles, increased regulation (India just elected a more left-wing government, which traditionally signals greater regulation), and turmoil resulting from India's strained relationship with neighbor Pakistan — India should experience a boom in mobile phone use over the rest of the decade.