A Look Into Future Of Indian Telecom

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It has been amazing to watch the Indian mobile market from close quarters over last 13 years. This market has seen more unexpected

twists and

turns than perhaps any other industry. Now with the entry

of new players, we are set for another round of game changing behaviour.

Traditional mobile industry models indicated that a minimum market share of 20% is critical for an operator to have a sustainable mobile business. Accordingly, there has been an expectation of consolidation in the market for last couple of years. Instead of consolidation, however, the market has seen new telecom licenses being awarded. Several global players have bought into the Indian operators, Virgin Mobile has entered the market and there is potential for entry of more mobile virtual network operators (MVNOs) in future.

Today, India is clearly the most competitive telecom market in the world with 12 facility based licensees. Going forward, with the potential entry of 3G and MVNO operators , this number is set to increase.

We do not see consolidation happening in the medium term for several reasons. Firstly, the large scale of the Indian market and declining capital costs for mobile equipment have led to a fundamental change in mobile business economics. Currently, we expect that a pan-India operator can make sustainable margins at a subscriber base of about 40-50 million. That translates to a market share of about 7% as the market grows to over 600 million in a few years timeframe. Secondly, global telcos have taken a stake in most Indian operators. Most of them would like to hold on to such a large, profitable portfolio of subscribers in the context of their global footprint and subscriber base.

Third, most of these operators will incur a substantial proportion of their planned capital expenditures in next 2-3 years to drive pan-India rollouts. With these costs sunk-in , duplicate networks in place and limited merger synergies, the case for consolidation could further weaken. It is pertinent to note that most mergers in the Indian mobile industry have been driven by the need to enter new circles and not been intra-circle in nature.

Therefore, intense competition is here to stay for a long time. We see about 8-10 facility based operators and a few MVNOs co-existing in the market. Most of these operators are expected to have a pan-India footprint. Such high competition will have significant impact on the market, particularly as growth begins to slow down after 3-4 years.

As market growth slows down, and multiple brands co-exist , mobile services could increasingly begin to ape the FMCG market, particularly for the mass market prepaid segment. If number portability were to become seamless enough, it is even possible to envision a scenario where the customer makes a brand choice every time he/she comes for a recharge. This could drive the end-game towards getting maximum share of the customer’s communication spend through share of MOUs or share of use.

Business risks to the operators in such a market will increase substantially. With high contestability, high churn and commoditisation of service, relatively rapid changes in market share would be possible. Any significant reduction in market share or volume could leave an operator saddled with overcapacity, stressing the entire cost structures and potentially creating a downward spiral.

With network coverage and quality a given , there would be two key levers to play in the mass market segment. First would be to meet the next level of customer needs like service experience, emotional connect with the brand and relevance of value added services. Second, which is discussed below in more detail, would be ability to realign cost structures to emerging pricing models.

In the near term, pricing is expected to see another round of sharp decline with the entry of new competitors. Overall prepaid Average Revenue Per User (ARPUs ) will decline with the need to penetrate the next income strata of customers. Even the postpaid ARPUs, which have been a key profitability driver, are expected to decline significantly, as operators aggressively target these customers with introduction of number portability.

Regulatory intervention is soon expected to reduce the currently high carriage and termination charges. This will provide greater flexibility for operators to come up with the next round of pricing strategies. The new operators with idle capacity and low subscriber base are expected to take a lead in driving these pricing innovations. They also have the opportunity and possibly the compulsion to plan upfront for lower ARPUs.

Hence, expect them to design low- cost greenfield networks leveraging the declining GSM capital costs and possibilities offered by infrastructure sharing . Pricing innovations could for instance , include all you can eat pricing (unlimited call nationally) for a low fixed monthly charge. Such models will enhance the minutes of use and drive down realisation per minute, putting pressure on incumbents with their large subscriber base and minute factory models.

Our analysis indicates that within a year’s time, mobile tariffs will reach a level as to allow customers from all income segments to enter the mobile market, subject to availability and need. Any future decline in pricing would be driven more by competitive forces rather than the customer’s ability to pay. Accordingly, the pricing will go down to the levels at which operators can have sustainable business plans. One would expect that operators with lower cost structures will emerge as winners in that scenario.

At the same time, most operating costs are expected to increase. Marketing expenditure will go up without commensurate increase in customer base; regulatory and competitive pressures to improve network quality, within a constrained spectrum, could drive increase in network expenditure .

Servicing the rural markets may be more expensive than urban customers. Some other factor costs such as labour, utilities and real estate would be also driven up by inflationary pressures. Therefore, despite increase in scale for all operators, margins could come under pressure.

There might be a temptation to presume that since Indian telcos are making good margins at such low tariffs, they are running very efficient operations. Our experience suggests that while the labour cost advantage within low- cost countries leads to lower absolute costs, it also masks several inefficiencies.

After adjusting for the structural differences across countries, the overall cost structures of LCC operators are at times higher than best in class. It would be fair to assume that the need to chase high growth in a low labour cost environment has led to reduced focus on efficiencies.

It is imperative for operators to prepare for this scenario by taking a hard look at the cost of their people, processes, channel and outsourcing contracts to fundamentally change their cost structures. How well they are able to realign their cost structures to prepare for the emerging environment might well determine their position in the future pecking order of the telecom market in India.

Saurine Doshi is partner and vice president and Mohit Rana is principal consultant, AT Kearney India