Why Are Indian Companies So Keen on Looking Outside? A Look at some Strengths and Weaknesses of the Mobile Operators in India
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Through this post, we can possibly try and deal with some of the issues plaguing Mobile Operators in India, possibly get an insight into why they are looking to go Global. This may also lend some ideas as to why Mobile VAS providers are not getting what they think should be more than their fair share of revenue margins.
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1st things First:
Mobile Operators in India are not making revenues that are anywhere close to the amounts being made by operators in developed countries. The revenue per month ranges anywhere from $7 per month to $10 per month according to various studies and estimates. For firms operating in the US and Europe, the Average Revenue Per User stands at $100.
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So India quite clearly is a volumes market. And because these ARPU figures are so low, Indian Mobile Operators (who have investors to please) are looking at squeezing as much as they can out of partners who can bring in the revenues (in many cases the VAS providers). One also needs to keep in mind that Indian consumers have a tendency to move towards free contextual content and thus VAS rates that are too high might not work in a price sensitive market. For now, the company that is the gateway to a consumer interaction is sure to hold the upper hand in negotiations.
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One often looks at the mobile market in India as something that can be looked at as a benchmark for the World (the tendency of the Indian Press, quite often). Truth is, as many of you know, we are far behind some of the Big Companies such as China Mobile (392 Million subscribers as opposed to Bharti’s 62 Million, RCom’s 45.5 Million, and BSNL’s 40 Million odd) and China Unicom (168 Million subscribers). Vodafone and Spain’s Telefonica are the other 2 big names that come to mind. So it’s quite clear that Indian Mobile Operators today are looking at the Chinese models of scalability and also picking up and modifying their operational model because in both markets, consumer responses to pricing and ARPU’s will be similar in the long run.
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In the current situation, Indian Mobile Telecom operators will not have the liberty to innovate fast enough, they will not have the opportunity to scale high value services. The reasons for Indian firms’ enthusiasm for foreign acquisitions are many. By acquiring international companies, Indian companies get easy access to new markets, new products and the latest technology. By buying domestic companies in other countries, they can enter protected or heavily regulated overseas markets much more easily. The strategy allows them to benefit from economies of size and scale, and to increase their presence along the value-addition chain, such as by acquiring raw material suppliers or users of their products, thus improving margins and efficiencies.
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While on the topic of margins and efficiencies, it must be noted that Indian Telecom Operators are very efficient when it comes to administrative, sales and marketing and technical expenses as opposed to their western counterparts. Here is an article which quotes a Mint Study that says the following. ‘As a percentage of sales, Selling, General and Administrative expenses account for 15% for Indian companies (against 20% for Western operators). Other key costs are interconnect charges (12% for Indian operators, against 15% to 20% for Western companies), license fees (10%, 5-9%), personnel (7-8%, 10-15%) and network (11-12%, 15-17%). This leaves Indian companies with a handsome 36% to 40% as operating profit against 12% to 30% for Western operators. As these numbers show, Indian mobile companies are saving on sales and marketing. They also focus on prepaid customers, which lower their customer support costs. They share infrastructure. Most importantly, perhaps, they outsource whatever they possibly can.’
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All this takes a toll on the quality of service but there are some obvious cost advantages – if they are taken beyond National Boundaries, then results can be fantastic in terms of higher profits and also greater technological innovation + diversification of risk.
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We had also written about the DoT Guidelines with respect to M & A’s. This has ensured that the Indian Market will be more or less competitive. While there is no doubt that the market is growing at a frantic pace,
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-Â Â Â Â Â Â Mergers of telecom licences will be allowed only within the same service area.
-Â Â Â Â Â Â A telecom company can sell equity to another company only after 3 years from getting a license.
-Â Â Â Â Â Â Merged telecom companies should not command more than 40% Market Share. (this used to be 67%)
-Â Â Â Â Â Â No M & A activity to be allowed if the number of operators in a service area fall below 4.
-Â Â Â Â Â Â No investor with 10% stake in an existing telecom company will be allowed to merge or acquire another telecom company.
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The M & A guidelines ensure that the Indian Mobile Domain is not big enough to be owned only by 2 or 3 majors. So possibly operators’ expectations from the market have also been recessed. As addressed above, there are multiple reasons as to why Telecom Operators are looking to go abroad. – beyond the Indian Market.Â
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It’s common knowledge that the call costs are the cheapest in India. At a stage when mobile providers like Reliance offering free calls to every other reliance all over the country and almost every other operator charging just 1 ruppee to keep the common consumer connected with the rest of the country, it is very tough to extract profits without depending on mass subscribers. It’s not for nothing that today’s telecom operators are trying their best to get the villages connected and also try to offer wireless internet connection at every corner because increasing the number of customers and also the number of services offered are the only way to increase profits.
I shall even go to the extent of declaring that we are lucky that the telecom sector in our country has come of age and it is because of the combined efforts of the operators (I can still not forget the time when Reliance forced every other operator to stop charging for incoming calls) and the government that today’s market is so competitive, despite the presence of so many players on the scene.
Talking about the strengths and weaknesses of the Indian telecom operators, I should say that India is one of the most mature markets in the world.
the most important reason of indian telcos going abroad is the buoyancy in the indian markets which despite 25 percent below their peak in jan offers tremendous amount of private equity money to indian companies……thats not the same case in western market because citigroup raised 10billion$ at a coupon rate of 9%……..vc’s think thrice when they invest in western countries and none while investing in indian counterparts……the other most reason for them going abroad is their ability to outsource most of the operations to india….remember wat sunil mittal told “he wants to replicate the low cost model acroos the globe” this shows that they are not after higher arpu’s but expectation of higher margins is wat excites them thru outsourcing …..arun sarin had to convince his board members many times while acquiring hutch for 20billion$…but 4 airtel offering mtn for 40 billion dollar was a piece of cake(cheap capital i say)……………..they also wants to acquire companies abroad for 15x expected earnings so they can get 30xtimes earning multiple on inidan bourses……….know all this cos i have a deep understanding of capital markets………..
Shallow article. Looks like you have seen two reports and put together this piece. It would be better if you could also put your individual opinions that make would make a good argument.