… And Thus Deflates The Great Indian Telecom Bubble!
Two years ago, in 2007, I remember, it were the happier times of the Indian Telecom Industry. Everyone wanted to be a part of this. This sector rose as the flag bearer of the rising Indian economy which had so much in it. IT for the first time in years started taking a back seat. The whole sector offered opportunities like never before, and every ship was hoping to rise once it came in contact with this tide. This provided opportunities for the new comers, they saw this as the best time to dip their fingers.
Everyone who got involved, or got entry, thought he had the license to become the next Sunil Bharti Mittal. Two years down the line, everyone is bleeding, and bleeding bad. The Incumbents, the newcomers, The incapable regulator, all having their own issues to resolve. The bubble is finally broken after the ruthless policies of the policy makers. And I’m sure, even as I’m writing, there’s something really worth noticing going on in this sector, to make headlines of tomorrow’s newspapers. After all Indian Telephony has baffled every economist on planet with the shear dynamism that it possesses.
There were happier times a few months ago, with 3G and MNP round the corner. The players thought that they were in the Golden age of Indian telecom sector, and the sector as a whole was being thought as the pivot for the economic growth in at least the coming decade. Then came the TRAI ruling to bring down tariffs. Even at that point India was offering one of the cheapest rates across the globe, but the regulator was not satisfied. It wanted the rates as low as 10p per minute which would have wiped out literally everything from the operator’s pockets. TATAs came up with the per second billing as the possible solution. It was the perfect deal. The rates came down as the Regulator wanted, also it gave the operators a good margin. But this is where the whole fiasco started off. Lets have a Vantage Point view of the whole story.
The operators -
The operators were in perfect health two years ago. Just a few players, Great profit margins, booming economy, progressing sector and the government support. The people sitting outside saw this as an opportunity to make some quick money. They bought some spectrum, took necessary clearances, started operations. Slowly the number rose. Now each circle had 12-13 operators, each fighting for their rightful space. Still the incumbents were sitting happy.
Then started the price wars. The advent of per second billing, was seen as a totally different phenomenon by the customers. When it was introduced 2 years back by TATA Indicaom, it really had few takers. But the volume has increased since then and now people switched. You don’t need to be a Calculus expert to say that the customers will gain while the operator will lose because of this whole thing. According to me, 18-20% is rough but a fare estimate of the degree of loss by the operators. Add to that about 30% taxation, termination charges, operating costs, operators are left with virtually nothing to feed themselves.
In addition to this the new comers are also facing the bully attitude of the incumbents. Bharti Airtel is asking new players to give it 10 paise each time its network receives an SMS from their networks. Its argument is that new players are wooing subscribers by offering very cheap SMS facilities, but since these SMSs are necessarily being sent to subscribers of existing firms like Bharti Airtel, they need to be paid for their networks being used. This, of course, is the basis for the Interconnect Usage Charges (IUC) — till March, when a voice call came from one network to another, the calling network paid 30 paise per minute to the network being called; this “termination charge” was lowered to 20 paise in March 2009.
Now take my argument. A voice call of about 16kb data per second costs one paise per second to the customers, while the sms with about 1 kb of data costs 10p to the operators. Also, The cost involved with the handling of SMS in any of the service providers network is insignificant as compared to the cost for handling voice. Its simply ridiculous. Do the math, and in 10p you can send 160kb of data by voice call. I’m pretty sure, that if these bully tactics were applied by the then incumbents(BSNL and MTNL), the current strong guys would not have reached such great heights and positions, to bully the present new comers.
This also brings us to an important observation that, by this standards, sms should be charged just a fraction of a paisa, but we all are paying any thing between 25 paise to a Rupee. Another important question to be asked is, are high rates for ISD calls justified. The International carrier, to which call is being made charges the Indian counterpart only 50-60 paise out of about Rs. 6-7 being charged to the customer for calling Europe/US. One more problem that I would point out is the low percent of revenue being shared with the VAS operators. So how justified is anything that you pay?
The operators are facing a new problems in term of lost revenue as well as falling share prices. The starkest evidence yet that the bubble has been pricked came through the results and forecasts of the three listed companies. First up was Idea Cellular, part of the Aditya Birla Group, which reported a 29 per cent sequential drop in profit before tax and exceptional income for the quarter ended September. The accompanying statement was more of a rant: “The bubble days of 2007-08 had blurred the distinction between the real and the fanciful in the Indian mobile sector. The resultant overcapacity has manifested in tariffs unrelated to economics. Market prices have plumbed depths which predicate that the market itself will eventually work the overcapacity out of the sector.” On cue, HDFC Securities reduced its forecast for Idea’s stock price to Rs 44-59 for the next quarter, down sharply from the Rs 71-86 forecast given a month earlier.
The echo of the statement had barely died down when Bharti Airtel, the largest mobile operator, reported its slowest profit growth in six years and said its growth was going to suffer because of the raging price war. Reliance Communications, in its turn, said its quarterly profit had halved and that there was more pain ahead. This makes consolidation of profits as a major crisis and concern area for the operators. Trust me, the bad days haven’t yet arrived.
Customers -
Customers have gained a lot. The price wars give the customers to0 many options to select from. Also the per second regime helps them to reduce the bills by drastic amounts. But sooner when the prices will stabilise in coming years, the fittest will survive, and most of the newbies will die out, Consumers will see new troubles standing in their way. My advice- stick with the tried and tested, they have huge pockets and will definitely survive the bloodbath.
There has been a postive for the companies. The Growth in terms of volumes has been constant with nearly 15 million new customers being added monthly, but a new problem has also come up with a growing trend of people using dual SIMs, to optimise costs, which doesn’t add to the revenue but rather just splits it into two. ARPU(Average Revenue Per User) is bound to fall. But till the companies don’t start falling apart, customers rule the roost.
The Regulator -
On a personal note, the operator has not been doing the right thing at the right time. Most of the times it is unsure about its next steps. For instance, when it asked the operators to implement one ‘per second billing plan’, I really doubt they had foreseen the incumbents too coming down to the bare minimum to give the fights to the newbies, and the biggies obliged by offering the most competative prices across board. Also, TRAI has never ever interfered with the injustice being done to the VAS operators.
TRAI needs to keep a check on whatever being charged to consumer and the end beneficiaries. And the first thing should be fixing up of basic termination charges so that, the rules are fare and square for everyone. Also some spectrum deals struck by new players have been really low, which was not controlled by TRAI. Resulting in loss of revenue for the government and giving chance to players like Airtel to charge termination charges of their own will, which anyway will reach a third party and not government.
I personally agree with Airtel about the price stabilising happening in two years time, but Indian Economy can never be predicted and one turn of events can change the whole scenario, which I feel should be introduction of 3G. Lets wait and watch.
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That the country is moving to 3G instead of 4g or 5g technologies such as WIMAX or beyond HSPA is staggering. Instead of making a step by step progress we could go for the jugular and aim for being higher than any other country.
BTW I would love to write a guest article about this if you guys are interested.
Are Telecom operators bleeding?
They still getting operating margins of 40%+, one of the highest in the world,So most probably revenue war till now did not had much bearing on them.
SMS Cost-fraction of a rupee?
SMS Cost can’t even be a paisa as long as termination charges are 10 paisa.It needs to be higher than termination chrages for telcos to break even on non-voice revenues.
The bandwidth used in kb is not a parameter to find our costs as thats just network handling operating cost above that you have termination charges+Revenues sharing with govt(around 6-10% of annual revenues)+managing telecom towers and other operational(marketing) cost.
We would welcome it harnish. You can mail us on info@watblog.com
I guess TRAI is reading WATBlog.. I had raised the cost of sms issue earlier… and now we can see, the prices are set to crash… http://www.siliconindia.com/shownews/SMS_prices_to_crash-nid-63154.html