Dialling many wrong numbers

From boom to doom: Despite the hype 3G licence may not make a big difference for telcos

The much-awaited auction for 3G (third generation) licence for high-speed mobile spectrum in India kicked off well last week with nine bidders for 3G spectrum and six for Broadband Wireless Accedd (BWA). The government is expecting to collect a grand sum of Rs 40,000 crore at the ending of the bidding process.

The government’s hope to make a killing is based on the fact that major mobile players in the country today are chocked with high traffic on their network and are desperate to grab additional spectrum to ease congestion. Currently, GSM operators, who  occupy 80 per cent of the total mobile telephony market, have around 7 MHz of spectrum on an average and will get an additional 5MHz with the 3G licence that can raise their operational efficiency by nearly 40 per cent.

The rush and expected aggressive bidding is also because a total of 14 players slugging it out in the industry have only three 3G licences to be auctioned now, making it a total of five 3G players, with government-owned companies, BSNL and MTNL having been awarded the licences already. Is the hype being witnessed with 3G auction in the country justified, especially because it is happening nearly a decade after 3G service was first launched in Europe? An even more appropriate question is whether 3G will help revive the fortunes of the industry?

Declining revenue
On the face of it, the Indian telecom industry is booming. It not only the fastest growing industry in the country but also the second largest in the world (after China) with a subscriber base of 562 million at the end of December 2009. The main driver is wireless or mobile telephony whose subscriber base reached 525 million at the end of December 2009 quarter, 51 per cent higher than a year-ago period. Every month India adds around 12 to 15 million subscribers, highest in the world. All these superlatives, however, camouflage the real picture, that is, an industry heading for major trouble tottering under severe competition and self-inflicted price cuts.

Just look at some of the key indicators to judge the health. According to the latest industry status report prepared by the Telecom Regulatory Authority of India (TRAI), the average revenue per user (ARPU) for the quarter ending December 2009, for GSM (Global Standard for Mobile) service was only Rs 144 per month or 35 per cent lower than Rs 220 in the same quarter last year. In fact, ARPU has been declining every quarter since last year (See Chart). For the CDMA (Code Division Multiple Access) service, accounting for 20 per cent of the wireless market, the scene is much worse. Their ARPU per month was only Rs 82 in the December 2009 quarter against Rs 111 in the same quarter last year.

Too many players
Only the industry is to be blamed for such miserable ARPU figures in the country, probably the lowest in the world except some extremely poor African countries. Around the middle of 2008 there were around six to seven players in each of the 23 telecom circles in the country. By the end of 2009 this number has swelled to 14 and two more players are soon to enter the already crowded market. With so many operators around and without any perceptible difference in service quality, the only way to grab customers was predatory pricing. Anticipating competition just as some older operators lowered the tariff to Re 1 per minute, new operators started offering one paise per second making this rate as the industry standard. And now there are some operators who are offering a rate of one paise for every two seconds.

Price war
While no one knows when this ridiculous price cutting will stop, all new players are bleeding white and a few big ones like Bharti Airtel, Vodafone, etc are barely managing small profits. According to TRAI data, Bharti’s gross revenue in the December 2009 quarter, for expample, was at Rs 8,580 crore, two per cent lower than the same quarter in the previous year. BSNL and MTNL are the other two big players that witnessed drop in revenue. Vodafone, Reliance and Idea are a few major players that managed to record small gains in revenue. The wireless industry as whole earned a gross revenue of Rs 31,099 crore in the December 2009 quarter, almost the same as a year-ago period.
Clearly, the strong growth in subscriber numbers is neither adding to their revenue nor to their profits.  The extent of damage caused by the price war is eminently evident on the performance of the government owned telecom giant Bharat Sanchar Nigam Ltd (BSNL) which had 28 million wireline subscribers and 63 million wireless subscribers at the end of December 2009. BSNL, according to recent reports, has made a net loss of Rs 2,611 crore in 2009-10 against a profit of Rs 575 crore in the previous year. Worse, its loss from operations was much higher at Rs 8,291 crore in 2009-10 if the Centre’s grant of Rs 2,600 crore and interest from bank deposits of Rs 3,080 crore is factored in.    

Drop in usage
TRAI report also shows that despite the sharp drop in tariff rates people seem to be talking less. The average minutes of use per subscriber per month for the GSM service, for example, has dropped to 411 minutes in the December 2009, 17 per cent lower than 411 minutes in the same quarter a year ago. Of course, one major reason behind the sharp drop in average revenue and average usage per subscriber is the new trend of multiple SIM cards acquired by subscribers. Today, most pre-paid subscribers (accounting for 95 per cent of the mobile population) have more than one SIM card.
As a result, industry experts estimate that the total wireless subscribers’ data in the country is inflated by 20 per cent. Once again, only the mobile operators are to be blamed for this distortion because they are giving free SIM cards (some are even adding free talk/ browsing time of Rs 20 to Rs 50) to push up their subscribers number, a ploy to grab more spectrum from the government. For the same reason operators do not de-commission a SIM even when it is not used beyond the TRAI prescribed time period.

Nearing saturation
Frankly speaking, the Indian telecom business has reached a stage where mobile operators have no choice but grab subscribers at any cost. The teledensity (number of telephone connections in every 100 population) in the urban area, according to TRAI, has already reached 110 in the December 2009 quarter. The figure for the rural area is 21 giving a national average of 48. As the markets in cities and small towns have saturated operators are now focusing more in the rural areas where customer acquisition cost is higher due to large investments required in networks and in promotions and revenue per user is lower. Either way, the scenario is depressing.
No wonder, the investors in stock markets sensed the problem well in advance and all telecom stocks, including mighty Bharti Telecom, have taken a beating in the last one year or so.

Survival strategy
If the present is bad, the short term future will be worse. Seemingly, that is why Bharti is fiercely trying to expand outside the country by acquiring majority stakes in a telecom company in Bangladesh and in another in Kuwait that has operations in Africa.  Then there are operators like Tata Telecom and Reliance Communication who started off in the CDMA segment and latter obtained GSM licence for pan India operations.
Having realised that GSM is a much preferred technology for voice –– accounting for 80 per cent of the industry revenue –– Tata and Reliance are now aggressively pushing for GSM subscribers.  But since CDMA is much superior in data service, like surfing on the internet, emailing, etc; they are offering high speed innovative data plans on this platform.

Tata, Reliance and MTS, for example, offer plug and play data cards that allow faster internet connection on the go. As accessing social networking sites like Facebook, Twitter and Orkut and video sites like Youtube is becoming a craze with youngsters, CDMA operators are expected to rely more on data rather than voice as for revenue. Tata and Reliance have also started offering TV channels on CDMA mobile phones.

Non booster
Can 3G spectrum be a game changer? Even as it is undoubtedly a big technology leap it cannot work as a magic remedy for the wilting telecom industry. Firstly, only three private and two government companies will get the 3G licence among 14 players and moreover, it will be expensive as the average pan India licence cost for 3G will be at least Rs 8,000 crore forcing operators to price the service at a premium. Since India is a primarily a voice market, experts believe not more than 20 per cent of the subscribers (around 100 million) will opt for a premium 3G service.

Besides, the novelty value of exotic 3G offerings like internet TV, video calls, fast music/ movie downloads etc, may not become popular unless price is affordable to the young users. While 3G will improve operational efficiency and serve the voice customers better, it is unlikely to make money commensurate to its cost. So in the short term, the telecom business in India will continue to struggle. Things will change for the better only when the industry undergoes a major churn where a few companies will die a natural death and a few others will get taken over by bigger players. Ultimately, in line with global trends, only four or five telecom companies would survive in India to emerge large and strong.