Indian Telecom Story (Part XVIII): Eroding profits for higher acquisitions
I have discussed many and most of the times, that Pricing cannot and shouldnot be a differentiator of Telecom services in India. Instead branded services should be sought to differentiate telecom airtime. For long Indian telecom operators have been happy to reduce costs to entice more customers. While reducing the operating expenses may be a manna for consumers, it does not spell right for the telecom operators. Erosion of margins may get eclipsed by the huge subscriber add ons, but in 2-3 year time, when growth flattens, the slim margins will squeeze the profits. An earlier blog post posses the challenge in terms of Telco net operating profits at risk.
Qouting from an earlier post: “Lowering the cost of ownership has been extremely successful ploy in terms of expansion of the Indian Telecom markets. The ARPU today is around the theoretical $5 break point. In mature markets an ARPU under $5, does serious harm to the bottom-line. In a growing market like India, the strain of a decreasing ARPU may not be significantly visible presently. However, with markets maturing, the focus will shift from growth to sustainability. The new classes of consumers are mostly rural and their ARPU would be well below $5 (probably $3-3.5). Managing bottom-lines at such low levels of Revenue per user and increasing costs of acquisition will prove to be a challenge.”
Subscriber adds are exploding and September 2009, should see India sail past the 500 million Telecom subscriber mark. Of the 9.31 million GSM subscribers added in August 2009, 3.4 million were added by Tata DoCoMo, the youngest Telecom operator. Tata DoCoMo is celebrating and raising a toasst to its success. They owe this to a disruptive per second plan. Even SMSs have become Diet, i.e pay per character! It couldnot have gotten better than this for the users. Moving from minutes plan to a seconds plan would save approximately 20% of the operating costs for the users. (Read this here). Diet SMS would be another saving.
These figures are corroborated by a research report by HSBC. If all operators adopt it the sector’s revenue could fall by 10-15 percent. It TRAI enforces the Pay per second plan, the Telecom majors could feel the heat. Translated further, revenue drop could mean lower EPS which would imply adjustment of share prices as lower levels and reduction in M-Cap.
The idea here is not to be against price drops. Lower cost of ownership of services is of paramount importance for higher penetration. The idea is service differentiation. Sample this: A $360 ARPU user has no special services available to him compared to a $5 ARPU user. Both suffer from the same lack of bandwidth problems, the same apathy from Telco representatives in case of wrong billings, and both of them also pay at the same counters. For start, atleast the quality of service can be different for High ARPU users ( A leaf out of book from HNI Retail banking).
With MNP and 3G auctions looking in the horizon, there is a reason and an opportunity to differentiate.