Ronnie05's Blog

Indian Telecom Story (Part XIX): Tariff war and Hyper competition

Posted in Industry updates by Manas Ganguly on October 31, 2009

Mobile tariffs in India are already amongst the lowest in the world and competitive pressures continue to push them lower still. Unless the telecom players resport to separate set of tactics, this tariff war would prove damaging to the industry in the long term.

The age of Hyper Competition is rapidly dawning in the Indian Telecom sector with the advent of per seond billing plans.Tata Docomo set the Domingo toppling with the per second tariff plan. BSNL, MTS, Sistema and Aircel followed suit and TRAI was only too happy to endorse the per second tariff rates (Read More). However it is Airtel’s giving into the paradigm that will now “mainstream” the per second billing trend. In this lower-rate regime, all new entrants into the telecom space will now find it harder to attract customers and end up with lower revenues per minute.

In an earlier post, I had discussed that the per second billing could shave off as much as 15-20% of the consumer monthly bill. Hence this is an attractive proposition for the consumers. However, the question that begs to be answered is whether price is a sustainable basis for competition. Is there a possibility of differentiation through services. Is there a possibility whereby services and high ARPU consumers could be bundled? These are answers left unanswered as the Telcos in India have only focused on Voice based growth rather than having a portfolio of data or services based revenues.

Voices from the industry:

  • Bharti Airtel with 100,000 cellsites is already one of the lowest producers of mobile airtime in the world at a cost of 42 or 43 paise/minute. By engaging in predatory pricing and targeting the subscribers of other telcos, Tata Docomo is trying to get big operators to bleed by selling below cost. This is bad for the country as a whole because it will create bankruptcy in the telecom sector,”
  • “Trai needs to examine if this is a sustainable tariff proposal. Consumer interest in the long term is not always served by lower tariffs. Tariffs must be cost plus. Operators cannot sell below cost,”

The interesting bit in the second statement is the candid  admission that consumer interest in the long terms is not always served by lower tariffs!

Tariff Wars

The on-going tariff war among telecom companies and the sector regulator Trai’s suggestion to move to a ‘pay-per-second’ tariff structure for all operators took a heavy toll on the stock prices of telecom companies. Analysts expect the new tariff plans are sure to dent the revenues of the telecom majors by 10-15% annually although the companies themselves maintain it would take 45-60 days to come back to the current average revenue per user (ARPU) levels. In the backdrop of the current telecom tariff war, analysts are now taking a bearish view of the stocks. Foreign broking major Morgan Stanley recently noted that RCom’s tariff could ‘‘possibly stagnate industry revenue growth for the next 12 months.” With aggressive pricing becoming the industry norm, and at the same time competition increasing ‘‘investors could start de-rating the Indian telecom sector,” it noted. They feel losses for firms could be higher and duration of competition longer since there are about 10 operators, listed and unlisted, who could start tariff war if pushed by new entrants or existing competitors.

The race to higher subscriber numbers and market share at the cost of eroding margins and diminishing profitability is a trap that the Telcos seem to have engaged themselves into in vain. If the stock indices are to be believed, investors feel that ability of the Telcos to create value even in a market as lucrative as India has diminished. 

In part XIXb, we will cover the self fulfilling doomsday prophecies of Indian Telcos, how “others” in the industry would ride the “operator dumb pipes” and how the Telcos measue up against others in emerging markets world over.

A chronological listing of earlier blogs on the same topic:

Indian Telecom Story (Part XVIII): Eroding profits for higher acquisitions

Indian Telecom Story (Part XV): Net Operating margins at risk!

Indian Telecom Story (Part XIV): Can pricing differentiate new Telco services?

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4 Responses

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  1. uberVU - social comments said, on October 31, 2009 at 3:39 am

    Social comments and analytics for this post…

    This post was mentioned on Twitter by ronnie051178: Wrong market strategies can make even an emerging Indian telecom market go sour for Telcos. https://ronnie05.wordpress.com/2009/10/31/yurt/

  2. […] Indian Telecom Story (Part XIX): Tariff war and hyper competition […]

  3. […] intense price war in the telecom space over the past couple of months, which has plunged tariffs to an all time low […]

  4. […] In a few earlier posts, i had lamented the lack of data traffic focus in TELCOs in India. Given the tariff war, hyper-competition and the near advent of 3G and the necessity to augment voice incomes, TELCOs in India are changing […]


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