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Summarizing 2011 for Indian telecom

Posted in Industry updates by Manas Ganguly on December 25, 2011

2011 is perhaps Indian telecom’s biggest year yet with launch of 3G services, mobile number portability implementation and 175 million new mobile phone subscribers in 10 months, taking the total subscriber base to 881 million.

However there have been challenges for the Indian telecom businesses-

1. 93 percent of users are low-spending pre-paid users
2. A low ARPU together with high energy costs for the diesel backup for a half-million towers, it’s a struggle for margins.
3. 3G licenses have come at a very heavy cost and the impact is in terms of cash strapped operations for many Telcos. The government made a lot of money and squandered off a little more, but that is a different story.
4. Inspite of huge investments on 3G, Poor user experience and a lack of content failed to draw users, killing all operator hopes of recovering that money.
5. Mobile number portability: 25 million users applied to switch operators while retaining their number, with 2.5 million requests pouring in each month. The churn is also taking its toll as Operators are responding with tariff cuts and deals.

A few future defining trends also shaped up in 2011 as markets evolved, matured and consolidated:

1. 2011 is possibly the year, when the Indian Telecom Industry moved up from a entry to a replacement market. The new sub adds plummeted to 6-7 million per month as against an average of 15-20 million activations in 2010.
2. Data emerges the hero as Telecom starts evolving from a some-what voice centric industry. 2011 should herald the decade of data for India with preliminary 3G and EVDO Rev. B launches. LTE is round the corner.
3. New classes of devices such as Smartphones and Tablets in the entry level with advanced OSs and application capabilities widen the consumer choice as well as the experience. Low cost Androidss are driving smartphone adoption rapidly across in ~$80 price segments
4. Tariffs bottoming out, Indian Telcos look for the next springwell of revenue and profits and new revenue models would start to emerge. Operators are looking at various VAS aided business models to augment their margins and profits.
5. The Aakash Tablet (and NotionInk’s Adam before that) established India’s status as a low cost innovator. Going forward with the markets in SE Asia and Africa being key to telecom growth, India will feature as a global innovation and R&D centre
6. The government has announced the NTP (National Telecom Policy) which is a proactive step in terms of defining telecom sector businesses going forward. The industry awaits greater clarity on a few issues such as mergers and acquisitions and we will see things get more clear and better as wel go along.

Top 20 Mobile Operators in the World

Posted in Industry updates by Manas Ganguly on May 28, 2011

Wireless Intelligence released a report recently on the Top 20 Mobile Operators in the world based on revenues. The list is led by China Mobile followed by Vodafone and Verizon. Bharti Airtel scores 5th in terms of subscribers having just shy of 200 million subscribers.

However, Airtel is the worst performer in terms of revenue generated per user. Airtel earns USD 14.5 per subscriber in an year, equivalent to about Rs. 650 in an year.China Mobile earns over Rs. 1530 on its 584 Million Subscriber base. NTT DOCOMO which is primarily based in Japan, earns over 9000 rupees per subscriber and ranks 6th largest in terms of revenue on its relatively miniscule 57 million subscriber base. That is about 14 times more than Bharti Airtel !

7 out of top 20 mobile operators earn over Rs. 4500 (USD 100) per subscriber. The average per subscriber earning amongst top 20 mobile providers is Rs. 3813!

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Updated facts and stats on Indian Telecom

Posted in Industry updates by Manas Ganguly on April 12, 2011


Data as per TRAI February 2011 report

As of Month end February 2011, Teledensity in India is 66.36% with total Wireless and wireline subscriptions totalling 826.25 million. Broadband reach is measured at 11.47 million. The number of active connections (making or receiving 1 call on the network per month) is 562.98 million.While the numbers show a saturation in urban teledensity numbers and a limited potential to add new urban subscriber connections, the potential in rural areas is obvious at 31% teledensity. However, margin challenges for operators will increase as teledensity will increase. Also, as the number of subscriptions from rural India is increasing, the minutes of usage per subscriber and the ARPU are falling on a Y-O-Y basis.

The inexorable rise of subscriber figures has powered the fast and furious growth of Indian Telecom sector past the 80 crore mark. In Contrast to high growth in subscribers (CAGR 0f 47% from March 2008 to December 2010), the growth in revenue has been at a CAGR of 17%in the same period.

Data as per TRAI and COAI reports

A total of 15 operators has made the markets hyper-competitive and it is expected that with 3G roll outs and hyper price war scenario, there ought to be a shake out and consolidation.

Data as per TRAI February 2011 report

While data on handset sales is not available it is believed that approximately 190 million handsets sold in 2010 with replacement sales contributing to 118mn units or 62.8% of the total units sold. Replacement sales for handsets is to clock a 32% growth rate over next 4 years to register 359 million unit sales/year. This would contribute to 89.30% of the 402 million unit handsets sales by 2014. Translated in terms of ASPs, medium ASP devices i.e devices between Rs.2000-5000 will benefit from replacement sales and is expected to register a CAGR of 26.07% over 2008 onto 2014, when the total sales of handsets between Rs.2000-5000 would be around 240 million units/ year. This is great news for the tier B Indian OEMs who have been more successful than the Tier 1 brands to garner the replacement sales.

Indian Telecom Story (Part XX): Telcos caught sleeping over data based revenues

Posted in Industry updates, Revenues and Monetization, Value added services and applications by Manas Ganguly on November 3, 2009

I have been writing about the how a price war in the Indian Telecom industry would be a future in vain. I have also written about why Telcos should explore future in data and consumer centric services rather than price wars. The pay per second bloodbath was clearly inevitable. However, i cant think, why would Large Telcos in the country miss the trick. A price led strategy would never be sustainable, and yet the whole industry seems to have rushed into 1 paise per second formula. Am i missing something?

The explosion of subscribers in India has put a lot of pressure on the existing telecom infrastructure and the frequencies available. While there have been efforts like sharing of infrastructure between operators which has allowed to keep Capex under control, there are also minefields such as Mobile Number Portability which adds a lot of uncertainty relating to the subscriber adds and churn. 3G is seen as an answer to the lack of bandwidth, but the license fees demanded by the government is exorbitant and will require long periods of gestation. India has also attracted players like MTS, Telenor, Etisalat, DoCoMo adding a lot of uncertainty in the existing market conditions.

The principal source of operator revenue is voice and data. (Data services here also implies SMS and MMS services). Under the present bandwidth shortages, existing operators have only been able capitalize on the voice led growth. SMS is the only the significant other contributor to revenues in Indian telecom eco-system. The current contribution of data services to operator revenues range from 8 to 11%. This includes SMS and also includes the Tata Teleservices and Reliance CDMA connections, which are typically data heavy services. GSM’s data revenues would be much lesser than CDMA. India being a 80% GSM country, the ratio of data services to Telecom services thus lags the international numbers. World over the higher percentage of Data revenue balances the fall in ARPU.(The Data ARPUs are on the rise globally). In India, data services provide no such safety net.

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A case in point is the US telecom market which is the world’s highest consumer of telecom based data solutions. Over the last 5 years, Data ARPU has increased 7X while the Voice ARPU has reduced by 30% in the same period. A $15 dollar ARPU loss in Voice has been compensated by a $12 increase in Data ARPU. One might argue that this be the case in US which is a 3G country. But the point made in Indian context though different in regulatory and eco-system aspects, draws from this example.

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  • While voice tariffs in India is the lowest, Data tariffs in India are amongst the highest in the world. Cost being an important determinant of penetration, higher data costs have acted as barriers to data spread.
  • Application and Content Revenue sharing models sometimes make it difficult for higher levels of applications to be built because of cost/higher break even periods. Even if applications are made, the revenue sharing with Telcos in India, would make it difficult for the Apps provider to advertise or communicate the offering to consumers.
  • There is little in terms of consumer services to High ARPU consumers. Telcos in India could perhaps learn from Indian banks a few lessons in differential treatment of HNIs.
  • All this time, Telcos in India have done little to tie up with content providers such as Googles of the world. LBS, Maps, Navigation and Social Networking could have been a great apps. This is a “Blue ocean” where Telcos have not ventured yet at all.
  • The CEOs of one of the biggest Telcos in India once dismissed the MVNOs as “loss making”. Perhaps it is time to re-think strategy in terms of branded and exclusive content. (Read Report)
  • All this while, Nokia has been preparing its platforms to differentiate itself through services. Telcos were in a far better position to aggregate service bundles and yet they didnot. Did all of them miss the trick? Did they fall into the Operator Dumb Pipe syndrome trap!

 So, when it was sunny, all the Telcos in India did was to make good subscriber numbers in falling ARPUs. That was the low lying fruit. Nobody perhaps looked at the next levels, because they were rolling in money anyways. The bloodbath in terms of per second tariffs is now catching the Telcos. They still prefer to look at market shares rather than the EVAs and Bottom-lines.

Next story in making would be the inevitable shake out and age of acquisitions.

Please feel free to rate the post and put your comments (negative or positive as may be!)

Read the earlier posts here:

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

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?

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?

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

Posted in Industry updates, Revenues and Monetization by Manas Ganguly on October 6, 2009

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.

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

Posted in Industry updates by Manas Ganguly on July 25, 2009

An extension of an earlier post, which has discussed the problem of reducing operating margins for Telecom Operators in India in the of falling ARPUs and high operating expenditures; this post profiles the predicament for Airtel. If Airtel being such an established player in the market is facing a crunch in its operating margins, the performances of other marginal players and new comers could be under serious doubt!

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Airtel registered a 17% YOY revenue increase. However, its quarterly sequential revenue growth seems to be tapping out at 1.19%. Thus the revenue growth is slowing down. Net profit is up 26% but that is mainly because of lower financial costs and spends. Operating profit margins are reduced from 30% in last year to 27% this year.

 The concern for Airtel is that the growth in number of subscribers is hitting a plateau. With more competitors, the subscriber figures growth may actually dip. The ARPU has decreased 20.6% YOY. With both these numbers going south, it would be difficult for Airtel to keep up its performance in the next few quarters.

 Applying the same analogy to other operators and the new comers, one would expect some congruence in the statuses. The overall market situation is same in all cases and thus the performances would not be very different for other operators. It is in this context one needs to evaluate the price discounting options that the new operators are resorting to. It may be a short cut to establishing a quick base but sustainability and profitability are very big questions. Couple that with the high initial spends of getting a toe hold in the market, the break even seems to be distant. Ask Virgin Mobile for validation.

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