Zero phone tariffs anyone?

In October this year, a seemingly off-the-cuff remark by J.S. Sarma, Chairman, Telecom Regulatory Authority of India, to reporters covering the annual meeting of the International Telecom Union at Geneva about considering "imposing" persecond call rates on mobile phone service providers shaved 10 per cent off the value of the telcos listed here in a day.

That dunk holds out the worry gripping stock analysts over the future of phone firms in India. Not only has the pricing power of the average telecom services firm, or telco in short, eroded—from Rs 4 a minute for a phone call in 2000 (plus Rs 2 each to receive one) to a low 20 paise a minute on some calling plans today— there seems no stopping the downward slide.

Sure, millions of customers are being added every month (16 million in October alone) in what remains the world's fastest-growing telecom services market by volumes, but the pressure on making money on each minute called (some six billion are recorded every day) is so much that analysts are throwing in the towel.

In a report, "Earnings take a structural hit, could be a knock-out blow for some", Citigroup analyst Rahul Singh and colleagues were clear that additional earnings would be "marginal" at current tariffs. In other words, profit expansion would be a miracle in the current market. Worse, the entry of foreign biggies such as Maxis, MTS and Telenor, into what is already a crowded party means that phone tariffs are seen edging to zero or near-zero levels for voice services in the not-so-distant future. That is, free voice calls. "This is an extremely challenging revenue environment for operators", says Nokia India's Managing Director D. Shivakumar.

Technically, free calls are possible even today; it's just that India does not have an enabling environment for its mass-scale uptake. In the US, the 1.4 million users invited to use Google Voice can already make free calls to (almost all) phones in America. International calls are charged—starting at two cents a minute depending on where the call is landing (Canada is free). Yes, services such as Skype, with 400 million customers and counting, have been around for a few years but a call to any fixed-line or mobile phone, even within the US, is charged, unlike Google Voice.

In India, regulations prevent Internet Service Providers (ISPs) from offering voice over Internet Protocol, or VOIP, calls to phone numbers. (Computer-to-computer calls are free.) Some in the industry blame the powerful telco lobby in India for this suffocating rule. Naresh Ajwani, Secretary, Internet Service Providers Association of India, a business lobby, asks, "Have you seen the profit margins of our telcos? They are exploiting users." The only way rural India will get really cheap calls will be through VOIP, he insists. Before the current tariff bloodletting, telcos such as Bharti Airtel reported operating profit margins of about 42 per cent.

That said, Skype and peers already have versions of their software that can be installed on so-called smartphones that retail at a starting price of Rs 5,000 in India. Better still, if you have a phone running Nokia's Symbian S60 operating system (pretty much every highend Nokia E-series and N-series device) you can install Fring—a software that aggregates Skype, MSN Messenger, Google Talk or Yahoo! Chat offerings. With a data connection on phone or WiFi networks, voice calls (often, admittedly, patchy) are free when made to someone who has similar software installed on his or her phone.

Short of Google Voice or a peer going global, what will it take to have zero call tariffs in India? Market leader Bharti Airtel may have the answer: advertising. "There is a certain cost to delivering a service and someone will have to pay," says Sanjay Kapoor, Deputy Managing Director at the firm. "Whether it will be the consumers themselves subsidising voice through data or if a Google-esque advertisingsupported model (takes) hold, there might well be new business models that evolve in voice."

Vodafone Essar has already piloted a free airtime deployment for consumers willing to choose an advertisement instead of their regular ring-tone. According to Vinod Thadani, Executive Director, GroupM India, an advertising buying house, over 1.5 million mobile phone users across several operators and several circles have decided that they will now subject their callers to advertising already.

This will be driven increasingly by advertisers trying to make the targeting of their ads more precise and phone firms scrounging the bottom of the barrel for new revenue streams. Eventually, that source could become big enough to subsidise free calls. No operator has offered consumers free airtime (as yet), but instead has been offering free caller ring-back tones.

The other ingredient for free calling is widespread broadband connections. There, India could have a blessing waiting to happen in its proposed auctions for third generation, or 3G, phone licences. Shorn of jargon (3G affords 10-plus megabits per second data throughput), the service delivers high speed data—something that will bring Fring and Skype phone calls up to a quality as good as voice calls today. Broadband customers, or those who own a connection that is at least 256 kilobits per second fast, is a minuscule 8 million today.

Industry insiders such as Ramamurthy Sivakumar, Intel's India sales and marketing honcho, blame the absence of compelling content and applications that appeal to a large mass of its citizens for the country's anaemic Internet penetration. "However, I believe as more relevant content comes online, more Indians will see the value of the Internet." Case in point: Indian Railways sells nearly 9,00,000 tickets online every month as consumers avoid the long queues at the transport utility's ticket counters. Ditto with airline ticketing and job searches, where customers find going online less painful.

Voice calls, then, could be the ultimate killer app that will give broadband services a boost in the country. ISPs to tech vendors are ready to launch cheap (sub-Rs 1,000) computing devices and Internet call services in India that will connect between computers, fixed-line and mobile phones. Their market could be huge: Indians are talkative; they talk for over 200 billion minutes every month — second only to the US.

Already, powerful others in the telecom food chain are pushing the envelope. This September, at Stuttgart, Anssi Vanjoki, Executive Vice-President, Nokia Oyj, the world's #1 maker of mobile devices, dreamt up a fantastic, connected world for his audience at the company's annual schmoozefest—a world in which a mobile phone will not just be your constant companion but will tell you all that you need and want to know about your friends. Driving such a world would be ubiquitous data services, a do-or-die condition for Nokia as it tries to transform from a fast-becoming commodity business into a services company.

To be sure, zero call tariffs will likely exist with near-zero tariffs, for there will always be consumers who don't want to switch to databased calling or want advertising to subsidise their calls. But, as broadband takes off, that could change.

The virtuous effects on the economy could be unprecedented, too. Rajat Kathuria, an economist with Indian Council for Research on International Economic Relations, a New Delhibased think-tank, who postulated earlier this year that a 10 per cent increase in mobile phone penetration translates into economic growth of 1.2 per cent, believes that the big network effect on the economy is in the future.

"Voice has opened up new business opportunities for people... but in every developed market data (broadband-delivered) has played a critical role in GDP improvement," he says. Borrowing from Nobel laureate Paul Krugman's work, he stresses his point: "No matter how much money the government throws into the economy, after a point real economic growth will come from productivity increases."

The real economic leveraging of India's 500 million phones may, then, be just waiting to happen.