The telecom paradox

Five years after Rakesh kumar left a small town in up for the bright lights of Delhi, he's a mini-entrepreneur with two employees on his payrolls. He doesn't make a whole lot of money, but by his own admission, is doing better than he expected. He doesn't thank his stars, his smarts, or even the big bad city for his good fortune. Instead, he thanks the Nokia 1110 handset and the Airtel connection.

Kumar, you see, runs a three-man whitewashing business out of his small shack in Gurgaon near Delhi, and until he bought a mobile connection about two years ago, the only way to find daily employment was to go stand near a roundabout on the main intersection that doubled up as a spot market for daily labour. It's been a long while since Kumar, a late 20-something, did that. These days, his marketplace is his mobile phone; customers call him, and he, in turn, dispatches workers, who, of course, have mobile phones, too.

In a country where inclusive growth is the new rallying cry, the telecommunications industry has played the role of a great equaliser. It has transformed lives of millions of poor in ways not yet fully measured. Indeed, telecoms is the most powerful emblem of the transformation that India has undergone since it opened up its economy in 1991.

And 12 years after the then Chief Minister of West Bengal, Jyoti Basu, rung in the first wireless service provider in Kolkata, telecoms is a story to be heard to be believed. It took three-and-a-half years for the wireless population in India to touch a million, but barely seven-and-a-half years to hit 10 million, and just under 11 years to touch 100 million. Today, the number of mobile subscribers stands at over 177-odd million, with six million users getting added every month-that makes India the fastest growing telecoms market in the world.

Yet, the beauty is that even at 177 million, the mobile phone penetration in the country is a modest 15 per cent. That means there's potential to add millions more as consumers over the years ahead. In fact, the government of India has set an ambitious target of hitting 500 million by 2010. To put it in perspective, it's talking of trebling the wireless population in just over three years. Operators seem equally gung-ho. In May this year, operators launched aggressive new schemes to get millions more on board. Reliance Communications introduced the "India Roam Free" (the user gets up to 1,300 minutes of free roaming talktime), followed by market leader Bharti Airtel, which offered lifetime prepaid at a new low of Rs 495. State-owned telecoms giant, Bharat Sanchar Nigam Ltd (BSNL), also plans to expand its coverage. "We are looking to target at least 60 per cent of the country. With our current coverage at around 25 per cent, there is a long way to go," notes S.D. Saxena, Director (Finance), BSNL.

Operators are putting their money where their mouth is. Bharti, for instance, has announced that it will invest $3.5 billion (Rs 14,350 crore) in 2007-08; Reliance Communications intends to sink another Rs 11,000 crore, while BSNL has a CAPEX plan of Rs 20,000 crore. All the major operators put together, the industry can expect investments in excess of Rs 60,000 crore this financial year alone. Evidently, the industry is confident of maintaining its breakneck pace of growth. Says Manoj Kohli, President and CEO, Bharti Airtel: "The current growth rate of 5-6 million subscribers every month is not only sustainable but will, in fact, increase."

Volumes sure, value no

Few doubt that, but with every passing month, the growth is beginning to look less and less attractive. An increasing number of subscribers often results in a falling average revenue per user (ARPU), which for the GSM operators (that is, excluding Reliance Communications and Tata Teleservices, which offer CDMA-based wireless services) has dropped to Rs 315.93 in the October-December 2006 quarter from Rs 335.46 in July-September-a drop of 6 per cent. Why should that happen? Because operators have almost saturated the more lucrative metros and are now spreading out into smaller towns and cities, where phone usage is low. "Around 20 per cent of the total subscribers contribute almost nothing," reckons Romal Shetty, Director (Telecom), KPMG.

A large number of the so-called marginal subscribers come from the prepaid category, where the user goes wireless for a very small amount. At a handset cost of less than Rs 1,000 today, coupled with rock-bottom tariffs (the lowest in the world), the reason to go wireless becomes extremely compelling. By the most conservative estimates, prepaid users account for around three-quarters of the total subscriber base and as far as the month-on-month net addition goes, that number increases to 80 per cent. Therefore, operators do admit that ARPUs will continue to fall. "ARPUs will go down and there is no doubt about that. The reason is that a large number of subscribers are first-time users and for them the basic purpose of the mobile is that of voice communication," explains Kishor Chaukar, Managing Director, Tata Industries.

The important point is that India is still a voice market and a large proportion of the operator revenues comes from talktime services. That's not a problem, operators say, as long as the subscriber numbers keep soaring. "When multiplied by a large customer base, even moderate arpus add up to substantial growth on a revenue basis," says S.P. Shukla, President (Personal Business), Reliance Communications. Other analysts say that while ARPUs are a useful measure, they may not reflect the correct financial picture. "It is more pertinent to look at returns on capital employed and returns on equity, both of which are still very healthy for telecom operators," points out Varun Bajpai, Managing Director, Macquarie India Advisory Services.

Yet, there's no denying that revenues are under pressure. The most recent measure that adds to this pressure is the cut in roaming charges. Traditionally, roaming charges have been the jam for operators, boosting their bottom lines. But on January 25 this year, the industry regulator TRAI asked operators to slash roaming charges by 22-56 per cent, which means a user could end up paying as little as Re 1 per minute. What's worse, there are people who feel rates could go down further. "I think there is potential for tariffs to come down further," quips Dilip Modi, Chairman & MD, Spice Telecom, which recently closed an ipo.

Focus on value add

In the midst of price cuts, what operators are banking on is a steep increase in talktime that could take care of a potential drop in revenues. Reliance's Shukla says that tariffs are important in a price-volume elasticity equation. "Our own observation is that every reduction in tariff has resulted in original revenue levels being restored after a certain time lag. This is a result of subscribers increasing their usage," he explains.

Operators have also been in fifth gear as far as launching new services is concerned. From a time when the caller line identification (CLI) and SMS were basic value-added services (vas), the story has changed quite dramatically. Today, the gamut of offerings include mms, video and gaming, among others, even as there is talk of some serious action waiting to play out on the vas front. "There are a large number of transactions that can be offered under vas," says Chaukar. It is broadly estimated that vas account for around 8-10 per cent of an operator's revenues. "We see that increasing to 15-20 per cent over the next few years," reckons Modi.

That apart, operators have been looking at various cost-cutting options like sharing infrastructure such as cell sites to get the best possible return for every investment that is made. In a situation where tariffs have fallen to less than a tenth in just over a decade, the pressure on operators to keep costs low can hardly be overstated. It is here that moves such as infrastructure sharing and outsourcing-Bharti's and Idea's deals with IBM for it outsourcing, for instance-have become so important. In some sense, that has been facilitated by the rapid growth in subscriber numbers. "Operators are starting to enjoy scale benefits in terms of network equipment and handset procurement costs as a result of the strong addition in subscriber base. Besides, the increasing acceptance of passive infrastructure sharing is likely to lower operating costs for telecom operators," says Bajpai.

Operators have not lost sight of that and they do recognise that it is indeed a different kind of industry. "Telecom is a unique sector. Even after privatisation, it requires competitors to both compete and cooperate at the same time. This is because of the critical need to interconnect and most other consumer sectors do not have such a need," points out Asim Ghosh, MD, Vodafone-Essar.

The industry's next set of consumers will come from rural India. A lot of the money that the industry is investing is aimed at prying open far-flung and relatively poor markets. Nokia-Siemens Networks, a newly-launched joint venture, is offering a village solution that promises to halve the investment required to tap rural markets. This is how it will work: Nokia-Siemens will sign up rural franchisees and provide them with telecom equipment to offer wireless services in a limited range (4-5 kilometres), allowing users to pay a little over Rs 100 in monthly fee. The big operators will hook their own networks with that in the village and share revenue with the franchisee-based business model. Separately, Arun Sarin, CEO, Vodafone, which majority owns Vodafone-Essar, has promised to launch ultra low-cost handsets to make telephony even more affordable.

Already, the biggest subscriber additions are happening in class A and B towns, but hereon, the focus may shift to smaller, C-class towns. According to Idea Cellular's MD, Sanjeev Aga, there are three clear drivers for the surge in subscriber numbers. One and two are the cheap handsets and low financial commitment to go mobile, which allow easy entry into the wireless market. "Finally, there is an enhanced calling potential following an increasing population that comes under telephony coverage," explains Aga. It's a logic that has created an industry now valued at a staggering $80 billion (it's the market value of all listed telcos), and one that may well deliver the magic 500-million number by 2010.

- additional reporting by Amit Mukherjee