PRICE WARS IN INDIAN TELECOMMUNICATIONS

INDUSTRY
C. VISHAL CHANDRA

GIIB
Telecommunications industry is no doubt one of the fastest growing sectors with respect to India
in the current decade. With the event of the existing companies crossing the break even and the
entry of many new foreign companies to gain acceptance and have a major market share in India
this sector has given lot of scope for the price wars. The decline in tariffs for the calls is so much
that the companies are experiencing a decline in their revenues and are under a confused state of
what the next strategy be for acquiring a major market share and also keep the revenues up.

This started with the entry of NTT DOCOMO a leading telecom operator of Japan with over a
50% market share their forming a joint venture with TATA in November 2008. TATA also were
not under GSM service providers until then accepted to form a joint venture to combinely
provide GSM services starting with 18 telecom circles (which majorly includes south India) in
India. Not that the price wars started with the entry of DOCOMO in India. The price wars
already existed between the then major service providers like Airtel, Idea, and Vodafone Essar
etc. Also some of the new entrants like Aircel were trying to have a market share. The problem
started with the introduction of tariffs with respect to pulse ( per second call rates). TATA
DOCOMO started its services in India with call rates of 1paise/ second. This made many other
major service providers to rethink about their marketing strategies and have retain their market
shares. This made other telecom service providers to automatically follow per second billing
despite of their decline in revenues.

India is the world's second largest wireless communications market after China. But the
competition among domestic and international companies for new phone subscribers is digging
into profit margins. India adds more than 10 million new mobile phone connections every month.
The lucrative business has attracted domestic and international companies to the Indian market.
The present estimate of the total users in India is about 540 million which nearly a half of the
total 1.2 billion population. Despite all this the call rates in India were considered to be much
lower compared to other western countries ( it is considered that the present call rates in India
were only 0.02 cents which is very low compared to about 2 to 3 cents in US). Every time a new
player enters the Indian telecom industry, the profitability of all the existing players take a dip.

Industry revenue growth for the quarter ending September 2009 was 1.7% quarter-on-quarter (Q-
on-Q) and 8.7% year-on-year (Y-on-Y), substantially lower than subscriber growth at 10.4% Q-
on-Q and 49.6% Y-on-Y," says a report by equity research firm Enam Securities. "The
aggressive entry by new GSM players has compelled the incumbents to reluctantly join the tariff
war to protect their market share."

The industry clocked about Rs. 38,755 crore in September 2009, which was lower than the
sector's revenues in the quarter ended December 2008, when it recorded Rs. 39,408 crore despite
having 125 million fewer customers then." The report notes that 13 operators are fighting for
share in a market that many believe can optimally support four or five -- and four more players
are planning to enter the market by next year.

PERFORMANCE ANALYSIS OF INDIAN TELECOM INDUSTRY PLAYERS

Total Total Net Addition in Net Addition in

 MRPU
Revenue  Revenue  Subscriber  Subscriber 
Company
in Rs crore in Rs crore base in million base in million
(in Rs)
(Q2 08-09) (Q2 09-10) (Q2 08-09) (Q2 09-10)
Bharti Airtel  8923.57  10355.16  8.1  8.14  29.85
Vodafone Essar  4444  5449  5.43  6.4  1.27
Idea  2303.35  2973.91  3.19  8.69  0.17
Reliance  3545.65  3057.89  5.26  6.5  -0.58
Tata Teleservices  513.44  542.79  3  9.68  0.03
Sistema Shyam
45.75  70.44  0.01  0.77  0.01
Teleservices Ltd. 
MTNL  1231.56  572.06  0.24  0.07  0.78
SECTORAL
3001.05  3288.75  3.6  5.75  0.16
AVERAGE 

At this point of time the major telecom service providers instead of analysing the average
revenues per unit (ARPU) are now depending wholly on marginal revenues per minutes (MRPU)
to estimate their revenues. Every strategy whether it may be the decrease in the tariff rates or
introducing new schemes for the customer to increase the custpmer base were predominantly for
increasing their customer base in the short term which had a severe impact on the revenues of the
whole industry in the long term. Faced with fierce price-war scenario; the marginal revenue per
user (MRPU) of the telecom sector for the September quarter reveals that every new addition to
the subscriber base resulted in a miniscule addition of 16 paise to the revenues of telecom
players, while going forward; intense competition due to number portability between the
operators would further erode their revenues and profitability, according to an Assocham
Financial Pulse Study.

In profitability terms, the net profit of 8 major telecom operators registered a whopping decline
of 127.8 per cent as their total income and expenses increased by 19.5 per cent and 25.1 per cent
respectively during the September quarter.

Intensifying the market competition:

Apart from the price wars one more important issue which is worrying the telecom providers
which is said to make the competition fierce is the mobile number portability (MNP) which is
said to be made available by the mid 2011 by TRAI ( telecom regulatory authority of India).

A study reveals that 18% of the already existing users are ready to change their mobile operators.
This made the competition in the telecom sector more fierce. Every service provider is now
making new strategies and rethinking their marketing strategies to retain their customer base and
increase it to the maximum extent.

Enhancement in quality of the service is one more key factor which has been understood by the
companies. Thus, they are increasing their service levels by upgrading their existing
infrastructure and also by providing several other schemes with respect to value added services
and internet services ( of cource internet service comes under value added services).

SMS is one of the major area of the telecom operators. It is estimated that about 5% of their total
revenues are from SMS services. This no more can be a source of income for the telecom
operators it is considered that almost the SMS services are now free. Apart from this with the
drastic decline in call rates in the recent past and will also in the near future will tell the same.
Some solutions:

one point many telecom operators are missing is that the teledensity ( teledensity is the number
of users for every 100 people i.e for a teledensity of 25% there are 25 users for every 100 people
in that locality) in majority of the rural areas in only about 12% to 15% and in many cases it will
not even cross the !2% mark. This is one of the great opportunities for all the telecom operators
to act immediately which not only increases their customer base but also increases their revenues
considerably. Thus, companies must look for increasing the rural customer base immediately to
survive in the competition.

While increasing the rural customer base the telecom operators can simultaneously start working
on their value added services in both urban and rural customers to improve in terms of their
revenues.

Also with improved services of providing internet also helps the telecom operators to a greater
extent. This will make the operators differentiated between their competitors if they provide un
interruptible and fast internet services in affordable prices ( after all maintaining utmost quality is
the only mantra to be successful in the contemporary markets).