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Telecom Tariff War in India
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1. Telecom Tariff War
The Indian telecom industry is one of the fastest growing industries in India next only to IT. There are around 15 operators competing in the market for the telecom space in India. The Indian telecom sector is one of the most competitive markets in the world with a subscriber base of 670 million and growing at the rate of 15 - 20 million every month. Tariff rates in India are the lowest in the world which may be very good for the customers but the telecom companies are facing severe financial crisis due to declining revenue trend and profit margin. This has adversely affected the market capitalisation of all telecom companies and the share prices have taken a dip during the recent period.
2. Telecom rates over the years
During 1995 when the mobile companies were first launched the rate per minute was Rs 16.80 and the incoming calls were also charged at the same rate. Apart from these rates which are called airtime, the customers were also charged the actual landline charges called PSTN which is payable to the government operators like BSNL and MTNL. As compared to that, the average call charge today has come down to less than 40 ps. The telecom operators are offering a large quantum of free minutes and the rates are now charged per second as compared to per minute earlier.
3. Strategy followed by the operators
Why did the telecom operators reduce their rates over the last 15 years? While one major reason is the regulatory and policy changes brought in by the Government of India which was passed on to the customers by the operators and second major reason is the cut throat competition faced by the industry.
When the mobile phones were launched in the country the Government allowed two operators in each circle and during 2000 the government allowed BSNL / MTNL to launch mobile services in all circles. In 2001 the Government allowed the fourth operator to launch services. In 2003 RCom entered the telecom market as the fixed services operator which was later on converted to Unified Access Licence. The abolition of incoming call charges in 2003 and withdrawal of ADC further reduced the tariff. Finally issue of additional licences in 2008 created an unprecedented tariff war and brought the rates to a level which is uneconomical and unviable.
In a tariff war, companies try to acquire larger share of customers by offering special promotions or rates like per second billing and free minutes. The incumbent operators have responded to the competition as they did not have a choice. While most of the existing operators never wanted to lead the price war, they subsequently responded to the needs of the market for survival.
An argument in support of tariff reduction is that the telecom companies no longer making profit from local or national calls but they will get substantial revenue from value added services like caller tunes, data services etc. There are around 100 different value added services offered by telecom companies.
4. Innovative methods introduced by the telecom operators
Some of the innovative plans introduced by the telecom operators are life time validity, per second billing and inexpensive recharge and free on net calls.
The pay per second was introduced by some telecom operators during late 90s but later on withdrawn to increase the realization per minute. However when Tata Docomo launched pay per second in 2009, it created a major impact and forced all operators to follow suit. But this has affected the long term financial viability of the telecom operators and led to crash of telecom share prices in the market.
Similarly the chotta recharge was introduced by Vodafone with a recharge voucher of Rs 10 when the lowest denomination available in the market was Rs 50. It became very popular and brought large number of prepaid subscribers by way of new additions.
Virgin Mobile, MVNO operator has gone one step ahead and announced 10 paise free for every incoming calls in their network.
Life time validity was another innovation in which the telecom operators removed the requirement of minimum monthly commitment to enlarge the market and reach.
When the voice call tariff rates were plummeting, the SMS rates were almost steady and remained untouched. However when ‘The Times of India' published a story on the cost and the call charged by operators for SMS, another round of tariff reduction was announced. Tata Docomo took the lead and announced SMS rate at pay per character.
5. Impact on industry Revenue and Profit
All these tariff wars resulted in huge drop in the revenues of telecom operators in 2009-10 and the industry reported a modest 2.5 percent growth as compared to 20% in the previous year. The price war has affected all telecom companies and the impact varied depending on the various stages of their evolution. While the impact is minimum ot temporary for the companies with huge free cash flow, it is disastrous for the new entrants and the companies which are in the process of network expansion.
The telecom services industry reported a revenue of Rs.159,510 crore against the previous year's revenue of Rs.155,683 crore. This revenue includes revenue from fixed, mobile NLD and ILD businesses. The industry has now come to a stage where it cannot afford any further tariff reduction. The worst affected are the new operators who started this war and many of them are looking for consolidation and some even proposed to surrender their licences to the Government.
6. Conclusion
Every industry has seen price wars and it is a global phenomenon. But the tariffs have now fallen to level which is not sustainable any more.The 3G launch and Mobile number portability are the two major events which are expected during Q3 2010-11. These two events are the next two important mile stones in the history of Indian Telecom and likely to trigger another unhealthy price war. It is time for TRAI to regulate the telecom tariff in the interest of the industry. In 2004 TRAI moved to a forbearance regime wherein the operators did not require prior approval for tariff changes. Currently the tariff is left to the market forces and the telecom operators are mandated to file with TRAI the tariff change details within a week of implementation. With the objective of long term health of the industry, the TRAI should ask the telecom operators to present their business cases every time when they change the tariff. To achieve the next target of 100% tele-density, the industry needs support from the investors which will be possible only if the industry runs a profitable operation. The industry has created huge economic and social benefits to the nation during the last 15 years. The industry's growth is directly linked to the GDP growth. The policy makers and regulatory body should ensure that this industry continues to grow and reach further heights.
About the Author
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The author can be reached at vsmoni@hotmail.com. To read more articles on telecom visit indiatelecomonline.com
Who is the best telecom consulting firm?
Hi,
Which firm in the world, is the biggest/best in strategy/technology consulting in telecom industry? Is there any ranking existing?
BTW does i-bank provide this kind of service?
Thnx.
Telcordia
Alcatel-Lucent
Bearingpoint
SAP
Accenture
However, light reading has its favorites here:
http://www.lightreading.com/section.asp?section_id=15
WTDC 2010: World Telecommunication Development Conference
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