Reliance rings thrice

The group has made a third entry into mobile telephony. Is its pricing a calculated gamble for cheap additional spectrum?

When Mukesh Ambani, the head of Reliance Industries, was making a high-decibel entry into mobile telephony based on the CDMA platform six years ago, he gave several interviews recounting how his father, the redoubtable Dhirubhai, provided the guiding principle for the business. In a customary heart-to-heart evening chat with his elder son, Dhirubhai said mobile telephony would take off only if a short how-are-you call cost less than a postcard, whose price was 15 paise.

That charted the course for Reliance Infocomm’s Monsoon Hungama. Opening on July 2, 2003, it offered a mobile phone for Rs 501, including Rs 100 worth of free talk time, and redefined the pricing and tariff structure in the business. Until then, if you wanted a mobile phone, the handset alone cost about Rs 2,000 and more, the connection was extra.

Now, Dhirubhai’s younger son, Anil Ambani, is going a step ahead. Having received the group’s telecom business in the June 2005 settlement with his brother and consolidated it as Reliance Communications, Ambani has taken the company’s focus back to GSM and launched a new pre-paid service that can be bought for just Rs 25 and will be valid for three months, one-eighth of the cheapest offer by anyone else. The connection will come with five to 10 minutes of free talk time (depending on the circle) every day, which works out to 450 to 900 free minutes in the three-month period.

Ambani’s rivals say this is purely a ploy to get additional spectrum at a low cost before the other new licence holders get in. Spectrum, the radio frequency on which mobile signals travel, is a scarce resource on which the new telecom wars are being fought. A new licence holder, as RCom is, begins with 4.4 MHz and gets another 1.8 MHz in Delhi and Mumbai once its subscriber base in these cities touches 500,000.

Low key, low cost
Reliance won eight circles when the government gave out the first GSM licences in 1995. However, they are on the fringe and have so far netted only 10 million subscribers. The group’s big entry in the business took place on the CDMA platform in December 2002. In keeping with the company’s penchant for grandeur, Atal Bihari Vajpayee, the Prime Minister at that time, took the first call from then communications minister Pramod Mahajan. The inauguration was covered live by most news channels.

Anil Ambani, who skipped that glittering event, has done it quietly this time — just a regular press conference in Mumbai. There were no ministers, no teasers, no hoardings, no multi-crore pre-launch advertising blitz, and no brand ambassador (cricketer Virender Sehwag’s mother had become a household name the last time).

But the usual Reliance methods of scale and speed are very much in attendance. The company has done a national rollout of the new licence in just 12 months. The others who got licences at the same time are nowhere close to it. RCom has already invested over Rs 10,000 crore and its target is to reach 95 per cent of the population in three to four months. That is close to the penetration of its CDMA service, which has more than 50 million subscribers. By the end of this month, RCom’s GSM will be in 11,000 cities and 300,000 villages.

The low-key launch has given ammunition to the spectrum theory. Its propounders say the company has saved on marketing and advertising expenses so that it reaches the half a million mark in subscribers in Delhi and Mumbai at the lowest possible cost and get more spectrum.

“There is nothing to respond to as they are not following a sustainable pricing policy and their average revenue per user is negative. They are making a loss per subscriber and virtually giving away SIMs (subscriber identity module cards) free to subscribers. Their aim is to reach 500,000 subscribers in a circle so that they can get the additional 1.8 MHz of spectrum nearly free of cost. They are not making any advertising blitz to keep the numbers in check,” says a senior executive of a leading telecom company.

According to RCom, however, this is a usual entry strategy for someone coming into a crowded market. “Our target is to reach the 100 million mark in mobile subscribers in the shortest possible time,” says S P Shukla, president of RCom’s wireless business. Since the CDMA service already has 50 million and the older GSM service 10 million, the target gets whittled down to 40 million.

Still, what about the cost?

Entry cost
Retailers can pick up the SIM card for Rs 10 and sell it for Rs 25. The company will give them Rs 40 after a month if the subscriber is still on the network. Thus, even if the retailer gives the SIM free, he still makes money.

If a subscriber makes calls for 10 minutes or less a day, RCom will get no revenue for the first 90 days from him since it is giving 10 minutes free every day. On the other hand, it will have to pay termination charges to other networks on the calls made to non-RCom phones at the government-mandated rate of 30 paise a minute. Assuming that about two-thirds of the free outgoing calls are to other networks — after all, Reliance’s GSM subscriber base is only a fraction of the total mobile user base of more than 300 million — the company will pay Rs 60 per subscriber per month to other networks for the free calls which anyway will not bring in any revenue.

Still, rivals say the expenses are a small price. “The math works out beautifully for them. Even if RCom has to spend Rs 180 per subscriber for three months as termination charges, that comes to only Rs 9 crore for 500,000 consumers. Once it reaches that number, it gets 1.8 MHz of additional spectrum under government policy. Everyone knows that the spectrum value is many times more,” says an RCom rival. He adds that apart from the subscriber base, the usage has also been made a criterion for allocation of additional spectrum. That RCom can achieve thanks to the free minutes which it has spread over the three-month period.

Says analyst Mahesh Uppal: “The strategy is akin to free sampling and acquiring subscriber numbers by being a loss leader so that you can claim more spectrum. The fear is that its consequences should not be passed on to others by creating a shortage of the scarce resource.”

The last time, Reliance’s cheap service garnered a large number of subscribers but later it had to write off a large sum as non-performing assets to clean up its balance sheet.

The reasons why Reliance is doing it again are two. First, over 80 per cent of the new additions in the mobile space are for GSM, since consumers like the flexibility of choosing their handset (CDMA phones are tied to the network). Secondly, international roaming, especially in Europe, is difficult on CDMA, and Reliance cannot afford to loose the customers who travel as they would typically be high-usage ones.

“We will leverage on our late mover advantage. Our aim is to get part of the 250 million GSM consumers who are frustrated with their existing networks to come and try a new, better service at the lowest cost, forcing the incumbents to defend their position,” says Shukla. He says the plan is also to get a part of the 8-9 million new subscribers that come on board the GSM ship every month, a market that was so far largely out of Reliance’s reach.

Macquarie Research projects that RCom should be able to capture at least 6 per cent of the net add market by the third quarter of 2009-10.

Experts say the pricing would affect the incumbents, which will have little choice but to take on this new RCom in GSM’s clothing. Already, Bharti’s Airtel, the country’s largest mobile phone brand, has cut its lifetime connection fee to Rs 99. Vodafone is planning to bring its down to the same level across the country. Idea Cellular is already offering it at Rs 40 in some circles and the average across the country has already fallen to Rs 149. All of them point out that they are not offering free minutes — a loss-making proposition.

Macquarie warns of a disruptive impact on the incumbents’ average revenue per user, or ARPU, as well as their minutes of usage since many pre-paid subscribers would shift significant talk time usage to RCom for the next 90 days. Macquarie says Bharti’s Airtel will suffer a 17 per cent drop in ARPU in the next quarter, and forecasts a sharper decline for Idea Cellular, which is also launching in new circles.

RCom executives say that while the goal is to get a large subscriber base, they do not think the company would be ARPU-negative and that the business model is not unsustainable. They point out that the company would make some money from calls that terminate on its network (at the same rate that it will pay other networks). Secondly, they expect all their consumers to buy recharge coupons and use their phones beyond the 10 calls that are free. Thirdly, the incentives given by other competitors to retailers for a new connection are as high as Rs 150-200 while RCom’s trade margins are far lower.

“The trends have shown that 85 per cent of calls from a phone are made to just five numbers, so once they know a new number they will also call back and we expect termination charges on incoming to neutralise what we spend on outgoing calls to other networks,” says a senior executive of RCom. He adds that the company has been able to pass on the lower trade margins and the zero cost on advertising to consumers as low entry packs.

“One of our competitors, which recently started service, spends Rs 30 crore on advertising, but got only 70,000 subscribers in a month. We have refrained from doing so,” says Shukla.

But is RCom overstretching itself by targeting 100 million mobile subscribers? Most analysts agree that the mobile market would hit the 600 million mark by 2012, nearly twice the current size, which has been reached with just seven players. With six new players joining the fray and incumbents controlling at least 70 per cent of the net additions, it might be difficult to get more than 30 million customers each and that would only materialise three years down the line.

Many expect RCom to loose its CDMA subscribers to its own GSM service, so there might not be any big real addition in its mobile subscriber base. “If RCom continues with this fabulous offer, its CDMA subscribers will feel cheated and shift. With number portability (which allows users to migrate from one service provider to another while retaining the number) coming in, it will be easier to do so. So these numbers are too ambitious,” says a senior executive of a competing mobile company.

Industry experts say the company itself might offer free or cheap GSM handsets to its CDMA customers to goad them to switch, so that it has to manage just one network. But RCom executives say they are technology-neutral and there is a market for both the products. Those who want data functions would prefer CDMA, while those looking for predominantly voice usage and handset flexibility would prefer GSM.

Shukla and his team are not only concentrating on new customers but also targeting the existing pre-paid, low-end customers of rivals. RCom has leveraged its existing network to keep fixed costs down. For instance, a similar launch by a new player would need twice the investment, as the network and the towers would have to be set up from scratch. The company can also leverage its existing distribution network of over 5,000 distributers, 2,000 exclusive stores and more than a million outlets. It’s a muscle that will be difficult to match for new players except for the Tata Group, which, too, already has a CDMA network and is making a foray into GSM.

Above all, RCom is counting on two factors. One, it does not expect any of the new GSM licence winners to roll out in the next 12 months. The second is the financial meltdown. “We clearly have time to consolidate our GSM foray in the next one year as we don’t see new players coming in. So we will be competing with the same players that we used to. The only change is that we have a pan-India GSM product,” says a Reliance ADAG executive. Not only that, by the time the other newcomers get in, RCom will also have more spectrum.