Wrong numbers

Zip Telecom was India's first private-sector payphone operator. Why is it losing its niche?

Just four years ago, Zip Telecom's jazzy looking payphones, some of them in grocery outlets, were talking points.

Today, they're hard to spot, simply because they have all but vanished in a tangle of strategic errors that India's first private payphone company is still struggling to unravel.

Mumbai-based Rs 100-crore Zip Telecom began operations in 1999 with the intention of building an international payphone model.

Packed with technology like computerised billing, one-touch dialling and so on, these phones, branded Zip Fone, were a welcome change from the dowdy and often inefficient payphones offered by public sector service providers.

Zip had everything going for it, with blue-blooded investors like AIG and Andersen, Weinworth and Company putting $ 10 million (approximately Rs 46 crore) into the company.

While Zip's intent was clear, its strategy has been losing definition by the year.

At present the company is facing cross connections in most areas, from its business and revenue model, retaining existing franchisees and roping in new ones, to the company's receding employee strength (from 600 in the first couple of years to a mere 200 people at present). Why is the market hanging up on Zip?

Zip Telecom's intention was to set up 50,000 payphones by the end of 2003.

At present the company has managed less than half of that with 21,000 payphones across 25 states, considering that Zip had an impressive start with the company installing almost 1,800 payphones per month by 2001.

But the number plunged to 700 a year ago and is currently down to barely 500 payphones a month.

What worked for Zip Telecom in the initial days was that it attracted franchisees with the promise of speedy installation of a Zip Fone in their establishment which compared favourably with the tedious and a long-drawn process of getting a telephone connection from a government body like Mahanagar Telephone Nigam Limited (MTNL).

Zip also helped private telecom companies like Hughes and Bharti build relations with PCO (public call office) operators to roll out their networks.

The trouble was that the company charged a huge premium for the prompt service. Zip Fone initially covered its installation cost by charging a deposit of Rs 48,000 from franchisees.

But with changing market conditions "" principally the increasing popularity of cell phones following sharp tariff cuts "" Zip had to take a sharp cut in its deposits. Now, it charges Rs 20,000 as deposit, but that is still way higher than the Rs 5,000 that MTNL charges.

Zip Telecom's chairman and CEO, Ravi Kailas points to other problems. He explains, "The major hurdle facing Zip Telecom in its quest to become a national player is the lack of an agreement with Bharat Sanchar Nigam Limited (the state-owned telecom carrier created from the Department of Telecommunications) to get more lines. BSNL operates about 44 million phones across the country."

Zip Telecom, on the other hand, buys telephone lines from private telecom service providers like Hughes Telecom in Maharashtra and Bharti Telnet in Madhya Pradesh and sells it to individuals who want to set up a PCO. With their limited coverage, this, naturally, is a constraint on growth.

But this was not the only reason Zip's targets went haywire. The company had been adversely hit by a number of things "" a delay in the availability of funds at a critical time when the second round of venture capital funding was delayed in mid-2001, impeding the company's pace of phone installations.

To top this, Zip had to account for the exit of some of its key executives, like Harish Bijoor (chief operating officer), Shishir Lall (president) and Vishal Sehgal (head of the payphone business).

The point, however, is that these, admittedly serious, operational glitches only exacerbated a revenue model that was flawed from the start.

The company had underlined three revenue streams initially "" revenue from calls, franchisee fees and advertising revenue.

An ex-employee points out that while the first two streams were expected to rake in the maximum revenue, they managed to make up only 20 per cent of the total revenue, while the major chunk (80 per cent) came in through advertising.

But advertising revenue too, became victim to a bad pricing model. To begin with, the snazzy-looking Zip Fones seemed an expensive deal for callers as they were paying Rs 2 for a local call against Re 1 on an MTNL line in places like Mumbai (outside Maharashtra, payphone calls are billed at Rs 2 per call).

The rates were high in Mumbai because Zip Telecom buys phone lines in bulk from Hughes Telecom and then fixes it at various locations.

Naturally, Zip had to account for paying Hughes back as well as recover its own cost. And Mumbai accounts for 25 per cent of the total Zip Fone population.

An ex-employee points out that Zip charged Rs 2 to discourage people from making local calls from a Zip Fone because it was essentially meant to be for high-value long-distance callers.

Long-distance call rates were priced on par with the phones provided by the public sector undertakings.

But there were two flaws with this reasoning. First, the lowest price point is often taken as a benchmark for the overall service offering. Hence callers perceived that they would be charged more even for domestic and international calls on the Zip Fone.

Also, most long-distance calls are made at night, and that too, for a couple of hours to take advantage of concessional rates. In contrast, PCOs do business throughout the day on the strength of local calls.

As a result, revenues at locations started falling. A franchisee in central Mumbai confirms this. He says, "Till two years ago, Zip Fones managed revenues of Rs 200 per day. Now, it's down to just Rs 15 to Rs 20 a day." This was partly because of the changing market dynamics.

Even as Zip tried to target STD and ISD callers, there were few callers going to a payphone booth to make long-distance calls.

With increasing cell phone penetration, almost all cell phone service operators were offering STD facilities with airtime rates as low as Rs 4 per minute.

Customers could also make long-distance calls from home by using MTNL's virtual card calling (VCCs) service and have the cost of these calls charged to the account specified by the VCC number.

Kailas also points out that, "Placing ourselves purely on a utility platform was not enough to recover costs. Thus, advertising revenues gradually became a crucial vehicle for Zip to drive on."

To this end, Zip's media division started offering to advertisers, through what it calls Zip media avenues, the phone's backlit acrylic header for thematic spots, the 16 by 10-inch LCD screen display which scrolled half-tone colour ads and the "Zip Touch", a one-touch button that companies could brand for consumers to access their service or call centres.

Zip began by charging Rs 500 to Rs 800 per month per location for the backlit header, Rs 150 per month for a 10-second scroll slot on the LCD panel and a similar amount for a month for the one-touch button.

At present, the per month per location rates are down to Rs 250 for the backlit header, Rs 30 to Rs 70 for ads on the LCD panel and Rs 100 for the one-touch button.

As a part of the deal with its franchisees, 10 per cent of the total advertising revenue would go to them. But most franchisees are unaware of any such arrangement.

"Some location owners or retailers who could not pay the entire deposit while installing Zip Fone machines, get only a lower percentage of the ad revenues," says Kailas, when we checked this with him.

With falling advertising rates the company's media revenues have plummeted too.

At present the media division's revenues are about Rs 12 lakh a year, a sharp decline if you consider that ad revenues were Rs 20 crore two years back.

Says a former employee of Zip Telecom, "Survival is a big issue at present because the entire ad revenue model has gone for a toss."

In the past, Zip had managed to rope in some big-ticket advertisers like Hindustan Lever, Cadbury, ING Vysya, ITC, Procter & Gamble, Bharat Petroleum and so on, advertising a variety of their brands and promotions.

But currently most of them have no inclination to renew their contracts with Zip because falling footfalls mean dwindling exposure.

Says a BPCL executive, "It made sense for us to advertise on Zip Fones about two years ago but now the traffic has dropped considerably. So it would be a waste of money to look at Zip Fone as a vehicle to advertise."

Former employees add that the entire media division of Zip Telecom has been asked to resign. Kailas, however, defends it by saying that it's natural for any company to go by performance measures.

He says, "We have shrunk the company to half the number of people because we do not require so many employees any more for most of our functions are currently outsourced."

These include after-sales-service of payphones, selling advertising space, roping in new franchisees and bill collections.

Even so, the basic issues with distribution, consumer perception and revenue model remain major problems. If it is to keep itself buzzing in this fast-changing business, Zip Telecom will have to sort out these cross connections first.

UnZipped!

(Zip Telecom got its wires crossed on three crucial counts)

Distribution: Zip Telecom started out by charging franchisees a high deposit of Rs 48,000. This discouraged location owners from taking up a Zip Fone franchise.

Revenue model: The company's over-dependence on advertising as the principal revenue model put the company in a tight spot "" just like it spelt doom for many dotcom start-ups in the past.

Communication: The company failed to communicate why "Zip Fones" were superior to the standard payphones in terms of technology. Since the Zip Fones looked snazzy, there was bound to be a perception that the service would cost more than the regular payphones. The company did little to alter this perception.