Newcomers have failed to wean customers away from the biggies
New entrants were supposed to get a boost from key government initiatives that would help increase competition and drive prices down. Instead, they face possible extinction.
In the last three years, key policy initiatives by the Government promised to fundamentally change the competitive landscape of the telecom industry by helping the new kids on the block to take the sword to established industry players. Instead, a mere three years later, the industry finds itself roiled not just by one of the largest corruption scandals in recent times, but also by the imminent demise of new entrants who haven’t realised any of the promise that greeted these initiatives.
In fact, other than a miraculous reversal of fortunes in the telecom industry, their collective bleak numbers suggest an early exit.
The tainted former Communication minister A Raja fired the government’s first industry-leveling salvo in 2008 by opening up the mobile space to half a dozen more players. The reason was simple: it would challenge the domination of the incumbents.(Click here for graph)
Another component of this parity-inducing initiative was the introduction of mobile number portability this year by new communications minister Kapil Sibal. Number portability promised to be a potent instrument for new operators as it allowed them to woo customers away from incumbents .
The initiative was hailed by analysts and industry watchers as something that would increase competition, allow consumers more preference and liberate prices from the stranglehold of the telecom biggies. But did these big moves actually change the competitive scenario in the telecom world?
THE RACE FOR MARKET SHARE
In 2008, there were only six players jostling for mobile customers. But in 2010, when the new UASL licenses started rolling out the number more than doubled to 12. Many of the new players were hoping to cash out by selling their licenses for big bucks, but when they were unable to do so, they were forced to become players in the telecom market, which by then had become bitterly competitive.
The new players could do only one thing to break in—kick off a tariff war and woo customers away. However, they had been out smarted even before they launched when incumbent operator-Tata Teleservices, which entered the GSM space in 2009, created a stir by offering a tariff of one paisa per second. Naturally, everyone else had to follow suit. It was the equivalent of being blindsided by a left hook from someone who had been leading with their right—that too, just months before the all-important debut launch.
“From the time the new players got their licenses in 2008 and rolled out in 2010, incumbent tariffs had dropped by over 30 per cent. So their business case had totally gone haywire”, says a senior executive at Reliance Communications. “Instead of five to six years to break even, now it looked like these new players would require ten years to do so,” he adds. He says that many of the newbies postponed investments on roll out and got into roaming agreements with other competing players just to meet roll out obligations—but in that model there is no money to be made as revenues have to be shared.
Can these new entrants ever make a dent on the incumbents in the future ?
It doesn’t appear so. In fact, a peek at their numbers, suggests that even survival will soon become an issue.
Currently the six new players have only less than 16 per cent share of incremental subscribers which are being added every month. Meanwhile, the growth of the market is clearly slowing down as penetration increases and most large metros already have more than 100 per cent saturation. In June, COAI reported an incremental growth of only 8.6 million customers, their lowest in the last 31 months. Also, based on 2011 census, there are over 1.2 billion Indians, and if projections are accurate, virtually every Indian will have a phone by 2014, thus bringing the great telecom chase for new customers to an end.
Out of this 1.2 billion projected population in 2014 who have phones, the share of the six new players in the incremental subscriber base together would be just over 50 million if the trend continues. Or, in simple terms, the six players together will not have more than 100 million subscribers in 2014—or just over 8 per cent of the market share—surely not enough for all of them to survive. "The telecom industry is top heavy with 70-80 per cent of the market share belonging to the top three companies. Larger companies can make better use of spectrum coverage and also save on marketing expenses, which can be distributed over a wider range of subscribers”, says Alok Shende, principal analyst, Ascentius Consulting. “But for a newer company, marketing expense on a per consumer basis is very high," he adds.
The fragility of the new players’ existences is easily revealed in their numbers: The six players, even based on conservative estimates, have put in over Rs 15,000 crore but the revenue that they made in the first quarter of this calendar year is a staggeringly low Rs 279 crore. “Just the interest burden on the money invested is close to Rs 1500 crore a year. That is equivalent to the projected turnover of the six players. How can it be a viable business?”, asks a senior executive of a new telecom operator.
This move was meant to provide new operators a weapon with which it could woo dissatisfied customers belonging to incumbents, to a new much better and emptier network. However, as the number show, the churn amongst customers is actually limited amongst incumbents—state owned BSNL and Reliance being the biggest losers. And when these two biggies have lost customers, they have been to other incumbents and not to new players.
So what went wrong? “There is cost pressure on new players with regards to MNP. They need to compete with old existing players on after sales, service and promotional offers,” says Angel Broking telecom analyst Shrishti Anand. “It is difficult for new players to match the incumbents on various fronts.”
New players agree. They say that the acquisition cost of a churn through MNP is as much as Rs 150 per subscriber. Yet, as most of them are low-paying, pre-paid customers, their average ARPUs are as low as Rs 25 to Rs 30 a month. “It simply means that, forget about anything else, we take six months merely to recover the cost of acquisition. And before you know it he has left you and churned again” says a senior executive of one of the new operators
Also, most new operators cannot match up with the distribution prowess of an incumbent, which is crucial to educating and wooing potential customers. “Low pricing is not good enough compelling reason for shifting to another provider,” says Hemant Joshi, telecom expert at Deloitte. “New players do not have good distribution networks and service like old operators, so they can not gain on MNP.”
For those companies who once dreamed of shaking up the telecom world, this is an unenviable position to be in.
Tomorrow: “Is the Rock-Bottom Telecom Tariff Party Over”
Additional Reporting: Mansi Taneja, Katya B Naidu
