In the early days of India’s telecom gold rush in the late 1990s, well before the rich veins of gold were struck, subscriber growth was a big story, even though the numbers added were less than 100,000 every month.
Today, Bharti Airtel, India’s leading mobile operator, adds almost that many subscribers every day. Yet, behind the massive numbers—India will close the September 2009 quarter with over 470 million mobile connections—things are not quite so rosy. There is an apparent mismatch between the actual number of connections and active users.
Worse still, while telecom operators claim that they have never really cared about revenues per user, the same has been falling sharply—ten per cent each quarter over the past few quarters to stand at around Rs 150 today. And with operators needing to go deeper and deeper into rural India to attract subscribers, network costs per subscriber have not been declining so sharply.
It is “connections” rather than subscribers that is the biggest worry for the telecom industry. There is a disconnect between the actual number of subscribers and those publicised by the Telecom Regulatory Authority of India (TRAI), but it is not clear. Pankaj Mahindroo, President, Indian Cellular Association (ICA), a body that represents mobile hardware manufacturers in India, says, “As per data, we are on average adding 12 million connections every month. But only 11 million odd handsets are being sold, of which maybe 3-4 million are replacement handsets. Even if one assumes some second-hand handsets and dual-SIM handsets, there is still a disconnect.” In fact, some in the industry estimate the number of duplicated subscribers to be as high as 100 million, and if that were true then India’s wireless subscriber base today would be closer to 370 million rather than 470 million.
Then, there is heavy churn in the subscriber base of operators—some say it is as much as 40 per cent annually. This is partly due to the fact that some users use and throw SIM cards once a month, but the churn is mainly being fuelled by new operators offering rock-bottom prices and deals to resellers.
But the new operators have a logic behind their apparent madness. “There is high penetration in urban markets. But there is also a larger than earlier estimated double and triple SIM holders. So, penetration may not mean those many customers. Also, people who currently have one connection are increasingly buying a second or a third connection. That’s an urban opportunity,” says Stefan Erik-Vellar, Managing Director, Unitech Wireless, which is shortly going to start services under the UniNor brand.
“We always tell our investors not to look at our subscriber marketshare but at our revenue marketshare,” says Sanjay Kapoor, Joint CEO, Bharti Airtel. He argues that with several new operators entering the market, subscriber numbers are not the best yardstick to measure Indian telecom operators. This is so because all new operators are advertising extremely low tariffs in “a race to the bottom”, according to Mahindroo. “These tariffs are not sustainable for a small operator. Being the largest operator, we have the traffic volume to keep our costs down, and we are transparent,” Kapoor adds.
In fact, Kapoor foresees large-scale consolidation in the sector in the coming years. “I feel the market will coalesce into four-five operators and if international markets are any indication, the top two players will be profitable and the rest will be marginal.” Vellar disagrees, “In a hypercompetitive market, price wars are to be expected. Margins will always be under pressure. As a new operator, we have no burden of legacy. We don’t own expensive equipment and towers, or have hundreds on our rolls to manage them. We find the best partners and the latest technology and get them to do this for us.”
How bad are revenues? For the quarter ended June 2009, according to the TRAI’s latest report, the monthly Average Revenues Per User (ARPU) for GSM operators declined by ten per cent quarter-on-quarter to Rs 185. For CDMA operators, the decline was 7.2 per cent to Rs 92.
Light on the horizon?
“There is still a whole lot of opportunity. As we penetrate deeper into the countryside we see a whole new class of consumers pick up mobile phones. And as that mobile ecosystem grows and the economy picks up, we expect revenues and minutes growth to pick-up,” Airtel’s Kapoor says. Vellar concurs here. “Rural markets are clearly underpenetrated with more basic consumption. The potential there is clearly through new connections and evolution on products and services,” he says.
The other interesting point, Kapoor points out, is the climb in data usage. Unsurprisingly, one of the latest entrants into the nationwide cellular market, Aircel, has decided to make data their main selling plank. “Only ten per cent of Indian operators’ revenues come from data (and value-added services) now. Data usage is going to climb, especially because India is a young country where youth want to do more. In many cases the mobile screen will replace the computer screen,” says Gurdeep Singh, COO, Aircel.
Vellar feels that customers will demand more from operators in times to come, and he is basing his strategy around that. “We have a lot of respect for competition. Some of the largest service providers operate in this market. But we also believe that a lot more can be done to try and get closer to the customer.”
But the big bet for Kapoor and most of his peers—in fact, for the whole industry—remains next-generation networks, particularly 3G. These networks, which will be built using the High-Speed Packet Access (HSPA) standard, promise far improved connectivity for users coupled with higher speeds. But 3G itself has been stuck in a quagmire for years with delayed auctions and sniping between the Department of Telecom and the defence establishment, which is hoarding the spectrum required for 3G use (this particular band of spectrum—2100 megahertz— is reserved for mobile communications, according to the International Telecom Union).
In the meantime, the additional 2G licence holders have been launching their services and skewing the market further. The recent raids by the Central Bureau of Investigation (CBI) at the Department of Telecom have raised serious questions about last winter’s rushed telecom licence dole-out. These will only create more problems for an already troubled telecom industry.