Indian Telcos go big bang on STD tariffs

 

Indian Telcos go big bang on STD tariffs

 

It started with reduction of STD tariff rates from Rs 2.65 to Rs 1.50 per minute and the war is just not getting over. You say it and it is available in the market, unlimited on net STD calling, unlimited on net local calling, Off net STD calling at 50 paisa, unlimited SMS, unlimited internet usage and much more than you can think of. Indian telecom market is relentless when it comes to declining tariffs and  it also sends a signal that their was enough scope for cutting tariffs and at the offer of Rs 2.65 per minute, they were making handsome margins or else they would not have reduced the tariff by 50% (at an average). We can say that the statement is partially correct, it is not that they were making huge money earlier rather it would be appropriate to say that they would be struggling on margins at the rate which is now being offered.

 

Let us discuss the whole war and chronology of tariff cuts right from the inception.

 

Airtel

Airtel, the largest private telecom operator in India took the lead and dropped tariffs by ~ 40 % (from Rs 2.65 - Rs 1.5) across the board for all the tariff plans. Interestingly, just after the move, management announced in the press conference that they would not feel the heat in terms of revenue and this would help them in acquiring more customers, thus compensating for the loss of revenue. Very true, Air tel has added ~ 2.5 million subscribers in May as per the latest numbers released by COAI. However, the impact on revenue is still unknown and will be made public only after the declaration of Q1 results.

 

Reliance

Soon after Airtel slashed the STD tariffs, Reliance Communications, the largest CDMA player announced unlimited on net (Reliance to Reliance) calling scheme for a fixed payment of Rs 496 per month. The plan is basically targeted towards customers who are making bulk STD calling to a fixed group of people. This plan offers unlimited STD usage to all Reliance phones and off net local and STD at 99 paisa and Rs 2.65 per minute respectively.

 

Idea and Vodafone

Next were Vodafone and Idea Cellular who dropped STD rates to Rs 1.30 per minute across the board. Needless to say that Vodafone was feeling the heat of Airtel and Reliance offer which forced it to further upgrade the offer to Re 1 at a fixed rental of 31 Rs.

 

BSNL

BSNL, which is always referred to as sleeping giant, as expected reacted a bit late but this time they came with a bang which is quite remarkable. Just two days back, BSNL went a step ahead to drop the rates to Rs. 1.20 across the board. They also have a topping for their rural customers who will enjoy the privilege of STD calling @ 80 paisa.  BSNL, being a PSU is always the last operator to join the war but this time they have made their presence felt.

 

TATA Indicom

Last but not the least comes Tata Indicom, which launched three separate schemes to counter all the offers explained above. The plans are kept very simple with no hidden charges and are referred to as 'no bakwaas plan or honest plan'. Plan 450 is the most attractive of all and offers unlimited Tata to Tata STD calling, off net STD calling at Re 1 and off net Local calling at 50 paisa. This plan counters the Reliance offer and is far aggressive than what Reliance is offering. While Reliance is charging 496 for the same plan, TATA is charging 450 and above all, off net calls are charged at 50 paisa and 1 Re for local and STD respectively where as Reliance is charging 99 paisa and Rs 2.65 respectively. The other two plans named as Plan 275 and Plan 150 offer all calling at 50 paisa and 90 paisa respectively. Plan 275 is a unique offering by TATA Indicom and no other operator is offering off net STD calls at 50 paisa. Furthermore, specialty of the plans is that calling across all legs are charged at the uniform rate and this leaves the customer with no confusion at all.

 

I think we had enough discussion and comparison on tariffs and products offered by different operators. Let us be a bit analytical and see it from the view of different stakeholders. Needless to say, customers are enjoying talking on phone like never before and as local and STD rates are being matched it does not makes a difference to them whether they are making a long distance call or a local call. So far as operators are concerned, the drop in tariff rates has got a downside for revenue and RPM. No doubt this will increase the usage by customer and MOU might go up but simultaneously ARPU is going to take small hit as the price elasticity is positive but less than one. Operators are already under huge pressure to maintain the ARPU as new additions which are basically from rural areas are low ARPU customers and are bringing down the average ARPU. In the wake of this, a reduction in STD tariff will further pull down the ARPU. The biggest challenge at this hour for the operators is to sustain the margin with the growing base and increasing capex due to network expansion. An EBIDTA margin ~ 40% looks really impressive but the big question is how long we can sustain it with tariffs dropping at rocket speed.

 

With dropping tariffs and increasing low ARPU base customer, maintaining margin is a big question which everyone is worried about. One thing which is pretty clear is that we can not bank on tariffs to sustain the margin as we can not expect tariffs to go up in future irrespective of the fact that India is offering lowest tariffs compared to the rest of the world. Secondly, we can not expect to acquire high ARPU as the crème da le (high end users) is already using one or other operator, though MNP (Mobile Number Portability) may change the rules of the game. As we can not play on tariffs and ARPU, we are left with the option of cost management. We are already aware that the cost per call is lowest in India and Mr. Sarin, Ceo Vodafone was so impressed with the cost management in India that he wanted his team abroad to take lessons from their Indian counterpart. But still there are few grey areas of concern which needs attention. In a report released two days back, it was mentioned by Mr. Prashant Singhal (India telecom leader, E & Y) that Indian telcos are losing ~ $1 billion on account of improper revenue assurance and it is expected to double in the next two years. So, we need to work on our back end and billing system which is very important from the perspective of telecom operators. Revenue assurance in telecom is a major activity and the SLA of the team is to ensure that the customer is being charged and billed properly for the usage made by him.

 

As tariffs are consistently dropping, operators are also exploring other avenues to maintain the margin. With the arrival of 3G in India in near future and new products like IPTV, mobile TV, Mobile banking, Mobile Videoconferencing which are either being offered or are in pipeline will definitely be a boost for margins. As of now, Value added Services (VAS) contributes ~ 10-12% of total revenue of the telcos and with the arrival of new technology and products and increased data usage by customers we can expect VAS revenue to constitute ~ 20 -25% of total revenue. As the margin on VAS is pretty high compared to Voice calling, it will definitely off set the loss on voice calling revenue owing to dropping tariffs.

 

As Indian telecom gains more maturity, we can expect revenue enhancement exercise in VAS area and better cost management which will prevent revenue leakage. Increasing competition and razor thin margins are calling for prompt action in these areas. This is indeed a testing time for operators when they can not increase the tariffs and they have to maintain the margins when the new customers acquired by them are giving low ARPU. It would be a good battle to witness.