Mobile service providers (MSPs), bleeding due to intense competition and tariff cuts, are desperately trying to stay in the business. The "pay-per-call" and "pay-per-second" initiative by Tata Teleservices has forced almost all players, including Bharti Airtel, Vodafone Essar, Reliance Communications (RCom) and Idea Cellular, to join the tariff war.
Lower tariffs for mobile calls may be good news for end-users but it is killing MSPs. For instance, new entrant Sistema Shyam Teleservices Ltd, a joint venture between the Shyam Group and Russia's Sistema, which operates under the MTS brand, is offering call rates as low as half paisa per minute to users in Karnataka. Last month, MTS launched its services in Delhi and the National Capital Region with a scheme of one million minutes of free talk time with a limit of 150 minutes usage every day. MTS is now eying Mumbai, the country’s most lucrative circle in terms of customers and average revenue per user (ARPU).
The aggressive launch and lower tariff plans from new entrants are not only snatching customers but are also hurting the top and bottom line of incumbent MSPs. During the recent quarter, all MSPs have reported a sharp fall in ARPU and minutes of usage (MOU). Bharti Airtel, the country's largest telecom service provider, reported a fall in revenues for the first time For the quarter to end-September, Bharti reported total revenues of Rs9,850 crore due to a higher-than-expected drop in ARPUs in its wireless business.
"Per second billing plan should enable Bharti to further consolidate its numero uno position with higher subscriber, minutes, and revenue market share without any significant impact on revenue per minute (RPM) post the current hyper competitive activity," said Religare Capital Markets Ltd in a report.
Anand Rathi Financial Services Ltd, in a report on Idea Cellular, quoted the MSP's management as saying, “Tariffs have fallen more rapidly than anyone expected. Management expects that pricing and other operating metrics would continue to be volatile due to sector overcapacity and hyper-competition."
Idea’s ARPU declined 9.9% quarter-on-quarter to Rs209 as of September 2009 from Rs232 in June. The ARPU for the former Spice Telecom circles of Idea also declined 7% quarter-on-quarter to Rs226 as of September 2009. Due to the continued rise in multiple SIM usage, Idea's MOU fell 6% to 399 on a quarter-on-quarter basis.
Anand Rathi, again quoting the management of Idea Cellular, said, "The emerging tariff levels are below economic cost for many operators, especially new entrants. Management expects early signs of progress on mergers and acquisitions (M&A) from mid-2010. It (the management) believes M&A rules would change ‘pretty’ quickly to facilitate consolidation."
The aggressive pricing strategy by some operators has adversely impacted the valuations of the entire sector as it will have a negative impact on the profitability of incumbent operators. "We believe that the flow of negative news could continue over the next few months, resulting in continued weakness in the stock. However, such irrational pricing would hasten the consolidation process in the sector and players with strong balance sheet, scale and brand would emerge as winners," said Sharekhan Ltd in a report.
The Telecom Regulatory Authority of India (TRAI) is also planning to make the one-second pulse a mandatory tariff option for all operators to bring in transparency into the tariff plans. Although this is beneficial for subscribers, such a ruling may hurt ARPUs of incumbent operators. Moreover, an increase in MOU cannot offset the ARPU decline and would therefore impact margins of telecom operators.
Mobile number portability, coming into force from 1 January 2010, will further increase competition. With an aggressive price war and declining MOU elasticity, the ARPU and margins of all MSPs will come under pressure in the near term.
Asit C Mehta Investment Intermediates Ltd in a reports said, "These price wars, along with declining MOU elasticity, have the potential to impact top-line of the operators. Further, the impact of tariffs cuts is uncertain and will be visible only in the third quarter of FY10. Many new players are expected to launch services in the near term; with mobile number portability being implemented as the same time, this increases uncertainty in the sector."
"While we also believe that such aggressive pricing is not sustainable, consolidation remains the savior for the sector, but would be a long-drawn process. While near term pain is inevitable and would severely impact financial performance, we believe players like Bharti with strong balance sheet and execution capability remains the strongest incumbent to withstand the difficult times,” said Emkay Global Financial Services Ltd, in a note.
Traditional understanding of consumer behaviour is changing with the proliferation of double SIM devices that allow the subscriber to use a discounted tariff plan of a competing operator while continuing with the existing connection.
The resultant overcapacity has manifested in mobile call tariffs which are unrelated to economics. Call rates have plumbed depths which predicate that the market itself will eventually work the overcapacity out of the sector. But the question is: will this really happen or is it a signal for consolidation for the MSPs, since there seem to be too many operators, old and new, in a circle at present.
We don't know for sure, but what we know is that the end-user is happy and does not mind switching to a new operator every time there is a new offer that lowers tariffs.