Mobile Telecoms Find Nirvana

India has become a red-hot market for cell-phone operators

In August, the Kazi family of Bombay decided to ditch their land line and switch their home phone to cellular. The monthly $22 bill from the state-owned fixed-line company was beyond the budget of the family of a factory foreman. Instead, Abdul Kazir Kazi's 19-year-old college student daughter, Ayesha, persuaded him to invest $88 in a Nokia Corp. (NOK ) handset and take advantage of the low rates that cellular operators were offering. They signed with Hutchison Essar Telecom Ltd. and now pay just $6.60 a month. "With mobile phones we can monitor talk times and budget ourselves better," says Ayesha. "Land lines are old stuff."

It's a free-for-all in India's exploding mobile-phone market. With the price of service falling almost daily, millions of Indians are signing up for cellular. No fewer than nine companies are competing for their business. The latest price war was begun on Aug. 13 by Reliance Infocomm, a late entrant to the telecom game, when it cut rates to 2 cents a minute, the lowest in the world. Reliance says it has signed up 8.7 million subscribers in 18 months. Competitors Bharti, Hutchison Essar, Tata, BPL, Idea, and state-owned BSNL, with 30 million subscribers combined, matched the price immediately.

The price war has given revenues and profits a hit, though the companies insist that huge increases in volume make up for some of the losses. According to consultant Gartner Inc. (IT ), India's mobile market, which has 42 million customers, will top 50 million by yearend and 165 million by 2008. There's plenty of room to grow; China already has more than 250 million mobile subscribers. This year, India for the first time will have more mobile phones than land lines. "Mobile phones are becoming a habit with Indians," says Ramesh Venkataraman, partner and head of Asia telecom for McKinsey & Co.


It isn't just demand that has pushed sizzling telecom growth. By the time India, long shackled by bureaucratic red tape and restrictive import policies, fully entered the mobile-phone game in the last three years, the cost of equipment had fallen dramatically, and Indian operators took advantage of low costs to build and expand their networks. Phone giants such as Samsung, Motorola (MOT ), and Nokia helped, offering handsets for as little as $60. And New Delhi did its bit. Over the past two years, the government has slashed tariffs on imported handsets to just 5%, lowered license fees, and removed regulatory hurdles such as requiring separate licenses for cellular and land-line operators.

Foreign players are rushing into the market. A sign of the frenzy: New York venture fund Warburg Pincus, which holds 15% of Bharti Teleservices, sold a slice of that stake on the open market in August for $207 million. Intense demand for the stock has pushed valuations to 29 times earnings, three times the average of its peers in Asia. Unsated, investors are eagerly anticipating an initial public offering by Hutchison Essar, the Indian telecom subsidiary of Hong Kong's Hutchison Whampoa Ltd. (HUWHY ). Others will follow.

The money raised in these listings will come in handy for India's mobile operators, all of which have been investing heavily in expanding their networks. The bulk of the new customers prefer prepaid services, where usage for a fixed number of minutes is paid ahead of time. The demand is so high that state-owned giant BSNL recently had to allocate prepaid cards in a lottery.

How will it all shake out? Analysts predict that the price war will trigger a round of consolidation, with the smaller three companies -- BPL, MTNL, and Spice -- being bought out by their larger peers. Still, the big players are working hard on reducing costs, because low prices are here to stay -- great news for consumers. That's why India is the hottest mobile market on earth.

By Manjeet Kripalani in Bombay

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