Indian Cellular Boom Spawns New Players

The subcontinent is set to overtake the U.S. as the second largest market by May. Competition from new operators could send tariffs lower

Expanding by eight million subscribers a month, the Indian market is poised to overtake the US as the second-largest mobile market by May this year. However, not all is well as operators scramble to boost ARPU and profitability to survive.

While industry pundits are talking about a wave of consolidation and operators are searching for ways to differentiate, there is no stopping new operators from entering this space. That is because, even as ARPU is low, EBITDA margins are high. Thanks to the high valuations of Bharti Airtel and Reliance Communications, investors that are flush with cash and in completely unrelated businesses are flocking to the sector.

"The pressure is getting very high, and India will see a lot of spending in this sector, " says Bruce Richardson, chief research officer at AMR Research. "This could lead to a price war."

True enough, India's leading mobile operator Bharti Airtel last January shifted all prepaid users to a 2.5-cents-a-minute scheme from the earlier 5-cents-a-minute plan. A month later, Reliance, the second largest operator, came up with a lifetime mobile scheme that offered connectivity at $5 with calls priced at 2.5 cents a minute.

Bharti and Reliance together represent 95 million or 40% of India's 237 million mobile subscribers, out of which 90% are prepaid subscribers.

Competition is driving India's biggest operators to cut prices to please consumers, who have ARPU of just $7.90 per month. Over the next few months, competition will tighten even more in the world's fastest-growing mobile market, which in the past 12 months has added 83 million new subscribers.

The Department of Telecommunications recently allocated 4.4-MHz of GSM spectrum to Reliance, Idea Cellular, Vodafone Essar and Maxis Aircel. Once these operators start services by the third quarter, there will be eight operators across India (six GSM and two CDMA) or double the number of current leading operators.

Further, the DoT has issued 121 letters of intent that will allow another five new national players to provide services across India. These include a venture of Shyam Telelink with Russia's Sistema, BPL Mobile's Loop Telecom and Swan Telecom. Even real estate firm Unitech and electronics major Videocon's subsidiary Datacom have been allotted LoIs.

When these further additions start services, the Indian consumer can choose among 13 service providers. There is no other big market globally that offers such a wide range of choice to subscribers.

"It is at a time like this that a lot of restructuring happens and innovative offerings as well as stress on quality takes place," Richardson said.

However, the problems for the big Indian operators do not end with new competition. Starting April 1, number portability will be operational initially in the four metropolitan cities of Delhi, Mumbai, Kolkata and Chennai. By the end of 2008, this will be gradually extended to cover the entire country. New players could nip off high-paying subscribers from existing operators' portfolio.

The rules of competition are going to change phenomenally, but well-entrenched players like Bharti are not worried. "It will not affect our margins," Bharti Airtel chairman and managing director Sunil Bharti Mittal has said. "We are hopeful that the margins will increase as Bharti's network would attract high-value customers from CDMA networks."

Downside of expansion

Without doubt, the immediate casualty will be tariffs. Even before the competition has arrived, Bharti and Reliance had cut tariffs. Videocon CEO V.N. Dhoot had even proclaimed that it is possible to provide mobile connectivity at a rock-bottom half-cent a minute. It remains to be seen what else operators can do to retain customers. One possibility that is being suggested is to provide unlimited calling for a fixed fee every month. That way the subscriber can budget his phone bill without worry.

As tariffs go lower, more new subscribers are expected to rise to possibly 10 million monthly, provided that handset prices fall further. A $10 handset could be the biggest driver and for that, operators will have to join hands with the handset vendors.

For example, Reliance has launched a handset priced at $19.25.

With more low-end subscribers expanding the market, the next casualty will be ARPU, although operators today are not too bothered about it. Mittal, for example, has simply stopped thinking about ARPU. According to him, what matters today is the average margin per user, which is the difference between the revenue generated by a user and the cost of serving him or her. Even with a low ARPU, it is possible to generate a positive AMPU.

Arun Bhyrappa, director for strategy and business development at Tonse Telecom, said call tariffs will drop further, but the newcomers have tough battles cut out for them.

"For example, a business customer of Airtel will not move even if the pricing drops from a new operator by up to 25%," Arun said. "In times of decreasing ARPU, a low price strategy can be financially extremely risky for the newcomer."

And this is why industry watchers say new operators may not remain independent in the longer term. "Depending on how many of the new operators are provided spectrum, some of them would be set for consolidation over the next 24 to 36 months, AMR Research's Richardson said.

"Some of today's bigger players will be in the race to acquire these new players, but it is quite possible that this can also happen today," he said. "The Indian telecom market will get all set for the next round of M&A, and it is unlikely that India will have more than six nationwide operators in the longer term."

International operators can also drive this development. Already SingTel, Vodafone, Telekom Malaysia and Maxis have a presence in the Indian market. Russia's Sistema is coming in with Shyam, and Virgin Mobile is expected to enter with Tata Teleservices. Others like AT&T and Deutsche Telekom are evaluating their entry strategies.

In turn, while international players are entering India, the bigger Indian operators have started to go global. The immediate focus seems to be on smaller markets in South Asia and Africa.

Inevitable consolidation

"Consolidation is a natural market restructuring process when demand supply chains approach certain levels of maturity," Arun said. "I don't believe that will happen immediately."

He added, however, that consolidation may be driven by other factors such as spectrum assets.

"This may happen as early as end of 2008 or early 2009. There would be another wave of consolidation when the subscriber base reaches around 400 million and when some of the medium-sized operators will merge into one of the Big Four."

Another important impact will be pressure from the Telecommunications Regulatory Authority of India to open some of the broadband bottlenecks, which will eventually allow unrestricted IP Telephony. "This will further impact new low-cost operators and force them to merge or exit. Also, there will be at least one round of consolidation among tower companies before 2009," Arun said.

The Indian telecom market is not showing any signs of a slowdown. That is because the current telecom penetration is just 23%. By the time it hits 60%, India should have close to 780 million mobile subscribers. This additional 550 million subscribers would drive the entry of the new players.

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