Stiff Competition, Tariff Declines Expected In NLD Telephony

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: India’s national long distance (NLD) telecommunication industry is likely to witness stiff competition in the near future with the imminent entry of players like Reliance Infocom Ltd and the Tatas (through their recent acquisition — Videsh Sanchar Nigam Ltd (VSNL)). The market is likely to witness a further round of tariff cuts since Indian NLD rates are still higher than international ones. Besides, competition from Internet telephony will also exert pressure on NLD tariffs. For private NLD operators, however, the key business risk is signing the interconnection agreement with the country’s existing NLD player, Bharat Sanchar Nigam Ltd (BSNL), and the terms thereof. NLD operators need to interconnect with the originating network to get long distance traffic and with the terminating network to complete the call. Since BSNL owns more than 80 per cent of the total telephone lines in the country, thereby controlling both the originating and terminating networks, an interconnection with it is necessary to gain a foothold in the market.

In the short term, declining tariffs are likely to cause revenues to shrink in the industry. Even the volume increase in terms of minutes of usage will not fully compensate for the drop in tariffs, resulting in a net fall in revenues. NLD incumbent BSNL will feel the heat the most though the extent of the erosion of its market share would depend on its competitors’ business strategies and the final shape of the interconnect regulation.

Background
Till recently, BSNL or the erstwhile department of telecommunications (DoT) was the sole provider of NLD telephony in the country. The National Telecom Policy of 1999 (NTP), however, called for open competition in the telecom sector to increase penetration of telecommunication services in the country. So in August 2001, the NLD segment was opened up for private sector participation.

Subsequently, Bharti Telesonic Ltd (BTL) (representing the Bharti Group) and Reliance Infocom Ltd (representing the Reliance Group) emerged as private operators in this business. While BTL launched its NLD services on January 26, 2002, Reliance Infocom is expected to start operations in the near future. Apart from these two, VSNL (in which the Tatas recently acquired a 25 per cent stake as part of the government’s disinvestment process), too, has received an NLD license from the government as part compensation for ending its monopoly in international long distance (ILD). It is expected to be the fourth NLD operator after BSNL, BTL and Reliance Infocom.

High entry barriers in terms of strict license conditions and considerable capital expenditure requirements characterise the NLD business in India. While the regulation allows unlimited competition in the sector, the strict roll-out obligations backed by bank guarantees and high net worth requirements for prospective operators, limits the number of aspirants to serious players alone. Moreover, the significant capital expenditure required to roll out a nation-wide network necessitates strong financial flexibility on the part of the operator.

In spite of the high entry barriers, the competitive scenario in this segment has already started heating up. The 50 per cent tariff cut announced by BTL for mobile-to-mobile long distance (LD) calls was more than matched by BSNL, which slashed tariffs for both mobile and fixed line long distance calls by 62 per cent. BTL subsequently matched BSNL’s tariff offer. But one thing was clear from the tariff wars: Incumbent operator, BSNL, is more than willing to match any attempt by the private operators to gain market share through the price plank.

Going forward, competition will only intensify with the entry of the Reliance Group and the Tatas. All four NLD players have a strong financial flexibility, which underlines their ability to match each other on price.

NLD Tariffs Expected To Further Decline
NLD tariffs in India are higher than those in countries like China and the US, which increases the probability of future price cuts. In addition, the favourable regulation for voice over Internet protocol (VoIP) and Internet telephony will exert downward pressure on tariffs as operators attempt to pass on the benefits of lower operating and capital costs to end customers.

At present, the domestic NLD tariff at Rs nine per minute for distances greater than 500 km, is more than double the prevalent inter-state tariff in the US, which is at a flat rate of around Rs three to four per minute.

Rates in China too are similar at around Rs four per minute. In fact, for VoIP-based networks, NLD rates in China are as low as Rs two per minute or less than one-fourth of the current Indian NLD tariff. China Unicom Ltd, the operator which is offering these services, has built a new low-cost VoIP network. Hence, it is expected that Indian operators setting up similar networks will also be able to offer similar rates.

VoIP is the utilisation of the internet protocol (IP) to transmit voice. VoIP is a more efficient medium of transmission as it exploits the entire available bandwidth for voice transmission compared to the standard public switched telephone network (PSTN), which dedicates one direct exchange line (64 kbps) per conversation. This results in the VoIP network being more cost efficient than PSTN (different estimates put the cost savings in the range of 30-70 per cent).

The NLD regulation permits operators to use VoIP-based networks instead of PSTN thereby allowing them to avail of cost benefits. Thus, players will be able to pass on the relatively low cost of networks to customers in the form of lower tariffs. Also, with VoIP, operators have the flexibility of providing below toll quality services (inferior to PSTN) at a lower tariff, thus effectively targeting the price sensitive segment.

The recently announced regulation for Internet telephony will, however, have a bearing on the NLD operators’ future business risk profile. The key issue is that the Internet service providers (ISPs) have been allowed to provide long distance communication with their existing licenses and without any revenue sharing. The regulation, however, limits domestic Internet telephony to only PC-to-PC, thus restricting the target market for ISPs providing NLD services. While issues regarding service quality and ease of usage are likely to restrain the popularity of Internet telephony for NLD services, the low prevailing tariffs for internet services (Rs six-Rs 20 per hour for dial-up connection) are likely to exert pressure on NLD tariffs. Overall, Internet telephony is not likely to impact the total volume of NLD business but it will exert a downward pressure on tariffs.

Interconnection With Incumbent - Key Missing Link For The New Operators

The new long distance providers’ ability to gain any meaningful market share in the NLD market is critically linked to their interconnect arrangements with access providers (both cellular and fixed line services). NLD operators need to interconnect with the originating network in order to get the long distance traffic and also with the terminating network to complete the call.

Considering that the incumbent, BSNL, owns more than 80 per cent of the total telephone lines in the country, it becomes imperative for any NLD operator who wants to gain a foothold in the business to have an interconnection arrangement with BSNL. But since BSNL itself is a NLD player, its keenness to offer a speedy interconnect to the new NLD operators is likely to be limited. Crisil, however, feels that the Telecom Regulatory Authority of India (Trai) will come out with clear guidelines to streamline the interconnection process and make it objective. As part of this exercise, Trai has already put out a consultation paper to address the key issues relating to interconnection.

At present, Trai has implemented the carrier access code (CAC) system, in which each long distance operator is provided with a unique number. This number, when prefixed to the existing number, automatically directs the call to the chosen long distance operator’s network. This system ensures that the calling customer can choose his long distance operator. While cellular operators and private fixed line operators have made adequate changes in their system to enable it to identify the CAC, BSNL is yet to do so. Pending this, NLD operators cannot have an interconnection arrangement with BSNL. BSNL has indicated that it will take around six-nine months to upgrade its system to identify CAC and have interconnection with the new operators. This will be a critical point for all the new private NLD operators since only then will they be able to offer their services to a significant chunk of the target population.

Prepaid calling cards will emerge as a key marketing tactic used by the new NLD operators to gain market share, as has been the case in most Asian countries. Under the current regulations, the access provider can choose the long distance operator for the default traffic (where the calling customer does not specify the NLD carrier). Default traffic is likely to have a significant share given the customer inertia in dialling the extra five digits as required under the CAC system.

Therefore, BSNL with its more than 80 per cent share of telephone lines, will continue routing long distance default traffic originating on its network to its own long distance network. By using a prepaid card of a particular NLD operator, the customer pre-selects that operator, independent of the access provider. This gives an opportunity to new NLD operators to capture market share without owning the originating network. Also, prepaid calling cards will be able to target customers who do not have the subscribers trunk dialling (STD) facility and currently use public phone booths to make long distance calls. Also, in order to pull customers to prepaid cards, operators will probably set lower tariffs on these cards.

Price Elasticity And Future Growth
Around 70 per cent of the current NLD demand comes from corporates and public call operators (PCO). Price elasticity of long distance communication is, however, expected to be higher for residential customers and small and medium enterprises than the bigger corporate customers. Therefore, with falling prices, it is expected that residential demand along with demand from small enterprises will be a key growth driver of NLD telephony.