?Number portability to be a call drop for telcos, boon for callers?

The much-touted mobile number portability (MNP), expected to become operational as early as September this year, will in all probability become a boon for customers and bane for telecom operators.

The implementation would become negative for the Indian telecom sector as it is expected to hit the companies? margins very hard due to high churn rates, possible failure in quality of services and an expected sharp fall in average revenue per user (ARPU), according to a study done by Angel Broking.

It is believed that MNP would be an additional ?pressure point? for telecom operators and even as it is overall a zero-sum game, it will be margin-dilutive. Based on the initial estimation, a likely 5% further decline in ARPUs, a 100-150 basis points negative impact on margins and consequent fall in EPS (earnings per share) of 9-21%, the study added.

The Department of Telecom (DoT) in March this year, issued licences to two players – Syniverse Technologies (India) Private Limited and MNP Telecom Interconnection Solutions India Private Limited (MITS), a Telcordia joint venture with an Indian company, to take up the MNP activities across the country in a phased manner and the same is supposed to be completed by mid-2010.

Given the spectrum crunch in the key metro service areas, the churn rates, which are already in the range of 4-5% a month (pre-paid subscribers), are likely to increase further. Following the higher ARPUs and revenues from the metro areas, the higher churn rates would hit the operators revenue and profitability hard, the study said.

MNP introduction is also likely to result in higher subscriber acquisition and retention costs for operators. The likelihood of high-end post-paid subscribers and heavy users porting to other operators? networks is certainly not a desirable outcome for telecom operators. Post-paid subscribers are typically high usage customers that generate higher ARPUs. Even though these users account for a fairly low proportion of overall subscribers, they contribute more significantly to the revenues of these companies. Assuming a 5% share of post-paid subscribers, calculations show that the revenue share of these subscribers is considerably higher than other share.

Consequently, to ensure that such users stay connected to their networks, mobile operators may be forced to slash rates, offer more freebies and resort to large-scale bundled offerings and value-added services. Greater expenditure on SG&A and higher capex investments to improve quality of service are also expected. Thus, even as MNP implementation is likely to be a zero-sum game, the end-impact of this scenario is likely to be a fall in revenue growth and margins of telcos.

According to an analyst with Angel Broking, the key issues for the success of MNP in India will be the cost of porting and the time taken to port numbers. Given the fact that India is a price-sensitive market, the likelihood of MNP succeeding is quite high. Further, as mentioned earlier, given the significant dissatisfaction with QoS, particularly in the metros, the likelihood of churn rates increasing in these areas is higher.

Another factor that is likely to play out in favour of a successful experience with MNP implementation in India is the absence of long-term service contracts. In many developed markets like Singapore and Taiwan, service providers tie down their subscribers with long-term service contracts ranging from 12 to 24 months. In return, service providers subsidise or provide free mobile handsets. Subscribers wait until their contract expires, or pay a stiff penalty for breaking their contracts if they still opt to switch service providers, the analyst added.

He further said that globally, the introduction of MNP across markets has witnessed a mixed response from customers. The push for MNP implementation has always been led by market regulators in an effort to provide mobile customers with the freedom to move between service providers and drive healthier competition. India is no different. In fact, operators have in the past opposed MNP on the grounds that there is already enough competition in the market and that penetration is still low. Nonetheless, in the interests of customers, this has been brushed aside.

?We expect the introduction of MNP to be a negative for the Indian telecom sector and for telecom stocks, even as it would be beneficial for subscribers. In terms of a company-specific impact, we believe that big players could be less impacted, given their larger scale and country-wide network. Companies which have lower scale and limited presence are likely to be impacted more, especially in the event of it losing high-value and more sticky post-paid subscribers,? he said further.