With telcos vying with one another to slash tariffs for calls and messages, the mobile telephony environment has turned extremely competitive. It was in January 2009 that Reliance Communications (RCom) rolled out its GSM services. Consumers lapped up the free minutes and the company claimed it had garnered three million subscribers in one month.
But once the introductory offer was withdrawn, subscribers were soon looking for freebies from other telcos. They weren?t disappointed. Tata Teleservices came up with a one rupee per call offer and then later in June, Tata DoCoMo unleashed a first of its kind per-second billing option to users. That scheme has been a huge success, giving Tata Teleservices ? including Tata DoCoMo ? the highest net additions for four months in a row.
Soon thereafter, the Tatas rolled out a per character SMS scheme, to which Reliance responded with a per paise SMS scheme. Not to be left behind in the fight for subscribers, market leader Bharti Airtel slashed rates for roaming services and as did Vodafone Essar. Soon, Idea Cellular cut tariffs to nearly 50 paise per minute in the Mumbai market, which it entered. Amidst the tariff war, Uninor rolled out services in seven circles while another new company, S-Tel plans to launch its services soon.
But lower tariffs haven?t translated into more traffic for the telcos. With users opting for more than one SIM card, telecos have found it hard to increase traffic on their networks. The average revenue per user (Arpu) for GSM players has come off by 11% ? from Rs 185 in the June 2009 quarter to Rs 164 in the September quarter. The all-India Arpu on prepaid services for CDMA players dipped 5.3% from Rs 69 in June 2009 to Rs 65 in September.
Still, the minutes of usage (MOU) haven?t really increased; on the contrary, they have dropped. For example, Idea?s MOU per month, for the September 2009 quarter, were down a sharp 5.5% at 429 minutes. One reason for this, telcos say, is that a rising number of new customers, in some cases up to 60%, belong to the hinterlands. After the September quarter results, Idea Cellular?s managing director Sanjeev Aga had observed that the number of dual SIM cards was fairly high and indicated a number of 20%.
Aga believed that consolidation in the industry was not far off given that the tariff war would continue. ?The current low-tariff model is unsustainable and a shakeout of the telecom industry is possible as early as next year,? he observed.
Idea?s revenues remained sequentially flat in the September 2009 quarter. The management attributed the insipid numbers to seasonal factors and the fact that 40% of the firm?s revenues come from rural markets, where the monsoons were delayed. ?The rural segment has increased compared with last year and currently forms a significant chunk of our revenue pie,? he observed, adding that the weak monsoons had impacted revenues during the quarter. What was worrying was that revenues for the 11 legacy circles had fallen by about 1% sequentially, impacting the operating margins that were down by 140 basis points quarter-on-quarter. Against this backdrop, results for the December 2009 quarter are unlikely to thrill investors. Toplines are likely to show only a muted growth and the resultant pressure on margins, leading to some uninspiring bottomline numbers. IDFC-SSKI Securities says the December quarter could see a growth in the average subscriber base by 8 to 11%.
Despite that, as Motilal Oswal Securities observes, the earnings for the sector would remain under pressure due to lower margins and tepid revenue growth. Revenues, it says, are likely to deteriorate due to sharp tariff cuts and per second billings adopted after October 2009. With Arpus expected to come off by 9-14% sequentially, wireless revenues could fall by 2-4% sequentially. The introduction of the per-second billing scheme and tariff cuts, IDFC-SSKI estimates, could lead to a 5-9% sequential drop in wireless revenues per minute (RPM). However, for some players such as Reliance, the impact could be cushioned by a different accounting method for plans such as ?Simply Reliance?.
Motital Oswal believes that with tariffs having been cut, the pressure on revenues could be partially offset by a rebound in traffic growth for some players. ?This would be driven by price elasticity due to sharp tariff cuts and promotions and seasonal strength.? Also, it believes incumbents have matched tariffs of new entrants to a large extent, so users may not constantly switch to new schemes. As such, aggregate traffic for the sector is expected to grow by 7-12% sequentially against 1-3% in the September 2009 quarter.
More competition in the space would also mean new tenants using the towers. ?We expect tenancy for telecom infrastructure companies such as Indus to rise,? notes ICICI Securities. While those players with towers can expect higher rentals, the tariff war will hurt the core business. Costs for telcos, however, would go up with companies expanding networks and adding towers. Besides, the cost of acquiring subscribers has risen.
