All Lines are Busy!

Gagan Arora | Umamaheshwaran B S | Samita S. Patnaik | Saurabh Kr. Sinha, IIM S

Telecom industry has undergone a sea change since last year from price wars commoditizing the telecom services to the 3G auctions that saw a collection that far exceeded the government’s expectations, giving the hope of achieving a fiscal deficit below 5%. But there is cautious optimism surrounding the future of telecom market with falling ARPU and huge debt in the balance sheets of the service providers not making the investors too happy and sending the market capitalization for a toss. Even in the post 3G auction scenario, Indian telecom giants like Airtel are exploring other markets and acquiring companies. The dynamics of the Reliance empire is making the industry all the more happening with Mukesh Ambani buying stakes in Infotel and Anil Ambani trying to sell stakes in RCom. This article attempts to draw a sketch of the entire industry scenario analysing the strategies of the various players and what future holds for them and for the industry as a whole. We have classified the industry players into three different categories depending on their period of existence and the analysis has been carried out on the GSM mobile service providers…

The last mile?
Take a flashback to the year of 2005, when Airtel, Vodafone and BSNL together constituted 68.91% of Indian GSM cellular subscriber base. Today going by the statistics of May 2010, these three service providers’ together account for 69.03% of the mobile subscribers. Not much of a change. But going deep we gain a significant insight: their combined monthly additions of new subscribers in May 2005 were 68.61% which drastically has come down to 58.97% in May 2010. The numbers were much better in May 2008, but after that the journey has become tougher.

Going by the numbers, Airtel and Vodafone have done remarkably well to grow in this hyper competitive telecomm industry, whereas BSNL has fallen prey to competition and has been consistently losing market share. But this growth story has been changing since last two years with continuous increase in market share of Idea and Aircel. The market share and monthly additions of both Airtel and Vodafone has fallen significantly on a year to year basis in May 2010. The entry of newer players like Tata Docomo, Uninor and Videocon has also increased their worries.
Airtel and Vodafone have followed different marketing strategies for their survival and growth. Starting with differentiation in the market, Vodafone has relied heavily on its brand image; network quality and value added services whereas Airtel has banked on its connectivity, functionality, special tariffs and creating a mass appeal. Airtel has often been identified by its music and its brand ambassadors ranging from Shahrukh Khan to Sachin Tendulkar to Kareena Kapoor to A.R Rehman. On the other hand Vodafone has the brand imagery associated with the Hutch dog and recently through its zoo-zoos. Cricket has been another platform for Airtel for reaching out to masses and it recently bid for Indian cricket team sponsorship and also became the official sponsors of Championship League. Vodafone is also not far behind and it leveraged IPL seasons for maximum eyeballs for its zoo-zoo ads. It is also using FIFA World Cup 2010 for connecting to people and promoting VAS.

Both of the operators have been targeting youth and working professionals with high preference for metros. But because of its association with celebrities and coverage, Airtel has been comparatively more successful in penetrating into rural markets. Both of these operators have embraced changing customer trends in their pricing and introduced attractive tariff plans and discounts for different groups of customers. Off late, neither distribution nor ease of recharging & bill payment has helped anyone of them to gain competitive edge over other. But these are the areas where BSNL has lost the plot in spite of having excellent network coverage.
Partnership is yet another aspect of competition between Airtel and Vodafone. The long-standing partnership with Nokia has given Airtel an edge into latent markets of eastern India by providing infrastructure and managed services. While both of them brought Apple iPhone to India, Vodafone has already partnered with Apple for launching Apple iPhone 4. It has also collaborated with Research in Motion for Blackberry handsets in India. These partnerships are even more important keeping an eye on the launch of 3G services. BSNL has again lagged behind in partnerships and has paid the price for the same.
Considering the 3G spectrum bidding strategy, Airtel has majorly opted for pre-dominated circles bagging 13 of them. Vodafone also adopted similar strategy and won licenses in 9 circles. With such massive investments, they are looking forward to increase their falling ARPU. For that, they are keen to upgrade their existing customers to high end services which may not be very difficult in Delhi and Mumbai but definitely far from easy in other circles because of the fear of losing them. For Delhi and Mumbai, both Airtel and Vodafone together with Reliance will also be looking to snatch subscribers from operators who won’t be able to provide 3G services.

New claimants to the throne?

Had Maggi sauce’s punch line not been “It’s different” then it would have been Tata Docomo’s for sure. This has been the whole essence of Tata Docomo’s brand positioning from day one. It introduced revolutionary pay per second pricing, mytunes and buddynet. In fact it is the only one among Idea, Aircel and Reliance not to have a brand ambassador. Pay per second pricing has changed Indian telecom landscape by forcing all other major telecom providers to follow the suit. This enticing pricing offered by Tata Docomo was a huge success for Docomo as it helped in building up a sizeable segment of consumer base rapidly specially in South India and Maharashtra. In fact, it was Reliance Mobile in first place, which positioned itself on the basis of aggressive pricing strategy, making money on scale but trying to assure it’s not skimming the market. Reliance is accredited with changing the face of Indian telecom market by introducing ultra-cheap calling rates, but the only problem was that the offering was in CDMA technology which failed to entice many and ultimately Reliance mobile CDMA primarily became a bottom-of-pyramid product. Thus, it ended up tapping a substantial chunk of rural market and it has continued to do so by bringing out ultra-cheap products like mobile internet phone at a paltry price of Rs480. The major difference between Reliance’s and Docomo’s strategy has been that Docomo used aggressive pricing to gain market share and then shifted its focus on VAS and innovation whereas Reliance has more or less chosen to stay differentiated through pricing.
Idea and Aircel of late have been involved in engaging customers in creating brand equity by running campaigns like “save paper” & “save tigers” respectively and hence, helping themselves in chalking up effective brand salience points. The brands have been successful in running the campaign as 360 degree campaigns to take them to masses by various media like TV channels, media partners, social websites etc. Initially Idea was a JV between Tata, Birla and AT&T and it created a huge stir in the telecom market. Eventually it did not live up to the hype and AT&T (now Cingular wireless) and Tata sold their stakes to Birla. Idea started with focus on improving the infrastructure and tariff plans and based
its branding on the same. In due course Idea, as a brand, began to take shape around 2006. It got major brand ambassador and then it continued to reap eyeballs when it roped in Abhishek Bachchan as its publicity by sponsoring Mumbai Indians and Deccan Chargers in IPL II and IPL III respectively.

Aircel has come off age with a small beginning. It has found innovative ways of branding. Be it the projection of its logo on the Gateway of India, ‘Just arrived’ boxes at the airport, or the IPL Scoreboard put up at the Mahim Causeway, Aircel has managed to create an unbeatable buzz. The inflated raft Aircel put up on Milan subway in Mumbai to be used during an emergency caused by heavy rains was a huge success and Aircel has planned to take this idea further to other cities. Aircel has shifted its focus on creating differentiation via innovative VAS services rather than innovative pricing as it used to do earlier. It has used its brand ambassador MS Dhoni very effectively for the same. It was the first ones to bring the idea of “pocket internet” and internet recharge cards.
Aircel has won all under tapped and promising circles like North East in 3G auction thus looking to gain strong presence in those circles whereas Docomo and Idea chose to bid for markets where they already have a strong presence. There is one fear with the 3G spectrums that some operators are going to use large amount of these spectrum for managing eternally increasing voice traffic, as Indian VAS market is yet to see highly expected Hockey-stick growth. Fortunately, this will be a temporary trend because to compensate for falling ARPUs (Average revenue per user) companies will have to shift their focus on VAS.

New kids on the block…
Slowly eating into the market share of the telecom giants are the new entrants. But breaking the telecom clutter is easier said than done. The price war, that characterizes this industry, was itself turned into a differentiating factor by Uninor, a telecom venture of Unitech and Telenor. The company, which has today’s ambitious youth looking for quality and service as its target group, attempted to achieve differentiation by
introducing ‘24x7 Badalta Discount Plan’. According to this plan, subscriber would be granted discounts inversely proportional to the traffic handled by the BTS they are currently covered by. Uninor is set to change industry practices with such dynamic pricing. In an industry where towers are the most essential as well as the most expensive investment, dynamic pricing will help utilize BTS better while providing the customers with discounts ranging from 5% to 60%. The discount offered will be continuously updated and displayed on the handset screen thus empowering the subscriber to control his tariffs. This is an attempt to redistribute the call traffic to ensure better utilization of resources and also delivery of better services.

While Uninor had one of the largest launches in terms of footprint, Videocon Telecommunication Ltd. hopes to flex parent company’s distribution muscle to get better reach and availability. The parent company has a good brand recall and retail penetration which gives the service provider a unique advantage. The parent company’s presence in IPL only helped in increasing the brand awareness of the Videocon’s telecommunication services. Uninor which is operational only in 13 circles interestingly stayed away from the 3G auctions. With the target of attaining 8% market share by 2015, Uninor is following the ‘voice is where volume lies’ mantra and is keen on leveraging opportunities available in 2G. On the other hand, to achieve its ambition of 10 Crore subscribers within three years, Videocon, having lost 3G bids is now trying to penetrate data savvy subscribers by providing free access to Facebook, mobile broadband and charging solutions. Its inclination towards mobile data services is based on the realization that though voice is still the mass market, mobile internet penetration continues to improve rapidly across the country.
In a scenario where all the players want to be present in the GSM platform, being restricted to CDMA is a risk that MTS has taken in the hope of high rewards. In LTE (Long Term Evaluation) standard CDMA and GSM would come together. So there might not be much difference in future. Besides, CDMA is better for data services. This gamble can prove profitable for MTS with the development of generic handsets.
Way forward…
This dynamic and vibrant industry has come a long way from incoming calls being charged to dynamic pricing. The consumer seems to be gaining the most – better and cheaper voice and data services. They have got very good dividends giving them the lowest tariffs in the world, courtesy the price wars. Since there cannot be any major price differentiation among operators,

Quality will be the driver. Valuation will move from subscriber base based to a model based on margins and Minutes of usage. With the much anticipated MNP, rise of tariffs will be impossible. Hyper competition is going to be a common place in the coming days with each operator trying to come up with innovative pricing plans to offset that of competitors.
Rapid re-basing of prices by the major players will make the existence of smaller players unviable and the consolidation will happen sooner than later. With business becoming all the more mobile and dynamic, there will be a need for instant data access and this will lead to smartphones ruling the upper middle class urban India. But to penetrate rural market, price has to come down rapidly and there must be applications relevant to the rural population as voice alone won’t help the players much.

Mobile VAS industry will definitely come to the rescue of the industry as it is growing at 50% CAGR. It will compensate for the falling ARPU and aid profit margins. As of now, Voice and rentals form 90% of the revenue with VAS contributing a measly 5% of the revenue. With reality shows ruling the roost, interactivity is increasing between the viewers and program which augurs well for VAS.

Mobile advertising is something that will pick up going by the sheer spread of the subscriber base. Though mass advertising is highly criticized, it is definitely a very good model in terms of returns. In the future, companies are planning to go in for targeted advertising after proper customer profiling which would be welcomed by one and all.
The mobile market in rural India has significant potential with number of subscribers anticipated to grow at a CAGR of around 32% during 2009 to 2012. Experiences in rural India show that information and communications technology can enhance poor people's opportunities by improving their access to markets, health care and education. Post 3G, fishermen can negotiate prices for their catch before heading for shore by sending in pictures of the type of fish they possess. Similarly, farmers who have perishable produce can use 3G services to bargain for the best prices before harvesting and giving the middlemen a skip. The amount of infrastructure needed will be even more when 3G rolls out because of the need for more closely spaced towers as 3G waves being of the higher frequency, cannot travel long distances without distortion. There is the political pressure group acting with TRAI insisting that telecom gear makers submit their entire source code to while away any security fears. Currently, Regulators hold the trump card as the players can’t afford to lose out on the huge business opportunity that India presents.
Even though the industry is cluttered, innovations just don’t stop. For instance, Tata Teleservices and Future group have launched a co-branded GSM mobile service called T24 that offers free talk time to customers who have purchased things at retail outlets owned by future group across the country. We have seen some innovations in the retail sector when discounts are offered. But this is one step further.

The industry is going to provide us with high intensity drama. The players have betted big in spite of huge uncertainties and it seems they will go to any distance to win the battle. With so many stakeholders eagerly looking forward to see how the drama unfolds, it is going to be interesting days ahead. It has all the makings of a perfect case study.