The recent tariff hike is a bold attempt on the part of leading telecom operators to nudge the industry to a more mature phase and shift the focus to revenue and profitability instead of merely adding subscriber numbers
The days of the 25-paise-coin have been consigned to history – forever. Reserve Bank of India recently took it out of circulation, but for all practical purposes, it had lost any monetary relevance long ago in an age of galloping inflation. There was practically nothing that you could buy for 25 paise, except perhaps a little talk time on your telecom network. Strange as it may sound, 25 paise was still enough to enquire about your near and dear ones on your mobile phone.
But not any longer. On July 16, Tata DoCoMo, which triggered a tariff war in 2008, cutting call rates to one paise per second, again took the lead – only this time, it hiked tariffs for new customers. Market leader Bharti Airtel followed and was joined by the other large incumbents, Vodafone, Idea Cellular and Reliance Communications, all of whom increased their tariffs by a minimum of 20%.
At an operating cost of Re.0.25 per minute, operators had no choice but to increase tariffs. Since 2007, Indian wireless tariffs have been down by 65% in real terms – with base tariffs down by almost 50% while CPI/WPI is up by 40% (cumulative average basis). The entry of new players in 2009 and the ensuing cuts in tariffs have dented the profitability of most mobile phone companies in the 15-player market. Uninor’s hugely popular two paisa per minute scheme and Videocon’s zero paisa scheme are examples of how the new players contributed to bringing down the tariffs. Cut throat competition from new players has forced average revenue per minute (ARPM) to come down from Rs.1.70 in June 2004 to 53 paisa in the first quarter of 2010 and to around 43 paisa currently. According to analysts, Bharti’s wireless RPM has declined by 17-24% every single year since FY ‘04 and has been consistently declining at 17% per annum for the past four years.
Also, last year’s 3G/BWA auctions have stretched telecom operators’ balance sheets and the industry is grappling with serious funding issues. The rollout of 3G is still at a nascent stage and growth in value-added services is also quite muted. As such, their contribution in overall revenue will be noticed only after a couple of quarters. But margin pressures for the industry have kept growing so much so that during the last year, barring Idea, all telecom companies reported a fall in profits. The latest quarterly results for June confirm that profitability continues to shrink for telecom companies. Idea reported a 12% drop in profits for the Q1, FY 2011-12, while Bharti’s profits declined by 28%. Also, Bharti has stacked up huge debts of around Rs.600 billion to fund Zain Telecom’s expansion in Africa as well as for its 3G business.
But not any longer. On July 16, Tata DoCoMo, which triggered a tariff war in 2008, cutting call rates to one paise per second, again took the lead – only this time, it hiked tariffs for new customers. Market leader Bharti Airtel followed and was joined by the other large incumbents, Vodafone, Idea Cellular and Reliance Communications, all of whom increased their tariffs by a minimum of 20%.
At an operating cost of Re.0.25 per minute, operators had no choice but to increase tariffs. Since 2007, Indian wireless tariffs have been down by 65% in real terms – with base tariffs down by almost 50% while CPI/WPI is up by 40% (cumulative average basis). The entry of new players in 2009 and the ensuing cuts in tariffs have dented the profitability of most mobile phone companies in the 15-player market. Uninor’s hugely popular two paisa per minute scheme and Videocon’s zero paisa scheme are examples of how the new players contributed to bringing down the tariffs. Cut throat competition from new players has forced average revenue per minute (ARPM) to come down from Rs.1.70 in June 2004 to 53 paisa in the first quarter of 2010 and to around 43 paisa currently. According to analysts, Bharti’s wireless RPM has declined by 17-24% every single year since FY ‘04 and has been consistently declining at 17% per annum for the past four years.
Also, last year’s 3G/BWA auctions have stretched telecom operators’ balance sheets and the industry is grappling with serious funding issues. The rollout of 3G is still at a nascent stage and growth in value-added services is also quite muted. As such, their contribution in overall revenue will be noticed only after a couple of quarters. But margin pressures for the industry have kept growing so much so that during the last year, barring Idea, all telecom companies reported a fall in profits. The latest quarterly results for June confirm that profitability continues to shrink for telecom companies. Idea reported a 12% drop in profits for the Q1, FY 2011-12, while Bharti’s profits declined by 28%. Also, Bharti has stacked up huge debts of around Rs.600 billion to fund Zain Telecom’s expansion in Africa as well as for its 3G business.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
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Arindam Chaudhuri: We need Hazare's leadership
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
