With five new players having launched services in the past 11 months, a price war was expected. But to what extent is it likely to escalate and impact operators' profitability is the key question. Industry analysts give their views on the ongoing price war and its after-effects...
The entry of new players into the telecom sector has been aggressive. How will their entry impact the existing and state-run players?
Kunal Bajaj: The most obvious impact is the loss in the incumbents' market share. This is because a large percentage of subscriber additions is going to the new entrants. For instance, TATA DOCOMO has caught on because it is offering lower tariffs. This is forcing the incumbents to match their tariffs, which, in turn, will impact their EBITDA margins.
Pankaj Mohindroo: The state-owned operators Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) have huge assets and are great organisations. But they need to learn from this and change their style of operation, especially by using their fixed line base for better purposes. If they can improve their fixed line quality of service and bring innovative business models into it, they have a very good opportunity to succeed. But I don't know whether that will happen.
Sridhar Pai: There are two types of emerging players. Players like TATA DOCOMO have come into the market with a strong and aggressive stance and have taken risky steps like slashing margins and opting for low pricing. A tariff war of this nature creates a tailspin in the market with each operator responding in kind. Other small players like Loop and Swan Telecom may not be able to make that kind of an impact, owing to the lack of a brand name and the required network. In fact, time is of the essence, given the aggressive competition.
The incumbents will feel the pressure on their average revenue per user (ARPU) and on margins, which they may be able to handle to some extent. State-owned operators MTNL and BSNL are getting even more battered. MTNL's ARPU has dropped below $2 and it may be entering a very rough patch. 3G has been nothing more than a banner for these operators since they have not been able to show significant responses or uptake. I think the free market economy is getting into extremely turbulent times and the incumbents will have to adapt themselves or they will face a situation like that of MTNL and BSNL. Bharti Airtel and others may have already planned some alternative ways to resolve this. Part of the strategy I think is bundling. Also, part of their strategy is to target enterprise broadband users who typically generate a much higher ARPU and will not churn only because some voice tariffs are churning.
Mahesh Uppal: The incumbents will naturally see this as trespass on what they consider as their turf. I doubt that they will see any shortterm threat in these developments. In the long term, however, they would ignore them at their own peril.
What is your view on the ongoing tariff war and its impact on operator margins?
Kunal Bajaj: If you look at the way the tariff war is going and at the performance impact we have already seen, EBITDA margins have already come down by 3 to 6 per cent for some carriers. For instance, Tata Teleservices (Maharashtra) Limited's (TTML) fell from 30 per cent to 21 per cent (but then, TTML is only one subset of Tata TeleServices Limited's [TTSL] services). Airtel has probably had the least significant fall in EBITDA margins from 33 per cent to 32 per cent in the secondquarter of 2009-10.
The tariff war really started heating up in October and I think only a marginal impact was felt at the time of the new launches and announcements in the August-September time-frame. We are going to see the real impact of it in the October-December quarter, with a larger number of subscribers migrating to these new plans.
The other thing to be wary of is that it is not only the low-end subscribers who are expected to adopt these plans but even high-end subscribers who are going back to their operators and saying they want to revise their plans. Existing users, who may be mediumor high-ARPU customers, are realising that they could reduce the size of their own bill. The real negative impact from this competition is not going to be only on the new subscribers but also on mid-ARPU subscribers. Roaming rates, SMS rates, national long distance (NLD) tariffs, etc. which have a lot of margin are being brought into the tariff war domain.
Pankaj Mohindroo: The tariff war has been going on since 2003 and is nothing new. It happens every six months to a year. But this time it seems to be very acute and operator margins are dropping as a consequence of it.
Sridhar Pai: The price war was triggered by TATA DOCOMO. At such a point, when the markets were already somewhat turbulent and market share so critical, it was a matter of time before operators such as Bharti Airtel jumped into the fray. In other examples, Telenor, which started out very recently, is offering a tariff of Re 0.29 per minute. Sistema Shyam TeleServices Limited (SSTL) is already offering a tariff of Re 0.005 per second. But in my opinion, this situation is not going to last forever. TATA DOCOMO is offering some 18,000 seconds (about five hours) of voice calls close to free on its network. These are various forms of expressing how value is rapidly dropping in voice.
Two trends that are likely to emerge in the next 12 months are that either forced consolidation of a few Tier II and III players will take place or players such as Bharti Airtel, Reliance Communications (RCOM), TTSL and BSNL will be forced to do some form of wireless-voice-data bundling. Other forms of bundling that are likely to happen are voice and ringback tone or specific value-added services (VAS).
Mahesh Uppal: There is no question that such aggressive tariffs will bring down EBITDA margins in a drastic way. For the incumbents, this will not be a problem in the short term because they incur very marginal incremental costs in providing services as their infrastructure is already in place. So, whether one subscriber or 10 subscribers use the infrastructure does not actually add to operator costs in any significant way. Eventually, obviously, if cash flows come down very drastically, operators will be concerned. This is because they would expect a certain return on investment, which is currently about 30 per cent, and if that falls drastically, there will be a problem. This will eventually lead to two sets of responses. One is that the incumbents would try to remain competitive at all costs. The second is for the incumbents to take the battle to another arena, such as the VAS market.
Overall, in a continuing tariff war, eventually everybody will be hurt and it is not as if the new players can sustain the tariff war indefinitely. They would obviously want to acquire subscribers in the shortest possible time so that both from the point of view of network economy as well as value of their businesses, they are heading in the right direction.
For how long is this tariff war likely to continue and how steep are the cuts going to be?
Kunal Bajaj: Telenor has just launched operations. We still have Datacom, Etisalat and MTS to go. As these players roll out services to more circles and do not run out of cash, the tariff war will continue. However, at some point it is going to hit the bottom.Everyone is saying that mergers and acquisitions (M&As) will be the end of the competition and the tariff war. That may be the case, but one thing to keep in mind is that as M&As happen, networks will get aggregated and as more spectrum is made available to certain operators, they will have more network capacity than they want to use. So, M&As may drive prices even lower, as there would be excess network capacity.
Pankaj Mohindroo: I think there will be at least a 1.5 per cent decline in EBITDA levels in the next two quarters.
Sridhar Pai: There is no logical or rational way to deduce how steep the tariff cuts are likely to be because there was no rational reasoning to begin with. This war is going to severely impact emerging operators like Telenor and players like Loop and Datacom which have not even launched services. That being the case, it is irrational to say that tariffs will not reduce even further.It is fair to say that there will be some form of bundling as a means to get out of it.
Mahesh Uppal: I think tariffs will come down further, but not at as fast a rate as they did earlier. I would expect tariffs to settle down in six months to a year. In a market of 12 players or so, being uncompetitive can be fatal.
As the tariff war intensifies, how will the new players be able to sustain margin pressures?
Kunal Bajaj: In order to stay ahead in the game, operators will have to differentiate their offerings. The focus on VAS will have to increase. However, all that will not happen very easily. It takes a huge amount of time to migrate users from the current usage pattern to use more VAS. The fact is that we are going to see a huge decline in EBITDA levels in a year's time. 3G might help as those high-end users who are willing to spend that much money as they migrate to 3G may actually move to higher-margin services, leading to higher revenue contribution.
Pankaj Mohindroo: Capital expenditure is much reduced now compared to what it was a few years back. So, at the current levels, it will be difficult for the new players to sustain operations if tariffs go down any further. It will be difficult for them to provide good quality of service and have everything up and running.
Sridhar Pai: It is going to be extremely tough for them. Operators may utilise managed services as a medium to mitigate pressure, but this may not work. Also, the focus is still on the urban areas, which are already saturated. A few operators should have shifted focus to Tier II or Tier III towns, but that is not happening. So, in this overall scenario, I think some people are going to pay a heavy price.
Mahesh Uppal: In the short term, it will not be an issue.The new players may seem like novices to the market, but they are not. Players like Telenor and Etisalat are big boys and come with a lot of financial backing and experience. They are qualitatively a different kind of competitor. So, yes, they will be able to sustain losses in the short term and they would be prepared for this kind of eventuality. Moreover, their rollout costs are much lower than expected because networks are now relatively cheaper to install and network sharing has brought costs down further. They are not as pushed to the wall as newcomers were 10 years ago.
What will be the competitive landscape in the short, medium and long term?
Kunal Bajaj: In the short term, we are looking at 10-12 or 14 operators per circle. In the medium term (the next 12-24 months), this may not change too much. In the long term, consolidation has to definitely take place and in anything beyond 24 months, we would see some of these operators running out of cash and steam. We will see some of the larger operators under pressure to do something about their margins and tariffs. We may also see acquisitions and rollouts taking place at that time. A few industry analysts opine that acquisitions may take place within 12 months itself as the regulatory policy is put in place by TRAI and DoT. That regulatory policy will probably take six to nine months to be rolled out anyway. Thus, the soonest anything could happen would be within a year. But it will definitely happen sooner rather than later.
Pankaj Mohindroo: There is bound to be consolidation. But it may not be as aggressive as the industry thinks because even if people are able to achieve subscriber numbers of 20-25 million, it's a reasonable size to sustain an allIndia operation. The short term will see very acute competition. However, there is scope for many players in the Indian market as long as they behave sensibly.
Sridhar Pai: There is another aspect to it – mobile number portability. Putting all this together, there will be extremely turbulent times. In the short and medium term, there will be some sort of consolidation. In the long term, there is a possibility that voice will become flat, that means, you will have unlimited voice for a fixed fee per month bundled with some other service.
Mahesh UppalI do not think we are going to see any major changes in the next few months. However, in the medium term, there will be major consolidation. We would see around six major players emerging in about two years. There are several ways in which this can pan out but it would be foolish to keep running each other down to the ground.