In recent years, telecom companies have lavished consumers with freebies and too-good-to-believe tariffs. But that love affair with consumers is fading fast. In a sign of things to come, last fortnight leading operators Bharti Airtel and Idea raised effective tariffs on special vouchers between eight per cent and 25 per cent, signaling the end of cheap airtime.
The correction in tariffs was started by Reliance Communications in September last year, when it had raised tariffs by 25 per cent for prepaid customers. The company followed it up with a further correction earlier this month by wiping out free minutes of usage. If other operators such as Vodafone follow suit, then over 350 million customers, nearly half of the prepaid users hooked to these vouchers, will have to fork out more for their talk-time. That's not all, the company has also taken the axe to its other generous plans. The validity of lifetime customers, depending on the circle, has been reduced by nearly half and the threshold that consumers had to pay for full talk-time has also been increased.
These tariff increases have huge positive ramifications for the industry struggling with dwindling profitability and high costs. According to some estimates, every one paisa increase in average realisation has the potential to add over Rs 3,600 crore to the industry's bottom line. However, the key issue to consider is whether the increase will have an impact on the total volume of minutes consumed by the users. If that goes down, making further correction would not be feasible. But analysts say consumers used to mobile phones will not reduce their talk-time as the rack rates have been kept unchanged. In that case average realisation could rise by two to three paise a minute, translating into an additional Rs 10, 500 crore for the industry.
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RComm's chief executive Gurdeep Singh sees at least two to three more opportunities in the next 12 months for companies to raise tariffs. Singh argues the market is consolidating to now just five pan-India players (instead of over ten players before the Supreme court verdict on 2G spectrum) and the hyper competitive phase of telecom business is over, leaving the existing players with enough room to raise tariffs.
So what has forced the telcos to end the party? It's no secret that telecom companies have been struggling with a double whammy. At one level, average realisation per minute has been going down dramatically from Re 1 per minute in 2007 to as low as 42 paise for incumbents. It simply means that though telcos might be declaring published tariffs of 60 paise to Re 1 a minute, the effective tariff after discounting free talk-time and SMSs is dramatically lower. Whatever may be the costs, telcos are clear that the realisation has to rise, at least to the levels it was three years ago - over 50 paise a minute. At the same time, their costs have risen due to high churn rate among users, which has forced them to offer higher margins to retailers.
Incumbents blame it on new players. They say the tariff war was kicked off by Tata Teleservices in 2009, after it introduced the aggressive 1 paisa per second call rate, forcing everyone to fall in line.
"The new operators were giving huge amount of free minutes in their desperation to get market share and pick up customers. Their average realisation was not more than 20 paise, much lower than their costs, but they killed the market," says a top CEO of a telecom firm.
New operators, obviously, don't want to take the blame. Says a senior executive of Sistema-Shyam Teleservices one of the new players in the business: "In Russia, we have big telcos and some smaller ones which have tariffs which are 20 per cent lower. They are positioned as discounted players, but the bigger telcos charge a premium for their brand, coverage and service. In India, however, the big players just dropped prices to the same levels as the new players."
However, in a price-sensitive market like India, the dynamics are not the same. Incumbent operators say they realised that customers, especially in the pre-paid market, care only about who offers the lowest tariffs. They do not care about the brand salience or whether it offers better coverage. They are ready to shift every time someone offers a better deal.
As a result, the churn rate has gone through the roof, hitting 15 per cent to 16 per cent per month from merely three to four per cent a few years ago. It means one out of every six customers is leaving an operators to join another every month. It also means operators are adding more customers every month just to keep their net customer base at the same level. Acquisition costs, therefore, have increased and now account for six per cent of the industry revenue. In addition, telcos are also paying huge commissions to retailers who were encouraging customers to move from one operator to another, based on the lowest tariffs to make their commissions.
Surely, the business model is not helping anyone. The high churn rate and gross additions model is unsustainable for the industry, Bharti Airtel's outgoing CEO, Sanjay Kapoor, had said earlier. Telcos are taking quick steps towards change. For instance, most of them have cleaned up subscribers who do not use their SIM cards to make calls. As a result, active customers as a percentage of the total subscriber base has gone up substantially. This, of course, will eventually boost ARPU's (average revenue per user). Also, retail margins are now being squeezed by telcos.
In this scenario, tariffs will rise further until a new player comes in to disrupt the market. Analysts expect it to go up by anything between 10 per cent and 20 per cent in the next 12 months. But even that, they say, would not bring them to average realisation of the industry three years ago.
There are new pressures on costs as well. The industry might have to fork out over Rs 20,000 crore on-one time fee for excess spectrum, and though this will be staggered through 10 years, it is bound to increase costs. However, with competition easing, telcos are likely to pass on the costs to the customers rather than absorb them. The government's attempt to make roaming free will also have an impact on revenues in the short term, although over a period of time it might be neutralised as free roaming could lead to users talking more.
Acquisition costs are also likely to rise with telcos setting out to tap the semi urban and rural markets, where there are over 400-500 million untapped customers. But acquisition costs to reach them are much higher, compared to urban markets. They might have to lower tariffs to woo these first-time users.
The writing is pretty much on the wall. The telecom regulator has hinted that it could reconsider "forebearance" in tariffs and intervene in pricing by fixing a cap as it used to do earlier. But with less competition and high costs, tariffs northward march is unlikely to be halted.