Effect of reduction of call tariffs on performance of
cellular service providers


By

Mujib-ur Rahman
Sr. Faculty Member
AIT-School of Management
Apeejay Institute of Technology
Greater Noida
 


In this decade, the Indian telecom sector has seen a rapid growth in wireless segment. India, second largest wireless communications market after China, adds more than 10 million new mobile phone connections every month. and is world's. It added a record 19 million subscribers in December, taking the total number of telephone connections to 562.21 million—that includes 525.15 million mobile phone connections.

The lucrative business has attracted many domestic and international companies to the Indian market. To capture the opportunity, many companies have entered this booming sector with an aim to earn profit.

As a result, the wireless telecom sector has been flooded with many Indian and foreign companies. Alongwith Indian companies like Airtel, Reliance Communication, Idea, BPL, Tata teleservices, many foreign telecom companies like UK based Vodafone, Norway based Telenor, Japan based DOCOMO are present alongwith a partner in India.

In an effort to increase the subscriber base, companies adopted a predatory pricing strategy, resulting in the start of a raging tariff war.  Call rates, already among the lowest in the world, have been driven down further by companies wanting to attract new phone subscribers. 

The tariff war was initiated by Tata Teleservices Ltd for its new global system for mobile communications, or GSM, network-based mobile service branded Tata DoCoMo, which launched its one paisa per second call charge scheme in July. The move was quickly followed by Aircel Ltd, MTS, Vodafone Essar Ltd and also Reliance Communications Ltd, and the state-owned Bharat Sanchar Nigam Ltd. Country's leading telecom company, Bharti Airtel too joined the tariff war a few hours after saying that it would not match the lowest common denominator in the market on 29 October, when it announced its results for the second quarter of the fiscal year.

Although most of the companies added millions of new subscribers, the tariff war has thrown the world's fastest growing mobile phone market into turmoil. Around 40 million users were added in the quarter ended 31st Dec 2009 in the country. But, the sector couldn't see an increase in net profit over the same period in last year. According to data compiled by the Telecom Regulatory Authority of India, or Trai, the industry's gross revenue (excluding fixed-line phones) for the quarter ended September was Rs38,755 crore. This was lower than the sector's revenue in the quarter ended December 2008, when it recorded Rs39,408 crore, even though it had 125 million fewer customers then.

The lower call charges resulted in falling sales revenues and lower net profits in the sector. Among the leading players, only Bharti Airtel could manage to come out with percentage increase in both profit as well as Revenue in quarters ended September and December 2009. For all companies, Average revenue per user – an important indicator of performance of service providers has dropped significantly.

BHARTI AIRTEL

Bharti Airtel recorded an increase in its net profit by 13% to Rs2,321.6 crore for the September quarter, from Rs2,050 crore for the same period a year ago. But it's profits fell 9.5% on a sequential basis. Total revenue grew 9% to Rs9,850 crore ($2.1 billion) over the same period last year, but fell almost 1% from the first quarter.

Although, Bharti Airtel Ltd added 8.4 million mobile subscribers to reach a total of 119 million the quarter ended ended 31st December 2009, it could not report an impressive growth. It could mange out a 2% growth in net profit for the quarter ended 31 December to Rs2,210 crore. Revenue rose just 1% to Rs9,772.2 crore from the year earlier, although it added 8.4 million mobile subscribers to reach a total of 119 million by end-December.

Average revenue per user declined from Rs 357 in March quarter of 2008 to Rs 252 in December quarter 2009.

IDEA CELLULAR

Idea Cellular Ltd, one of the leading cellular operator reported a huge decline in net profit in the quarter ended ended 31st December 2009.It reported a 23% decline in net profit to Rs170.11 crore from the year ago, although sales rose 15% to Rs3,149.47 crore.

Average revenue per user declined from Rs 287 in March quarter of 2008 to Rs 209 in December quarter 2009.

RELIANCE COMMUNICATIONS (RCOM)

RCom reported that net profit fell by 54.8% to Rs740 crore for the quarter ended September, from Rs1,531 crore a year earlier. Revenue for the September quarter rose only 1% to Rs5,703 crore from a year earlier.

Average revenue per user declined from Rs 317 in March quarter of 2008 to Rs 161 in December quarter 2009.

VODAFONE ESSAR

Vodafone Essar, the country's third largest mobile phone firm by subscribers announced that its revenue has dropped by 7% sequentially to £704 million (Rs5,435 crore) for the September quarter. The telco does not provide a quarterly break-up of profits from its Indian operations.

Average revenue per user declined from Rs 350 in March quarter of 2008 to Rs 222 in December quarter 2009. Source: Mint research; company data

CONCLUSION

The fierce tariff war has pushed the world's second largest mobile phone market into turmoil Indian telecom sector been going through the most challenging period over the last few quarters. The competition is likely to grow in the coming months, once the number portability is implemented. Since the call rates can not be reduced much in future, the competition will occur in service quality. In days to come, firms providing the best service at competitive rate will rule the market.

REFERENCES

1) "Tariff wars erode telco profits, worse to come", The Mint 2nd Feb'10

2) "Bharti Airtel ekes out profit amid tariff war", The Mint, Jan 22, 2010

3) "Tariff war cuts short telecom growth dream", The Mint,  Nov 15 2009

4) http://www.voanews.com/english/news/2009-11-27-Indias-Expanding-Telecom-Sector-Witnesses-Price-W ar-76236397.html
 


Mujib-ur Rahman
Sr. Faculty Member
AIT-School of Management
Apeejay Institute of Technology
Greater Noida
 

Source: E-mail November 3, 2010

          

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