Mobile price war 2.0

The Indian mobile market has long been a case study for managing massive traffic volumes largely through the use of outsourcing contracts.  As far back as 2004 the country's largest mobile operator Bharti Airtel was engaging major telecom and equipment vendors to outsource its network management and IT operations. 

This practice was seen as essential to drive down costs and allow operators to become "minute factories" focusing largely on branding and marketing, and profitability continued to increase despite a falling ARPU. Therefore, it was not a serious concern if India already had one of the lowest effective mobile voice tariffs in the world and conversely one of the highest MOU rates especially given the vast growth opportunities that India offers in a market, which has just crossed the 50% SIM card population penetration threshold.

That theory is set to be put to the test, however, in a revitalized Indian market with unprecedented competition driven by new and newly-partnered mobile operators.  India has always had a competitive market with local conglomerate-backed players such as Bharti Airtel, Reliance Communications, Idea Cellular, Loop Mobile and Ping Mobile competing among and against government operators BSNL and MTNL and the foreign players Vodafone and Maxis-backed Aircel.  However, the Indian market is now home to many new operators such as MTS India backed by Russia's Sistema, Telenor's Uninor venture and Batelco-funded S-Tel. 

Etisalat's DB operation will launch in early 2010, and white-goods manufacturer Videocon is in talks with Vivendi to acquire a stake in its mobile venture, meaning that the market will grow even more competitive.  Furthermore, long-time player Tata Teleservices has rebranded itself as Tata DoCoMo following a 26% investment from the Japanese mobile operator and launching GSM service.

Unsurprisingly, these new operators have aggressively cut mobile voice tariffs even further in an attempt to gain a foothold in the market.  Given the already competitive nature of the Indian market, the most recent round of price cuts have pushed Indian mobile tariffs to record-low levels.

For example, when Tata rebranded itself and launched GSM services it offered 1 paisa per second billing plans, which equals about $0.012 per minute, MTS India following suit with its own 50 paisa per minute rates ($0.011) and Uninor offered 29 paisa-per-minute rates (U$0.006) to coincide with its December 2009 service launch.  These low rates have consequently caused the rate of subscriber adoption to accelerate, as the Indian mobile market added over 19 million subscribes in December 2009 alone.The price war in India couldn't have come at a worse time for mobile operators for two reasons.  The first is that the long-awaited 3G auction for the private sector is set to take place in the current fiscal year.  Only three additional licenses are available, and with so many operators bidding someone is likely to overpay. The Indian government hopes to raise $7.5 billion in the process.  Therefore, operators have to worry about exponential voice traffic growth and the associated capex and opex increases in addition to a possible 3G deployment.

The second reason is that India is also on the verge of launching mobile number portability on April 1.  Many Indian operators, particularly the new ones, will view this as an opportunity to gain market share, particularly in the post-paid segment and a fresh round of price cuts is expected.  In addition to these two points, it should be noted that two of India's new entrants - Datacom and Etisalat DB - have not even launched services, and many operators are still competing their nationwide rollouts so the worst is still largely yet to come in terms of competition.

Of course the most pressing question for mobile operators in a price war is how long it will last.  The most comparable case to the Indian situation is the price war that broke out in Indonesia's mobile sector in 2007-2008. New competition from the new entrant Hutchison, a rebranded Axis and CDMA players like Mobile-8 and Bakrie Telecom caused aggressive responses from Telkomsel, Indosat and XL.  Eventually prices also fell to 1 US cent-per minute range, profitability fell for most operators, multi-SIM card usage mushroomed (there are now 1.7 SIM cards in Indonesia for every user) before operators eventually eased off aggressive price-based marketing and instead looked to further segment their prepaid base and concentrate on the quality of users and some degree of consolidation.

This will also likely happen to a certain extent in the Indian market although it will also likely be more severe and last longer as there are more operators in India coupled with the fact that most operators in the market are backed either by a powerful domestic conglomerate or pan-national operator. 

Another pressing question about India's current price war is if it will spill into the mobile data market.  India has never had a high mobile data uptake rate, even with SMS, largely due to the fact that the price disparity between voice calling and SMS has never been that great. Mobile data only accounts for 11% of the total mobile revenues, making it one of the lowest ratios in the region.

3G services began in 2009 with BSNL and MTNL, but uptake has been fairly limited with roughly one million subscribers at the end of the year. The country also had about 1.5 million CDMA datacards users. Therefore, the voice price war may be a prime opportunity for Indian operators to showcase their data service offerings, and there are signs that this is already happening as both Bharti Airtel and Reliance Communications have announced their intentions to build their own application stores this year.

Marc Einstein is an industry manager for Frost & Sullivan