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ShareSistema Shyam TeleServices launched its mobile phone services in the Delhi circle on Thursday under the brand name MTS. As a part of the opening gambit, the company is offering a call rate of one paisa for every two seconds, i.e. effectively 30 paise per minute. Only, to get this rate, a subscriber has to pay Re1 per day.
The 30-paise rate is of course 20 paise lower than the 50-paise-per-minute that looked like becoming the industry norm after the launch of RCom's Simply Reliance plan.
This new tariff makes things even more difficult for other new entrants, such as Swan-Etisalat and Unitech-Telenor, which have no option but to offer even lower prices. It also makes things difficult for players like Aircel, which have entered the market recently and have been on an expansion spree.
To offer low prices is the easiest strategy to follow in a bid to capture market share. But does it really work? International telecom experience suggests it does work initially, when call prices are high, but as prices are cut and reach lower levels, the impact is not much.
The Indian experience too has been that mobile ownership really took off after call rates started to come down.
Beyond a point, however, lower prices do not gather much traction primarily because a large section of consumers does look at factors like brand power, customer service and network coverage.
Also, consumers like to hold on to their numbers. The impact of number portability, when it is launched in the months to come, thus remains to be seen.
What's more, the incumbents can easily cut prices to match the lower prices of the new entrants. They have a better chance of surviving the bloodbath that is likely to follow, primarily because they already have a huge customer base. So, even though they may not make enough money on outgoing calls, they can continue making termination fees on calls made from other networks to their network.
Let us take the case of MTS, which is charging 30 paise per minute. Calls made from its network are more likely to terminate on other networks. For this, Sistema will have to pay a termination charge of 20 paise per minute. That leaves the firm with just 10 paise to meet all the other expenses.
Thus, the bigger incumbent companies can simply cut outgoing call rates to bleed out the new entrants, given their huge subscriber base. Analysts feel that is precisely the idea behind the RCom's 50 paise plan.
Most of the new players do not have their own infrastructure and they rely primarily on the towers and other infrastructure of the existing telecom companies. This is a weird situation wherein the competitor is also a supplier, which, any strategist will tell us, is a less than ideal situation.
All this in fact makes a strong case for consolidation in the sector.
Jagdish Sheth and Rajendra Sisodia make a rather interesting point in their book, The Rule of Three: Why Only Three Major Competitors Will Survive in Any Market. As a market matures, it is dominated by three major players, with the rest being in niche areas. From the look of it, the telecom market in India appears to be headed that way.
The government acknowledges as much. The report on spectrum allocation and pricing, recently released to the public, underscores the importance of facilitating an early consolidation of the sector through mergers and acquisitions.
