3G model looks predicated on subscriber poaching

Why did telecom companies fork out gigabucks for third-generation mobile spectrum?

For the huge profit potential, of course.

But will they get to realise the profit potential?

Easier said than done, say analysts. The lack of a significant user base for high-priced, value-added services (VAS) can pull the plug on many a PowerPoint profit postulate, they point out.

“The success of the 3G model will lie in how quickly telcos can
poach the top 20% subscribers of rivals, who lend the revenue volumes,” said a Mumbai-based telecom analyst, who did not wish to be named because he was not authorised to speak to the media.

Citing an example for the Delhi telecom circle, the analyst said 3 million post-paid subscribers of a telco generate a revenue of Rs 86 crore while 8 million pre-paid subscribers of the same telco generate about Rs 80 crore.

“The faster they do it, the more realistic profit guesstimates get. But the flipside is, with every telco trying the same trick, tariffs will grind down, pegging them back afresh,” he said.

It will also depend on the way telcos set price points for voice calls, video calls, and data services from circle to circle.
“The breakeven in 3G will be a factor of subscriber base. But there may not be an exodus between telcos till MNP (mobile number portability) is in full force. Till such time subscribers would be using multiple SIMs to access 3G services,” said Vijay Shekhar Sharma, chairman and managing director of Delhi based VAS firm One97 Communication Ltd.

Making the basic voice service subscriber shift to VAS would be another mountain to climb.

“For example, a major chunk of Reliance Communications’ (RCom) subscriber base is at the bottom of the pyramid. These subscribers use handsets that cost Rs1,000 to Rs3,000 whereas 3G handsets are available at around Rs5,000. So, essentially, you are asking them to switch to a higher cost service by paying as much as five times upfront for a handset. That is a massive entry barrier,” said the Mumbai-based analyst.

VAS currently contributes about 9% to the revenues of telcos in India, according to Telecom Regulatory Authority of India data.
“Only when telcos generate 20% of their revenues from 3G services can you say it’s a successful and sustainable model,” said Romal Shetty, telecom analyst with KPMG, the consultancy.

A 3G user base of 3-4 million, as is the level of VAS subscribers with telcos, won’t be enough, said Shetty.

Going by experts, the VAS subscriber base needs to grow 3-4 fold from current levels to be able to generate 20% of the revenues.
Some believe the telcos will form some kind of association amongst themselves to further their respective 3G interests.

“None of the telcos in India except BSNL has got pan India 3G spectrum. So, they will have to get into mutual cooperation amongst each other to enable 3G roaming services for their subscribers, which will make 3G schemes meaningful. The crucial battle will be on how these services are priced and how quickly telcos generate the 3G subscriber base,” said Jatin Ahluwalia, the founder of VAS firm vRock Mobiles.

At the auction for 3G spectrum held in May this year, nine telcos together spent about Rs65,000 crore to get spectrum across telecom circles.

Assuming each operator invested Rs5,000 crore for spectrum, the Mumbai-based analyst said, they will have to spend a further Rs 5,000 crore apiece to procure the radio equipment needed to launch 3G services.

The massive investments made to buy 3G licences have cranked up debt in the balance sheets of the companies.

Bharti Airtel, India’s largest telecom operator by subscribers, has a total debt of $12 billion (Rs 55,000 crore), including the loans it took to finance the acquisition of Zain’s telecom operations in Africa.

Rival RCom has a gross debt of over Rs 33,000 crore post the 3G expenses.

Some companies, which provide both CDMA and GSM mobile services, expect to utilise their existing infrastructure to reduce 3G rollout costs.

“Our 3G services will run on WCDMA (wideband code division multiple access) network. We shall be utilising a large part of our existing CDMA network for this. Thus, the network cost will be shared. Similarly, the cost on fibre rollout to connect exchanges would also be shared as we will use our existing fibre network,” said Mahesh Prasad, president - marketing for RCom’s wireless business.

RCom hopes to rollout its services by the year end.

However, analysts feel cutting costs will not help much.

“Success in 3G is not a factor of cost from a telco’s side. It is a revenue issue,” the Mumbai-based analyst said.

Some telcos, however, continue to be optimistic in betting on low-cost 3G handsets to make the transition viable.

“Low-cost handsets (Rs5,000 price point) are now available. The cost of setting up infrastructure is also coming down through use of Chinese equipment. There is every reason to believe that 3G will be a success. It will, of course depend on content, pricing, network quality and how consumers take it,” said the top executive of a Mumbai-based mobile services provider, requesting anonymity.