RCom move has telcos in a tizzy

The decision of Reliance Communications (RCom) to cut its outgoing call rates to 50paise per minute from around Re1 so far has the industry worried.

Most telecom operators — barring RCom and Tata Teleservices, which were pure code division multiple access (CDMA) players until not so long ago — currently charge around Re1 per minute of outgoing call.

For the big GSM (global system for mobile communication) players, the average revenue realisation today is 20paise per minute for incoming calls and Re1 per minute for local and national long distance calls. On a blended (incoming-outgoing) basis, they are able to generate revenues of around 60paise per minute.

Under RCom’s new tariff plan, which leaves no room for surcharges and rentals, realisation will drop by about 40 per cent to 35paise per minute, excluding the negligible impact of ILD.

The cut, coming just two months before the initiation of regulatory changes that will allow subscribers to change operators without changing phone numbers, is widely expected to be copied by other players.

“The question is not whether others will have to follow the lead, but of when,” pointed out Sheriar Irani, a veteran telecom analyst based in Mumbai. Echoing a general fear in the market, Irani points out that each major price-cut in the hyper-competitive market, usually announced by RCom, has been followed by matching cuts from other players such as Bharti Airtel, Vodafone-Essar and Idea Cellular.

To make matters worse, JS Sarma, the chairman of the Telecom Regulatory Authority of India (Trai), told reporters in Geneva on Monday that he plans to force operators to offer a per-second billing scheme to their consumers.

The average phone call in India lasts only around 50seconds. If Sarma has his way, therefore, an operator charging Re1 per minute will see the billing rate drop to 83paise per minute.

The industry, of course, can overcome the issue of per-second billing by pricing the per-second plans higher than the per-minute rate, but how does it adjust to life after RCom’s 50 paise-per-second move?

“We cannot afford to reduce our rates to that level,” said an official with one of the big three GSM operators, unwilling to be quoted. “We simply can’t afford, due to our network costs.”

GSM operators have been claiming they incur a cost of 30-38paise per minute of talk time, whether incoming or outgoing, depending on the network. However, they get to charge only 20paise for incoming calls, resulting in an under-recovery of 10-18paise per incoming minute. Hence, they say, they need to charge outgoing calls at the rate of at least 40-56paise to be able to merely recover their operating expenses. This submission was made to the Trai earlier this year. It is another thing that the regulator threw out the claim and insisted operating expenses were in the range of 13-30paise per minute.

Irani, however, believes the operators will find a way around the issue. “If one operator can do it, the others will soon find a way to replicate it,” he says.

Perchance, the new equation is likely to favour players with adequate scale, he adds.
In addition to the airtime charge, the operator from whose network the call is made also has to shell out a per-minute carriage fee in the range of 15-65paise per second in case of STD.

RCom and Bharti Airtel, by virtue of having their own long distance networks to virtually all corners of the country, have an advantage in this sphere as well.

All this, say some experts, make it virtually impossible for many operators to match the cut-throat pricing adopted by RCom.

Morgan Stanley believes most operators will not try to totally match RCom’s new tariff plan. While it won’t prevent the new bunch of operators from starting service, it could stagnate telecom industry revenue growth for the next 12 months. “With aggressive pricing and increased competition, we believe investors could start de-rating the Indian telecom sector,” the investment bank noted in a report.

Other brokers and institutional investors too dimmed their outlook on the sector almost immediately after the cuts. Anand Rathi, for one, cut the earnings projection on Bharti Airtel by as much 22 per cent.

The GSM operators are, however, putting on a brave face for now.

“The new and the cross-over operators (Tata and RCom) have nothing to offer but lower tariffs. They may get some traffic and some customers, but not revenues. Therefore, they do not have a viable and sustainable business model,” said Manoj Kohli, CEO of Bharti Airtel.

“I am surprised that banks and institutional players are offering funds to such players without recourse even though they have no business model,” Kohli said at an event in Bangalore.

All the same, the players secretly agree that a revision in tariffs may be required soon.
“I can’t say we won’t cut. For now, we are just waiting to see what happens next,” said a senior official of an established GSM operator.