BANGALORE, India-By the end of December 1997, there were close to 800,000 cellular subscribers in the four metros and 15 telecom circles (roughly equivalent to states) where services so far have been introduced in India. The number of new cellular connections was growing this year at an impressive 60,000 or so every month. By the time cellular companies complete three years of operations later this year, the country is expected to have 1 million subscribers.
With all this good news, why then is there a sense of gloom throughout the industry?
Part of it can be attributed to bureaucratic hurdles and regulatory roadblocks. But in addition, operators have made some blunders. Their quest for subscriber volume hasn’t paid off in terms of revenues, primarily because usage is still rather low. Revenue generation from cellular phone usage has fallen far short of expectations; against the global average of about two minutes per call, cell phone usage in India is below one minute.
Cellular executives are losing sleep trying to find ways of not only roping in new subscribers, but also retaining existing ones. Mobile telephone operators are offering a slew of value-added services and attractive packages, and are ready to slash rates even up to 75 percent to grab a larger share of the newly developed market.
The outlook is rather grim for cellular handset companies, at least in the short term.
According to Siemens Telecom Vice President Shubhrangshu Das, the industry was expecting 600,000 to 750,000 new cellular subscriptions this year; that doesn’t seem likely now.
The growth rate in the metros in particular has dropped dramatically. The overall country average of 40,000 new subscribers per month achieved until early this year has dropped to between 18,000 and 19,000. Moreover, if some existing subscribers drop out-as seems probable once rentals are increased-it will encourage growth in the second-hand phone market.
Sources say this drop in new adds-a whopping 60 percent since late 1997-is due to a dull market in the grip of an industrial slowdown as well as the tax notices being sent to subscribers.
Cellular handset vendors such as L.M. Ericsson and Motorola Inc. have slashed their market projections by between 15 percent and 30 percent following sluggish monthly growth in the first six months of the year. Other vendors similarly are scaling down their projections.
There are some fundamental reasons for this downward swing. Political uncertainty and lack of transparency in policy decisions have affected the growth to some extent. Adding to these woes are industrial recession. In addition, many potential subscribers were waiting for duty reduction on handsets. The decision of the government to start charging a tax to cell-phone owners further affected the growth in subscribers. The income tax department mailed tax notices to cell-phone owners during March and April with the aim of widening the tax net.
Cellular operators nationwide have accumulated a loss of more than US$500 million, based on conservative estimates, and the net loss of the eight operators in four metros alone has plummeted nearly US$175 million since service started.
The losses have occurred where revenues earned by private operators are not enough to meet expenses, which include license fee capital cost, interest charges on borrowing, depreciation and crucial interconnect charges. According to cellular operators, the license fee is estimated at 400 percent of retained revenue over a three-year time period and 60 percent of retained revenue over 10 years. Total charges, including dues payable to the government, worked out to 600 percent and 75 percent, respectively, over the same time periods.
The coming year will see operators focusing on their bottom lines-i.e. quality of customers and their ability to spend, rather than subscriber quantities. The industry also will see metro operators further consolidating.
Regulatory issues
In 1992, when the Indian government invited bids for cellular licenses, both the government and the industry estimated average airtime use would be 250 minutes per month. This expectation shaped the bids, with service operators committing an astonishing total sum of US$6.75 billion as license fees for the 10-year license period. In addition, operators now have to incur capital costs that may run up to US$5.5 billion for the industry.
“The projections are a joke now,” said Rajiv Burman, chief sales and marketing officer for operator Escotel Mobile Communications Ltd.
The Cellular Operators Association of India (COAI) reports cash flows of most operators are so low they’re in no position to pay the license fees.
Nokia Telecom General Manager of Marketing Sanjay Bhasin believes the government will have to help the industry in the short term through deferment of license fees and flexible tariff structures. “Otherwise (the) industry will go into a coma.”
Thanks to government initiatives, cellular licenses have been extended from 10 years to 15 years after Communications Minister Sushma Swaraj conceded to a long-pending demand by cellular operators that are not doing well.
However, she said the carriers’ demand for a two-year moratorium on payment of license fees was not discussed since only eight operators had complied fully with the conditions prescribed before considering the moratorium.
The cellular operators are dissatisfied with the government’s decision not to grant the two-year moratorium, but welcome the license-period extension. “We are disappointed over non-consideration of the grant of moratorium on the payment of the license fee as it is vital for the financial viability of the sector,” said T.V. Ramachandran, executive vice chairman of the COAI.
Paging
The Paging industry in India has been posting cash losses (expenses after interest and tax, but before depreciation) of about US$5 million per month, with about 850,000 pagers operating in the country. These losses are in spite of an increase in the subscriber base by about 30,000 every month.
Paging operators have been complaining the tariff-US$6.25 per month-they are allowed to charge customers is too low. In terms of subscriber numbers, the industry expected to reach the 1-million mark by the end of fiscal 1997-98, which ended 30 September. But this didn’t materialize.
The biggest challenge to paging providers has been subscriber retention. Aggressive marketing and subsidies on cell phones also have hit the paging industry hard, according to P.N. Uppal, general secretary of the Indian Paging Service Association.
Many service providers are looking for face-saving exits from the industry, though no deals have come through yet.
The IPSA also is pleading with the government to extend the duration of paging licenses from 10 years to 15 years without any additional fee. There is a proposal to increase the rental for pagers. In addition, the association wants a two-year moratorium on submission of license fees.
Recent signals from the government have been sympathetic, so paging companies are hoping that with a little help, they will be able to overcome their problems.
The number of paging subscribers likely will receive a substantial boost with the introduction of vernacular paging services by operators. Following the launch of Hindi and Marathi paging, and operators in the south introducing Tamil Malayalam and Karnada paging to rope in the semi-urban and rural population, paging companies hope to add substantially to the total subscriber base.
Raman Nair, general manager and head of BPL’s paging division, said vernacular paging would in all probability change the industry’s situation as pager rates would increase sharply, going by trends in other countries.
In the meantime, it soon may be consolidation time in the paging industry.
“Already we
realize that four operators per city is much too crowded for the market,” said Pravin Kumar, managing director of DSS Mobile,
a paging service provider and president of IPSA. “So what happens is that each of us tries to grab a share of the market to keep the company going. This has sent marketing costs soaring, but to no avail.”
