Tariff war leaves mobile operators bleeding

28 October 2009

These days every other GSM mobile services provider has been bit by the lower tariff bug. The "pay-per-call" and "pay-per-second" initiative by Tata Teleservices has forced major players like Bharti Airtel and Reliance Communications (RCom) to join the tariff war. The latest to join the war is Idea Cellular, which is offering call rates as low as 40 paisa per minute.

While this is great for consumers, but the real question is, can these companies really afford it? And if yes, then at what cost? During the April to June quarter, all GSM mobile service providers have reported a fall of about 8% in average revenues per user (ARPU) while their total revenues increased marginally by 2.4%.

Following the launch of its GSM services and new plans, Tata Teleservices is gaining in terms of subscribers. Although, earlier, almost all players termed Tata Tele's tariff plans as a marketing "gimmick", now everyone is feeling the heat. Despite offering a reduced tariff plan, Bharti Airtel, the country's largest telecom services provider, reported a 10% drop in net subscriber addition in September. This is the highest month-on-month decline for Bharti Airtel, after March 2005, when its net subscriber addition fell by 22%.

According to Anand Rathi Financial Services Ltd, the decline in net additions may have been a key factor behind the sharp tariff cuts announced by Bharti Airtel in late September under the ‘Airtel Advantage’ scheme.

"We estimate RCom’s 50 paisa flat outgoing rate plan to generate 40-45 paise average revenue per minute (ARPM), including SMS, value added services (VAS), benefit of 60 second pulse and customer inertia and expect Bharti would be able to charge a 5%-10% premium given its superior branding, coverage and distribution," the brokerage added.

The quality of earnings would continue to deteriorate as the share of high margin 'monthly rental' declines and minutes of usage (MOU) and ARPMs decelerate at a higher rate. "While the industry has witnessed ARPM declines in the past and has been resilient through MOU increase, this time we anticipate lower MOU elasticity, if any, as well as higher churn management expenses and pressure on post-paid revenues,” said Enam Securities Pvt Ltd, in a report.

Enam said it believes that lower capacity expansion and creation and industry consolidation are eventual outcomes in the long run.

Besides Bharti Airtel, the players that would feel the maximum pressure of the tariff war are RCom, Vodafone Essar and Idea Cellular. All these mobile services providers, except RCom have witnessed about 10% drop in net subscriber additions in September. During the month, Bharti Airtel added 2.5 million subscribers while Vodafone-Essar and Idea were able to add 1.9 million and 1.4 million subscribers, respectively.

"Deceleration in Idea's financials would be much higher due to lower incumbency advantage, lower ARPUs and lower EBITDA percentage compared with Bharti," Enam said.

The tariff war started by Tata Teleservices will also affect new entrants in the mobile services market. According to a report by Motilal Oswal Securities Ltd, EBITDA break-even timelines for new entrants continue to stretch because of tariff pressures as relative tariff stability is critical for new operators to achieve break-even but pricing innovations targeted at increasing visibility are likely to continue. Competitive pressure and prospects of spectrum sharing/in-circle roaming could make new entrants reduce capacity expansion outlays, the report added.

-Yogesh Sapkale [email protected]

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