Mobile rate rise likely to meet auction spend

The ground reality could be very different as tariffs are dependent on market forces

What telecom companies have paid for spectrum, in the recently concluded auction, will determine how much consumers would have to shell out for the mobile services, rather than disruptive pricing.

Sources said the rates would go up by five paise to 10 paise a minute, for the companies to finance the large sums they had to pay at the auctions.

Research firm, CIMB said voice tariffs will have to go up by three per cent per annum in FY16 and FY17.

The government, on the other hand, said the fear of a rate rise is exaggerated. Union Minister of Communications Ravi Shankar Prasad on Thursday said, the rise in tariff due to the auction won't be more than 1.3 paise a minute.

However, the reality could be very different as rates are dependent on market forces.

Telecom operators, especially a new player like Reliance Jio, could upset the applecart merely by disruptive pricing, which everyone else will have to follow.

Says a top executive of a leading Indian telco: "With an empty network, Reliance Jio will obviously have to woo customers and the only way to do it is by playing on price. Everyone will have no choice but to follow at least for a certain period of time."

The assessment could well be the reality. For one, Reliance Jio does not have the first-mover advantage currently in 4G LTE services and its rival Bharti has a clear edge in the spectrum data battle. It will also have to contend with Idea and Vodafone, which are gearing to launch 4G services as well.

Reliance Jio might not have an option but to play the price game.

If it does, it won't be the first time this happens. In 2009 for instance, Tata DOCOMO introduced disruptive pricing. To take on six new operators given licences, it launched a one paisa a second scheme. Before that, operators charged per minute, irrespective of the seconds usage. After resisting for a while, nearly all operators jumped in, too.

The result: Realisation per minute dropped dramatically for the sector by 10 to 15 per cent and margins got squeezed by 20 per cent.

Similarly, in 2003, Reliance Infocomm fired an aggressive salvo against incumbent operators in the market, when it offered "Monsoon Hungama" mobile phones for just Rs 501. The move helped the company to rope in millions of customers within months, but also put it under serious financial strain.

However, it is true that operators will get deeper in debt to finance the burgeoning cost of spectrum. According to Cellular Operators Association of India, the total debt burden on telcos is to the tune of Rs 250,000 crore. With operators making part-payment of about Rs 28,000 crore in a few days, the overall burden will go up by about 10 per cent.

Looking at it from another perspective, telcos at an average have to pay out about Rs 10,000 crore every year for the next ten years, which will dent both the overall debt as well as the interest burden for the sector.