Cellphone Firms Resort To Cost Cuts For Survival

Early last year, cellular companies started complaining about poor market conditions and how their initial projections were way off the mark. Towards the end of 1997, the promoters of the companies raised their pitch by pointing to mounting cash losses estimated at over Rs 500 crore a month.

Ever since the companies started recording huge cash losses (profits gross of depreciation but net of interest, amortisation and tax), there has been speculation on how long the operators will be able to sustain the losses. The scenario got more bleak as financial closures of the projects got delayed after financiers got wary of funding them.

How then have cellular operators managed to stay afloat despite doomsday predictions? Cellular industry sources said, faced with mounting losses and a trickle-like cash flow, the companies have basically cut down on major expenses like licence fees, interest charges, customer-acquisition expenses (like handset subsidies), marketing and manpower costs.

Worse, in some cases, companies are yet to repay telecom vendors for the equipment supplied. The Essar-Swisscom joint ventures, Sterling Cellular and Aircell Digilink _ the cellular licensee in Delhi, Uttar Pradesh (East), Haryana and Rajasthan _ have not paid Siemens for supply of equipment, while Koshika Telecom (Uttar Pradesh (east and west), Orissa and Bihar) owe money to Alcatel.

Most of the Rs 400-crore `loss' being recorded by the cellular industry is on count of huge investments in capital equipment and licence fee payments being made by the companies. The cellular industry in the country comprises 22 companies running 42 networks which account for nearly a million subscribers.

The total cost of providing cellular service in the country is estimated at nearly Rs 6,000 a subscriber per month. Since the per month revenues hover around an average of Rs 1,000 a subscriber, this translates into a loss of nearly Rs 5,000 per cellphone user: that is, about Rs 500 crore for the entire industry.

Of this whopping loss, the four major heads of costs are: licence fees; capital expenditure; operating costs; and, finally, interconnect and wireless charges. The cellular companies are to pay the government more than Rs 2,000 crore in licence fees every year. However, given the cash crunch, all operators but one (Escotel Mobile) have defaulted on such payments and the outstanding to the government on this account is estimated to be over Rs 1,300 crore.

Capital costs is next on the chopping block. According to cellular operators, a total of over Rs 8,000 crore has been sunk into capital investment. Even at an interest of 19 per cent, interest charges work out to a whopping Rs 1,520 crore. "Most of the (circle) cellular companies have not entered financial closure. In the short-term, the companies have arranged for short-term debt (from equipment suppliers through banks) which works out to be expensive. Most of the companies are defaulting on such payments and banks have their fingers crossed," said a source.

Acquisition costs _ benchmarked at some Rs 5,000 a subscriber _ are also being reduced. "One way to reduce this cost," said the marketing head of a Delhi cellular company, "is to bring down the number of subscribers being acquired by the operators. One of the reasons for a sharp slowdown in the growth of subscribers since the beginning of this year is that operators don't have money to spend on subsidies or advertising campaigns."