The consumer electronics major has entered the cutthroat mobile telephony market and is confident of acquiring 100 million subscribers in three years. Can it break the clutter?
Videocon Industries Chairman Venugopal Dhoot has a clear target. In three years flat, he wants 100 million subscribers for his mobile telephony service. That it took Bharti Airtel, the market leader, 14 years, Vodafone 15 years and Reliance Communications 7 years to hit the mark does not bother him. He is ready to invest Rs 14,000 crore to get there. Videocon Mobile Services, an arm of Videocon Industries, is the 13th player in the market.
India may be the world’s fastest-growing market (over 600 million users; number projected to rise to 800 million in three years), but it is also the most competitive. Cut-throat rivalry has brought down profit margins of incumbents at an alarming rate. The average revenue per user for GSM has fallen 35 per cent to Rs 144 per month in the last one year, while that for CDMA has shrunk 26 per cent to Rs 82 per month.
Clearly, this is no place for the weak of heart. So why does Videocon want to try its hand at telecom? It is a large player in consumer electronics, though Korean chaebols LG and Samsung lead in the market by a fair margin. It has interests in oil & gas. (Videocon has 25 per cent in the Ravva field off the Gujarat coast, and owns assets in Brazil, Mozambique, Australia and Turkey. While Ravva went into production some years back, other blocks are under exploration.)
It recently ventured into direct-to-home television. Profit margins in consumer electronics are under pressure, though they are still healthy in oil & gas. Videocon’s gross profit margin in consumer electronics fell from 13 per cent to 10 per cent, and in oil & gas from 32 per cent to 29 per cent. DTH is still in investment mode, and Videocon is at the bottom of the heap — the industry is known to carry losses in excess of Rs 5,000 crore on its books.
Dhoot gives a text-book answer. “Tele-density in the country is just 46 per cent. We are in it for the long term. Often, we have entered sectors even when they were yielding low margins in the short term and when people were shying away. In 1994, oil had seen low margins but we went ahead.” Sector analysts say Videocon can build great value for its shareholders in telecom. Along with a few others, Videocon got spectrum for a song — just Rs 1,651 crore. Unitech, one of them, then sold 67.25 per cent to Telenor of Norway for Rs 6,120 crore without a single subscriber on board. Similarly, Swan Telecom sold 45 per cent to Etisalat of Abu Dhabi for around Rs 4,000 crore. Imagine Videocon’s valuation if it has 100 million subscribers on board! Bharti Airtel, which has 138 million subscribers, is capitalised in the stocks markets at Rs 111,780 crore. However, Videocon has spectrum only for 19 of the 22 circles in the country, unlike Uninor, Tata DoCoMo and others who have a pan-India licence. So it may be valued slightly below these rivals.
In fact, Dhoot does not rule out selling 26 per cent in the near future to a foreign partner. He may need the money to fund his expansion plans. State Bank of India, the country’s largest lender, has committed Rs 7,000 crore; which means he still needs to arrange Rs 7,000 crore. This is where the stake sale fits in. There have been talks of Vivendi of France buying into Videocon but those have now faded out.
Some analysts believe Videocon’s capital expenditure could be higher than projected because it has only 4.4 MHz of spectrum, which could constrain its growth. So, it will either have to acquire another service operator or buy spectrum afresh. This could be costly. Each MHz of 2G or 3G spectrum could cost as much as Rs 2,500 to 3,000 crore.
| MEET THE NEWBIES > Aircel: Target the youth, especially those looking to surf the internet > Tata DoCoMo: Offer per-second tariff, youth-focused applications, kickass ads > MTS: Focus on heavy-duty users, work with small businessmen > Uninor: Discount tariffs, target subscribers not overtly price-conscious > Videocon: Offer bundles of products, build hype around better “signal” |
Brand advantage
To be fair, Videocon does come to the market with some advantages: It has a wide distribution network and a brand that is well recognised. “Our brand has become well established over the last 25 years, and we have reached India’s remotest corners with our after-sales service,” says Dhoot. “Our strength in servicing and reach is what makes us confident of acquiring 100 million subscribers by the end of three years.” Some observers agree. “Videocon can bank on its brand presence unlike other newcomers such as Uninor,” says Romal Shetty, who heads the telecom practice at KPMG.
McCann and Interbrand ran a research before the launch of Videocon’s mobile services, which concluded that it would be best to go with Videocon as the brand. It would also have a halo effect on other businesses. The group had done a brand overhaul in 2009, engineered by McCann, which many felt at that time was done to pave the way for savvier telecom advertising. Operators have been known to spend 13 to 15 per cent of their turnover on advertising which has seen no dearth in media innovations and creative content. Some observers feel telecom will therefore be a tough challenge for Videocon. “The incumbents already have a good brand recall, having built emotional connect over the years. So, there is no room for error for Videocon,” says Milagrow Business Knowledge Solution Founder Rajeev Karwal who has in the past worked with LG, Electrolux and Philips.
The other advantage Dhoot can count on is his distribution network. Apart from 50,000 dealers of Videocon consumer electronics, Videocon owns the Next and Planet M retail networks, which together are over 1,000-store strong. In addition, the company plans to enlist over 20,000 independent dealers right away and another 25,000 in three months’ time. But it will have to do more. Bharti Airtel, for instance, hopes to have a distribution network of 2 million by the end of the year.
Dhoot looks unfazed. “(Bharti) Airtel claims over 110 million subscribers. Videocon as a brand already reaches as many as 160 million consumers,” says he. While most of these consumers may already be with other network operators, Videocon expects 30 per cent of them to convert to its network. Industry data suggests that as many as 50 per cent subscribers change their service operator in a year. This is the opportunity Videocon has in sight. The operator is reaching out to existing consumers in Mumbai’s suburbs with a pilot loyalty programme. It calls on such consumers and offers them a tentative enrollment plan to switch to Videocon Mobile Services.
Also, a new player in the market need not set up its own infrastructure of towers; it can take on rent those of rivals. This compresses the capital investments required in the rollout as well as the go-to-market time. In fact, Videocon plans to take on rent 80 per cent of the towers it needs. It will fix its own towers where the network is weak. That is why, in its first television campaign, it has played heavily on the “signal” of the network as the differentiator. Most subscribers in India refer to the strength of the network as signal. Through its tagline, Pakdo life ka har signal (catch every signal of life), it hopes to own the word in recall among subscribers, rather than give prosaic explanations about network coverage.
The tagline can also be localised as the brand rolls out in different areas. It infused a local flavour when advertising its launch in Tamil Nadu — its first circle — by placing ads in Tamil during the recent Indian Premier League matches. “Advertising in the regional language on national channels struck an emotional chord with consumers,” says Videocon Mobile Services’ head of marketing, Sunil Tandon. As the group has consolidated media buying, the telecom service hopes to save 5 to 10 per cent on advertising costs.
Bundled plans
But the clincher could be something else — bundling. There is talk in the market place that Videocon could offer consumer electronics like an LCD television if a subscriber guarantees a certain annual usage of airtime. Analysts say Videocon could sell its connections along with handsets which will be either subsidised or completely free. The condition could be that the user has to remain on the network for a minimum of two years and use the service for a minimum specified period of time. “Rather than cut tariffs, players can subsidise the handsets. By tying handsets to the network, operators can offer differentiation over a longer period of time than temporary tariff plans,” says Ernst & Young Partner (technology, communication and media) Amit Sachdeva.
In markets such as the US and Europe, this is common business practice. It would allow Videocon to rise above the price-play among GSM players. In India, CDMA operators have locked third party devices with their networks. But consumers resented that because there was forever a limited choice of handsets. Videocon, on its part, has already launched as many as 24 handsets and is ready with 20 more. This, experts believe, will help Videocon acquire low-revenue subscribers.
Dhoot admits such a strategy indeed is on the drawing board. “The handset business would allow us to bundle our network with it. It will allow us to introduce youth-focused applications and flexibility in pricing.” This is somewhat similar to what Videocon did in DTH — it bundled the set-top box with the DVD player and television. (Its d2h service has got nearly a million customers since launch in September 2009, which is 5 per cent of the market.) Dhoot also plans to build a suite of value-added services for the youth. But the space is crowded, and his application developers will have to think really out of the box.
Has Videocon got it right? What do the initial numbers suggest? In less than two months, it has covered six of the 19 circles it has spectrum for, with six more likely to be covered before 100 days. Tandon claims that 100,000 subscribers came on board within four days and it has already crossed the 1-million mark. (In contrast, Uninor, which started its rollout in December 2009, has got 2.5 million subscribers) Dhoot’s job is to find another 99 million subscribers in a little less than three years.
