Future revenues have to come from data services, but the obsession with low-cost calls leaves telcos with little time, or money, to focus on it, says Mahesh Uppal.
Reliance Communications is reportedly offering to its new GSM customers free calls worth Rs 10 every day for the first three months. The retailers of its SIM cards, priced at Rs 10, can afford to give them away free since their commission on each card is reportedly Rs 40. This is part of Reliance’s strategy to shift focus from its CDMA business, where it has a market share close to 60 per cent, to GSM, where it has barely 4 per cent. It is reportedly keen to reach 100 million mobile subscribers in the shortest possible time. In response to Reliance’s freebies, some GSM players now charge a mere Rs 99, for their popular ‘Lifetime’ tariff plan, which only recently sold for over twice this price. These price cuts, in spite of their obvious value to those marginal urban users for whom mobile services are still expensive, are a cause of worry. This price ‘crash’ might, in the end, harm the growth of data services including broadband and internet, where India’s record is already poorer than its peers and will hurtrural subscribers whose need for data services is often overlooked.
In a competitive mobile market like India’s, with more operators and cheaper prices than anywhere else in the world, freebies would seem an obvious, though possibly expensive, way for Reliance to acquire market share. But thanks to India’s unorthodox rules, the cost of freebies is a small fraction of the price of 1.8 MHz of precious 2G spectrum that it can claim once it accrues 500,000 subscribers — hardly a challenge, in a market which adds over 10 million new subscribers each month. Its critics have rightly complained that Reliance’s profligacy hurts it less than its competitors and others, by reducing their future supplies of the spectrum.
These ‘subscriber-linked criteria’, which were designed to deal with demands for additional spectrum as mobile operators signed on more users, have come in for justified criticism. The rules are admittedly tighter now and require the operators to acquire more subscribers before they can claim spectrum. However, the amount of spectrum that an operator can get, beyond the 4.4 MHz and 2.5 MHz that comes with GSM and CDMA licences respectively, is still linked to its subscriber numbers or, more accurately, the number of SIM cards it has sold in the market. Additional 2G spectrum is itself a virtual freebie. It is allocated at little cost, beyond the revenue share that operators pay for its use.
The mobile licences themselves used to be auctioned earlier, but were given last year at a fixed price of Rs 1,651 crore. Subsequent transactions demonstrated that this was less than a quarter of the licence’s true value.
Presumably in the light of experience with 2G spectrum, the government plans to allocate 3G spectrum at prices and priority determined by an auction. The auctions have been delayed repeatedly but few will doubt that they are an important first step in reforming spectrum allocation.
The link between 3G and 2G services is obvious. 3G is a significant improvement over 2G although both support many of the same services. 3G services offer much greater capacity for voice and data than 2G-based mobile services. They will relieve the current pressure on 2G spectrum, besides supporting popular applications like multimedia downloads and mobile internet access, that require larger bandwidths for convenient use.
This is relevant, since India’s performance in broadband access is way below its peers including China. With barely 5.45 million subscribers, the government’s modest target of 8 million by the end of last year is still unmet. India’s broadband penetration would have been even lower if its definition of broadband — data speeds of 256 kbps or higher — was in line with the much higher speeds (typically, 1 mbps) that define broadband internationally.
Data services are of special interest in rural areas. It is increasingly clear that voice services alone will not be enough to meet needs there or to make networks viable. The rural population speaks multiple languages, faces higher levels of illiteracy and disability etc. Support for graphics, multimedia, or touch-based interfaces will be critical. Only broadband can deliver it. Services such as entertainment, health and education, which can arguably deliver a higher value in rural areas, will similarly need broadband. India’s ambitious e-governance programme and mobile banking could arguably never be scaled up if all potential users had to rely on the current narrowband 2G mobile networks to move and process the huge amount of data that widespread usage would entail. Taking up these data services can generate new economies for a capital-intensive sector like telecom. And, 3G is our most realistic option for providing broadband data services across India.
Voice usage, which accounts for roughly 90 per cent of operator revenues, cannot be expected to rise indefinitely. Indeed, after a steady rise over several months, India’s unusually high usage of voice services at 500 minutes per month, is now beginning to flatten out. Internationally, lower voice revenues have been accompanied by higher proportion of revenues from data services. But in India, with almost all competition focused on voice services, and the recent steep fall in prices, overall voice revenues may well fall further without the corresponding rise in revenues from data.
With spectrum rules encouraging large-scale entry, most operators seek to retain market share by competing on the price of voice calls for which there is a large ready market. Also with the spectrum being so fragmented, there will be little incentive for operators to promote data services or to use them to differentiate themselves from competitors.
A recent report by Strategy Analytics Emerging Markets Communications Strategies (EMCS) suggests that Indian operators that are focused on subscriber acquisitions may be spending little resources on developing mobile value-added services or data markets, the likely source of their future revenues. Unlike voice, most users are less familiar with data services, their range, their possibilities and their pricing, even if SMS, internet access, Blackberry-based email etc are increasingly popular. Developing a data market will require significant time and money for design, development and trial of services of interest to Indian subscribers. Unfortunately, the cheap call rates leave little surplus — or even focus — to develop such a market. It may be politically incorrect to draw attention to this unwelcome consequence of low average revenue per user (Arpu), but it would be risky to dismiss it.
India has a strategic interest in data services, especially for growing the economies of rural areas. Since wireless is our only cost-effective option, access to spectrum is central. Like 3G, we need to auction 2G spectrum too. This will remove the serious bias against data and the incentives to acquire voice subscribers at any cost, as Reliance has done most recently. 3G, designed for high-speed data, is even more important. Repeated delays in auctioning 3G spectrum are also, therefore, far more damaging than a dispute over reserve prices which is said to be holding up the process. We are losing out on growth, as well as competitiveness. Our peers are much ahead.
