This mobile is not reachable

With the urban cellular market getting saturated, service providers must move into rural India. But can they fund expansion?

Vishnu Raju is both good and bad news for India's cellular phone service companies. The 42-year-old welder subscribes to Bharat Sanchar Nigam Ltd's CellOne pre-paid service in Bangalore.

His average bill "" less than Rs 250 a month "" puts pressure on the profitability of the state-owned telecom provider. "My business depends heavily on my cellphone," says Raju in Kannada, "but I try to make sure that the bill is low."

Mobile phone company CEOs dread the Rajus of India, that is, those who generate Rs 250 (less than $6) monthly average revenue per user, or ARPU. Clearly, generating a surplus in a market where telecom tariffs are among the lowest in the world is tough.

However, what makes up for the loss is market expansion: since 2004 between one and 1.5 million new subscribers get added every month. India has about 55 million cellphone customers. Roughly, the split is as follows: 45 million subscribers are on the global system for mobile (GSM) network and 10 million use the code division multiple access (CDMA) phones.

The bad news is that even the growth (that compensated low tariffs) in the urban cellular markets is beginning to slow down. The downward trend in the metros is steady. The year-on-year growth in Delhi, Mumbai, Chennai and Kolkata has more than halved to 36 per cent in May this year from 85 per cent in January 2003. The four cities have about 11.5 million mobile phone users, equivalent to a near-40 per cent penetration. Very soon, one in two people in the metros will have a mobile phone.

Growing slowly

So are the wireless voice networks fast reaching a saturation point in Indian metros and other large cities?

No, says Anil Nayar, president (mobility), Bharti Televentures, the owner of the Airtel brand of cellular service. Growth may be slow in percentage terms but not in sheer numbers. The metros, for instance, continue to add about 250,000 mobile phone customers every month.

Pricing changes by cellular companies, like a reducing the minimum usage on pre-paid accounts to Rs 200 a month, are expected to deepen the addressable market further.

Rural challenge

Even so, analysts reckon there will be a marked slowdown in growth in urban markets that account for nine in ten of India's cellphone owners. India's urban population of about 300 million people is highly concentrated: more than three-fourths of this live in its top 1,000 towns and have a higher propensity to spend.

The remaining 25 per cent are in the other 4,000 towns. In all, mobile phone networks cover about half of India's 5,000 towns and the cellphone penetration is estimated at 20 per cent in these 'urban agglomerations'.

"Going forward, growth will be driven not so much by falling tariffs but more on the back of rapidly increasing geographical spread," IDBI Capital Markets Services wrote in a research report.

The effort then is to expand the cellular networks in smaller towns and villages. Bharti, for instance, signed a $250 million deal in April with its network vendor Sweden's Ericsson AB to expand to 3,000 towns.

Other operators are also pushing into small towns. T V Ramachandran, secretary general of the Cellular Operators Association of India, says there is a potential to draw up to 200 million more customers to mobile phone networks if they can expand.

Pankaj Mohindroo, president of the Indian Cellular Association, a trade body representing handset vendors, predicts operators will complete urban rollout in 2007 and shift focus to building rural networks.

But the funding challenge must be fixed. Ramachandran says the current level of ARPU is not adequate to generate enough profits for expansion. He estimates that up to a third of cellular operator costs are government levies: license fees, spectrum usage costs, access deficit charges, service tax and other duties. Any tightening here can help.

Companies shy away from bundling phones with tariff schemes, a regular practice abroad, to attract customers because the administration charges license fees (averaging 9-10 per cent) even on the cost of the handset. So handset cost remains a hurdle for low-spending customers.

Then, there is the issue of raising capital. India needs about Rs 75,000 crore to expand its telecom networks. Estimates of domestic sources is just half of that; the rest will have to come from international investors and debt markets. With the left playing hardball on the 74 per cent cap on foreign ownership in telecom services, Indian cellular companies, which have already reached the ceiling in their holding and operating arms, find this avenue closed for now.

Welder Raju's siblings back home in his village in north Karnataka will have to wait to sport their mobile phones.

(The author can be contacted at josey@vsnl.net)