Indian Telecom Story (Part XIV): Can pricing differentiate new Telco services?

Of late, the number of foreign operators who have entered the Indian shores is impressive. Global Operators like MTS, Etisalat, Sistema, Do Co Mo have started offering their services to consumers.

However, what is disappointing is that all of these operators have yet again taken the price route to establish themselves in the market. Sample Tata Do Co Mo in Karnataka/Bangalore for instance. They have innovated on the talk times, charging consumers for seconds of usage instead of minutes of usage. This squarely means that if I make a call for 3 minutes and 20 seconds through the network, Tata Do Co Mo charges me for 200 seconds of usage instead of 4 minutes. That is very good news to the consumer. A rough calculation and analysis of my call minutes showed me that over the last 24 hours or so, I had actually used 2381 call seconds, while my operator would be charging me for 59 minutes/ 2940 seconds of usage. Going by the Minutes of usage concept, I was paying for 10 minutes that I did not use. These were the residual seconds that I was charged for! That is a 19% waste of my money! The seconds of use is thus a terrific value to the consumer. No wonder than that Tata Do Co Mo had signed on 400,000 users in the first week of launch.

Now let’s flip it over from the business perspective. Many of the new entrants have deep pockets and hence are keeping the advertising and media happy with marketing spends. However, a deeper analysis leads me to think that the approach is likely to be very short term. Here are the reasons that I put forth for the same:

1. Without Pan India presence it is very unlikely that these new entrants will find a lot of business segment consumers (who are typically high value)
2. Thus these price based promotions will land them with a base of medium of low and medium value consumers.
3. Even if we assume that this may attract new subscribers to the services, but the ARPUs will not be sustainable and profitable.
4. Such promotions do not act as differentiators or entry barriers in the long term. It wont be long before Airtel, Vodafone, Reliance and older players follow suit leveling the ground.
5. If anything, this tactic only serves to lower/break the floor prices of the services.

Lowering the cost of ownership has been extremely successful ploy in terms of expansion of the Indian Telecom markets. The ARPU today is around the theoretical $5 break point. In mature markets an ARPU under $5, does serious harm to the bottom-line. In a growing market like India, the strain of a decreasing ARPU may not be significantly visible presently. However, with markets maturing, the focus will shift from growth to sustainability. The new classes of consumers are mostly rural and their ARPU would be well below $5 (probably $3-3.5). Managing bottom-lines at such low levels of Revenue per user and increasing costs of acquisition will prove to be a challenge.

I had expected a higher degree of service innovation by the new players. I had expected that they we would see some exciting innovations around value delivery. It could have been Internet, VAS or the MVNO based delivery. By playing the price route, the new players seem to be playing it right to the incumbent’s advantage. I have always thought that in absence of compelling value propositions that the consumer is willing to pay a premium for, it is always cost that the consumers fall back upon. It seems that branded value services are one of the most obvious businesses that the current Telcos are missing to capitalize. Lets then wait for the discontinuity from the current price based business model to value based ones!