Bharat Kumar

The business of telecom is complex. Here, an industry analyst shares her view of both the short takes, and the trends that are for the long haul.

KOBITA Desai has this habit of hitting the nail on the head. It helps you understand the telecom business for what it is, much better than you thought you would. Take this, for instance: Mobile services give you marketshare, fixed line services give you margins. That’s the Indian telephony market for you in a sentence. Principal Analyst, telecom, at Gartner India, Kobita Desai dwelt on other issues too, in her chat with eWorld. Excerpts:

How is telecom growth directly linked to Gross Domestic Product (GDP)?

Countries such as China and India have a lot of disposable income even in rural areas. Telecom penetration improves lifestyle and definitely cuts down the time taken to do a particular task. In the enterprise market, if a sales person can use a phone network to send data — that he collects on his rural rounds — to his headquarters, then his efficiency goes up. He is able to quickly move on to the next consumer and his base broadens. His company gets data almost real time and can plan inventory better and get its forecast right. That impacts his productivity for the better.

Let’s look at the consumer market. Here, estimating efficiency is nebulous. Two things happen here. Spending increases. So it affects savings. In a way, it impacts the economy since there is more liquidity. But it also means that individuals are saving less. So, it helps if cost of communication keeps slumping. The lower the cost, the better. This helps achieve a healthy balance between savings and market expansion.

What is your view of the market now?

Carriers have a tendency to cream the market. If you have a base, then you tend to milk the base totally. It makes more sense to expand the base. Sure, it may not be the same for fixed and mobile services. That’s true. The fixed service has its limitations. The cost of setting up and running a fixed network is significantly higher than that for a mobile network. The mobile network is different. The cost of setting up infrastructure is significantly lesser. If fixed costs you between Rs 20,000 and Rs 25,000 per line, mobile rollout costs you only Rs 9,000 or so per line.

If it costs less to set up a mobile network, and if the cream of the market has also been tapped, then an expansion into rural areas should have been logical. Why hasn’t that happened?

Telecom is a business with a long gestation period. Investments are made on business viability and carriers who enter the telecom space, especially on the last mile segment, should have a long-term view. It’s a tendency to cream the market. Once you see money coming in, you want quicker return on investments. But, some carriers have this long-term view.

Villages and towns are more spread out, so you need more base stations. Also, you cannot expect too many subscribers in the beginning. It’s a risk you have to take. If you continue to limit to B class and better towns, it’s dangerous. Carriers with a pan-India presence are able to leverage that better. Geographic spread and operating cost go down significantly — With a large base, you have the same billing and the same CRM (customer relationship management) platform. So cost savings is a given.

BSNL is a great example of what coverage and geographic spread can do. It started mobile operations in 2002 — didn’t do it piecemeal but went for the big bang approach. In six months, it was the number two in the industry.

Are there any signs of instability in the market now?

The concern I have is that the next two years is a period of rollout. This is the time for carriers to expand as much as possible. Consumers don’t need education on the value proposition on mobility. Forty-five per cent of consumers are below 25 years of age. That chunk would typically like to experiment and to evolve. Though, unlike other industries, government support is important for telecom. It’s an area where you have social obligations.

In a recent report, you had said that four entities could well stand out in the next few years. Interestingly, Hutch was not part of that list, while incumbent BSNL was. Your comments?

We talked about four integrated carriers — not only about mobile or fixed line carriers. That’s what the market is moving towards. Every provider will have to have a gamut of services. He’s the guy who has everything and who benefits the most. Margins for mobile are very low while they are phenomenal for fixed. It’s just voice today but I am convinced that for broadband, nothing can beat Optic Fibre Cable (OFC) technology which needs wires right up to your home. That’s what fixed folks have. That’s where the margins are going to come from. If you have both wireless and wireline services, the former will give you market share and the wireline will give you margins.

As to individual players, it’s not that Hutch won’t be significant, but we believe that there will be 4–5 large players. There is scope for players to be niche such as in the enterprise market. They might not be able to create dramatic moves in the market. They might be around to add a host of solutions and value-added services.

What is your view of the international long distance (ILD) market?

International voice market is especially a commodity product. It goes by settlement rates and minutes of usage. Revenues come from companies using ILD services. The folks who needed to use ILD irrespective of what it costs them will continue to use it for the same time daily or weekly. You won’t see traffic volume picking up there. Even if you see volumes increasing, it would come from a section of users who would be looking for an inexpensive deal. They aren’t going to give you margins. Those who come in are from the low-income group. How many ILD calls will they make? The ILD market is now showing negative growth rate in terms of revenue. The volume of traffic is increasing but not enough to compensate for the revenue slump.

Growth in ILD is because of competition, but has Internet Telephony contributed at all?

It’s something to watch out for. Voice over Internet Protocol (VoIP), which is distinct from Net telephony, is the important thing. If a service provider commits to two million minutes to a US carrier, then he gets good settlement rates. So you need volume. If you get hold of a base, then you can push in data services. Internationally, settlement rates are under pressure.

Even with rates going so low, the grey market continues to be a concern. Can’t you have a list of grey market operators, and ask the big operators in North America to not deal with them?

It happens everywhere. The big operator in the North American region is looking for a good rate. What the Indian service provider is doing in the US is not illegal while the India-end of his equipment and business may be on the wrong side of the law.

The point is to make poor quality of service show in the churn. For that, carrier pre-selection helps.

The guy who owns the last mile is the key. He has direct access to you. Carrier pre-selection means that you get to choose one of the 4–5 long distance service providers, even though one operator, the incumbent, has lines coming into your house. Once competition sets in there and you as a consumer get to choose your carrier, then the incumbent cannot throw his weight around.

But won’t we come to a situation where everyone will start laying down the last mile to the home, just to escape perceived tyranny of one who owns the last mile?

That would be ideal. But it would be too costly for everyone to lay lines to the home. That’s why I say you have to look beyond creaming the market. The ideal is that all carriers do all of that. But that doesn’t happen. The incumbent carrier always dominates local loop. Eight years into deregulation, we are talking of just 10 million subscribers in the fixed arena of private players. The BSNL-MTNL combination has 43 million fixed subscribers. There are two ways to look at this: From the consumers’ point of view, it’s their privilege to have choice among carriers. That would bring down costs and drive up service. ILD/NLD can give me their best deal — if they come down significantly, then I choose him, so the dominance of the incumbent is under pressure.

In a recent report, you talked about increasing volatility in the next 18 months? Could you elaborate?

We referred to volatility in terms of consolidation in the sector. We believe that it is a mass-market phenomenon. But no business is big enough for everyone to survive happily. The pie will increase only up to a certain point. Each carrier will want as much of it as possible. Sure, the pie size is also increasing. But volatility persists because of too many carriers and low margins. Consumer loyalty to carrier is limited, unlike the enterprise market.

Recently, players have started saying that average revenues per user (ARPUs) are not true indicators of a good business. That’s what they have been referring to for so long. So why is it suddenly a villain now?

I think it is in their interest not to use ARPUs as a measure. The real measure of how well a business is doing is not revenue but profitability. We have never believed it as a true mark of a good business. It’s progressive to look beyond ARPUs. ARPUs will always go down, never up. For mobile especially, revenues are from low-income groups that switch to mobile, so they cannot spend too much more now than they did five 5 years ago. If volume contributes to revenues, the fixed cost is distributed over larger base. But variable costs will depend on the number of subscribers.

You had indicated that the SMS market would see a surge. What segments (or what kinds of services) of this market are seeing a peak?

The youth market is a large percentage of the mobile phone consumer population. Contest-driven SMS is showing promise. The enterprise segment is also looking at innovative ways of using the technology to increase efficiency. A mobile service provider and the owner of a chain of retail petrol pumps have this arrangement by which SMS helps communicate fuel levels in pumps and usage to the headquarters without having to depend on the crew. Using GPRS in the metre, a message is sent to headquarters every time there is a change in fuel levels. This helps prevent pilferage. This kind of use should pick up.