Price war in Indian telecom sector: The way forward

Abstract

The regulatory changes in Indian telecom industry over the last 15 years paved the way for increased competition. While government wanted to let competition drive efficiencies and benefit customers, today the industry is at a stage where the sustainability of companies is at stake. Factors such as high number of operators in each circle, low differentiation in product offerings, and high strategic stakes have ensured that all companies want to garner market share through whatever means they can. In the process, new companies that did not have brand identity or superior product offerings launched aggressive campaigns in the form of per-second-billing plans and heavily discounted pricing. As expected, it hurt all the players including the large ones. But price competition is just manifestation of several structural issues in Indian telecom industry that have reduced its attractiveness, at least in short-term. All incumbent players are mulling the strategies they can adopt in the face of the changed nature of competition in the industry. Two distinct approaches that some companies have been trying and which others too are likely to adopt are expanding into new geographies outside India and consolidation in the industry in India. These two strategies are at industry level. At firm level, companies can try to look at their cost structure to drive in more efficiencies, as shown by Bharti, or look to differentiate their product portfolio through new offerings such as 3G services. Large players such as Bharti and Reliance have been trying to buy assets abroad, mainly in Africa where the penetration rates are still low and the growth opportunities are huge. While the theoretical analysis suggests that acquisitions abroad do not make much sense for Indian companies, companies such as Bharti, who enjoy unique scale and scope advantages, are forging ahead in foreign markets looking to drive synergies between their domestic operations and foreign ones. The number of operators in Indian industry today is unsustainable with sustainable figure being in the range of 6-7. So if the industry has to move from a position where there are 10-12 players fighting in each circle to only 6-7 players per circle, either there has to be some consolidation in the medium-tolong term or some players are likely to shut shop. Given high strategic stakes, the latter is less likely. Hence players can look at consolidation as a viable strategy in Indian telecom industry. Indian telecom service prices are already lowest in the world. Even then, companies such as Bharti are able to generate EBITDA margins of 35-40% on sustainable basis. Other companies, incumbents or new, can look to follow Bharti in this regard by looking to derive maximum value from their operations. Value chain analysis shows that outsourcing of almost all operational activities and gaining economies of scope and scale are helping Bharti stay ahead of the pack. Recent 3G auction in India saw 3 private players in each circle getting license to provide 3G services. This is an opportunity for players who have got these licenses to launch differentiated services and stand out from cut throat competition in 2G space. There is also opportunity for companies that are not using all of their capacity to rent it out to virtual operators (MVNOs), thus getting better value for their infrastructure. This is especially true for 3G spectrum because very few companies in each circle have been given licenses and many others will be looking to start their own 3G operations.