Mumbai: India’s most lucrative market for mobile telephony companies, by revenue per user, Mumbai, could soon turn into the most competitive market in the country, with the imminent entry of two telcos, Idea Cellular Ltd and Aircel Ltd, a company controlled by Malaysia’s Maxis.
India’s commercial capital, which has 9.5 million mobile telephony subscribers, is home to six mobile telcos, four that operate on the GSM technology platform and another two that operate on the rival CDMA one. That makes Mumbai the market with the most number of cellular telephony firms in the country. And not too many countries in the world have as many telcos fighting for a share of the same market.
“Mumbai has the highest average revenue per user (ARPU) of any cellular circle in India, as even the poor of Mumbai rival the middle class in some other less attractive circles,” said Jayant Khosla, executive director, Bharti Airtel Ltd.
ARPU in Mumbai for the last quarter of calendar year 2006, at Rs460.86, is 45.84% higher than the all-India average of Rs316.
Bharti Airtel has 1.8 million subscribers in Mumbai; market leader Hutchison Essar Ltd has 2.4 million. Vodafone Group Plc, the world’s largest mobile telco by revenues, recently acquired the 67% stake Hutchison Telecommunications International Ltd held in Hutchison Essar for $11.1 billion.
“Mumbai’s cellular-user penetration of around 55% of the potential mobile-user segment compares favourably to 60% penetration in Delhi, the largest metro cellular market in India,” said S. Subramaniam, chief executive officer, BPL Mobile Communications Ltd.
The city’s average per-user revenue, however, is higher than Delhi’s Rs425.5, making it a preferred market for any telco. And it costs less to operate in India, according to Khosla.
“Mumbai packs a very large population in a land area of 11 million sq. m. Network infrastructure is the biggest fixed cost in the cellular-phone business, and Mumbai, with its densely packed population has a low cost of network infrastructure as compared to other cellular circles in the country,” said Khosla.
The lower investment and the higher per-user revenue translate into higher profitability per subscriber. That, said several analysts who did not wish to be identified, is why Reliance Communications Ltd and two more GSM-based cellular service operators are eyeing the market.
The already low-cost of infrastructure in Mumbai is set to get lower with the emergence of companies that build telecom infrastructure such as base stations and lease it out to multiple telcos.
“We have agreed to provide Idea with access to 250 shared cell sites for its Mumbai launch,” said Ajay Madan, CEO of Essar Telecom Infrastructure Pvt. Ltd, one such company. “We are taking the lead in sharing our cell sites wherever the landlord does not have an objection to Hutch, BPL and Tata Teleservices Ltd.”
The companies could share infrastructure, but they will be competing with each other for subscribers. “The market is already quite competitive, which had led to a fall in pricing,” said a senior executive with Hutchison Essar who did not wish to be identified. The analysts were not sure the market had space to accommodate all the new companies and said the penetration of mobile telephony in Mumbai could reach 100% in the next three years.
At that point, the analysts added, the eight or more telcos operating in the city would have no option but to woo each other’s subscribers to grow.
For customers, the entry of new telcos means lower tariffs. “Any new operator who enters a circle offers freebies like minutes free,” said Subramaniam.
“New operators usually offer a lower tariff to differentiate themselves from the existing ones,” added Manoj Mohta, head, research, Crisil Research and Information Services.
Existing telcos usually counter this by reducing their own tariffs. That could mean a reduction in per-user revenue; a report by Macquarie Securities (India) Pvt. Ltd, a brokerage, said that this has been falling by around 12% year-on-year despite the average usage (in minutes) rising almost 13%.
Companies entering the Mumbai market hoping to generate at least as much per subscriber as the average per-user revenue in the city could be in for a shock, warned Subramaniam.
The incremental average per-user revenue (for new users) is a third of the overall average, and could be as low as Rs150, Subramaniam said, adding that most new subscribers are first-time users. And although companies can hope to benefit from lower infrastructural costs, they will likely have to spend more on promotions and advertising, resulting in an increase in sales costs.
According to the analysts, selling, general and administrative expenses, at around 15% of revenue, outstrip network costs, at around 12% of revenue, for most service providers.
“The marketing costs for existing players will increase as they will have to fight for retaining their existing customers when the new players come in with attractive offers. Similarly, the marketing spend for the new companies will be higher as they will have to make subscribers switch (from existing companies). Companies are most likely to meet the increase in the marketing spend from savings arising from hiving off their tower business,” said Sandeep Shenoy, a strategist with Mumbai brokerage, Pioneer Intermediaries Pvt. Ltd.
In anticipation of higher levels of competition, BPL has increased the number of its cell sites from 550 in August 2006 to 750, and is further increasing this number to 1,200 in a year’s time to enhance the quality of service and cater to more subscribers.
And all the telcos want more spectrum. “If the operators do not get the required spectrum then their capital expenditure will increase as they will require to put more base stations. Otherwise, the service quality will get affected,” said Mohta.
“New operators will need 1,000 sites minimum if they are operating in the 1,800MHz frequency range as all operators will match tariffs. To attract subscribers new entrants will need to provide good coverage,” said Khosla.
Telcos that operate at higher frequency spectrum (such as 1800MHz) will need more cell sites to ensure adequate signal strength than those that operate at lower frequencies such as 800-900 MHz (BPL and Hutch Essar have spectrum in this frequency).
Increased competition in Mumbai, however, is not likely to have any impact on the revenue and profitability of most national telecom companies; the city accounts for just around 6-7% of India’s overall subscriber base.
The situation could change if the new entrants decide to target more new markets. That is a possibility.
Aircel, which currently operates in nine out of the 23-telecom circles in the country has got licences to operate in the remaining 14 circles including Mumbai.
“The company is now waiting for spectrum to roll out its services in the new circles,” said a company spokesperson.