Shares of telecom service providers such as Bharti Airtel Ltd and Reliance Communications Ltd (RCom) were the major gainers soon after the election results in May. These two companies’ shares had risen by 25% in just one trading session.
However, the share prices of both companies have underperformed the Nifty index on the National Stock Exchange by around 20% since then.
One of the main reasons for this is the increase in price competition in the industry. While the mobile telephony space has always had intense price competition, the launch of Tata DoCoMo’s services on the global system for mobile communications technology standard has caused a significant disruption in the pricing strategy of the industry. Tata DoCoMo bills its customers on a per second basis, rather than on a per minute basis, which incumbents use.
According to Citigroup Research, “(For an) average call duration (of) between one and three minutes, we estimate a bill reduction of 17-50% depending upon the distribution of call duration. Subscribers with the maximum frequency of <1 minute duration calls will stand to gain the most and the utility of per second billing reduces as the call duration increases.”
While incumbents haven’t responded with similar per second billing plans, they have reduced tariffs through various schemes. For instance, Vodafone Essar Ltd is offering national long distance calls at subsidized rates in exchange for a nominal monthly fee.
According to an analyst with an institutional broker, the impact has been felt the most in that space because of Tata DoCoMo’s promotional offer, which charges lower long distance rates in the first month of use.
Early this year, when RCom launched its national GSM services, it attracted customers by offering free minutes of use on its network.
Citigroup’s telecom analysts point out in a note that the per second billing plan may be able to attract and retain low-end marginal subscribers better than the free minute schemes.
Tata Indicom, which offers services on the rival code division multiple access platform, has also slashed tariffs and is offering flat rates for calls irrespective of duration, subject to certain conditions.
But this would primarily help in increasing the usage of existing customers on the platform rather than attracting new customers. Customers are generally more comfortable with GSM service providers since they don’t have to buy a new phone when they change their service provider.
But Tata DoCoMo’s aggressive pricing strategy has caused some disruption in the industry and it wouldn’t be surprising if average revenue per user falls considerably in the near term. For incumbents such as Bharti and RCom, this would be partly offset by a better-than-expected performance of their tower infrastructure business.
Even so, the fact that the core wireless business is under pressure seems to have the markets worried.