Cell Cos Tread Thin Line Between Cost and Profit

Members of the cellular service industry have raised the clarion call for the need for co-opetition as the industry finds itself faced with huge losses. SD Saxena, Director Finance, BSNL warned, "We have seen how price cuts and unsustainable customer acquisition practices took its toll on the paging and ISP industry. Let not the same happen to the cellular industry." While it is true that the cellular industry has been registering robust growth rates (with a CAGR of 109 percent), the industry itself is far from the path to profitability. The industry, which requires intensive technological upgradation is a high capital expenditure ball game with a minimum gestation period of seven years, revealed
Saxena. 

Indian cellular tariffs are among the lowest in the world at $16 for a 300 minute basket of airtime usage as against $20.86 for China and $115.58 for Argentina, which has the highest tariff in the world for comparative airtime usage. And the industry is bleeding with total debts running to the tune of Rs 9,000 crore. The industry therefore has a tough task in lowering costs to build the market and balancing it to sustain its profitability. Operators have been betting on the increased volume to offset cost reduction but that has not taken place as ARPU has remained very low. The challenge before operators is therefore to expand the customer base as well as increase the ARPU of existing customers through value-added services. In order words, the cost of customer acquisition should justify the
ARPU.

Cellular operators have admitted that the immense competition in the sector has resulted in tariffs touching rock bottom levels with little scope of further reduction. Said Sunil Bharti Mittal, Chairman and Group Managing Director, Bharti Enterprises, "There is little scope of cellular tariff reduction. Reduction will now be in paise. Further tariff reduction is dependent on easing of some government regulations." These regulations include issuing spectrum in bulk, revenue sharing, interconnectivity regime, service and sales tax issues. These account for a total of 35 percent-40 percent of the operators' cost. One of the major issues faced by the sector is the need to allocate spectrum in bulk. Indian operators are allocated 6.2 MHz as against the international average of 17 MHz. Operators incur additional capital expenditure due to lower spectrum allocation since they have to install more base stations to ensure the quality of networks.

Under the existing scenario, COAI has urged members to share its infrastructure to bring down costs. Each operator has set up its own network incurring huge capex to the tune of Rs 21,000 crore. Operators have also realized the sound economics in sharing networks with increasing co-optetion in terms of sharing infrastructure. Said, Anil Nayyar, Head Mobility, Bharti Cellular, "Sharing infrastructure is a trend which is picking up because there is a need to drive down costs. Physical infrastructure like towers which house the base stations can be shared but Indian regulation prohibits us from sharing active infrastructure like fiber optic cable. We have around 2,500 base stations of which around 5 percent-7 percent are on shared towers over the last six months." 

Nayyar pointed out the factor inhibiting infrastructure sharing which is the absence of a license fee. "If a percent of the overall revenue is charged, it would encourage operators to enter into a barter system with each other." According to Manoj Kohli, former Chairman COAI and CEO of Escotel, Bharti, Escotel and BPL are currently sharing around 100 cell sites in Kerala. Network sharing is a worldwide trend and is increasingly catching up in the capital-intensive telecom sector