CELLULAR: It is All About Money, Honey

The Indian cellular subscriber base has gone up by 90 percent during the last

financial year. This is an encouraging trend that is expected to continue

through the near future.

Voice is and will remain the killer application for quite sometime as far as

the Indian cellular market is concerned. The incumbent cellular operators in

India still regard voice as the most prominent source of their income, which

accounts for more than 90 percent of their total revenue.

Will this trend continue to push the voice usage and increased voice ARPU?

Well, there are considerable risks for both incumbents and the market if voice

revenue are eroded in the price war. This is most likely to be initiated by a

new entrant business {eg. Fourth (4th) cell operator }, whose market penetration

strategy depends on data revenues (because data services have four key

objectives- reducing churn, generating revenue, achieving differentiation and

building market share), and the acquisition of customers attracted by low voice

tariffs. Discounts between 15 percent and 30 percent for traditional

applications like voice, basic VAS (voice mail, call forwarding, etc) maybe

provided by the new entrant at market entry. Other applications may be priced at

the market level. It is unlikely that an incumbent would instigate such a

strategy because voice revenues will be too important to their existing business

model.

However, it is entirely possible that a new arrival will force such a pattern

on the market. This would transform current ARPU projections and have a

significant impact on existing business models. The entry of MTNL in metros like

Mumbai and Delhi, has already caused airtime rates to come down substantially.

In fact price war has already begun with cellular operators both in metros and

circles, bringing down their airtime rates significantly, in order to increase

and save their existing subscriber base. Fixed service providers through limited

mobility (if allowed ) coupled with a rate of Rs 1.20 per 3 minutes, will

further bring tariffs down. While lower tariffs will tend to increase voice

usage, this effect will not result in a net increase of revenue due to

increasing inelasticity of the market in the longer run when the penetration has

reached a reasonable level. Apart from this, the declining voice ARPU will

definitely impact the business models of both the existing and new entrants in

the cellular field. Factors like interconnection charges, revenue sharing

regime, spectrum fee charges, declining airtime rates per minute and, possibly,

the inability on the part of the vendors to bring down the prices of the

equipment supplied by them to any significant level (unless the volumes ordered

are large enough) as their profit margins are already under strain, may

instigate operators to start thinking of innovative product differentiation and

aggressive marketing strategies, to make their businesses viable.

Learning to Strategize

In western Europe, the revenue generated by voice is on the decline. The

current thinking in western Europe further suggests that while voice revenues

are still expected to decline at a rate of around 10 percent per annum, revenues

from new appealing applications and m-commerce will rise, and it is entirely

possible that the projected uplift of 30 percent will turn out to be highly

prudent. This prediction may turn out to be good learning for us and should help

us plan our strategies in a more timely and sensible way. In the Indian context,

operators have to vision their product development, and marketing & selling

strategy in such a innovative way that it enhances their brand-positioning and

revenue streams.

While developing a futuristic business model, one may consider revenue

generation by three distinct elements

• Voice
• Application services and content
• M-commerce

In the battle for market share, one of the big questions

facing Indian operators is how to achieve any meaningful form of differentiation

in an increasingly competitive environment. Applications offered will play a key

role in sustaining revenue streams when voice ARPU is expected to go down

because of price war and fierce competition. The applications to be offered for

metros may be quite different initially from that offered for circles. New

entrants in Metros for example, may switch over to quite a few of the advanced

applications {horizontal and personal applications–Internet access,

m-commerce, credit phone etc. Vertical and corporate applications–Professional

services, consulting and application development, mobile VPN, etc, apart from

traditional applications like voice (local, long distance, international), basic

VAS (Voice mail, call forwarding etc)} right from the start whereas circle

operators may have to adopt a different strategy depending upon the urban,

semi-urban and rural areas.

Thus, creation of application portfolios may be regarded as

an evolutionary process for circle operators albeit one informed by an evolved

marketing strategy. Good market research coupled with right market segmentation,

will clearly define the proper strategy to be followed as to which application

or set of applications need to be adopted. The new entrant may have to adopt an

aggressive network roll-out strategy as far as QoS, reach and foot print,

network-reliability and supporting a good number of applications are concerned,

from day one of the commercial launch of services. A good deal of innovation and

imagination have to go into the type of applications to be launched so that

customers can immediately feel the proper value addition Service)/(CostXTime)> being brought to them by the existing/new entrant in the

cellular business.

One has to excel in each and every department whether it is

technical, marketing, sales, customer care etc in order to derive significant

benefits out of new products and services. Customer care, for example, through

the right adoption of CRM and key differentiating applications, has to be very

proactive in increasing customer loyalty and thus, help reduce churn, say, from

a figure of 25 percent per annum, to a very low level in order to make the

business viable. The new entrant(s) as well as existing operators have to very

closely follow the six (6) sigma approach in order to make the launch of new

products and services successful, apart from providing world class service and

improve upon its brand image. This in turn, will help enhance the revenue stream

earnings which is the bottom line for the operators.

Maximising Business User Revenue

Most operators would like to decide to target business users

as a priority and there are a number of compelling reasons for such a decision.

In the first place, the business sector is usually willing to spend relatively

freely on technology that improves efficiency and flexibility. In addition, it

would be easy for the Indian operators to identify potentially attractive

applications for the business sector than attempting the same process for the

consumer sector. For a start, most business applications already exist and run

on desktop computers. Such applications are in the process of being modified for

use in a mobile context, with multi-platform e-mail at the top of everyone’s

wish list. From a network planning perspective, the majority of these functions

do not require high data rates, the exception being efficient Internet access

and significant file transfer {both of which will be available via Edge

technology or UMTS a few years later}.

In addition, a focus on the business sector means

concentrating on the roll-out process which is more controllable and as a

result, simplifies the work of an operator. The decisions about the applications

(which require high data rates) will have considerable impact on network

planning. The determination of cell size and location will depend on the rates

required to run particular applications. The higher the data rates, particularly

on the uplink, the smaller the cell size and the more expensive the network.

This is true in terms of the cost of network infrastructure, deployment and

operations. All this has to be carefully incorporated in the initial planning

along with a suitable percentage of excess capacity (may be 20 percent to 30

percent), if an operator wishes everything to be right for him from day one in

this competitive environment. Operators should avoid approaches that seek to

balance future expectations with current needs. This will mean starting with

lower data rates and less ambitious roll-out plans to save money and ultimately

lead to a less-ambitiously dimensioned network which will not be able to provide

competitive products and services to build market value at launch and during the

early critical years.

Maximising Mass Market Revenue

One should not forget to target the mass market apart from

the business sector as discussed above. Simple applications like e-mail, SMS and

simple SMS-based applications with local cultural touch to the content will

drive home significant revenues(17 to 18% of the total revenues or even more)

when voice ARPU comes under strain. This is because the entry of lower usage

segments in the mobile market will result in lower average minutes of use per

subscriber. Ultimately, in the longer run, mobile services & applications

have to be given the status of FMCG and mass market appeal will be the key to

success. Mass-market consumer applications will be much more diverse and

difficult to predict. However, the time seems to be right to push for mass

market acceptance of m-commerce because the telecom markets have shown a healthy

trend with the lowest subscriber potential regions classified as "C"

circles growing by 163 percent during the period from April 2000-April 2001. The

subscriber base in circle "A" and "B" has grown by 100

percent and 98 percent respectively, while the metros have shown a growth of

71.4 percent. Moreover, people in metros as well as a major part of circles are

becoming familiar with the idea that the same product can be purchased via a

variety of media.

Thus, m-commerce appears to have the maximum potential to

provide fresh revenue streams. This is because it is only obliquely "paid

for" by customers, yet offers significant benefits in terms of convenience,

time-saving and ease of use. In addition, m-commerce encompasses all aspects of

retail, transactions, banking and cross-corporate activity, so it is likely to

appeal to almost everyone who owns a mobile terminal. Consider one’s income

and how he spends it. Then estimate what percentage of that spending might be

transferred to m-commerce. It does not have to be large items–cinema tickets,

parking, petrol, and restaurant bills are all possibilities. Then assume the

operator gets a percentage of that annual figure. It is clear the operator’(s)

cut does not have to be large for the revenue to be substantial (revenue uplift

of 20 to 25 percent in metros and 10 to 15 percent in circles are expected in

the longer run). For m-commerce to fulfil its potential, it needs to be easy to

use and inspire confidence. As far as network planning is concerned, the

m-commerce proposition involves the transmission of minor amounts of data and

because of their small size, the impact on the network is small.

Hundreds of transactions are equivalent to one medium-sized

file transfer and because of a reasonable level of excess capacity (20 to 30

percent) associated with the well-planned network, there is plenty of space to

accommodate such activity. The immediacy of purchase choice that mobility

brings, specially when combined with the always —on the nature of link- will

support and encourage the impulse buying of content when on the move. Push-based

m-advertising will also be important. Especially in cases like offering last

minute flight offers to those in the vicinity of an airport, sales notices near

shops and special occasion services for birthdays and anniversaries. Operators

have to ensure the matching of content with delivery.

Apart from e-mail, SMS and simple SMS-based applications as

indicated above, most projected application portfolios might also include fast

Internet access, entertainment and gaming etc. This means network considerations

must be brought to the fore, since all these applications will require high data

rates. They also need to be offered right across the network. Operators need to

think about the timing of such offers and whether it will be possible to

generate sufficient volume of revenue from a limited range of highly targeted

applications. Another important consideration is the influence and management of

customer expectations. The right balance needs to be maintained right from day

one of the commercial launch of cellular services.

Building Strategic Alliances

A strong relationship and partnership has to exist between an

operator, vendor, application developers, and the independent companies that

write applications. One of the main drivers for the evolution of attractive

applications could be the input from third party developers. The operator has to

provide the delivery mechanism and a reasonable number of aggressive and tech-savy

small and medium sized application companies located at Pune, Hyderabad,

Bangalore, etc., will supply the ideas that will capture the public imagination.

By welcoming the Internet community and encouraging third party IT—enabled

application development, operators can encourage innovation and inspire the

market. This in turn will help drive home sustained revenue stream earnings both

for the operator and small and medium-sized application companies as mentioned

above. Planning for key differentiating products and services amounts to

planning for gold.

Let us fire our imagination.

Ved Prakash Singh is vice president, engineering and

operations, Birla AT&T Communications Ltd