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.

Somebody sending SMS messageHowever, 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

Somebody receiving SMS messageIn 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 [Value = (Quality X
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

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