CELLULAR SERVICES: A Heavyweight Affair

The fiscal began on a belligerent note over the limited mobility issue, with
swords drawn out. Supporters of the two rival camps—GSM and CDMA—nearly
bordered on fanaticism. And as the matter inched toward the final hearing in
courts, passions flared up. It looked like an either-me-or-you situation
then....

Time—and the positive approach of the industry—has changed all that. It´s
a me-and-you-too scenario now.

It couldn´t have been otherwise, given the fact that the cellular pie in
India is big, and growing. More so, contrary to all apprehensions, Reliance´s—and
hence CDMA´s—big-ticket entry helped expand the market.

The Subscriber Surge

It was a 135 percent-caliber explosion that expanded the market. The mobile
service subscriber base swelled from 14 million in March 2003 to 33 million in
March 2004.

Reliance Infocomm was the strongest growth propeller, lapping up 6.9 million
subscribers for its Reliance IndiaMobile brand in 10 months flat (the offering
was launched in May 2003). Although numbers fell short of the company´s
initial projections of 10 million subscribers in twelve months (the figure is
yet to be achieved), it was a project well executed.

V&D estimates CyberMedia Research

For one, in a matter of seven months or so, the dominance of Bharti in the
mobile arena was over, though not necessarily for good. (Bharti has already
bounced back with some strategic moves, aimed at turning the management into a
lean, mean

machine.)

Going back to Reliance´s entry, the Dhirubhai Ambani Pioneer Offer did
manage to change the rules of the game, and, commoditized cellular services to a
certain extent. It grabbed instant mindshare by announcing a 40 paise per minute
rate for STD calls made from a Reliance phone to another. Even though the scheme
got scrapped as TRAI disallowed it for obvious reasons, Reliance did manage to
create a marketing blitz out of the ‘offer´.

The RIM—Reliance India Mobile—honeycomb attracted swarms of worker bees
aka Dhirubhai Ambani Entrepreneurs (DBAs) who built a huge base of subscribers
in practically no time. The growth rate—1 million subscribers per month, for
months in a row. The new CDMA juggernaut rolled on…crushing many a skepticism
on the way.

And those who ardently thought that RIM´s advent would crush the GSM
brigade for good, proved equally wrong.

As tariffs crashed, induced by a highly competitive scenario, mobile services
looked a lot more attractive—and affordable—to potential subscribers. A
record 2 million plus customers decided to cross the lowered entry barrier and
go mobile.

ARPU, Poor ARPU

In the industry´s quest for quick subscriber growth, average revenue per
user (ARPU) continued to be the worst sufferer. The average industry ARPU shrunk
to a new low of Rs 475 as against Rs 595 in the previous fiscal and Rs 780 in
the fiscal 2001–02. In percentage terms, the fall was 20 percent this year and
nearly 40 percent over a two-year period.

V&D estimates CyberMedia Research

Two factors accounted for much of the fall in the average ARPU. One,
increased pressure on voice tariffs, as voice still accounts for 90 percent of
the traffic. Two, the high incidence of prepaid subscribers across almost all
service providers.

Tata Teleservices could boast of the highest ARPU, at Rs 650, only because
its mobile subscriber base is largely postpaid. However, Reliance Infocomm,
despite having a large postpaid base, couldn´t realize a high ARPU because of
an ongoing spate of billing-related problems, and the resulting revenue losses.

Among the GSM-only operators, Hutch claimed the highest ARPU in the industry,
at Rs 534. In its stronghold Mumbai, where it has a relatively higher incidence
of post-paid customers as compared to other operating circles, the ARPU was as
high as Rs 608.

State-run cellcos BSNL and MTNL had significantly low ARPUs for different
reasons though. One, the somewhat barebone nature of their offerings didn´t
quite prompt the users for non-voice usage. Also, BSNL had a large number of
subscribers in the B- and C-class cities where even the voice usage is
relatively low.

Yet, Revenues Shot up…

The sharp drop in revenues was more than compensated by the hefty rise in
subscriber numbers. Bharti topped the tally with Rs 3,261 crore and clocked a
growth of 57 percent. In the previous fiscal, it had posted revenues of Rs 2,084
crore.

Reliance, despite zipping past Bharti in terms of number of subscribers, had
to contend with the second slot. This was because for most of the year, Bharti
billed on a larger subscriber base. Only in the last two to three months of the
fiscal 2003–04 did Reliance Infocomm have a large billable base.

Fiscal 2004–05 could be different though. If Reliance can maintain the lead
it has created over Bharti, in terms of number of subscribers, it can easily
surpass Bharti in revenue terms too. It´s too early to derive conclusions at
this stage though, as Bharti is quite capable of springing surprises…outsourcing
partnerships with tech giants Nokia, Ericsson, and IBM have already put new
weapons in its arms.

Reliance, however, added the maximum amount—Rs 1,888 crore—to the revenue
kitty among all operators. Clocking a high growth of 276 percent, the group´s
mobile services business grew from a relatively smaller revenue base of Rs 683
crore in fiscal 2002–03 to Rs 2,571 crore in 2003–04, of which Reliance
Infocomm alone accounted for more than 87 percent.

V&D estimates CyberMedia Research

Hutchison managed to retain the No. 2 position, with estimated revenues of Rs
2,701 crore, sending BSNL to the fourth slot in the process. It registered a
good growth of 56 percent over the previous year´s base of Rs 1,735 crore.

The top five companies/groups together accounted for 81 percent of the mobile
services revenues, while the top three made up 59 percent of the pie. Bharti´s
individual share was slightly above 21 percent while Reliance´s slice was
close to 20 percent.

It may be worth noting here that the fiscal was of historic significance to
Bharti, being its first full year of profit. All its four quarters showed
improvements quarter on quarter and all quarters were profitable in themselves.

Reliance Infocomm on the other hand, is yet to become profitable. In fact,
the company incurred a loss of the order of Rs 300 crore in the CDMA services
business.

Prepaid for Fast Forward…

Bharti used prepaid significantly as a tool for subscriber growth. However,
the downside to this approach was a lower ARPU, because of heavy churn rate in
the segment, among other factors. Bharti sought to increase loyalty among its
prepaid subscribers by way of improved brand association and greater number of
recharge-options. The company has 79 percent of its mobile customers on prepaid.

V&D estimates CyberMedia Research

Bharti´s market expansion initiatives for prepaid were well-crafted moves
and associated with catch phrases pronounced by its brand ambassadors. One such
highly effective initiative was ‘Aisee azadi aur kahan´, targeted at prepaid
customers.

In May 2004, Bharti introduced the Easy Re-Charge option for prepaid users.
Unlike other similar schemes, the feature has had a very positive impact on
recharge patterns. Bharti claims that already, nearly 40 percent of recharge
coming through this electronic scheme, rather than the paper coupons.

Hutchison was relatively less passionate about prepaid, even though it could
hardly ignore the segment for obvious competitive reasons. In May 2003, it
signed agreements with leading banks like SBI, HDFC Bank, UTI Bank, IDBI Bank,
and Citibank that would enable Hutch and Orange users to refill their prepaid
cards by simply sending an SMS or using refilling options at one of the banks´
ATMs. This initiative was termed ‘Direct Top-Up´, and gave prepaid
subscribers the flexibility to refill for any amount between Rs 315 and Rs
5,000, instead of using pre-denominated cards.

This process also allowed one to top up for others by just entering their
mobile numbers on the ATM screen. It saved users the inconvenience of physically
carrying the refill-slips when they are roaming or unable to go to a Hutch
outlet.

Idea Cellular too, a month later, announced a similar feature for its prepaid
subscribers. This allowed Idea ChitChat subscribers to keep the card valid for a
period of five months by paying a fee of Rs 50 per month. For this, they need to
recharge their cards with a minimum denomination of Rs 540.

A new prepaid user is informed of the new service via an SMS. If the
subscriber opts for first recharge using a Rs 540 or Rs 1,080 denomination
voucher, another SMS informing the subscriber of his card´s validity for five
months is sent. The validity is extended once the subscriber replies to the
message with a ‘YES´.

V&D estimates CyberMedia Research

As may be seen from the above examples, service providers tried to create
some differentiation in their otherwise similar-looking offerings.

It is understood that in not-too-distant future a very large percentage of
people will make recharges electronically, as it gives them the flexibility of
topping up flexi-amounts, depending on the need or affordability.

Looking Ahead

The fiscal under consideration saw a number of major regulatory challenges
being met and the regulatory regime in the country getting stabilized. This
removed the haze for all, and particularly improved the climate for
consolidations.

Chennai-based Aircel bought out 79.24 percent stake in RPG Cellular Services
for a consideration of more than Rs 210 crore. Later, in January 2004, Idea
signed a definitive share-purchase agreement for 100 percent acquisition of
Escotel Mobile Communications. The acquisition got completed in June 2004.

V&D estimates CyberMedia Research

In early April 2004, Bharti Tele-Ventures announced that it had reached an
agreement with the Shyam Group to acquire the latter´s 67.5 percent equity
stake in Hexacom India for a consideration of Rs 430 crore. Earlier, in December
2003, Bharti entered into an agreement with Telesystem (Mauritius), a subsidiary
of Telesystem International Wireless, Canada to buy its 27.5 percent equity
interest in Hexacom for a consideration of $22.5 million (approximately Rs 102
crore).

The latest rounds of negotiation involve none other than Aircel, which itself
acquired RPG Cellular just a few months ago. Idea Cellular is reportedly in an
advanced stage of talks with Aircel with an offer in the order of Rs 1,200 crore.

Hutch and Bharti are said to have approached Aircel´s promoters, Sterling
Infotech, with their respective offers. However, Hutchison has sprung a surprise
by closing the deal.

As the year progresses by, a few more companies may be drawn to the
negotiation table. In fact, one need not be surprised to find not more than
seven players in mobile arena by the time the fiscal 2004–05 draws to a close.
However, some big  players may not get the go-ahead as they could end up
having more than two-third market share, post a large acquisition.

The current round of consolidation, which has already underway, is going to
be pretty interesting to watch. Fiscal 2004–05 is poised to become the year of
consolidations.

Deepak Kumar

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Freedom to Grow

Brand: AirTel

Catch Phrase: Aisi Azadi Aur Kahan

Brand Ambassadors: Shahrukh Khan and Sachin Tendulkar

Footprint: Service already available in 15 out of 23 circles in India.
Licenses taken for another six circles and LoI issued for Assam circle

Leadership: Sunil Bharti Mittal has exhibited enough grit and
determination. Has the capability to face challenges head on, and emerge
stronger—against state-run behemoth BSNL and Ambani-promoted juggernaut
Reliance Infocomm. Bharti also has Kurt Hellstrom, the former president and
world chief executive of Ericsson on its board of directors.

Holding Company: Bharti Tele-Ventures, which has grown rapidly into an
integrated telecom services company. This has given AirTel the leverage to
engage in competitive pricing against the state-run BSNL, and survive. A ‘Crisil
governance and value creation (GVC) Level 1´ rating was assigned to Bharti
Tele-Ventures in February 2004. The rating reflects the strong strategic
direction and management oversight provided by Bharti´s board.

The Approach: Have the first mover advantage wherever and whenever
possible, and best, market it well

Promoters Holding: 46.6 percent

Foreign equity: Foreign companies—37.35 percent; FIIs—9.24 percent

Technology offerings: GSM, GPRS

Value-added Services: Voice reminder alerts, download content such as
Java games, polyphonic ringtones, wallpapers, videos over GPRS-compatible
handsets, MMS and mobile office on GPRS, enhanced phonebook and inbox service,
vernacular SMS, astrology, etc.

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Believe in the Value Game

Brand: Hutch

Catch Phrase: Wherever you go, our network fo