EXPANSION STRATEGY : Going for the Kill

Go Rural is the mantra of all service providers in the country. The next
growth wave is likely to come from rural India and operators are coming out with
various strategies to garner the maximum share of this pie. With the exception
of Virgin Mobile, every operator worth its salt is focusing on the rural
segment.

Recently, Communications and IT Minister, A Raja came up with the target of
200 mn rural telecom connections by 2012 at a penetration rate of 25%. As of
now, around 88 mn phones have been provided in rural areas with a tele-density
of around 11%. Experts believe that this target is on the conservative side and
India is likely to achieve it by 2011, judging by the way service providers are
making a beeline for the rural segment. "According to our predictions, we are
looking at a target of 730 mn wireless subscribers by 2012, so rural subscribers
should contribute at least 50% of it; and we feel a target of 200 mn rural
subscribers is achievable by 2011," says Madhusudan Gupta, senior research
analyst, Gartner.

The Big Players

Reliance and Airtel have a strong focus on the rural segment and are
investing heavily. Both have pan-India network presence, covering all 23 circles
in the country. Followed by BSNL and Vodafone, which have presence in 21 and 16
circles, respectively. Bharti Airtel is clearly the leader as far as the rural
subscriber base is concerned and the company would want to take full advantage
of its first-mover advantage. "We offer post-paid, pre-paid, roaming and VAS
through our extensive sales and distribution channel covering 9,23,472 outlets.
Currently, our network is present in 5,048 census towns and 3,64,287 non-census
towns and villages in India, thus covering approximately 74% of the country's
population," says a Bharti Airtel spokesperson.

"Almost 50% of our monthly net customer additions come from the rural
areas.Over 74% of our population is expected to go mobile over the next decade
and that in itself is both an opportunity and a challenge. In our quest to get a
disproportionate share of these new customer additions, our top priority is to
strengthen availability (of network, recharges) and operations so as to leverage
the most out of the first-mover advantage," the spokesperson added.

Game Plans

Following in the footsteps of Chinese service providers like China Mobile,
Airtel also plans to use text-based services to expand to the rural market, and
this is exemplified by the Bharti-IFFCO tie-up. It aims to better understand the
requirement of the rural sector, and is also looking at more such tie-ups in the
future. The company has also entered into a strategic tie-up with Indian Farmers
Fertilizer Cooperative (IFFCO) and formed a new JV called IFFCO Kisan Sanchar
Limited. This JV endeavors to provide market information to the farmers. The
company recently tied-up with IFFCO to address the rural segment to as part of
this tie-up, the subscriber will get a bundled deal with an Airtel mobile
connection. The farmer will also get access to a VAS platform that will
broadcast five free voice messages on mandi prices, farming techniques, weather
forecasts, dairy farming, animal husbandry, rural health initiatives and
fertilizer availability.

Bharti Airtel recently launched rechargeable coupons worth as little as Rs10,
Rs 20, etc. Inspiration for this has come from the 'satchet model' followed by
FMCG companies to address the rural market. Bharti Airtel has come out with a
unique retailer and distributor program to address the rural customer and his
specific requirements. It has approximately 8,00,000 points of sale and, going
forward, the share of the rural retail outlets is likely to substantially go up.
The company is looking at rural retailers to not only help in acquiring new
rural customers but also act as a local one-stop-shop for rural customers.

Mobile has gone rural and this restaurant in Dharamshala, Himachal Pradesh, keeps the hoarding but no SIM

Ace rival Reliance Communications is not far behind. "Our network provides
voice and data telephony services to over 4.5 lakh villages currently and we are
in the process of expanding to cover 6 lakh Indian villages. On the completion
of our ongoing expansion plans, we would be covering over 97% of the Indian
population," a Reliance Communications spokesperson said. The company is
believed to have earmarked a capex of $2.5 bn for our network expansion plans.
Reliance is planning to add 100 mn customers for India as a country and to meet
this target it is putting a pan-India 1,20,000 km fiber optic integrated
network.

Bharti Airtel might still have an advantage compared to Reliance
Communications, though it is present in fewer villages. The company is planning
to add another 1,00,000 villages by the end of the current year. Bharti's's
tie-up with IFFCO is going to play a key role in its rural customer acquisition
strategy.

BSNL is planning to provide an umbrella curve through their WLL network in
rural areas so that if there is requirement for connection in any particular
area, the company would be able to provide that through its wireline or wireless
network. However, the only drawback is that the company needs to roll out its
plans in a much faster manner.

The China Comparison

Compared to China, Indian service providers face a dual challenge in
addressing the rural market. One, the ARPU generated by a rural customer is far
lower than the ARPU generated by an urban customer. And two, this is compounded
by the fact that the cost of roll-out is far higher in the rural segment than in
the urban segment. This was the main reason why service providers were not keen
on addressing the rural market. It is only when the urban market began to show
signs of saturation that the service providers aggressively started looking at
the rural market.

Though India is the fastest growing telecom market in the APAC region, the
ARPUs are abysmally low. The ARPU generated from the rural segment is at least
25% to 30% lower than the ARPU produced in the urban part of the country.
However, analysts believe that since the volumes are high, it would still be a
profitable business for the service providers.

BSNL is known for making rural people talk. But this is what the office in Mc Leodganj Dharamshala looks like

According to a report by UK-based Portio Research, The Next Billion, around
67.2% of China's subscriber additions between 2007 and 2011 are expected to come
from the rural areas. Rural penetration is already at 15% and will go up to 56%
by 2011. In India, however, rural penetration is expected to go up to less than
half of that at 25%, it currently is at about 6%. The monthly ARPU levels in the
Chinese mobile market are expected to remain constant at $10 per month. This is
starkly different from the situation in India where the overall ARPU is expected
to decline to reach $6.6 by 2011.

According to the same report, the reason for this difference is the headstart.
China enjoys cultivating the rural market, with special tariff plans and
relevant data services such as SMS, news, weather information services, etc,
which are extremely popular even for rural subscribers. An increase in the
popularity of data services coupled with the 3G launch are likely to play a
major role in sustaining ARPUs in the Chinese market. The scenario is vastly
different in India, which is heavily dependent on voice services, especially in
rural regions. Falling call tariffs will result in a decline in ARPU from the
urban subscribers as well.

The Rural Pull

Gartner believes that the blended ARPU is likely to fall to around Rs 200 by
2012 and the rural ARPU is going to be far lower at Rs 120. As of now, ARPU is
between Rs 160 and Rs 200. Both service providers and analysts acknowledge that
there is pressure on margins but the rural segment is still going to be
profitable, and that is the reason why service providers are making a beeline
for this segment. Though the blended ARPU will see a decline, the drop in rural
areas will be offset by the growth of data services in the urban regions, where
the decrease in ARPU is expected to be much less.

A pre-paid connection is preferred over post-paid in India's rural segment
and the pre-paid ARPU is lower than the post-paid. It is for this reason that
bundling becomes an important business strategy for both handset manufacturers
and service providers. Most service providers have formed bundling alliances
with handset manufacturers to offer a winning proposition to the prospective
subscribers.

"In order to make telephony more affordable in the rural areas, we are
already offering highly affordable bundled packages for the benefit of our
subscribers in rural India," says a Reliance Communications' spokesperson.

The issue of low ARPU from the rural segment is likely to be addressed better
if operators are able for offer services, which have a direct bearing on rural
life. The importance of VAS solutions is going to be critical to the success of
the service providers in addressing the rural market. In fact, they are going to
be the key differentiating factors between the service providers.

"Having led affordability in the Indian telecom sector, we find that the
rural customer today has no less aspiration than his counterpoint in urban
areas. Our studies have shown that applications that enhance productivity are
greatly valued. For instance, crop updates/doctors on call etc. Their monthly
spend is therefore representative of their needs-voice like any customer and VAS
that help them derive more out of their mobile experience. We have seen that
service quality, innovation and new products are the real growth drivers in
mobile uptake. What we look at is the cost per minute and the revenue per minute
and the margin we make. Our strategy is to give an affordable value-proposition
for customers in rural areas that help them join the mainstream of mobile
telephony," says the Bharti spokesperson.

What will Drive ARPU?

As of now, VAS is contributing around 9-10% of ARPU for an operator and this
is likely to go up to 12-15% in the times to come, according to Gartner. "Data
will play a major role in increasing ARPU. Applications like mobile banking and
micro-finance are likely to be launched for the rural market. There are already
many pilots going on in the country, which demonstrate high level of
customization for the users. The data business has potential and operators will
be pushing this aggressively for an increase in their ARPU and revenue from the
rural segment," says Gupta.

This traditional mobile shop has become a Recharge Point for some

"A large section of our customers in rural areas use data services that drive
ARPUs higher. We are also in the process of developing rural applications on the
mobile platform, which would benefit our customers residing in such areas, at
the same time enhancig our revenue potential," says the Reliance spokesperson.
Though there is a lot of interest around 3G, analysts believe that 3G is not
likely to help in the acquisition of rural subscribers. "We believe that in 3G
the total cost of ownership is going to be around $200, which is way too high
for a rural customer. It is definitely unlikely to emerge as an acquisition tool
for the rural customer," he adds.

It remains to be seen who would finally rule the rural telecom market but the
consumer is likely to get the best deal as service providers come up with
strategies to have the maximum number of rural subscribers.

Gagandeep Kaur

gagandeepk@cybermedia.co.in