PCOs–Tried and Tested

Katwaria Sarai is one of the numerous urbanized villages
within Delhi that are favorite staying destinations for qualified young
immigrants from all over the country. Engineering graduates, MCAs, and even MBAs
from the eastern states of Bihar, Bengal and Orissa form the majority (almost 70
percent) of the population in this originally Jat inhabited village, because of
its proximity to Delhi’s major educational institutions like IIT and JNU, easy
availability of affordable one-room flats, and easy availability of food and
other essential items.

Let’s get down to business–the business of PCOs to be
precise. The village, not more than three-fourths of a square kilometer in area
and housing a maximum of 150 buildings, has about 50 odd PCOs. Still, making
long-distance calls from one of these PCOs after 8 pm is never a smooth affair.
You have to wait a good deal for your turn to arrive. There is a long queue–almost
always.

PCOs are doing good business indeed, going by the above
instance. Bharat Sanchar Nigam Ltd (BSNL), the sole fixed service provider in a
major part of India has to say. In a submission to the telecom regulator TRAI on
the issue of allowing cellular PCOs, the company (then called DTS) pointed out
that 30 percent of its long-distance revenues was derived from STD-PCO
operations and if cellular operators were allowed to provide a parallel service
of this nature, it would lead to an annual loss of more than Rs 1,000 crore in
revenues for the government operator.

In fact, according to a visiting telecom expert, the two most
important factors that made the spread of telecom facilities possible in India
during the Sam Pitroda era were the development of indigenous low-cost switching
by C-DOT and the adoption of an expansion model that made the local entrepreneur
the driver of change. And the driver of change he referred to was none other
than the local PCO operator.

Success Factors

While most developed markets have taken the cardphone route,
India has seen huge success with PCOs. The reasons are many, some of which are:

• PCOs follow the pay-as-you talk model. So the customer
  does not have to commit any money by prepaying

• Cardphones, mostly unmanned, have an acceptability
  problem with Indian users, who are still not very comfortable with unattended
  machines

• From the service provider’s point of view,
  investments in cardphones is done by the telecom service, whereas in PCOs the
  investment is made by the local PCO operator

• For many PCO operators, the real estate and other
  costs are shared with some other business that they do. So the investment made
  is only on PCO equipment, which is not too high. Also, PCO operators have opened
  Internet cafes, mobile phone shops, etc.

Mass-telephony Model

The potential for the PCO business has been huge. Moreover,
it has played an important role in boosting telephony usage. According to
experts, the PCO policy should ensure that there should be one PCO for every 500
persons on an average. The exact number, however, will depend on the basis of
the geographical area under consideration.

Till July 2001, BSNL alone accounted for a total of 760,241
local, STD, and highway PCOs, as against a figure of 590,601 in November 1999.
The bulk of the PCO concentration has been in Andhra Pradesh, Gujarat,
Karnataka, Maharashtra, Punjab, Tamil Nadu, and the four metros. While in
1999-00, about 10 telecom units had over 25,000 PCOs, today over 13 units have
crossed that mark. Another 10 units are yet to cross that number. While Mumbai
leads the tally with about 60,000 PCOs, Maharashtra, Andhra Pradesh, and Gujarat
have a count of 51,500, 48,000 and 41,600, respectively. Other potential telecom
units are in Madhya Pradesh, UP (East and West), Rajasthan, Bihar, and
Northeast.

In terms of revenue generation, it has been observed that
PCOs normally take around 50 to 75 calls per day on an average, and around 100
calls in some busy areas. And the average collection is Rs 500 per day, which
can range between Rs 750-1,000 in a busy area. BSNL offers, as service charge, a
commission of 20 percent to STD-PCOs in urban areas, 22 percent wherever there
are cellular PCOs, and 25 percent to franchisees in rural areas, on gross
turnover. For long-distance intra-circle calls between 100 to 200 km,
franchisees can collect a service charge of up to Rs 2 per call in urban areas
and Rs 1 in rural areas. On inter-circle STDs too, PCOs can collect Rs 2 per
call. But these service charges do not apply to local calls and inter-SDCA
calls, which are calculated on 180-second per unit basis.

Success Factors

Perhaps the most important reason behind the success of PCOs
is that Indians are used to the cash-and-carry method and the card culture is
yet to become prevalent. Hence, there is a PCO market in India and not the
pay-phone market like elsewhere. Moreover, Indians are used to an incremental
form of billing as against the decremental form of billing popular in the West.
In incremental billing, when one makes a call in the STD booth, he or she can
see how much money is there and then pay it. Decremental billing is a prepaid
kind of thing where the money in the card decreases as one makes a call.

Also, Indian callers are more comfortable with manned booths.

Another important factor that needs to be taken into account
is that India has a large number of indigenous manufacturers of PCO instruments.
It is believed that there are more than 120 companies manufacturing such
instruments. However, only 20 of them are well known. This is mainly because
most of these manufacturers may be restricted to one or two areas only. In fact,
this is the only industry segment where there are hardly any MNC manufacturers
or assemblers. It is important to note that most of these products are meant to
be manned by people who are not technologically very literate.

Over the years, equipment manufacturers have built a strong
dealer network. Dealers enjoy good margins–ranging between 10 to 15 percent.
Prices vary between Rs 10,000 and Rs 15,000, depending on the features of the
instrument. The explanation given in support of the pricing is that users of
instruments not being technically qualified people and if there is any problem
with the instrument or there is a revision of tariffs, the necessary adjustments
have to be done immediately. However, the prices will have to decline as PCO
owners are now planning for a total investment of Rs 20,000 to Rs 25,000.

Benefits over Pay-phones

As explained above, PCOs have been a tried-and-tested model,
and it makes good business sense for P-FSPs to emulate it. Being a
low-investment proposition, it also provides a good opportunity for the
unemployed. The PCO installed at the existing premises–shop or residence–of
the franchisee serves like a value-add.

When deciding upon the kind of equipment, cost again plays
the key role. While a regular PCO machine costs between Rs 12,000 and Rs 15,000,
a cardphone is priced between Rs 35,000 and Rs 65,000. In addition, an MDF unit
is required at the exchange, which costs between Rs 10,000 and Rs 20,000.
Besides, one needs network-maintenance software and refilling cards for
operating a cardphone.

PCOs also offer easier rollouts, and customer-friendliness or
familiarity is certainly not an issue. The model is estimated to fetch about Rs
5,000 per month per line at a good location and would mean no high investment in
terminal equipment for operators. Yes there are chances of misrule on the
franchisee operator which can be controlled by adding value with business
logistics.

The basic business model revolves round two type of PCOs–local
and long-distance. A local PCO is within the SDCA or 200-km range, while the
long-distance PCO offers nationwide and international calling. While coin-phone
can be a good solution for the local PCO, the existing call-billing machine is
certainly the best solution for long-distance PCOs. The call control mechanism
can be a switch.

It may be recalled that Tata Teleservices, the basic services
operator in Andhra Pradesh, initially started with card phones, but later
shifted to the PCO model. It is learnt that the company invested on around 3,000
card phones which cost it close to Rs 5 crore for a year on maintenance, staff
training, network etc. On the other hand, Bharti in MP, promoted the PCO model
and expanded around 5,000 PCO lines with negligible investment. Tata, after
taking stock of the return on investment on the 3,000 card phones, stopped
expansion and is now with the PCO model with some customization and branding. It’s
offering the wireless fixed terminal sourced from local manufacturers with its
own specifications, colors, and brand name and giving the wireless set, PCO
machine and phone from its end to the franchisee with a deposit. It’s
providing a commission of 8-10 percent to the franchisee. Meanwhile, Shyam and
Bharti specify 10-12 manufacturers and the franchisee can buy from any of these
manufacturers. In MP, Bharti is providing five percent commission to franchisees
over that being offered by BSNL. And Shyam in Rajasthan offers commission at par
with BSNL.

There are some exceptions though, depending on the location.
For example, Hughes and MTNL have been successful with coin phones in Mumbai,
mainly because users there are used to coin-phones.

Experts are of the view that operators also need to look at
the tight marketing conditions, falling long-distance revenues in view of
increasing competition and technological developments like VoIP, before they
invest on card technologies. It should also be borne in mind that we are
operating in a multilingual, multi-cultural environment, with different calling
habits. The existing manned PCO model is estimated to fetch about Rs 5,000 per
month per line at a good location, without a high investment in terminal
equipment.

If developed as a strong retail network, PCOs can not just
generate revenue, but can also act as sales and marketing channels for the
private fixed service providers. And with a mammoth BSNL already in control,
private operators cannot afford to waste time in testing the user’s patience
in card phone and similar fancy technologies. At least not in the initial few
years.

Ch. Srinivas Rao