In his 2002 book, The Rule of Three, considered a classic in business circles, management guru Jagdish Sheth concluded that any market has room for only three real competitors. The fast food market in the US had McDonald’s, Burger King and Wendy’s; Exxon Mobil, Texaco and Chevron ruled the oil business and when it came to PCs, Dell, HP and Lenovo had carved the market up in almost equal shares. Today, Sunil Mittal, Chairman of India’s largest telecom firm, Bharti, would be desperately hoping for Sheth’s analysis to hold good, closer home in India.
The Indian telecom market, now the fastest growing in the world, has shown no signs of cooling down even during the slowdown. When the world was reeling under recession, India added close to 10-12 million new subscribers per month. The mobile teledensity stands at a mind boggling 40 per cent today. To put that in perspective, nearly a third of the country lives on less than $1 a day. India’s mobile phone user seems one of the most prized customers in the world today, with eight companies vying for his attention, and another four waiting in the wings to get buzzing.
Cracking the overcrowded market has become the toughest challenge for telecom firms in India.
“The canonical, textbook strategy of cracking the crowded market is to fight on pricing or create a completely new vertical, as Apple did with the iPhone. It not only entered the market late but also a virtually locked one with Nokia having a market share of close to 60 per cent. There’s plenty of scope to go the vertical route in India, but it has been largely a pricing-led play,” says B Narayanaswamy, president, Ipsos Indica, a market research and consultancy firm.
In the telecom sector that has witnessed the most pitched battles right from the process of acquiring licenses and spectrum needed to enhance services, to selling the products, the two most recent newcomers, Aircel and MTS, and a rejuvenated Tata DoCoMo have shaken up the market with a mix of disruptive pricing and attempts at creating new market niches. Tata DoCoMo, once a laggard, is now the fastest growing in India with more subscriber additions for three months running. The Japanese telecom giant DoCoMo, known for its cutting edge technology, took a 26 per cent stake in Tata Teleservices earlier this year, and the combine rolled out dual network services (both on GSM and CDMA) countrywide. The company introduced a pay-per-second pricing scheme instead of the pay-per-minute industry standard, a huge attraction for subscribers.
When MTS, the CDMA-based mobile services brand of the joint venture between India’s Shyam telecom and Russia’s Sistema, rolled out its services in Delhi last month, it became the region’s ninth operator. Now, with a penetration of close to 90 per cent, the capital is one of the most saturated urban markets in India. At the MTS launch news conference, a few weeks back, journalists had almost written off the relatively unknown Russian company, and there were derisive comments about Russian “mafia” money making its way into India. “From what we have seen of its strategy, MTS seems to be in the game of just selling Sim cards and not long term customer retention. It doesn’t make any sense to us,” says a senior executive of a rival firm commenting on MTS’ offer of a million minutes of talk time for Rs 499. As a result of such industry-wide price-offs, the average revenue per user (Arpu), currently is at Rs 200-levels, compared to Rs 3,000-levels in 1998.
The strain of the tariff war is beginning to show. Older GSM companies have seen a decline in subscriber addition numbers in September, suggesting loss of incremental market share. Bharti Airtel, Idea Cellular and Vodafone Essar, whose mobile subscriber numbers are available, have seen 10-11 per cent falls in monthly additions in September. With this level of churn, it is likely that these companies could lose their revenue-market shares as well. Macquarie Group, an international brokerage firm, for instance, downgraded the entire telecom sector to ‘underperform’. ‘This rapid re-basing in pricing by an incumbent will seriously affect and threaten smaller, regional and start-up operators, perhaps shortening the period before which industry consolidation takes place,’ the report said.
But MTS counters that price is not going to be the sole determinant of its success in India. “Firstly, we aren’t competing against all eight existing operators. Our competition will be the 5-6 new operators that have won licenses, and have started services a few months back. We have a substantial time lead. Second, we are not in direct competition with the incumbents because our strategy hinges on data and is not centred on voice alone. As for claims that it’s mafia money, Sistema has been listed on the NYSE for more than ten years. It’s open to as much scrutiny as any other US corporation. And a market cap of $20 billion and revenues of $10 billion would suggest that it’s a going concern,” says Cheenu Seshadri, MTS’ chief strategy officer.
With both Reliance Communications and Tata Tele opting for a mix of both GSM and CDMA based networks, MTS has bucked the trend and opted to remain the sole pure-play CDMA operator in India. But there’s more than just its obscure origins that MTS must overcome to egg customer switchovers. Indian consumers are frequent handset changers, and only GSM networks offer that mobility. On a CDMA platform, there are few compatible handsets. Nokia, the world’s largest handset maker stopped making CDMA devices long ago. “Reliance’s initial strategy to go in for volumes meant that consumers started to think of CDMA as a poor man’s alternative. We certainly won’t go that route. US’ biggest network Verizon uses CDMA and its sales plank is ‘America’s best network’,” says Seshadri.
“If we chose GSM, we’d have had little to differentiate ourselves from Airtel. So, instead of competing with the incumbent on its own turf, we will look to dominate the CDMA market,” says Vsevolod Rozanov, president and CEO, MTS India. The company plans to break even in under three years on the back of its data strategy. Though India has close to 500 million telecom subscribers, the number of wireless data or Internet service users is less than a fourth of that.
Aircel, the other newcomer, created a big publicity bang in April this year when it started operations in large parts of the country. A JV between Maxis Communications of Malaysia and the Reddy family, the promoters of Apollo Hospitals, Aircel initially operated only in the Tamil Nadu circle. Sponsorship of the IPL franchise Chennai Super Kings, the decision to use MS Dhoni as a brand ambassador, and an ad budget of Rs 200 crore helped the hitherto regional player gain national visibility. “Aircel’s strategy seems to have paid off. It is one of the fastest growing brands in India with a substantial share of higher value enterprise, or corporate customers,” says a telecom analyst.
“But ultimately, there’s only room for two or three players in the market, as the airline companies are discovering. There’s Etisalat, the extremely cash-rich Middle Eastern firm set to enter soon, and the aggressive China Mobile surely has an India strategy up its sleeve,” he adds. There may be limited room for newcomers, but there’s action aplenty in the Indian market.
Additional reporting by Alok Singh