Special: The Telecom Jungle

By Prajjal Saha and Neha Kalra, afaqs!, New Delhi, December 01, 2009

Section: News Category: Marketing

The new telecom companies marching into an overcrowded market face a tough mission: finding the consumer at a profit...

Red-hot. That probably best describes the state of the telecom business in India. And it is visibly overwhelming too. Advertisements selling telecom offerings have sprung up in the unlikeliest of places. With telecom service providers clocking up Rs 1,50,000-crore in business - it is double the size of the FMCG industry - the excitement is palpable.

There are 12 players, slugging it out (both nationally and locally). And four more are waiting in the wings. What are they betting on? afaqs! tries to make sense of the clamour in the telecom jungle.



Good news – and bad

The growth of telecom has come mainly on the back of mobile telephony subscriptions, which are going up by around 10 per cent every quarter. In the first half of 2009-10, mobile phone operators (GSM and CDMA) added 80 million subscribers, taking the subscribers' base to 470 million.

The sobering fact is that the monthly ARPU (average revenue per user) for a telecom operator is declining. In the GSM category, ARPU went down by 10 per cent from Rs 205 in January-March 2009 to Rs 185 in April-June 2009, while in CDMA - where it was already low – ARPU declined by 7.2 per cent to Rs 92 in the same period. The industry has taken note of this. In fact, Sanjeev Agha, managing director, Idea Cellular went on record warning the industry of a sectoral bubble. But threat of bursting bubbles is not holding back those in the fray.

Of the 12 players in the field, two (Aircel and MTS) have gone national, two have launched or expanded their GSM services (Reliance Communication and Tata Teleservices), while a new bunch of four (Datacom from Videocon, UniNor – a JV between Unitech and Telenor, Etilsalat-Swan Telecom and the S Tel-Batelco JV) are readying themselves for the coming battle.

Aggressive advertising is the name of the game. Airtel, the biggest spender in this category, invests around Rs 950 crore (according to Spatial Access) in advertising, while Vodafone spends around Rs 750 crore. Even Idea - a comparatively smaller player - has a budget of Rs 400 crore. This means that even if the newer brands (seven, including the four who are set to jump in) spend around Rs 400 crore each, the category is expected to contribute around Rs 3,000 crore more. Besides, the existing players should increase their advertising and media budget by at least 10 per cent by next year to Rs 4,500-odd crore. As a result, advertising and media spend by telecom could touch Rs 7,500 crore, a lion's share of the total media and advertising spends in India.

What are they talking about?

When Aircel went national earlier this year, it launched a campaign highlighting advanced value added services – and was clearly aimed at high-end users. Surprisingly so, because mobile penetration was already very high in this segment, and new consumers were expected to come from the bottom of the pyramid.

Interestingly, the other brands which were launched - or expanded - subsequently also adopted a similar route, be it GSM service provider Tata Docomo or CDMA operator, MTS. The newer players refrained from talking about price in the initial phase of their communication beause they did not want to alienate any consumer segment. And speaking directly to the low-end would have alienated the higher-end consumers. Also, the brands believed that talking to the top-end would pull in consumers at the bottom of the pyramid. In fact, this strategy works especially well for the telecom sector, where a single brand caters to two extreme ends of the consumer base.

What these new players were also banking on was that the attrition rate in India is one of the highest in the world - around 30 per cent of users change operators every year. This is because India is predominately a pre-paid market (around 80-90 per cent), where the subscriber is may well change his service provider, every time he goes to local outlet to recharge his subscription.

Moreover, the trend of multiple SIM cards was fast catching up, thanks to the virtually zero cost of acquiring a new SIM. The consumer today prefers to use different SIM cards depending on his need. For instance, if a particular service provider offers cheap STD call rates at night, a subscriber might buy this service just for this. Even high-end consumers use multiple SIM cards or services, lured by the attractiveness of the scheme. For instance, a high-end consumer may use Airtel or Vodafone post paid service for voice, but for mobile internet connection, he might opt for a CDMA operator.





Value for money

MTS, the brand launched by Russian company Sistema and Shyam Telelinks, hopes to get 70 per cent of its revenue from voice calls. The rest will come from data and other value-added services (VAS). This is why, in its communication, it put the consumer at the centre with multiple hands representing an urban-centric consumer who takes up multi-tasking and has multiple needs.

Telecom players are desperately promoting VAS (it includes ringtones, caller tunes and SMS, among other things), which, in India, still don't contribute more than 15 per cent to a telecom operator's revenue. In comparison, China's mobile companies earn, on an average, about 29 per cent of their revenues from value-added services. In the Philippines, where women use Blackberry phones as chatting devices, that figure is as high as 40 per cent.

The present communication strategy of telecom players is also in anticipation of the future market conditions that might develop after number portability (the deadline for implementation of the first phase is December 31) is in place (the subscriber can change his service provider without surrendering his number). Many newer players expect the churn-out amongst post-paid customers to go up substantially. Besides, the introduction of 3G will open up new opportunities and services.



Blink and miss

MTS plans to set up 2,000 branded outlets across five circles so that the consumer can 'experience' the brand. Besides, the company is also banking on multi-brand shops in various localities keeping in mind the fact that if a customer has to travel a kilometre extra every month to get his cash card recharged, he might even change the service. Newer brands need a distribution network that matches any FMCG brand's.

That becomes imperative because it is almost impossible for a consumer to differentiate between operators, even in terms of services, packages and tariff plans. Brand imagery, brand perception and brand familiarity become the deciding factor. Admits Pradeep Shrivastava, CMO, Idea Cellular, "Though Idea is a familiar brand across the country, it still faced a huge challenge in the newer circles that it entered. So you can imagine the fate of new brands."

The newer players are doing everything to get maximum visibility through outdoors or innovative marketing. For instance, MTS, on the day of its launch in the capital, paid for the free passage of vehicles at the DND Toll Gate, Noida ensuring word of mouth publicity.

Meanwhile, the existing players are going strong on the message of reliability and trust. Theme-based advertising has become the order of the day, whether it is Airtel's conversation about its network of 110 million people or about Tata Indicom's push through 'Suno Dil Ki Awaaz'. Tata Teleservices (it offers both GSM and CDMA services) wants to position Tata Docomo as a 'young' and 'value-to-the-customer' brand, while Tata Teleservices caters to the growing data demand (CDMA players claim that their services are more suitable for data).

Talking about the peculiarity of advertising in this sector, K V Sridhar, national creative director, Leo Burnett, says, "When everyone talks about FMCG-isation of the telecom category in terms of the advertising patterns of the categories, the only similarity is that both FMCG and telecom have a wide range of products and services to offer under the main brand. But on the advertising front, they are the opposite! Telecom ads are more intuition-based, reacting and responding swiftly to market changes - in as little as a week. FMCG advertising is more of strategy-based which takes months to take shape after full-fledged research."

According to marketing heads of telecom service providers, television is the favourite medium (more than 50 per cent of the spend goes to TV) for telecom brands, especially those that have gone national. Brands that are strong in the southern or eastern region rely heavily on regional television. However, what's interesting is that a large chunk of the media spends of new players - almost 25 per cent of their media spending budget or Rs 700 crore - will go to OOH. This could be a crucial boost for the outdoor medium.

Digital media too finds a place in the mix as does in-store brand messaging, when it comes to converting a prospective consumer at the point-of-sale. In India, nothing sells like cricket. Telecom players seem to have picked up the lesson well enough, and very much in time. Purchasing properties and sponsorship rights for various events are on the cards for all top companies.



Ignore price at your peril

Though all new players began with communicating their technological advancements and enhanced services, talking about the price war or a more attractive package could not be avoided for long because the new consumers will have to come from semi-urban and rural areas. Some estimates declare that every second new consumer will come from this segment.

Price will be a plank telecom operators have to use for some time. "Tariffs will go down further. It's there in the local calls and STD calls as of now. You would probably see it further in ISD as well. That will keep happening till someone is able to differentiate in terms of their service offering," points out Romal Shetty, head of telecom, KPMG.

Tata Docomo, a GSM service provider, launched in April this year, introduced a per-second tariff plan instead of per-minute, though it did not communicate the same in the initial phase. It wasn't an untried tactic, but per-second pricing hadn't caught on in the past. Says Gurinder Singh Sandhu, head - marketing, Tata Docomo, "We refrained from communicating the scheme initially because we wanted the consumer to realise it himself." Soon others - old and new - were forced to adopt it, though it meant an estimated 20 per cent drop in voice revenue.

Pay-per-second became the biggest thing to hit the market after the lifetime validity plan for Rs 999 was introduced in 2005. What the industry pundits say is that the scheme became popular because of its transparency.

After Tata Docomo, Aircel launched the plan in Kolkata, while MTS followed suit in Delhi. State-owned BSNL also went for the per-second plan in Karnataka, while Aircel added Orissa. Idea, Vodafone, Reliance and Airtel then joined the gang. Others like Reliance pushed the price war further with one single tariff plan of 1 paisa per second irrespective of the location of the customer or the network he is talking to. Tata Docomo also introduced a pay-per-word SMS service.

Many industry practitioners believe that the players are scraping the bottom of the barrel for low-pricing options, which are not sustainable in the long run. They feel that supply is outstripping the demand and it is hurting business. With profit and loss figures of telecom service providers for 2008-09 showing revenues slowing down, what will happen when more competition enters?

"In the near future, some companies will have to merge or get acquired. The Indian telecom market cannot accommodate more than seven players," predicts Shetty of KPMG.

The older players in mobile telephony like to believe that the consumer does not want cheaper price. Instead, she wants uninterrupted, enhanced services for a competitive and reasonable price. For instance, a consumer in the metros wants no call drops even if she is in a basement or a lift.

Matching tariff plans and acquiring new customers looks like an achievable objective. But the biggest challenge for the new kids on the block will be to have their network in place, especially in rural and semi-urban areas. Providing seamless conversation without call drops in rural areas could cost several hundred crores and for some circles this could even go over Rs 1,000 crore, depending on the geographical spread. It includes spectrum cost, cost of setting up a customer service channel, telecom and IT infrastructure. Besides, setting up the network takes time.

Many believe that 12 to 14 players cannot exist - and sustain themselves - in one circle (in advanced markets, there are three or four). Despite all the questions and posers, telecom companies are living in interesting times.





This story is based on interviews with Gurinder Singh Sandhu, head-marketing, Tata Docomo, Kumar Ramanathan, CMO, Vodafone Essar, Leonid (Lenny) Musatov, CMO, MTS: Lloyd Mathias, CMO, Tata Teleservices, Pradeep Shrivastava, CMO, Idea Cellular, Sanjay Behl, group head - brand and marketing, Reliance Communications and Shireesh Joshi, director - marketing, Airtel.