Scrambling for growth

Telcos are slashing tariff to shore up revenues from data services. But will it be enough to recover their huge investments in 3G licenses?

Published 12 years ago on Jul 21, 2012 12 minutes Read

Anirban Sen, a 25-year-old media professional, was happy when his telecom operator slashed 3G tariffs. Like many of his peers, Sen is a chronic Facebooker, downloads movies almost every other day, is hooked to YouTube videos, and checks emails almost every hour. “Doing this on 3G would be prohibitive, especially on roaming,” he says. “I tried it once and burnt my pocket after my bill hit more than Rs.6,000.”

Still, Sen continues to surf and check emails on his handset — the convenience is undeniable. Telecom operators know this and are betting on it heavily. They have turned to 3G as the next big avenue to shore up their revenues, but even after 18 months of rolling out the services, there’s little to cheer about. The recent spate of tariff cuts across companies, therefore, serves two purposes — to soothe fears of existing users like Sen, and to lure more subscribers.

On the face of it, the rate cuts seem like a windfall for 3G subscribers but, in fact, they are born out of necessity as the telecom sector struggles with the crippling costs of acquiring 3G licences. The 3G auction in 2010 earned the government a whopping Rs.67,719 crore — operators have been battling to fill that expensive spectrum with subscribers ever since.

It was Bharti Airtel that set the ball rolling with a 70% cut in 3G prices in May. Vodafone, Aircel, Idea, RCom and MTNL followed suit and within the next couple of weeks, the cost per 10 KB download slumped to 2 paise. This domino effect in prices is very much in line with the overall trend in the telecom sector — every time an operator (usually, market leader Airtel) cuts tariffs, others follow to prevent users from switching to a rival’s network, something that has become extremely easy with mobile number portability. 

The telcos, though, are insisting this is not a tariff war. “The slashing of prices is not going to cost us because the volumes and increase in usage will more than compensate for the price cut,” says Sashi Shankar, chief marketing officer, Idea Cellular. “This is just an intervention to get more subscribers.” There are an estimated 20 million active 3G subscribers in India (a minuscule 1.8% of the total number of subscribers).

Telecom Regulatory Authority of India (Trai) data for the December 2011 quarter shows telcos are currently earning an average Arpu (average revenue per user) of Rs.100 per subscriber per month. Only about 15% of this comes from non-voice revenues, of which 3G accounts for 1.5-3%, varying between operators. What Indian telcos are predicting — and hoping — will happen is that a significant amount of future revenues will come from 3G data services than voice. As 40% revenues in developed markets come from non-voice services, Indian industry expects these services to fetch at least 20% revenues in the next two or three years. 

Three cheers 

But what makes telcos so upbeat about 3G? First, mobile broadband is a new area that presents an opportunity for the telecom industry because penetration of broadband in India is just 1.2% (13.35 million in a country of 1.15 billion people). “We are certain it will go northward,” says Rajiv Rajgopal, CEO-broadband, Bharti Airtel. Moreover, on an increased base, the average use of 3G data is only going up.

“An average 3G user consumes more than three times the average GPRS user,” Rajgopal says of Airtel’s customers. If the average Idea Cellular 2G data user downloads 75Mb of data per month, his 3G counterpart downloads 330Mb. That’s at the high end of the spectrum. But other research bears out that 3G subscribers tend towards more data usage — a Nielsen Informate Mobile Insights study, released in October 2011, says data usage by 3G users is 44% more than that by 2G users.

Even those modest — and perhaps more realistic — numbers are good enough for analysts to become hopeful of the sector. Morgan Stanley analyst Vinay Jaisingh believes that 3G will lift industry revenues, with increasing contribution of data to total revenues. “We estimate 15% CAGR in data revenue between FY11 and FY14, which would lead to 13% industry revenue growth.” According to Trai, the industry’s revenues were Rs.1.3 lakh crore in FY12.

The advent of cheap smartphones and the crash in 3G prices will also help. A report by CyberMedia Research says that in 2011, nearly 18 million 3G-enabled phones were sold in India, a year-on-year growth of 153%; and the number is expected to cross 25 million in 2012. Naturally, telcos have started a marketing blitzkrieg to increase their subscriber base.

Massive push

The Indian telecom industry spends about Rs.1,000-1,200 crore annually on advertising and marketing — across print, television, radio and outdoor media. Neither companies nor agencies are willing to share break-up of spends, but everyone agrees that 3G campaigns currently account for a big chunk of that spend. For the most part, advertising for 3G has been under the umbrella campaign.

So Vodafone transformed its ZooZoos into Super ZooZoos that perform incredible tasks at superfast speeds — stopping a train from falling off a bridge like Superman — to connote faster, smarter and better services. Teaser ads preceded the campaign and the commercial was made available to fans of ZooZoos on Facebook and YouTube before hitting TV screens during the World Cup in February 2011.

For its part, Idea continued with brand ambassador Abhishek Bachchan and his trademark deadpan humour ads. The first 3G ad in July 2011 suggested that bored people have more babies, which made 3G the perfect birth control alternative: people would be too engrossed in their phones to have time for other ‘activities’. Another ad showed Bachchan in a triple role and the ‘What an Idea, Sirji’ tagline gave way to ‘What an Idea, 3G’.

The latest series shows Bachchan in heaven, promoting ‘heavenly’ 3G apps — a mosquito repellant, a lie detector, a car finder are among the apps he suggests will make even the afterlife exciting. Similarly, Airtel stuck to its ‘connecting people’ brand proposition in its 3G campaigns, showing a military official having a video conversation with his girlfriend from a faraway location. Another had a young boy helping his grandfather take revenge over an old rival after locating him on the mobile through Facebook.

All the campaigns got customers’ eyeballs and became much-forwarded viral campaigns, but the impact on subscriber numbers has been far more muted. But telcos are at it. Take for instance, RCom. Recently, the company entered into a two-year partnership with Google’s Android, bundling all Android handsets of companies like Samsung, LG, HTC and Sony Ericsson, with the Reliance network (existing Android users also have the choice of switching to Reliance).

There’s no payout in the partnership but RCom has committed to spend an undisclosed amount for marketing the Android platform — for instance, in RCom’s latest Rs.30-crore ‘blue bot’ campaign, the green Android bot is shown trying desperately to turn blue (RCom’s brand colour); it finally realises that only the Reliance 3G network can help it transform. “This was a way to break the clutter and tell Android users about the partnership,” says Jishnu Sen, CEO, Grey Worldwide, RCom’s agency for the last two years.

In this partnership, Reliance has the marketing rights for all Android apps. So, RCom has the exclusive right to advertise any new app launched by Android in India and the revenue for downloading is shared between Android and the app developer. RCom gets the entire revenue if an app is
developed by it. 

Under the deal, all Google-endorsed Android smartphones will come bundled with an RCom 3G connection as well as 1 GB of free downloads for the first six months. Customers don’t necessarily have to subscribe to the RCom connection, which means the outcome of the Android partnership is anybody’s guess. Some of the 200,000 first-time Android device buyers expected in the next couple of years could probably opt for the RCom free connection, but it’s very unlikely existing Android users will switch to an RCom network simply because of the Google tie-up.

“This partnership may help RCom boost its new subscriber base but will not affect the market share of other players majorly as they have the advantage of a large existing user base,” says Ashish Basil, partner, telecom practice, Ernst & Young. 

While it’s not clear how RCom will win customers because of the Google deal, what is apparent is how imperative it is for the company to get its 3G card right. “The incumbent GSM operators have a larger user base of early adopters and higher Arpus,” admits Sanjay Behl, group head — brand & marketing, RCom.

“We cannot limit ourselves to adopting a SIM replacement strategy”. RCom’s Arpu stood at Rs.99 in the March 2012 quarter as against Rs.189 for Airtel and Rs.180 for Vodafone. RCom currently has 3 million active 3G subscribers, which is just 5% of its total 153 million users. 

Idea Cellular, meanwhile, is focusing on selling Idea-branded smartphones (sourced from vendors) bundled with its 3G connections. It sells two models in the Rs.6,000-8,000 price range, but since its introduction in December 2011, only 100,000 handsets have been sold. Idea’s Shankar says it is pricing that will break the barrier in the uptake of 3G handsets. Recently, the company launched its third dual-SIM 3G smartphone priced at Rs.5,994, one of the cheapest 3G handset in the market. These phones come with pre-loaded applications and are bundled with benefits: Rs.2,300 worth free minutes and 6GB data, plus a free Idea TV subscription with over 100 live channels.

“Our target audience is our own subscriber base,” says Shankar. “This will have an impact on existing users as it encourages them to upgrade from 2G to 3G handsets.” He is also confident that the offer will appeal to Tier-2 users as they are more likely to experience the internet on their mobiles first. Shankar says that with the tariff cuts and the smartphone strategy, Idea hopes to triple its 3G user base by March 2013 — currently, its 2.7 million 3G subscribers make up only 3% of its total 110 million subscribers. In FY12, the company added 2 million users, compared with Airtel, which added 5 million 3G subscribers, taking its total to 8 million. Industry-wide, around 12 million new subscribers came on board in FY12.

Vodafone, meanwhile, is offering a segmented upgrade programme that suits its subscribers’ usage. So, if a Vodafone user switches from a feature phone to smartphone, his initial access to 3G data packs, push mail and other high-bandwidth-hungry services like video downloads has a lower tariff. The operator has also partnered with device makers such as Samsung, BlackBerry, Nokia and HTC to drive up usage. Ditto for Airtel, which has tied up with Samsung, Nokia and Sony Ericsson to offer free data packs with devices for an initial three or four months.

Rajgopal says the focus of Airtel’s marketing is ‘adoption of internet’ to fuel 3G growth. So the company is replicating its successful ‘chota recharge’ model in the data space, offering 3G packs for as low as Rs.10 for a day’s validity that allows a subscriber to use a 3G connection for 30 minutes. Idea has launched a similar package, too. Two factors have driven the introduction of small 3G packs — it encourages trials and helps customers who can’t afford a big-amount recharge. 

King content 

Romal Shetty, head, telecom practice at KPMG, believes that the strategies of bundling 3G services with a phone may work well in attracting customers, but only good content will keep them hooked. “You have great speed and a great network at great prices; but what content will you browse?” he asks. And that’s what ails the 3G ecosystem in India. Both telcos and handset makers are aware that content is where all the action lies and, therefore, they are now creating apps of their own: it takes anywhere from $10,000 to $50,000 to develop an app; gaming apps are much more expensive. Shetty points out that telcos have the great advantage of an extensive database of subscriber profiles, so they are in a much better position to design useful content. 

Every telco is doing its bit. RCom has been developing apps since its CDMA days — it has an ecosystem of in-house and freelance developers and offers about 4,000 apps to its users, ranging from social networking, weather updates and phone directory retrieval to cricket updates, Bollywood news and maps. Among the most popular is an app that integrates all email and social networking sites with a common log-in ID. The company claims that the app sees about 50,000 downloads a day (apps like Angry Birds see over 1 million downloads daily). 

Operators are also setting up their own app stores, which buy applications from developers and are made available to consumers for downloads. Airtel’s App Central has over 100,000 apps across various categories. Vodafone’s VStore offers over 10,000 free and paid apps on business education, games, lifestyle, personal finance, social networking, sports, and travel. Paid applications, which cost from Rs.5 to Rs.150, have seen 6 million downloads since their launch in November-end last year.

It’s not just operators — major handset makers such as Nokia, Apple and Samsung also have their own app stores. More than 20,000 items are now available for Nokia devices at the Nokia Store and the company has also introduced an operator billing system wherein, instead of making payment to Nokia’s store, consumers are charged by the operator in their monthly bill.

Yet, the variety of apps is still not as irresistible as they can be to allure customers. That’s because the revenue share between the app developer and the app store, typically 30:70 post taxes, is skewed in favour of the app store. Shetty says this imbalance in app revenues discourages the 250,000-strong app developer community in the country. He adds, “In the US, app developer earns as much 80% of the revenues.”

Operators, however, argue that most app-development entrepreneurs in India lack sound business models so they have to rely on their operators’ app stores for visibility and monetisation. In developed markets, third-party stores have apps that are compatible with multiple handsets, irrespective of the OEMs and operators. Users download apps directly and pay for them online, doing away with the need for operators as middlemen. There are no such stores in India yet. 

The real problem though is unlike the global trend, Indian consumers use more free than paid apps. So, while, Indian app developers talk of the freemium model, which offers basic app for free and charges for premium content, there still aren’t enough takers. App developers therefore continue to be at the mercy of operators and even receive their payments through operators after a lag. Till an evolved ecosystem of exciting apps comes up, companies can hope that low prices will keep users interested in 3G but, as RCom’s Behl says, “The trigger for growth in 3G is providing a better experience. Of course, price is a big factor in drawing people, but they will stay on the network only for a better experience.”

There’s another kind of experience that telcos are betting on. In 2005, the US market was deluged with discounted plans and tariff cuts to grab subscribers. However, as the market matured and smartphone penetration increased, the demand for data continued to move up. AT&T reported 200 times growth in data usage over its networks after the iPhone was introduced in 2007, and data made up 43% of Verizon’s Q12012 revenues of $18.3 billion (Verizon is the second-largest carrier in the US).

The company, much like rival AT&T, has invested in creating a high-speed network over which data travels. Now that customers are hooked to their data services, operators in the US are increasing rates and doing away with unlimited data plans. Indian operators are hoping for a similar scenario in the future. “While investments in terms of the level of effort (in non-voice business) are extremely high, the returns at this point of time are far lower than what we believe we should get,” Idea Cellular MD Himanshu Kapania said in a post-results concall in May 2012.

“We believe that demand for data is on the upward swing though, obviously, it is nowhere near what the developed world has seen. But there would be a time when the adoption of services will surprise all of us. So we have to wait for it.” But it could be a very long wait, before the exorbitant 3G investment pays off.