India’s telecom sector analysts have been speculating for some time on whether tariffs in the country could actually drop to nearly zero. It may sound absurd; nobody is in this business for charity. But the rates are so low that further cuts could make the cost of the paperwork for billing higher than the average bill. At their lowest, tariffs in India reached seven cents a minute. For some limited plans, it was even lower. The idea was to charge subscribers a higher rate for data transfer and offer voice calls almost as a freebie.
But the plan hasn’t quite worked. First of all, data transfer has been slow to take off. Secondly, the earlier price cutting was forced on the industry by increased competition. But some newcomers have retreated because of the highly publicized telecom scams in the country. For the established players, it is no longer necessary to reduce tariffs to protect their turf.
What has happened instead is that the service providers are hiking rates. For example, Tata DoCoMo — the Tata Group’s joint venture with NTT DoCoMo of Japan — started the price wars in the first place. Now the company has also taken the initiative in raising tariffs. In June, Tata DoCoMo hiked its rates on certain plans. But it was only when Bharti Airtel, the company with the largest subscriber base, increased its tariffs in the last week of July by 20% in six major regions that others sat up and took notice. Vodafone and Idea have followed suit.
But even as the service providers are trying to get their financial houses in order, the Telecom Regulatory Authority of India (TRAI) has asked them to offer reasons for hiking rates. The TRAI is investigating whether there is a cartel. Meanwhile, data from the Cellular Operators Association of India shows that the average revenue per user (ARPU) for the four top companies — Bharti Airtel, Vodafone, Idea and Aircel — has stabilized. ARPU fell only 0.83% in April to June as compared to the first quarter of 2011. In the first three months of the year, the fall was 3.4% over the previous quarter.
“The tariff hike by industry signals a reversal of unsustainably low tariffs in the past three years of hyper-competition,” noted a report by equity research house Enam Securities. “The [telecommunications companies] are finally seeing pricing rationale.”
The Indian tariff question has ramifications far beyond the country. Indian telecom companies are expanding globally, particularly to Africa where Bharti Airtel took over the Zain network for $10.7 billion in early 2010. Bharti has exported the Indian tariff model of fully priced handsets and low call rates there. On the other hand, telecom service providers in the West have subsidized handsets with much higher tariffs and lock-in periods.
Indian telecom companies have managed to keep costs under control by outsourcing practically everything from management of IT functions to networks and call center operations. They have also been sharing passive infrastructure like telecom towers and generators. More recently, Vodafone, Bharti and Idea have agreed to share 3G networks.
Can this model be imported to the developed countries? The answer to that question has significant implications because the market in the West is stagnant when compared to the developing world. The growth is in India and China, where the subscription numbers are spurring handset manufacturing and technology development. This is one area where the Indian model could take on the world.
Sunil Mani, planning commission chair in development economics at the Center for Development Studies in Trivandrum in South India, has just completed a paper on the mobile communications industry in India. “The Indian model is more feasible because low tariffs ensure larger access,” he told India Knowledge at Wharton. And handset prices are coming down, too. “Of course, the success of this model depends on the nature and extent of competition between service providers,” he continues. “The role of public policy should be to ensure continued competition while making it viable for the service provider.”
He also points to problems created by the Western model. “In the U.S., the low handset price is recouped through long-term subscribers,” he says. “Despite mobile number portability, these long-term contacts actually stifle effective competition between service providers.”