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Prudent Partnerships: Operator initiatives to reduce opex

June 26, 2013
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A hypercompetitive market characterised by low tariffs and declining profitability has compelled telecom service providers to reduce their opex. The high debt burden and an uncertain regulatory environment have been the other key factors leading operators to cut back on costs. Many operators are, therefore, forming partnerships and collaborating with infrastructure providers and other service providers to control costs. These include deals for sharing infrastructure such as towers and optic fibre cables, using common energy solutions and establishing intra-circle roaming arrangements.

This trend is in contrast to the earlier approach, wherein most operators maintained a separate network to provide services. This was primarily because their revenues were increasing rapidly with the high growth in the subscriber base and low operational costs. Another crucial factor was the limited competition in the market.

The need for sharing resources arose when market dynamics changed with the entry of several companies into the telecom space after 2007. These new players used tariff cuts as their main strategy to acquire subscribers, which triggered a tariff war that continued till 2011. However, the low-tariff model, huge subscriber acquisition costs and high spectrum costs started impacting the margins of telecom companies. Thus, it became imperative for the industry to share network equipment in order to reduce opex.

Apart from minimising operational costs, collaborations and alliances are being seen as a strategy to reduce time-to-market and improve service delivery. This has led to the emergence of several interesting trends in the telecom market.

Tying up with existing players

Partnering with existing companies helps new entrants reduce capex in network roll-outs, which constitutes a major portion of the overall investments. Also, sharing of existing networks enables new companies to earn relatively higher margins during the initial period of operations and avoid issues such as right-of-way and government approvals that are associated with setting up telecom infrastructure.

This strategy has been adopted by Reliance Jio Infocomm for launching 4G services. It has signed deals with Bharti Airtel and Reliance Communications (RCOM) to use their telecom infrastructure, which will expedite the roll-out of 4G services. It has signed a Rs 12 billion deal with RCOM to use the latter’s optical fibre network. In return, RCOM will have access to networks built by Reliance Jio Infocomm in the future. In a separate deal, Reliance Jio Infocomm will lease 45,000 towers from Reliance Infratel, the tower arm of RCOM, for Rs 120 billion over the next 15 years.

In order to ensure the availability of data content from international markets, Reliance Jio Infocomm has also collaborated with Bharti Airtel to use the latter’s i2i submarine cable network connecting Chennai in India to Tuas in Singapore. Moreover, the company has formed a consortium with UK-based Vodafone Plc, Telekom Malaysia Berhad, Omantel, UAE-based Etisalat and Sri Lanka’s Dialog Axiata to develop and maintain a 100G submarine cable network, the Bay of Bengal Gateway, which will span 8,000 km linking Malaysia and Oman, via India. Access to the two submarine networks will allow Reliance Jio Infocomm to connect to telecom networks across the world and provide high speed data connectivity to its customers.

Collaborating with handset manufacturers

During the 3G spectrum auctions in 2010, operators had made significant investments in acquiring airwaves in anticipation of mass adoption of data services in the country. However, even after two years, the uptake of 3G services remains modest at best. The primary reason for the slow adoption of these services was the limited availability of affordable smartphones.

In order to drive smartphone penetration and 3G service growth, operators are focusing on forming alliances with mobile handset manufacturers. The aim is to sell free data packages bundled with handsets, which will encourage first-time users to experience data-rich 3G services. Vodafone India and Airtel have tied up with global manufacturers such as Samsung, Apple and BlackBerry, among others. In addition, equated monthly instalment and cash back schemes are encouraging users to opt for high-end smartphones. Operators are also partnering with domestic manufacturers to launch entry-level smartphones to target price-sensitive customers, who constitute a significant portion of mobile users.

Such alliances have resulted in a win-win situation for operators and handset manufacturers as both mobile sales and data usage have witnessed a huge increase. In the case of Apple, sales have surged by as much as 300-400 per cent and the company now accounts for about 3 per cent share in the Indian industry. Meanwhile, data usage on operators’ networks grew by 92 per cent between December 2011 and December 2012, according to Nokia Siemens Networks’ Mbit Index.

Partnering with VAS providers

Although smartphone penetration has increased, limited availability of innovative value-added services has been an impediment in 3G service (VAS) growth, especially in rural areas. To overcome this challenge, operators are collaborating with content providers and financial institutions to cater to the specific demands of its customers. For instance, Idea Cellular, Airtel and Vodafone have partnered with Nokia for a variety of value-added services. While Airtel has collaborated with Nokia for offering its Ovi Life Tools service, which provides information on agriculture, education and entertainment to rural customers, Vodafone and Idea users will be able to access Nokia’s music store and applications.

Similarly, RCOM has tied up with Twitter to provide its customers free access to the micro-blogging website. RCOM is also offering its subscribers access to Facebook for a charge of Rs 16 per month while Airtel is providing three months of free access to the social networking site.

Operators have also partnered with banks to offer m-banking services, thereby facilitating financial inclusion. Tata Teleservices Limited (TTSL) and Vodafone have collaborated with ICICI Bank for offering remittance and money transfer (m-pesa) services respectively. Bharat Sanchar Nigam Limited (BSNL) has associated with the State Bank of India (SBI) to provide mobile payment services.

Liaising with the government

Operators have not been keen to provide broadband services in the rural areas due to the high cost of network roll-out and low ARPUs. Considering this, the government is implementing the National Optical Fibre Network project, which will connect 250,000 gram panchayats through optical fibre cables. Access to this infrastructure would be offered to all telecom service providers on a non-discriminatory basis, which, in turn, would facilitate provision of broadband services in rural areas. Operators are set to gain from this collaboration as the cost of offering services to rural customers will reduce substantially.

The way forward

Alliances and partnerships will play a crucial role in optimising costs and expanding the reach of telecom services in the country. That said, several alliances are at the planning stage and are likely to be announced soon. Airtel, for instance, is planning to form a joint venture, on the lines of Indus Towers, which would provide managed services and is expected to invite bids from operators in the near future. Service providers are also looking at sharing spectrum and other active infrastructure in order to ensure optimal use of the existing networks and drive down opex. Going forward, it will be interesting to see how operators balance these strategic alliances with their ability to retain a competitive edge in the market.

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