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A Fresh Start: New players review strategies to regain lost ground

August 21, 2013
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The new operators who had set up shop in India’s booming telecom market in 2009 suddenly found themselves in the midst of controversy when the Supreme Court revoked 122 permits in February 2012. This, coupled with policy uncertainty, led many new players to exit the market. A few like Uninor, Sistema Shyam TeleServices Limited (SSTL) and Videocon Mobile Services (VMS) decided to stay the course.

Their situation, however, remains somewhat tenuous in a hypercompetitive market marked by low ARPUs and dwindling margins. For these players, carving a niche in the market and being profitable are proving to be an uphill task.

In order to continue operations, the companies bought back spectrum in the auctions held in November 2012 and March 2013. As the reserve price set was high, spectrum acquisition was limited to a few circles. This was in contrast to the earlier scenario when the companies were granted licences as well as spectrum in all 22 circles for only Rs 16.58 billion.

To ease their financial burden, the government allowed Uninor and VMS to make one-third of their total spectrum payments upfront while SSTL could pay one-fourth. This amounted to Rs 13.25 billion for Uninor, Rs 7.33 billion for VMS and Rs 16.26 billion for SSTL. The remaining fee could be paid in 10 equal instalments following a three-year moratorium. Moreover, the government allowed the new players to adjust their spectrum payments with the entry fee paid in 2008.

With the acquisition of new licences, Uninor, VMS and SSTL have set ambitious targets. They are restructuring their business strategies to regain market share. It is natural that these players will be extremely competitive. Says Dr Mahesh Uppal, director, ComFirst, “Their operational costs have increased as the spectrum they acquired in the auctions was at a high price. They are now compelled to focus on select circles, which reduces their potential market size. Also, being late entrants into the industry, they are not able to offer differentiated services as compared to other operators.”

To overcome these challenges, the new operators are coming up with compelling marketing strategies to capture users. Telenor, for instance, has decided to increase the commissions of retailers. It has also hired auto-drivers and milkmen as sales agents. SSTL, on the other hand, is focusing on data services.

On the policy front, the new operators can look forward to a few positives. The cabinet has approved increase in the ceiling of foreign direct investment (FDI) in telecom companies to 100 per cent from the current 74 per cent. The policy will allow players like Telenor and Sistema to increase their stake in their joint ventures (JVs). They will also not be required to have domestic partners to operate in India.

Besides, the mergers and acquisitions (M&A) guidelines, which are expected to be released soon, will, make it much easier for the new players to either pick up stake in existing service providers in order to scale up operations or be acquired by the incumbents. This will pave the way for the much-needed consolidation in the market.

tele.net takes stock of the operational and financial performance of these new players and the market strategy they are adopting to recover lost ground…

Uninor

Prior to the 2G spectrum auction held in November 2012, Uninor’s Indian stakeholder, Unitech Wireless, sold its 32.75 per cent stake following a dispute with Norway-based JV partner Telenor. The move paved the way for Telenor to find a new Indian partner for the JV. Subsequently, Telenor partnered with Lakshdeep Investment and Finance to form a new JV, Telewings Communications.

In the auction, the company bought 5 MHz of spectrum in the 1800 MHz band in the Andhra Pradesh, Bihar, Gujarat, Maharashtra, Uttar Pradesh (East) and Uttar Pradesh (West) circles. As the company did not buy airwaves in seven other circles including Mumbai, Kolkata and West Bengal, operations were shut down as per the Supreme Court order that service providers exit circles for which they did not win spectrum in the auction.

Although the move affected subscribers and the workforce in these service areas, Uninor has taken customer-centric steps such as offering free roaming services to subscribers travelling to the Mumbai circle. It also compensated retailers and distributors in circles where it had shut down operations and relocated some of its employees from these circles to the six services area where operations will continue.

Subsequently, the company shifted its focus to these circles and pursued an aggressive marketing strategy with its Sabse Zyada campaign. It targeted the youth and low-income segments with innovative advertisements on hoardings and bus shelters across major cities in the Uttar Pradesh (West) circle on a pilot basis. According to Uninor, this initiative resulted in a 36 per cent growth in its recharge business in the circle and reduced subscriber churn. Following the success of this branding model, the company replicated it in five other circles.

In an effort to further its communication with customers, Uninor partnered with autorickshaw drivers, milkmen and newspaper vendors to sell SIM cards and recharge vouchers at customer premises in Pune, Maharashtra. Uninor is extending this model to other circles. The company has also launched its Jodi Zabardast campaign to increase customer awareness in Patna, and has adopted a novel concept of setting up mini shops – the Mee Store – at its retail outlets. Uninor has set up 41 such mini stores for facilitating faster activation of SIM cards.

Special tariff vouchers (STVs) offered by Uninor have been a big attraction for customers and have been driving overall sales. For instance, by subscribing to STV 108, which is offered under the Sabse Sasta plan, a customer can make unlimited calls to any local Uninor number in the Bihar circle for 30 days. Users can also opt for STV 55, which offers free local calls for 9,600 seconds on the home network.

Through these initiatives, Uninor has registered improved operational performance. The average minutes of usage on the network per month increased from 351 minutes for the quarter ended March 2012 to 401 minutes for the corresponding quarter in 2013. The ARPU increased from Rs 95.48 to Rs 96.33 during this period.

There have been improvements in the financial performance as well. The company reduced its operating loss from NOK 4.68 billion for the quarter ended March 2012 to NOK 194 million for the corresponding quarter in 2013. In addition, the company has achieved break even for its operations in the Gujarat, Uttar Pradesh (East) and Andhra Pradesh circles, and expects to turn profitable in other circles by end-2013. The company attributes this to its low-cost operations model coupled with the focus on providing basic services for the mass market. Under this model, Uninor monitors customers’ service usage to optimise operations. The company claims to have reduced its cost per minute by 25 per cent as compared to the incumbents, which has allowed it to sustain operations despite low voice tariffs.

Going forward, Uninor plans to invest Rs 155 billion in expanding and strengthening its network over the next five years. It has selected Alcatel-Lucent to provide operational support and business transformation services in Gujarat, Maharashtra and Andhra Pradesh. Further, it is likely to install 500 and 140 tower sites in the Gujarat and Andhra Pradesh circles respectively. In addition, it will set up 1,500 retail outlets in Andhra Pradesh, thereby increasing the total outlets to 346,716 across the six circles.

SSTL

Following the rejection of its curative petition regarding licence cancellation by the Supreme Court, SSTL was left with no option but to acquire spectrum in the March 2013 auction. The company bought 3.75 MHz of spectrum in the 800 MHz band in the Delhi, Kolkata, Gujarat, Karnataka, Tamil Nadu, Kerala, Uttar Pradesh (West) and West Bengal circles for Rs 36.39 billion. In addition, the operator holds 3.75 MHz of spectrum in the 800 MHz band in the Rajasthan circle. Like Uninor, SSTL shut down operations in 13 circles in compliance with the apex court’s mandate.

Exiting these circles has impacted the company’s financial performance. Its net losses increased from Rs 5.27 billion for the quarter ended March 2012 to Rs 6.43 billion in the corresponding quarter in 2013, while the consolidated revenues declined by 13.55 per cent from Rs 4.07 billion to Rs 3.52 billion.

However, with spectrum and licence issues addressed, SSTL is leaving no stone unturned to regain market share and achieve profitability. It has adopted a new business strategy based on data services and aims to expand its popular Mblaze broadband services across the country.  Focusing on data services makes commercial sense as these account for one-third of the operator’s revenues, which are likely to grow with the increase in smartphone and tablet adoption.

Further, SSTL is planning to launch a strong marketing campaign to promote its MTS brand. While TV advertisements will be used for promoting voice services, the internet and print mediums would be used for marketing data services. To promote its marketing plans, SSTL recently partnered with Creativeland Asia to develop a marketing and communications strategy for the MTS brand across nine circles. These initiatives will be part of the $1 billion investment earmarked by the company.

SSTL is also planning to offer 4G services by using 1.4 MHz of spectrum in the 800 MHz band. The company intends to invest $200 million in setting up long term evolution (LTE) networks over the next few years. The operator would benefit from offering 4G services using spectrum in the 800 MHz band. As it is targeting Tier II and Tier III markets, which have low network coverage, spectrum in the 800 MHz band would provide higher in-building penetration than the 2100 MHz and 2300 MHz bands, thereby improving service quality.

With these initiatives, SSTL expects to break even in five circles by end-2014. In other circles, it would turn profitable by early 2015. Meanwhile, the operator is exploring the option of acquiring stake in other companies. It was recently reported to be in discussions with Tata Teleservices Limited (TTSL) for merging their businesses. This deal could significantly improve SSTL’s chances of competing with the incumbents at the national level as TTSL holds adequate spectrum in both the 800 MHz and 1800 MHz bands across the country. "A merger with TTSL would allow SSTL to leverage TTSL's the former's market power presence and scale as well as its GSM services," says Kunal Bajaj, an independent telecom consultant.

VMS

Like other new entrants, VMS has launched a turnaround strategy to gain market share. In the November 2012 spectrum auction, the company bought 5 MHz of spectrum in the 1800 MHz band in the Haryana, Madhya Pradesh, Gujarat, Bihar, Uttar Pradesh (East) and Uttar Pradesh (West) circles. VMS also holds 4.4 MHz of spectrum in the 1800 MHz band in the Punjab circle.

Videocon intends to expand operations across the country in a phased manner. The company is adopting a cluster approach, under which it is buying spectrum in circles that form a cluster (such as the southern region).

On the services front, it is setting up 1,550 and 1,800 towers in the Madhya Pradesh and Gujarat circles respectively. In addition, the company is increasing its retail store base to 100 in the Gujarat circle. In order to incentivise retailers and distributors to sell more mobile connections, VMS has offered light emitting diode TV sets and vacation trips, for which the company has set aside Rs 100 million.

Besides these initiatives, Videocon has also taken short-term measures to increase its subscriber base and compete with the incumbents. For instance, it has done away with roaming charges for incoming calls across all its licensed circles. However, users will be charged Re 1 per minute and Rs 1.50 per minute for outgoing local and STD calls respectively. In addition, it has reduced 2G data tariffs by 90 per cent across the Punjab, Haryana, Gujarat and Madhya Pradesh circles – data customers are charged Re 0.01 per 10 kb for additional usage as compared to Re 0.10 per 10 kb previously.

In addition to providing basic voice services, Videocon is banking on 4G services. It has selected Nokia Siemens Networks to set up LTE frequency division duplex networks for offering services across its licensed circles except Punjab. The company intends to partly use spectrum in the 1800 MHz band for offering these services. It would buy additional airwaves based on the user response to its 4G offerings including videoconferencing, mobile TV and high definition TV.

According to Videocon, its ability to offer services at 15-20 per cent lower tariffs as compared to those offered by the incumbents would drive service adoption.

In sum, Videocon has established a large asset base in terms of 2G, 3G and 4G licences and spectrum in select circles. It may not be a dominant player in its service areas, but its large asset base could make it an attractive acquisition target, especially with the government likely to finalise the M&A norms in the near future.

The Road Ahead

Despite these efforts, new entrants would continue to face hurdles in the near future. Since they are largely catering to low-end users who are very price sensitive, their revenues are dependent on voice services.  Going forward, these companies would find it difficult to sustain operations by offering only voice services in select circles. They would need to buy additional spectrum and provide data services. To this end, Uninor and SSTL will have to acquire an existing operator or participate in the 700 MHz spectrum auction. Videocon, on the other hand, may sell its spectrum and exit the telecom business in the long term.

Clearly, the market can expect some significant moves in the coming months. It will be interesting to see whether the new players can pull off a successful rerun.

 
 
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