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Regaining Lost Ground: Small operators devise strategies to overcome challenges

April 30, 2014
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After a particularly tough run, small operators like Sistema Shyam TeleServices Limited (SSTL), Uninor and Videocon Telecom spent the better part of 2013 consolidating their business in an effort to regain a foothold in the telecom sector. Their main focus was on realising revenues and pushing operational growth. While Uninor decided to focus on a few high-growth potential cirlces to remain profitable, SSTL and Videocon focused on the data, broadband and handset segments.

They seem to be on the right track. As a PricewaterhouseCoopers spokesperson points out, “While 70 per cent of the revenue market share is held by the largest few operators, there is still scope for smaller players to build a sustainable and profitable business by focusing on niche segments and geographies. Although there are risks, this strategy can be successful, and more so in India than in other markets based on the size and sheer variety of the market here. Focusing on low-end subscribers through low-cost service models and on superior data services are two examples of how such a focus can be executed.”

Given the size of the Indian market and the fact that a large part of the population is still unconnected, these operators are chalking out major network expansion and technology upgradation plans in order to tap this market opportunity.

A look at the operational and financial performance of these players and their strategies to recover lost ground…

Uninor

Customer retention and network expansion are at the top of Uninor’s agenda. Leveraging its position as a low-cost service provider, the operator has launched a slew of “sabse sasta” offerings for the mobile internet segment.

“We are moving out of data and into the internet. The internet is the medium through which customers use data and our approach will be to make that usage the cheapest among all operators,” says Morten Karlsen Sørby, chief executive officer (CEO), Uninor.

In a strategic shift, the company is moving away from volume-based internet offerings (MB and GB offerings) to service-based internet offerings (Facebook and WhatsApp). This will change the way in which the company offers internet services to its existing 33 million and future subscribers.

Uninor recently launched unlimited internet plans for subscribers using Facebook and WhatsApp on their mobile handsets. They can avail of unlimited access to these services at a fixed charge for a period ranging from an hour to a month.

The company’s efforts to add subscribers are paying off. According to data released by the Telecom Regulatory Authority of India (TRAI), Uninor’s market share stood at 3.8 per cent in January 2014. Its user base increased to 33.91 million in January 2014 from 32.78 million in December 2013. It also achieved earnings before interest, taxes, depreciation, and amortisation (EBITDA) break even in five of the six circles it operates in.

Uninor’s finances have been improving. For the quarter ended December 31, 2013, its performance indicators showed significant improvement. During this period, it reduced its operating loss to Rs 1.32 billion from Rs 4.44 billion in the corresponding quarter in 2012. Further, its ARPU, at Rs 106, marked an increase for the fifth quarter in a row.

With plans to tap 50 million new customers, Uninor is expanding its networks across the Uttar Pradesh (East and West), Bihar (including Jharkhand), Maharashtra and Goa, Andhra Pradesh and Gujarat circles. It is looking to deploy an additional 5,000 tower sites in these circles over the next five months, which will take its total tower base to 24,000 across these service areas.

In Gujarat, the company aims to increase its network coverage by 30 per cent by deploying over 1,000 sites over the next five months. This will help the operator accommodate an additional 5 million users on its network. Uninor also plans to expand its retail footprint in Gujarat by adding over 200 new points of sale. In sum, the operator will have a network of 4,100 telecom tower sites, 65,000 points of sale, 400 express stores and about 250 distributors in this circle. In Andhra Pradesh, it is looking to deploy 550 additional network sites over the next three months, which will take the total number of sites in the circle to 3,500.

Meanwhile, in the February 2014 spectrum auction, Uninor acquired additional airwaves in the 1800 MHz band in four of its six existing circles – Uttar Pradesh East, Uttar Pradesh West, Bihar and Jharkhand, and Andhra Pradesh – and in the new circle of Assam at an investment of Rs 8,447 million. The operator is now looking to enhance its voice and data capacity by 20-25 per cent in Uttar Pradesh (East and West), Bihar and Jharkhand, and Andhra Pradesh. In Assam, the company is aiming to serve a population of over 30 million. With this, Uninor’s footprint will now increase to seven circles.

Going forward, the company plans to focus on data through the internet segment and enhance its network. According to company officials, Uninor is looking to offer data services for various segments, including agriculture, education and financial services. It has reportedly launched a technology and infrastructure upgradation exercise to prepare its network for the expected surge in internet traffic. The capacity expansion project includes enhancement of packet core nodes, creation of dedicated resources for data services and enhancement of transmission and compression mechanisms. Through these and other measures, the company expects its network infrastructure to support a two-fold increase in internet traffic. In addition, the company has earmarked Rs 6 billion for network expansion.

SSTL

For SSTL, which offers telecom services under the MTS brand in India, operational consolidation started after it won back licences in eight circles in the spectrum auction held in March 2013. The operator had lost 21 of its 22 telecom licences under a February 2012 Supreme Court ruling.

In October 2013, SSTL converted its licences to unified telecom licences, which are valid for 20 years. Currently, the company offers CDMA-based mobile services in nine circles, among which Rajasthan, Karnataka and West Bengal (including Kolkata) are the biggest service areas. The operator has a very active data subscriber base. Around 34.5 per cent of its revenues are contributed by data services. In the quarter ended December 2013, non-voice revenues from both data and mobile value-added services (VAS) increased by 5.2 per cent over the previous quarter to reach Rs 1,030 million. The company’s data card subscriber base increased by 11 per cent to 1.34 million during this period.

As of January 2014, SSTL’s subscriber base stood at 9.45 million, accounting for a market share of 1.06 per cent. “The performance of MTS India improved on all major parameters across circles in the full year 2013. The company recorded its lowest full-year operating income before depreciation and amortisation (OIBDA) loss in the last four years. The consolidated OIBDA loss for the year stood at Rs 8,584 million and yearly OIBDA margins improved by 19 percentage points,” says Dmitry Shukov, CEO, SSTL.

With a focus on data, SSTL entered the 3G space in the latter half of 2013 with the launch of the 3GPLUS telecom network based on next-generation EVDO Rev. B Phase II technology. In this space, it plans to provide improved coverage and high speeds at low prices. The operator’s broadband service is priced 20 per cent lower than that of its competitors. For example, it is offering post-paid subscribers 10 GB of data for Rs 875 per month as compared to Rs 1,000 being charged by other service providers.

Another focus area for the company is its smartphone business. SSTL has launched several devices in the market. For example, in December 2013, it launched the dual-SIM (EVDO+GSM) Canvas Blaze smartphone, priced at Rs 10,999, in partnership with Micromax, which received a good market response.

The company’s financial performance has been improving. For the quarter ended December 31, 2013, SSTL reported a loss of Rs 4.45 billion, as compared to Rs 7.78 billion during the same period a year ago. Its net loss during the quarter reduced by 42.8 per cent on a year-on-year basis.

The closing down of operations in 13 of the 22 service areas impacted SSTL’s revenue for the quarter. Its revenue came down by about 23 per cent to Rs 2.99 billion during the quarter ended December 2013 from Rs 3.9 billion during the same period in the previous year. However, the blended mobile ARPU for the quarter under review increased by 2.8 per cent and stood at Rs 97 on account of an increase in minutes of usage. In 2013, SSTL incurred a capital expenditure of about $35 million.

Despite making significant progress, SSTL faces several challenges on the regulatory front. In particular, after winning 3.75 MHz spectrum in the 800 MHz band in eight telecom circles in the March 2013 auction, the company has been demanding 5 MHz of contiguous spectrum in the 800 MHz band to provide data services. Subsequently, after the Department of Telecommunications (DoT) decided to auction spectrum in the 800 MHz band, SSTL wrote to DoT stating that the government should fix the reserve price of CDMA spectrum at Rs 18.16 billion per MHz. This is 2 per cent lower than the base price set the previous auction in March 2013. The issue has not been resolved and consequently the company did not participate in the recent auction.

Going forward, SSTL plans to leverage its 3GPLUS telecom network and strengthen its smartphone portfolio. “The main objective is to turn OIBDA positive by the first quarter of 2015 and all our efforts and plans are aligned to this goal,” says Shukov.

Meanwhile, Shukov says that the company would need more spectrum in order to ensure long-term growth. “Everything depends on the pricing of spectrum. If the pricing is right, we would want to acquire more spectrum and may look to roll out long-term evolution (LTE) in the future. We are hopeful that, as in the case of 900 MHz and 1800 MHz spectrum, the adopted pricing formula for 800 MHz would encourage serious telecom operators to not only bid and acquire spectrum for their existing circles but also bid for new service areas.”

Videocon Telecom

It has been a tough journey for Videocon Telecom so far. The company was among the eight operators whose telecom licences were cancelled by the Supreme Court in 2012. The company lost its licences in 21 of the 22 circles. Nonetheless, it launched a turnaround strategy and in the November 2012 auction, won back spectrum in the 1800 MHz band for six circles to restart operations.

Since then, the company has been focusing on regaining a foothold in the sector, primarily by expanding its network. For example, it has partnered with Huawei in the Punjab circle to launch Wi-Fi services through hotspots. Also, the operator is reportedly in talks with another two companies, including one based in Israel, to set up Wi-Fi hotspots in other circles.

The company achieved a compound annual growth rate of 83 per cent in its subscriber base and 81 per cent in revenues in Punjab, Haryana, Gujarat and Madhya Pradesh between January and November 2013. As per TRAI data, the company had a subscriber base of 4.23 million and a market share of 0.47 per cent in January 2014. Meanwhile, for 2013-14, Videocon Telecom registered revenues of Rs 10 billion. This includes revenue from its four operational GSM mobility business circles, its long distance business and wireline business in Punjab.

Data is a key focus area for the company. The segment now accounts for over 50 per cent of the company’s monthly VAS revenues.

Continuing with its focus on the data segment, the company plans to launch 4G services in Gujarat. It is looking to conduct a 4G LTE-frequency division duplex service trial in the 1800 MHz band in the circle this year. The company is preparing a strategy for the service launch. It will reportedly invest Rs 4 billion in the infrastructure required for service roll-out.

Meanwhile, to retain and add subscribers, the operator has launched several handsets and value-added services. For example, it has launched the Videocon VT85C tablet, priced at Rs 8,999. The device runs on the Android 4.2.2 Jelly Bean operating system, and has a 7 inch screen and the dual-core Cortex A9 processor. Its other features include 4 GB ROM, 1 GB RAM, support for Wi-Fi, Bluetooth and 3G and dual cameras (a 5 megapixel rear camera and a front VGA camera).

Going forward, the company is looking to increase its revenue and customer market share across its circles. It currently has a customer market share of about 6 per cent in the eight-operator markets of Punjab and Haryana, and is targeting a market share of 12.5 per cent within a year. In Madhya Pradesh and Gujarat, which are 8- to 10-player markets, the company is targeting a customer market share of 12.5 per cent and 10 per cent respectively within the next two years. In addition, it is expecting two of its four operational circles to become EBITDA positive.

Overall, the operator expects to achieve a revenue of Rs 25 billion by March 2015. Following the launch of 4G services in Gujarat, the company hopes to increase its subscriber base in the circle to 4 million by March 2015. It also aims to increase its revenues from the Gujarat circle to Rs 3.5 billion in 2014-15 from Rs 1.5 billion in 2013-14.

Moreover, in 2014-15, Videocon Telecom is looking to launch its services in the Bihar and Uttar Pradesh (West and East) circles.

Analyst view

According to industry analysts, the biggest challenge before these players is competing with the established operators, especially in the data segment. Playing the low-cost card may not work as data tariffs have already been cut across the board and these may not be sustainable in the long term as margins are paper thin.

No doubt, it is an uphill road to recovery for the smaller operators. Still, they are pulling out all the stops and attempting to regain their foothold in the telecom space.

 
 
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