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Price Surprise: Major operators hike tariffs after continuous decline

August 26, 2011
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At Re 0.01 per second, base tariffs for voice calls in India are the lowest in the world. However, for operators, the low-cost tariff model has become unsustainable as margins have been hit hard. The contribution of voice revenues to overall operator revenues has been continuously declining over the past year. Therefore, for some time now, industry analysts have been predicting a tariff increase.

In 2009, the major drop in tariffs was triggered by TATA DOCOMO. This trend continued till mid-2010, before levelling off. By the time the financial results for the quarter ended March 2011 were announced, operators were already considering increasing their tariffs. TATA DOCOMO, for instance, first doubled its net tariffs for GSM services in Tamil Nadu (from Re 0.01 per six seconds to per three seconds), followed by other circles. The operator also doubled STD call rates for new subscribers after a year of connection and increased local and national SMS charges by 67 per cent and 25 per cent respectively.

On July 22, 2011, market leader Bharti airtel took a bold and significant step by increasing tariffs by 20 per cent for prepaid subscribers in the Delhi, Andhra Pradesh, Kerala, Madhya Pradesh and Gujarat circles and later extended this to 13 more circles.

It hiked tariffs for two plans – Advantage and Freedom – for calls and SMSs within the airtel network. Users of the Advantage plan now pay Re 0.60 per minute instead of Re 0.50 per minute for local and STD calls and Re 0.90 per minute for calls to landlines. In addition, subscribers are charged Re 1 and Rs 1.50 per local and national SMS respectively. Existing users are required to pay the new rates after the validity of their existing vouchers expires. Subscribers of the Freedom plan are now charged Re 0.12 per second for local and STD calls as compared to Re 0.01 per second earlier.

That the market has welcomed the tariff hike has been evident from the rise in telecom stocks, which had been languishing for months in the hope that margins would improve. As compared to the April-June 2011 quarter, when the scrip of Bharti airtel and Idea Cellular increased by 11 per cent and 18 per cent respectively, and that of Reliance Communications (RCOM) plunged by 14 per cent, the news of the tariff hike pushed up telecom stocks 5-15 per cent in a single day.

Following this, Idea Cellular and Vodafone Essar also increased tariffs for their prepaid plans in select circles while Bharti airtel applied its new tariffs to other circles.

Idea increased its tariff from Re 0.01 per second to Re 0.012 per second for all calls to other networks in the Delhi service area under the per second billing scheme, before revising call and SMS rates for circles like Gujarat, Madhya Pradesh and Maharashtra.

Vodafone Essar, on the other hand, increased tariffs in 12 circles from Re 0.01 per second to Re 0.12-Re 0.15 per second.

Key reasons for the move

The entry of new players and the resulting tariff war as well as the high cost of 3G spectrum (Bharti airtel and RCOM spent Rs 122.95 billion and Rs 85.83 billion respectively) had a major impact on operator margins and finances.

Bharti airtel also spent Rs 33.14 billion on broadband wireless access spectrum and $10.7 billion to acquire Zain’s African operations. Currently, the company’s debt is estimated to be around Rs 600 billion.

Moreover, cut-throat competition from new players forced the major operators to reduce tariffs, which resulted in a drop in the average revenue per minute (ARPM). According to analysts, the ARPM has dropped from Re 0.53 in the first quarter of 2010 to around Re 0.43 currently. At an operating cost of Re 0.25 per minute, operators had no choice but to increase tariffs.

With the market leader taking a strong stance to reverse the tariff trend, peers have been quick to follow suit. For the big operators, India is no longer just a new market where subscriber acquisition is the key, but one in which increasing revenues from customers is becoming important for profitability. For instance, with 170 million subscribers, Bharti is in no hurry to add customers as it is looking to consolidate its subscriber base and improve revenues. “Bharti has no compulsion to add subscribers quickly as it would require additional spectrum to service a large user base. Moreover, it is clear that from now on, spectrum will be auctioned,” says Dr Mahesh Uppal, director, ComFirst.

As far as the impact of this move on revenues is concerned, industry analysts feel that while the near-term effect on finances will be limited, the hike marks an earlier-than-expected revival of wireless tariffs and is a long-term positive for earnings.

Wait and watch

So far, none of the six new operators has announced any changes in their tariff plans. Unlike the domino effect in 2009, when even established operators slashed tariffs to retain subscribers, this time around, new operators have adopted a wait-and-watch approach to analyse the effect of the tariff hikes by the established players.

The tariff hike does not seem to have faced opposition from users so far. But the industry would have to wait for its impact on the industry dynamics over the medium to long term. Meanwhle, with several NGOs and consumer groups challenging the move, TRAI has asked the operators to justify the increase in call rates. But faced with increasing opex and declining margins operators say that they do not have much of a choice but increase tariffs

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