Mobile phones: more opportunities than threats

By C. R. L. Narasimhan

A recent news item, quoting industry sources, says that the number of mobile phone users in India would soon touch the 2 million mark. Delhi has the maximum number of users followed by Mumbai. The four cell operators in these two cities have a subscriber base of over one lakh each, while those in Calcutta and Chennai have fewer subscribers. Among the four metros, Chennai has the least number of mobile phone users. At the moment, the largest private cellular provider is the Delhi-based Bharti Cellular (almost 2 lakh subscribers), while the Mumbai- based BPL Mobile is second with 1.77 lakh connections.Interesting as these tidbits are, there are important question marks over the immediate future of the cell phone industry as indeed over the entire telecom sector. New policy initiatives - permission given to the private sector to set up international gateways, the sharp reduction in import duties on cellular handsets, and the reconstitution of the regulatory authority - have revived hopes in the telecom industry. A special report prepared by the rating agency Duff and Phelps Credit Rating (DCR) highlights the recent performance and the near term prospects of the Indian industry.

The key conclusion of the DCR report is that survival and growth of the sector will depend on the nature of value-added services (mobile phone banking, and Internet access through cell phone) that the cellular operators can provide. Increased competition would result in a few successful companies leveraging on the new technologies. The latter in turn will depend on the speed at which convergence takes place within the IT, communication and entertainment (ICE) sectors.

New welcome policy initiatives

With the announcement of the NTP-99 (National Telecom Policy) and the reconstitution of the Telecom Regulatory Authority of India (TRAI), the telecom sector will be in a better position to attract private investment. The TRAI will decide on revenue- sharing arrangements and set terms for interconnections. The likely introduction of a `calling party pays' (CPP) regime will increase the number of cell phone users as well as air time usage. Since the NTP has mandated the entry of a third player in each circle, market dynamics will alter for ever. Cellular telephony will, according to the DCR report, witness price wars which will ultimately benefit Indian consumers.

Mobile telephone services are now available in 22 circles. The cellular phone companies face threats as well as opportunities. Competition, especially driven by fast-paced technological changes, will threaten many. Consolidation through mergers and acquisitions (M&A) will become inevitable just as they have been in the telecom industry globally. (In the latter category there have been several mega deals running into billions of dollars: example, MCI Worldcom-Sprint and Vodafone-Mannesman).

In the Indian telecom sector too M&As and buy-outs are becoming common. Note for instance the Hong Kong-based Hutchison Whampoa's purchase of a 49 per cent stake in Sterling Cellular and its interest in acquiring a stake in Fascel, the cell phone provider for Gujarat. Bharti Telecom, so far the most successful company, has acquired a 20 per cent stake held by the Sanmar group in JT Mobile (operating in Karnataka and Andhra Pradesh) and has also agreed to take over the 40.5 per cent stake held by Crompton Greaves in Skycell, one of the two service providers in Chennai.

Value additions and convergence

The Tatas and Birla AT&T have come together for a joint venture in Andhra Pradesh. AT&T may establish another direct presence in India when it takes over Media One, the company which owns U.S. West. The latter has a collaboration with BPL in Tamil Nadu and Kerala.

The above is only a sample of what has happened even in India. Almost certainly the main consequence of technology induced competition will be to reduce the number of players. There will therefore be special regulation to curb monopolistic power. But enlightened regulation will help rather than hinder the business prospects of the cellular companies that survive.

Future growth will most certainly come as much from technology- driven value additions as from expanded coverage. A major barrier here - high costs which will meet with consumer resistance - will be progressively lowered though not dismantled altogether. Courts have forced the cell companies to reduce their tariffs. And the budget has reduced the customs duty on handsets and spare parts from 25 to 5 per cent and on battery packs from 25 to 15 per cent. The move to a revenue sharing regime from a fixed licence regime will also have the effect of lowering the service charges by the service providers.

The outlook for cell providers is thus bullish. The cellular sector has attracted 49.3 per cent of the Rs. 4,220 crore foreign direct investment that has come to the telecom sector between August 1991 and October 1999. Most of the service providers are already on to value added services such as mobile banking, and receiving and sending e-mails. It is from these that the bulk of their future revenues will come. Experts say that the convergence of the mobile phone and the Internet is being acknowledged as potentially the strongest growth driver in the industry. Internet service providers (ISP) are on a price war. A manifold increase in Internet usage is a certainty. That can work wonders for the cellular operators too.

If the grey areas in cellular services are sorted out the industry will show phenomenal growth. Of course, problems such as lack of interconnection agreement among the operators and inadequate availability of frequency spectrum have made the cellular services expensive.

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