India: cut-price tariffs squeezing margins and causing telecoms stocks to tumble

A number of articles here have wrestled with the question of optimum pricing for mobile operators in emerging markets. Some of these have focused on the case of Millicom International Cellular selling its three Asian operations, having cited, in the case of Cambodia, the challenges of maintaining healthy profitability in the face of the highly aggressive market entry strategies of new entrants.

This week a price war fought amongst telcos elsewhere in Asia has cause a slide in the value of their stocks:

The lady speaking in this clip contends that the first shots in this Indian tariff war were fired by Aircel (India's seventh largest cellco by market share) and Tata DoCoMo, the recently-launched GSM proposition from CDMA operator Tata Teleservices, arising out of its strategic alliance with Japanese mobile giant NTT DoCoMo.

In August, Tata DoCoMo made waves by becoming the first Indian mobile brand to offer per-second billing. Some media sources contend that impressive subscriber additions for the operator since then have been largely driven by the attractiveness of this innovation. Surya R Kannoth of the Economic Times, writing today, says that the most aggressive response to this yet has been from Reliance Communications, which on Monday announced a flat, cheap per-minute lifetime tariff for all calls - local, NLD, on-net, offnet, inbound/outbound roaming - made by both CDMA and GSM prepaid users. All this comes for no monthly fixed charge, but with a one-time set up fee of Rs48 (around one US Dollar).

The commentator speaking in the video clip above argues that this tariff causes the spread between cost per minute and revenue per minute to become very narrow, "and that would hurt profitability going forward." She goes on to quote analysts who say that the tariff is "disruptive" and will put pressure on major players such as Vodafone, Idea Cellular and Bharti Airtel, whose Chairman said today that prices in India have hit rock bottom. In light of the damage to share prices seen this week, investors in the various mobile operators will doubtless be hoping that this really is the case.

Bharti Airtel is getting consecutive mentions at DTW, having been the subject of the most recent article here, which was about how India's market-leading cellco has been disappointed by a second failed attempt to create a merger with the Africa and Middle East cellular powerhouse MTN of South Africa. In that article I mentioned, not for the first time, that there exists the belief that competitive pressures in its home market will continue to make the exploration of foreign investment opportunities very compelling for Bharti Airtel. I take today's news of a price war and tumbling telecoms stocks to be a pretty solid plank for that argument. I also reported the opinion that the Indian cellco might want to take a good look into acquiring some or all of the assets of Zain, the availability of which has been talked up for months now, not least here at DTW, where we ran a whole series of articles on speculation around the Kuwaiti group's possible exit from Africa.

A Business Standard article run on Saturday contends that not only is this a likely scenario, but that the Indian operator may need to take on its one-time suitor in a battle to take control of Zain. This idea seems to be drawn from the fact that last month, MTN CEO Phutuma Nhleko told journalists that his company would consider buying the African assets of Zain if the deal with Bharti Airtel did not go through.

India: cut-price tariffs squeezing margins and causing telecoms stocks to tumble

What next for Bharti Airtel in the wake of scuppered MTN deal?

Sunil Bharti Mittal: looking to new opportunities in the wake of scuppered MTN deal?

Will they? Won't they? Will they? Won't they?

No. Not now - and maybe not ever.

Of the two big telecoms M&A deals discussed by this blog over the last few months, one has definitely stalled, seemingly not to be revived again this year.

We've been here before. Giant Indian cellco Bharti Airtel and South Africa's multinational mobile group MTN failed to come together last year. Now, after months of discussions and a repeatedly extended deadline for those talks, the two firms have once again failed to find a way to combine their assets into one giant emerging markets player which would have been the third largest telecoms company in the world, according to the Indian MNO's statement about the scrapped merger plans.

Bharti Airtel maintains that the planned alliance "was a vision based on solid fundamentals" and that "substantial synergies could have been captured" with the proposed transaction. The Indian firm's statement indicates that much thought was given to the "the sensibilities and sensitivities of both companies and both their countries" and contends that "the proposed deal structure took into account their leadership in their respective geographies to ensure continuity of business - including listing, tax residencies, management, brand etc." With what sounds like a note of regret about a missed opportunity, the statement expresses the opinion that "the deal would have been a significant step in promoting South-South cooperation - a vision of the two countries."

So what's gone wrong this time? The Bharti Airtel statement indicates that failure to gain the approval of the South African Government is what has caused both companies to take the decision to disengage from discussion. James Middleton of Informa Telecoms & Media also describes the aborted transaction as a case of both firms failing to convince the Zuma Government, which is MTN's biggest shareholder via the Public Investment Corporation (a pension fund), of the value of the deal.

Another Informa scribe, the shadowy 'Informer', in his usual playful manner, reaches for the fairly obvious metaphor of a cancelled wedding and has some fun with it. Writing yesterday, the mystery man of Mortimer House jokes that that "the parents of the bride-to-be" were "clearly unimpressed by the quality of her suitor."

While the Indian firm expresses the hope that "the South African government will review its position in the future and allow both companies an opportunity to re-engage," it's probably legitimate to wonder if there will be the appetite to revisit this again for a third time. I'm all in favour of persistence - God loves a tryer and all that. I've also learned, though, that 'no' often means... 'no'. Happily, I've not had the chastening experience of asking several times for a lady's hand in marriage and being repeatedly spurned. My guess, though, is that I'd probably start to take the hint at the second knock-back. If Sunil Bharti Mittal and his management team feel at all like that, then this recent disappointment begs a new question: What next?

In its statement about the failed tie-up with MTN, Bharti Airtel stated that the company "will continue to explore international expansion opportunities that are consistent with its vision and bring value to its shareholders." I would expect that to be the case, having expressed the view back in February that competitive pressures on home turf might force the Indian operator to identify investment targets around the world.

As the year has unfolded since then, some of these pressures have not proven to be as strong as might have been feared. For example, one threat my February article identified was state-owned operators (i.e. BSNL and MTNL) stealing a march in the 3G space and in the WiMAX services arena. As we have seen here since, however, it now appears that the two big public sector telcos have failed to make much of this this first-mover advantage.

Other pressures do continue to exist, though, even in a massively booming market. Since that February article, India's mobile operators have added almost 100 million subscriptions. Bharti Airtel's share of the vast subscriber base, however, has slipped a little, with ground conceded to a strongly performing Reliance Communications and to smaller players whose market share has improved a bit, notably Aircel and Russian-owned MTS India.

Where, then, will the giant MNO seek new growth opportunities outside its home territory? Back in February, I aired the view that Bharti Airtel may be almost uniquely well suited to the challenges of African markets, noting that the Indian operator has to cope with the lowest tariffs in the world while sustaining growth. More than once, when reporting the rumoured sale of a set of African mobile operators, this blog has noted that those operations are rather less profitable than the parent company's properties in the Middle East. Bharti Airtel, then, might be the most obvious fit to purchase those assets. The group being referred to here is, of course, Zain.

So, could the failure to tie-up with MTN now put the Indian operator in the frame as a suitor either for Zain's African portfolio or for a stake in the entire Kuwaiti-headquartered group? Maybe. Consider this from the chuckling 'Informer':

"You shouldn’t stick around where you’re not wanted... there are, after all, plenty more fish in the sea. The Informer suggests that Bharti has a look at Zain, instead. Zain gives the impression of being a little more, how shall we say… available."

If this were to happen, I'd guess that a link-up with MTN would be permanently off the cards, due to the significant overlapping of the Zain and MTN footprints.

What next for Bharti Airtel in the wake of scuppered MTN deal?

India: Aircel invests in expanded coverage; TRAI/DoT wrangles to hamper new MVNOS?

My most recent post here was a discussion about the prospects for MVNOs gaining traction in emerging markets. Specifically, I rounded up views about which of India or Africa (taken as a whole) would be first to see truly mass-market MVNOs.

Anyone betting on India may be disappointed to hear about potentially quite unhelpful disagreements between the country's telecoms regulator and Department of Telecommunications. One of these is a difference of views about the question of whether prospective MVNOs should be allowed to be hosted by more than one MNO in a given area. According to an Economic Times (India) article today, the TRAI position is that each MVNO should stick to a single network. The DoT has decided otherwise.

This, and other bones of contention, may delay the market entry of MVNOs. As the Economic Times article notes, while the Indian Government has already cleared the entry of MVNOs, it has not issued policy guidelines because of the DoT and the TRAI failing to arrive at a consensus on several important points.

The TRAI justification for wanting to restrict MVNOs to single operator tie-ups is built on a stated concern about further complicating mobile number portability. A DoT communication to the TRAI also stated that calculation of spectrum charges would also become difficult if virtual operators tied up with multiple MNOs "as each service provider has a different slab for calculating these levies (based on the number of customers they have)." The regulatory body, states the Economic Times article, has also expressed concerns about monitoring and and maintaining service records if MVNOs are allowed to tie up with multiple operators.

The TRAI has also taken issue with the DoT suggestion that each mobile operator should be allowed to share their networks with no more than two MNVOs. The article indicates that the feeling at the TRAI is that this would not work to attract a good number of MVNOs onto the Indian market.

When (and whether) MVNOs make a significant impact in India remains to be seen, then. One Indian cellco, however, is working hard to ensure that its own impact on the market is greatly increased.

­A Cellular News story today reports that Aircel, in which Maxis Communications of Malaysia holds a 74% stake, has announced plans to double its subscriber base and invest USD 5 billion in its network over the next three to five years.

Aircel is not currently among the giants of the Indian cellular area. According to the World Cellular Information Service, the company had just under a 5% share of the country's mobile subscriptions by the end of 2008. Thus far, Aircel has not extended its reach to all 23 of India's circles (regional markets). The Cellular News piece quotes the company's COO Gurdeep Singh as saying that following recent expansion of Aircel's coverage "by April-end, we will launch our services in rest of Maharashtra, taking the total number of circles to 18." Singh added that "Hyderabad is the 13th circle where we have launched our services and with this we have completed our southern footprint."

India: Aircel invests in expanded coverage; TRAI/DoT wrangles to hamper new MVNOS?