Business; Crash Course

India Today, November 30, 1998
Nov 30, 1998

TELECOM
Crash Course

Huge unsustainable losses, dwindling revenues and a declining subscriber base are sounding the death knell.

By Robin Abreu

Nikhil Mehta has been using a cellular phone for more than a year now. A senior executive with a Delhi-based publishing firm, Mehta uses the gizmo extensively -- but his monthly bill never exceeds Rs 1,200. How does he manage to do that? "I use it more as a pager than as a cellular phone," he says. "I just note down the caller's number and return the call from a land line."

Such frugality is just the tip of the iceberg that the cellular-service industry has crashed into. A bigger problem is the sharp drop in the subscriber base in recent months -- from 10 lakh in May to about eight lakh now. According to the Cellular Operators Association of India (COAI), the number of subscribers in the four metros -- which generate 75 per cent of the industry's revenue -- has declined from a high of 5.58 lakh in April to 4.36 lakh in September.

The decline is largely because many companies have stopped offering freebies to lure customers. In a bid to expand the subscriber base, cellular operators had offered free airtime, subsidised handsets and ridiculously low non-peak tariffs. In Uttar Pradesh, for instance, a non-peak hour call on a cell phone costs only a rupee per minute. These marketing gimmicks did cause a surge in subscriptions. But when these free airtime schemes were discontinued, cell-phone users started feeling the pinch of the high charges.

Indeed, cellular-service operators are realising that the typical cell-phone user is more like the penny-pinching Mehta than the spendthrift chatterboxes they had projected in their project reports. According to industry estimates, about 42 per cent of Delhi subscribers and 58 per cent of Chennai subscribers run up bills of less than Rs 500 a month, derailing the projections of the cellular operators. Says Rajeev Chandrashekhar, managing-director of BPL Mobile: "We anticipated a yield of Rs 2,000 per subscriber but what we are getting is an absurd Rs 500."

The low usage pattern (an average subscriber uses only 100-120 minutes of airtime a month compared to the 220 minutes required for the operator to break even) and the high percentage of defaulters (10-15 per cent instead of the projected 2-4 per cent) have led to cellular operators incurring huge unsustainable losses.

Certainly, cellular call charges in India are prohibitively high and deter customers from using their cell phones frequently. The problem has its roots in the ridiculously high bids made by companies when the government invited tenders for cellular licences in 1995. With a woefully low penetration of basic services -- 1.3 per cent as compared to the global average of 11.5 per cent -- and a waiting period of close to a year the market for private cellular services seemed very promising indeed. Buoyed by unrealistic projections, cellular-service operators went over the top in the rush to grab licences, committing to pay the government an enormous Rs 27,000 crore over 10 years in licence fees. "There was clearly an overestimation of the market," concedes Sunil Mittal, managing director of Bharti Telecom. These companies are now finding it difficult to pay the huge sums they had committed as licence fees. Admits Shashi Khalathi, a director in RPG Telecom: "The cash flows of most operators are so low that they are in no position to pay their licence fee." Together, the 23 cellular operators owe the government more than Rs 2,100 crore in licence fee for 1997-98 (see table).

The market potential was not the industry's only miscalculation. Many companies did not realise the level of investment required before plunging headlong into the telecom business. Says Sandeep Das, the managing director of Hutchinson Max India Ltd: "Any infrastructure project requires a long-term commitment which most of the Indian operators do not have. The investments required by this industry are at least 20 times more than what was envisaged."

The industry wants to be excused for the mistake of overestimating the potential of the market. Instead of a flat rate, it now wants that the licence fee be pegged at 15 per cent of the revenue earned by an operator. Last month, the Telecom Regulatory Authority of India (TRAI) proposed a two-year moratorium on the payment of licence fee and the sharing of the interconnectivity revenue earned by the Department of Telecommunications (DOT) with cellular-service operators. It suggested that the charge for a land line call to a cell phone should be raised from the present Rs 1.31 to Rs 3.90, and the additional Rs 2.60 should go to the cellular operator. Also proposed was a steep 220 per cent hike in the monthly rental from Rs 157 to Rs 575. However, dot has rejected all these demands except a 25-30 per cent rent hike and spreading of the licence fees payment over 15 years.

Far from addressing the concerns of the industry, the Government has decided on what can be termed as the last nail in the coffin for most cellular operators. The impending entry of the Mahanagar Telephone Nigam Ltd (MTNL), which will be launching cellular services in Delhi around March 1999, may prove to be tough competition for cellular operators.

With low overheads, the public sector behemoth will find it easy to achieve its target of one lakh subscribers within a year of launch. The Rs 900 it is expected to pay as annual licence fee per subscriber in Delhi is chickenfeed compared to the Rs 6,023 private operators have to fork out. Voicing the fears of the private players, Birla-AT&T Director Virat Bhatia says, "Once the MTNL launches its cheaper services, our customers will start abandoning us." Cellular-service operators had moved the court against the Government's decision to allow MTNL to launch cellular services but the Delhi High Court quashed their plea.

The Government's intransigence on the TRAI proposals and the high court ruling on the entry of MTNL has further lowered the morale of the industry. "Everyone is scared of what is going to happen," confides B.K. Modi, promoter of Modi Telstra. Little wonder then that many cellular companies have decided to quit the business altogether. The Essar Group was the first to opt out when it sold its stake in Essar Telecom to its foreign partner Swisscom in August. Many cellular operators are now following in its footsteps and have approached banks and financial institutions to find buyers.

Birla AT&T, which operates cellular services in the Gujarat and Maharashtra circles, owes the Centre Rs 313.80 crore in licence fees for 1997-98. With its equity base of Rs 525 crore completely wiped out by accumulated losses, its promoters are on the lookout for a buyer. Ditto for Koshika Telecom which operates services in eastern and western Uttar Pradesh, Bihar and Orissa. The company owes Rs 211 crore in licence fees and its promoter Vinay Rai of Group Usha has decided to put 90 per cent of the stake in the company on sale. Similarly, the promoters of SkyCell Communications are in talks with BPL-US West for selling the Chennai licence.

The industry is peeved at the Government's attitude towards the sector. Says Chandrashekhar of BPL, who is also the chairman of COAI: "If the Government continues to have a negative attitude towards the cellular-service business, there will only be sellers and losers." Clearly, the way things are going it won't be long before the sun sets on what was a sunrise industry.

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