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Wednesday, January 5, 2011

MNP not a game changer

In Indian, any survey of mobile users will show Vodafone to be an operator with one of the most, if not the most, loyal customer base. But one statistic shows just how relative that term -- customer loyalty -- is in the telecom industry. According to its British parent's annual report, for the quarter to September, Vodafone's Indian operations recorded an annualised 'customer churn' of 41%.

In other words, 41% of its 118 million subscribers will leave during the year! Dissatisfied, disillusioned, disinterested. Yet, its subscriber base is expected to grow because its subscriber gains outnumber its losses.
Other operators have a similar story to report in a market that is still untapped. And that's why, they say, they are not scared of number portability causing a Pied Piper-like exodus among their subscribers. They are not deterred by this new mechanism of consumer empowerment that, for just Rs 19, lets subscribers switch operators without changing their phone numbers.

"It will have very limited impact," predicts Kumar Ramanathan, CMO of Vodafone Essar. The first reading shows limited impact. In Haryana, which was the first state to offer portability from November 25, industry data for December 2010 shows that 1% of the state's 17 million subscribers opted for it. Annualised, that works out to 12%, which is a fourth or fifth of the churn operators have been living with.

So, they say, even when number portability rolls out in other circles they can live with it. "We are already in a high-churn environment," says Rajiv Bawa, executive V-P (corporate affairs) at Unitech Wireless, a joint venture between Norways's Telenor and India's Unitech.

Yet, behind that business-as-usual veneer, there's a hint of nervousness brought on by the other change gathering momentum in Indian telecom: 3G services, which turns a mobile phone into a TV and an Internet-fired computer, and delivers music, movies, TV, games, information and more seamlessly. "Number portability will not be the game-changer ; 3G will be, and it could lead to outcomes like portability," says Ramanathan.

Old divisions in the industry are being raked up again. GSM versus CDMA. The old guard versus the young upstarts. The 3G haves versus the 3G have-nots. It's a polarised debate, with operators aligning their views to their business strategy.

All these years, operators trained their energies on the 'pre-paid' segment, which accounts for 95% of the 700 million mobile subscribers in India. "A majority of pre-paid users are hardly interested in retaining their number," says Ramanathan.
Not only are pre-paid subscribers fickle, they don't even give operators big revenues.

Yet, operators woo them because are easy to add. In the way the business is run presently, numbers matter. Allocation of spectrum is linked to subscriber base. More subscribers translated into more spectrum — and higher share valuations.
So, the market saw crazy pre-paid plans, where operators essentially paid people to become subscribers.

For example, when it launched in September 2010, Etisalat charged zero rent and gave a subscriber 50 free minutes for three months. 'Use and throw' became the norm with pre-paid users who were price-conscious and didn't care about number retention. This was happening at the operator end.

At the handset end, an upstart manufacturer launched a device in 2008 that promoted this sort of user behaviour. The manufacturer was Micromax and the device was a dual-SIM handset. It was a huge hit. Other manufacturers followed. According to global market intelligence firm IDC, 40% of all handsets sold in India in the past year have been dual-SIMs. For example, Micromax, which has a 5% share, has 45 'active' models. "40 are dual-SIMs," says Rahul Sharma, executive and marketing director, Micromax.

"We've had 'virtual number portability' for the last eighteen months. With new entrants offering free talktime and other incentives for a limited period, customers take up the connection, use the freebie and throw the SIM," the CEO of a leading telco had earlier told ET.

Old operators see a churn of about 45%; some of the new entrants, 60%. "New operators are already dealing with high churn," says Unitech's Bawa. "Their challenge is to get chosen as a second or third SIM, stay in the phone, and over time, move up to primary SIM status."

Much of this churn is in the pre-paid segment, and so portability is expected to have only an incremental effect there. For example, in the quarter to September, Vodafone recorded an annualised churn of 42.4% in the pre-paid segment. By comparison, its churn in the postpaid segment was 23.2%.

With 3G and number portability, the churn in the post-paid segment might increase, which is what operators are concerned about. The postpaid segment is the bedrock of an operator's revenues. Although it accounts for about 5% of the subscriber base of a big operator, it brings in 20-25 % of revenues.

It's also the segment Indian operators have been taking for granted. For example, even as they slashed tariffs in the pre-paid segment to 30 paise a minute to add subscribers, operators haven't done the same for post-paid rentals.

The thinking is that, compared to their prepaid peers, the post-paid set show lower sensitivity to price and greater sensitivity to number retention. With portability, the number attachment is no longer a factor. "The barriers to change will be demolished," says Bawa. "Operators with legacy high-value customers will need to do more to keep them."Adds a recent report by Fitch Ratings: "Subscriber acquisition and retention costs may increase in the post-paid segment over the next 12 months."

However, a price war is not expected in postpaid. "The pre-paid tariff war was not beneficial to players and, hence, we may not see such an intense war in post-paid ," says Rahul Singh, telecom analyst, Standard Chartered Equity Research. "Post-paid customers are more sensitive to parameters like coverage, quality, 3G offerings and brand, rather than low tariffs."

Services will be the clincher especially with 3G services. "Postportability, the single differentiator will be extensive service delivery," says Rajat Mukarji, chief regulatory affairs officer at Idea Cellular.

At the basic level, better service will mean greater voice clarity, fewer call drops and a wider network. Theoretically, all else being equal between two networks, the one with fewer subscribers should give better call quality. That should put newer networks at an advantage.

However, it's not a pronounced advantage, according to the Telecom Regulatory Authority of India, which assesses the service quality of operators quarterly. Most licensees, even those with the busier networks, meet the rgeulator's service norms — for example, 95% success rate in call set-up , 95% of calls of good voice quality, billing complaints of less than 0.1% of pre-paid subscribers. So, there's only a limited case for post-paid subscribers to switch.

But the strength of value-added services provided by an operator could compel a switch. That means 3G. Vodafone's Ramanathan believes the portability impact will eventually gravitate to larger issues. "Companies with differentiated services like 3G in key circles, superior network and greater predictability of quality services will have an edge," he says. "Small players who didn't win any 3G spectrum will have less to offer in value-added services, and so may have limited bite."

When it comes to 3G services, it's the old, big operators that are the best placed. In the 3G spectrum auction held in 2010, seven operators that account for 98% of mobile revenues cornered the three slots available in each circle. So, if there's a push factor working against them because of their clogged networks, they can counter it with a pull factor in the form of 3G.

That's why analysts say portability won't lead to an exodus from old operators. "An increase in churn rate would be temporary. As the euphoria around portability wanes, we expect the longterm churn rate to stabilise at current levels for an operator offering 3G services," says a recent Crisil research report."

In these realignment however, there are three kinds of operators that are more vulnerable to losing subscribers, that too valuable ones, because of portability.

The first is post-paid subscribers of old operators that failed to gain size or traction. Such marginal operators failed to build a brand or go pan-India , or buy a 3G footprint. Their standing among their subscribers derives largely from their first-mover advantage. Since they were among the first operators to offer a mobile service, they roped in the high-spending subscribers.

A good example is Loop, which is present only in Mumbai (though it has inter-connect agreements with other operators) and has a modest 3 million subscribers. Loop was earlier BPL Mobile, which launched in the mid-nineties, when handsets were bricks and an outgoing call cost Rs 32 a minute.

Mobile telephony was the preserve of the rich. And once they chose an operator, many a times, they stuck on because they did not want to lose their number. Now, they can switch while retaining numbers.

The second likely loser is government-owned BSNL, another old player that started as a threat but was cut to size, at times by its own. Even though it is the fifth largest operator with 80 million subscribers, it is in decline. The competition is chipping away at its USP: reach beyond the metros. Unable to add lines, its capacity is strained.

The executive admits portability could deliver a body blow to the company. "BSNL could lose many customers who are unhappy with its quality of services and after-sales support," he says. Even its 3G services, which had a first-mover advantage, have made little impact. Launched in February 2009, 19 months ahead of others, it has managed just 2.1 million 3G subscribers.

Old CDMA operators, namely Reliance and Tata, are the third potential loser. Their subscribers too have been locked in — to an operator, a technology and a handset, along with a number. Liberated, the push factor might be greater for them.
Ramanathan of Vodafone, feels CDMA subscribers would like to break free of the relatively restricted world of their technology. "At least 80% of CDMA subscribers use operatorspecific devices, unlike GSM customers," he says. "Dissatisfied CDMA users well may exercise their freedom to migrate to GSM, which offers more flexibility, both in number of operators and highend devices."

A top Reliance executive who did not want to be identified disagreed with that reading. "CDMA customers keen to go to GSM will need to invest in a new GSM handset," he says. "This will be a natural barrier to churn."

Whether or not, Reliance manages to hold on its CDMA flock, one thing is for sure: for Indian subscribers, the freedom to choose has never been greater. This will nudge operators to acquire a greater customer orientation. Some operators are improving their network quality by putting more points of interconnect - locations where two networks link up and exchange traffic. Expect more group and family plans.

"The world over, number portability has yielded low to moderate results. "Adoption levels are modest," says BK Syngal, former chairman & managing director of VSNL. He cites a recent study by Telcordia, one of the two firms that facilitates portability, that says that the annual average port rate — percentage of subscribers who switched operators in a year — for 19 countries in 2007 was a modest 4.5%.

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