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3G to buoy mobile companies’ squeezed margins

MUMBAI: The frenetic growth in the Indian mobile telephony is expected to continue given the huge untapped market that exists and a penetration level of a mere 25 per cent. The mobile subscriber base, with 25.8 million additions in the first quarter of 2008-09, is at 287 million and net monthly additions averaging 8.5 million.

However, major players are increasingly facing a hit on profitability margins due to a cut in national long distance (NLD) and roaming charges at the beginning of the fiscal year and higher network operating expenses — essentially network rollouts in new circles.

Manoj Mohta, Head, Crisil Research, expects margins of mobile service players to decline in future. “While the mobile subscriber base is likely to continue to expand, average revenue per user (ARPU) will keep declining and costs, especially network operating costs, would escalate significantly, thereby exerting pressure on profitability. Over the next two years, the margins of mobile service providers would contract by around 100 basis points.”

To combat this, players need to increase average minutes of usage on their networks or control declining realisations — a difficult task considering the likely increase in competition and the higher proportion of low-usage subscribers being added.

The government’s plans for global auction of its third-generation (3G) radio frequencies can help as 3G will allow subscribers access to services like high-speed internet, interactive gaming and instant movie download but at extra cost. Number portability and entry of mobile virtual network operators (MVNOs) will also help. MVNOs purchase minutes in bulk from mobile network operators, brand and resell them to end-consumers with either a price or product differentiation.

Madhusudan Gupta, senior research analyst, Gartner Asia Pacific told The Hindu, “the growth momentum of subscriber base continues unabated and we estimate it to touch 700 million by 2012 with every fifth subscriber being on 3G by then.”

According to T. V. Ramachandran, Secretary General, Cellular Operators Association of India (COAI), “2G players can go for natural evolution to 3G and consumers would expect a natural evolution to 3G, particularly in context of the low broadband penetration. Other countries have had adequate wire penetration when 3G was launched, but in India mobile telephony is the real frontrunner with wire penetration declining.”

From an operator’s perspective, valued added services (VAS) at $1.5 billion last year will go to $5.5 billion by 2012 and has now emerged as a key differentator for operators — not just for entertainment but in terms of utility — mobile banking, education, services and the like.

Mobile handset prices will decline as technology evolves and there will be an increasing demand for feature-rich products as content quality improves. ``The 3G Handset prices have to come down and this will also happen as cost of ownership comes down,” said Mr. Gupta.

Intensifying competition could point to a consolidation and success determining factors for players would be becoming ‘one stop shop,’ offering Fixed-Mobile convergence, quality of service and proximity of service (given that 90 per cent connection are pre-paid). “Some operators feeling the pinch of declining ARPU and high competition would look at aligning with MVNOs to increase their network utilization and alleviate financial pressures,” felt Mr. Gupta. Some indirect consolidation is already prevalent with 4-5 players controlling 75 per cent of the market. “There could be consolidation at the bottom of the pyramid and we could see joint ventures between global players and new MVNOs or for others.”

Mr. Ramachandran felt that 3G introduction was timely with the Commonwealth Games in India in 2010 and this could play an important role in furthering interests of the 3G mobile companies. “With the auctions and licences completed, networks should be up by the second half of 2009. The biggest contribution to 3G software has come out of India and going forward, that segment can service the carriers and provide content directly.”

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