Table 1 Cellular Subscribers | ||
---|---|---|
Operator | Circles | No. of Subscribers* |
Bharti Cellular | Delhi, Himachal | 125,229 |
BPL Mobile, BPL US West | Mumbai, Tamil Nadu, Maharashtra, Kerala | 122,801 |
Hutchison Max | Mumbai | 122,772 |
Sterling | Delhi, Rajasthan, Haryana (Essar Cellphone), Uttar Pradesh (East) | 113,743 |
Modi Telstra, Modicom Networks | Calcutta, Punjab, Karnataka | 58,364 |
Escotel Cellular | Haryana, Kerala, Uttar Pradesh (West) | 37,820 |
RPG Cellular, RPG Cellcom | Chennai, Madhya Pradesh | 34,452 |
Birla AT&T | Gujarat, Maharashtra | 28,652 |
Usha Martin Telecom | Calcutta | 26,640 |
JT Mobile | Andhra Pradesh, Punjab, Karnataka | 24,319 |
Skycell Communications | Chennai | 23,044 |
Tata Cellular | Andhra Pradesh | 18,500 |
Fascel | Gujarat | 12,300 |
Koshika Telecom | Uttar Pradesh (West & East), Bihar, Orissa | 10,134 |
Hexacom | Rajasthan, Northeast States | 10,014 |
Reliance Cellular | Bijar, Himachal Pradesh, Assam Northeast States, West Bengal | 3,088 |
Srinivas Cellular | Tamil Nadu | License not Signed |
*As of December 31, 1997 Source: Department of Telecom (DoT), Cellular Operators |
Why, then, would a relatively successful cellphone operator -- Hutchison-Max -- sell its interests to a foreign partner? Why would Essar hand over management control to Swiss-PTT? Why would JT Mobile sell its Punjab operations to Essar so cheaply? And why is Koshika so desperate to find a buyer? HFCL has already reduced its stake in Fascel -- one of the operators in lucrative Maharashtra -- to the mandatory 10% and is planning to sell all its shares in the near future. HHS Communications pulled out of Tamil Nadu as soon as it got in. Also on the auction block are stakes in cellular companies from the BPL and B K Modi stable, Skycell Communications, and Hexacomm, say sources. Even the big guys like Reliance and Tata are struggling.
Table 2 Indian Cellular Projections | |
---|---|
Year | Subscribers |
1998 | 1 million |
2001 | 3 million |
2005 | 7 million |
2010 | 14 million |
Source: DoT |
Why indeed! Things turned nightmarish almost from the beginning when cellular operators realized that their projections for subscriber growth (see Table 2) and airtime usage were simply unrealistic. In fact, the miscalculation of average airtime usage is the primary reason for their current financial difficulties. Additionally, operators expected revenues of $62.50 per month per subscriber! Failure to meet these expectations has resulted in insufficient revenues to cover huge government-assessed licensing fees.
To make matters even worse, the subscriber growth rate has been severely impacted by:
Cellular operators in the circles, roughly analogous to a state, have petitioned the Department of Telecom (DoT) to:
The remainder of this article will examine the reasons why cellular subscriber growth and airtime usage in India have not met operator expectations, the government response, and what operators are doing to survive.
At the low-end -- roughly 15% of users -- the operators' per-month subsidy amounts to US $21.10 per user. The cost of service is about $25 per line, plus a $4 service fee. Not surprisingly, banks and financial institutions are becoming increasingly reluctant to finance cellular projects, as they are convinced that most of them are not feasible.
They have asked the government to:
Mr. Ramachandran points out, however, that the revenue loss to the national exchequer is misleading because operators are in no position to pay license fees. Only $225 million has actually been paid, out of a total license fee commitment of $450 million in the fiscal year 1997-1998. Even relatively strong operators such as Birla-AT&T and Tata-Bell Canada are behind on their payment schedule. Only Escotel -- a joint venture between the Escorts Group and First Pacific of Hong Kong -- and Reliance are on schedule.
On December 31, 1997, a former finance minister said that the income tax department would target cell phone subscribers as part of its efforts to increase the taxpayer base. Accordingly, it started sending tax notices to cellular phone subscribers in the first quarter of 1998. Many cellular operators are blaming this new income tax on the drop in new subscribers. According to insider sources, operators believe that a "fear psychosis" has set in among potential subscribers.
As a result, cellular companies in the circles have been increasing their share of the total cellular subscriber pie at the expense of operators in the metro areas. Circle operators' market share increased from 30% in December 1997 to more than 37% by the end of March. Figure 2 shows how the circles' market share grew progressively through the second half of 1997.
In comparison, eight companies in the metros had over 545,000 subscribers at the end of 1997, while the circles accounted for 226,000 -- less than half the number of the metros. The number of subscribers in the metros had fallen to 551,750, while the number of subscribers in the circles had increased to 330,560 by March of this year -- a growth rate of 46%.
Table 3 Metro Areas & Subscribers | ||
---|---|---|
Metro | Operators | No. of Subscribers* |
Dehli | Bharti Cellular Sterling Cellular | 1,20,486 94,658 |
Mumbai | Hutchison Max BPL Mobile | 1,32,117 1,10,911 |
Calcutta | Modi Telstra Usha Martin | 29,386 22,180 |
Chennai | RPG Cellular Skycell | 20,239 22,180 |
* As of March 31, 1998 (latest) | ||
Source: DoT, COAI |
Says Coopers & Lybrand associate director Mr. Timmy Kandhari, "strong players -- such as, maybe, Birla-AT&T, Bharti-BT, and others -- will remain; weaker ones will shift out. We think that the M&A activity will start around October or November this year." The next installment of license fees is due then, and those companies, which have not reached financial closure, will certainly want to sell, he predicts.
Buy-out deals in the cellular industry that are nearing completion are indicative of the M&A activity in the next fiscal year. An industry analyst says, "There are two critical factors before the sell-outs begin. One, a buyer will wait for enough assets -- in terms of equipment and subscribers -- in the companies and, two, the seller has to be ready to sell at a price which will cover the liabilities of the company." Mr. Nanda K. Menon, assistant director at Jardine Fleming India Securities, feels that the liabilities of domestic cellular companies are so high that operators may be forced to sell their stakes at a discount (to the face value) or at par. "The days when promoters sold stakes at phenomenal premiums are over," echoes another analyst.
Take the BT case, for instance. Demands for unrealistic premiums from Indian carriers in the telecom sector has forced British Telecom to drop its plans for expansion in the Indian cellular sector -- at least for the time being. The company, which was actively pursuing options in other telecom circles, has now decided to back off for a while. The reason, says Mr. Arun Seth, country head of India and SAARC-BT, is that Indian promoters in the telecom sector are still hoping to get exorbitant premiums for their circles. "We would certainly like to improve our presence in the Indian telecom industry, but acquiring new circles at this point is out. Indian promoters are demanding unrealistic premiums. We have, therefore, decided to take a back seat in the acquisition game for a while," said Mr. Seth.
Ericsson, for example, has reduced its projections for new cellular connections from 900,000-950,000 to 650,000-700,000 for 1998, says Mr. Rajeev Kapoor, director of Ericsson Mobile Phones. They had made some very optimistic projections based on last year's phenomenal growth; however, they were forced to revise those projections downward after seeing new cellular connections slow to 25,000 to 35,000 a month in the first four months of this year.
Motorola, on the other hand, made a relatively conservative projection of 550,000 for this year, which represents zero growth over the previous year. Similarly, other vendors are scaling down their projections.
One must also keep in mind that these 1998 estimates do not translate directly into new cell phone sales. Their estimates are just indicative of the number of cell phone activations expected, which includes prepaid SIM (Subscriber Identification Module) and prepaid cash cards, both of which sell in substantial numbers. In fact, sources expect that actual cell phone sales this year will be somewhere between 300,000 and 450,000. Last year, an estimated 350,000 cell phones were sold -- through legal and smuggled channels -- in the country. It should also be noted that vendors expect the numbers of cell phones supplied through the grey market to increase. Compared with last year's estimated ratio of 65:35 between the legal imported route and the grey market, this year, it is expected to be closer to 50:50. Vendors attribute this to a drop in subsidized cell phone sales and the slowdown in cellular growth.
Beside canceling subscribers for non-payment, operators are also beginning to reconcile reported subscriber numbers with actual counts. "Numbers were padded by competing networks as a market strategy. Roaming subscribers were often included in the count of visited networks," points out an industry executive. "Now a lot of clean-up is happening, especially in the metro areas, in anticipation of the per subscriber license fee." These drastic actions have been prompted by two factors:
Private operators fear MTNL's strength in wireline operations and worry that they'll be unable to compete with the telecom giant if the Delhi High Court order remains unchallenged. If this happens, India could once again see the return of monopoly telecom services-- wireline and wireless.