Tuesday, November 24, 2009

Of blood baths and paid baths:

There are more than 13 existing telecom players in 23 circles of India where the penetration in urban areas is more than 75% and in rural areas is about 12%. India, till last year, had one of the lowest tariffs in the world. Since Tata DoCoMo launched its per-second billing, all other service providers followed suit resulting in price war causing red line on the balance-sheet of already loss making telcos. Now, India has the lowest tariffs in the world with more to follow to attract customers.

The Indian market is one of the fastest growing telecom markets with 500 millions subscribers and yet a huge untapped population base. With paucity of infrastructure, telcos are increasing the customer base with future in mind. No problem till now but it starts when increasing customer base becomes the only objective with no regard for short term profitability or even sustainability. Just 2 or 4 major players in GSM and CDMA segment, things were on a tight rope for these telcos. But with aggressive new players wanting to make an impact, existing players are feeling the heat. New entrants will lose money as they fight for share, but that is something that happens to new entrants in most businesses. The smarter new entrants will likely share infrastructure and outsource most of their operations—both trends that the first generation of Indian telcos discovered only earlier this decade.

Thus with time (may be a couple of years), “voice” service by telcos will become a “commodity”. All prices will be on similar terms, distribution will be similar, and all telcos are going to increase promotion with time. Thus new entrants and existing players will have to come up with value-additions for customer delight and ways to find customer retention with the launch of Mobile Number Portability (MNP).

Value-added services (VAS) will form the core part of this strategy but it will all depend on the pricing model in this case. If the 3G auction results in players spending huge amounts of money to the government, the prices of VAS would be high thus causing a hindrance to its mass usage. The revenues for the players will not accrue resulting in more time for turning the tide towards profitability.

Thus a time will come when “voice” will be given free of cost and with the telcos charging for the VASs. It wouldn’t be a surprise of sorts and wouldn’t even be a bad economic decision since it follows on the models of other great companies such as McDonalds which does not make money on its burgers but makes them on French fires and the soft drinks, Multiplexes which do not make money on the ticketing sales for the movies but makes them on the popcorn, soft drink and the other food items available for the customer, NEWS Channels or newspapers do not make money on subscription but makes them on the ad sales.

Bottomline, a time will come when the telcos will be hoping to make money by giving the soap away and charging for the bath.

Sunday, November 15, 2009

Blood bath in Telecom sector in India:

If an industry analysis of the telecom sector in India is done, it would show the cut-throat competition that is going on for subscribers between the existing players. There are 11 existing players in the telecom space already namely Vodafone-Essar, Airtel, Aircel, Idea Cellular, Tata Indicom, RCom, Loop Mobile, Spice Telecom, Virgin Mobile, BSNL, MTNL. The industry has high entry barriers with the requirement of huge infrastructure, massive promotion due to numerous players resulting in high spending and almost commoditization of telecom services (we will discuss the commoditization aspect later). Apart from this, the high amount that is needed for buying the all too sparse spectrum. There are high exit barriers. The average revenue per user (ARPU) is one of the lowest in India resulting in red lines for the telecom companies.

Yet new entrants are planning to enter India with 3-4 big players namely Shyam Telecom in JV with Russia based Sistema, Unitech Wireless with Norway based Telenor and UAE based Etisalat going it alone soon to launch their services in this already congested market.

The huge untapped market potential has all these players wanting to enter the telecom bandwagon with an eye of the future when 3G services will bring in the revenue and profits. The only motive of these operators now is to increase subscribers. The existing players and the new entrants do not have much different to offer in terms of services. The only service they had to offer was voice-calls and SMSes. It has made a commodity of the voice-call or sms. Value-Added Services (VAS) which get the revenues for operators in other developed markets has yet to evolve in India. Partly because of its high cost to the customer and the sophisticated high-end cell phones required for accessing these VASes. Thus the only aspect they can fight is in terms of pricing. The Indian market is price sensitive in various products/ services and it is no different here. This has resulted in price wars, thus bleeding the already losing operators.

Tata DoCoMo with its GSM service was the first to launch ‘per-second-billing’ plan. This was immediately followed by Aircel immediately when they launched the 123 billing plan where after the third minute, the STD call would have local rates. As soon as Tata DoCoMo aggressively pursued the per-second billing plan, others had to follow suit to be in the race and not allow DoCoMo to run amok with subscribers. Airtel, Vodafone, Idea, BSNL, RCom too slashed rates and the tariffs fell to a world record low of 1 paise per second. With these new plans in place and mobile number portability to follow, a lot of churn might happen and telecom analysts predict a reduction of about 15% in revenues for existing telecom operators. The financial markets have taken note of it and scrips of many a telcos have taken a severe beating with Bharti-Airtel taking the brunt of it. The customers are benefiting from the price wars but it is profusely bleeding the already bleeding telcos. When will this blood bath end?

A time will come when price would cease to be a factor. Differentiation would have to be actually done in services offered. But in the mean time, telcos will have to bear the harsh competition. May be consolidation would be the order of the day in the coming 3-4 quarters.

Wednesday, November 11, 2009

SBI- the Banker to Every Indian:

The world of finance and economics is very complex and boring for the layman. India is a developing economy moving from agrarian to the service sector directly giving manufacturing sector a miss in its transformation. The extent of a developed country can be gauged from the level of complexity and maturity of the financial market. Banking forms a critical part of the financial market comprising of equities, debt, commodities and a bit of insurance.

SBI is the oldest bank in India with a rich heritage of more than two centuries. It is India’s largest public sector bank in terms of balance sheet, customers, number of branches and ATMs and number of employees as well. Yet it doesn’t have the brand recall of say an ICICI or HDFC or any other foreign bank. SBI was a sleeping giant even post liberalization. Foreign banks and even Indian private banks went miles ahead in the race of brand equity and brand recall and service. SBI stood for a government bank, lethargic in its service. SBI was not the preferred choice for customers. Its scale, backed by the government made it sustainable. But since last couple of years it has woken up to the array of opportunities and turned itself into a versatile origination attuned to the needs of the changing customer.

The Indian consumer’s purchasing power and disposable income has grown exponentially in the last 5 years. The nimble and lean foreign and Indian banks have grabbed the customer with both hands. SBI lacked in this, rather all Indian Public sector banks lacked in this. Thus there was a line of PSBs outside ad agencies for changing everything from logo to the positioning and the promotional campaign. We had union bank of India, Canara Bank, Bank of Baroda among others changing their logo and using celebrity endorsements for their promotions.

SBI of late has started with a print and outdoor campaign which is drastically different. Neither are they talking about financial products, interest rates or returns nor are they going for the emotional appeal of trust, ease in service or reach of maximum ATM. The campaign is based on the value which makes all great brands i.e. the longevity. IBM, Coca Cola are century old brands. SBI is also trying to say that if we are centuries old, we are that damn good for the people. The methodology to convey this message is quite peculiar.

Motilal Nehru, one of the early Indian independence activists, Sardar Patel, architect of the integrity of India, Jagdishchandra Bose, an eminent Indian scientist, Dadabhai Navroji, founder of Indian National Congress for independence of India, Rabindranath Tagore, literature Nobel Laureate, Dr. Rajendra Prasad, Independent India’s first President, M Visvesvaraya, Engineer and Statesman were customers of SBI. This methodology is unlike testimonial ads yet it has that flavour. No other bank can boast of such an elite clientele. Thus they are trying to say that this is the clear differentiation which no other bank can claim to have.

A good and a refreshing piece of creativity and strategy. Kudos to you, SBI and their agency.