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The Hyper-Competitive Indian Cellular Market
Do We Want Prices That Low In The USA?
December 7, 2009
I just returned from a very enlighteningtrip to India, where I sampled some of the cellular phone offerings in that part of the world. The mobile phone is as ubiquitous on the streets of India as it is in the Western world, if not more. And while there were many interesting aspects of this market, the most interesting thing about it has to be price.
Indian phones are mostlyunsubsidized and sold separately from service. A user buys a phone from a carrier, a market, or a reseller, then buys a SIM card and plan to connect to a network. The price for a SIM card is about $4, and the price for voice use on a prepaid plan is 1.3 cents per minute with most cellcos – and that is billed on per second basis, meaning a 10-second call would cost you $0.0022, or about 1/5 of a cent. Those are not typos. It really is that cheap. I got exactly such a plan from Vodafone India, a partnership with local conglomerate Essar.
Photo Right: An Auto-rickshaw driver and his young friend crank out the Bollywood tunes on a Sony-Ericsson Walkman phone.
Let’s compare Indian prices to Europe, where typical SIM-only prepaid mobile price (in this case Orange in France) starts at 10 Euros, with 5 Euros of call credit included. That means 5 Euros ($7.50) for the SIM card and account, which compares well with the $4 in India. It’s only 87.5% more. The Orange card also offers per-second billing, incoming calls are free, and a bonus 5 Euros of credit is delivered by e-mail after 15 days - nice. But here’s where the two plans differ the most: Orange charges 0.50 Euro/min for outbound voice calls. That’s right, $0.75 compared to $0.013 in India. I’m not EU Telecommunications Regulator Vivianne Redding, but I still think a price discrepancy of 5769% begs further examination.
Now let’s compare the Indian price to the USA, and why not look at Vodafone’s local partnership, market leader Verizon Wireless. Verizon is a CDMA carrier, so there are no SIM cards to buy, but a $25 activation fee is charged for the privilege of becoming a customer. Verizon’s basic prepaid plan, though, has much more reasonable pricing than its EU counterparts, with a rate of 25 cents/min. On the downside, it is billed in one-minute increments, and customers pay for inbound and outbound calls. So, US basic prepaid customers pay 33% of what EU customers pay for a minute of outbound calling, but still 2083% of what our Indian counterparts are paying. Seems like more than a rounding error!
So what are the reasons for the huge price discrepancies between the markets? Let’s start with wealth. Indians earn about 1/45 of what average Americans earn, so the prices need to reflect a lower demand curve. Fixed line penetration in India is low, so the country has leapfrogged to a mostly mobile market. India has 427M mobile lines compared to just 38M fixed lines. Higher numbers of subscribers mean that infrastructure costs can be spread over larger numbers of people. Infrastructure costs are also much lower, with lower labor rates for technicians, installers, lower real estate costs for towers, almost non-existent NIMBY forces, and cheaper equipment used at the sites. The equipment is cheaper because India was early to turn to China’s low cost vendors, and the focus is on mature 2G technology, not cutting edge 3G or 4G equipment. India offers good rates to their prepaid subscribers, where in the US, the best rates (~7 cents/min) are reserved for high-use post-paid subscribers. Subsidies are low in India, and acquisition costs are lower, too. Subscriber growth is staggering at 50% year-over-year. In 2000, only 2.8% of Indians had a phone, where now that number is at 43%. The carriers are in a hyper-competitive land-grab to win the new subscribers, and these low-income customers are most attracted to price competition.
And competition there is - with most urban areas served by as many as 5 different cellular networks. There are 11 cellular companies in the country, with four more set to launch. Driving around India, cellular advertising seems to dominate the billboards. The carriers have recently been complaining of the harmful effects of the market on their bottom lines, with Reliance and Bharti both experiencing ARPU declines of 23 and 9.4% respectively. That said, the number one and two carriers are still eeking profits out of the cellular sector.
But even as the top two, Bharti and Reliance still manage a profit, investors are not bullish on the hypercompetitive market, slamming Bharti with a 30% market cap drop in one month, while Reliance got sliced by 45%. Experts and market analysts alike expect to see consolidation in the market which would reduce the number of carriers to closer to, but still slightly above, the global norm of 3-4 networks.
So, while western consumers would love the prices that Indians pay, do we really want to emulate the Indian cellular market? It is extremely volatile, offers questionable returns for investors, and is due for a painful shake-out. What’s more, comparing India to the US or the EU just isn’t an apples to apples face-off. There are too many fundamental differences in the markets. But if I seem like too much of an apologist for Western carriers, let me first say this:
Whatever the different fundamentals, if India can offer mobile phone service for 1.2 cents/min, and US carriers offer the same basic service for 25 cents/min, there must be room for cost and price reductions in the US. Even if you mismatch Indian prepaid against the lowest US postpaid rate of 7 cents/min, what the heck are we doing wrong that our prices need to be 6 times higher?
by Derek Kerton
Principal Analyst, The Kerton Group
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