Sucheta Dalal :RCom starts another tariff war by offering SMS at 1 paisa
Sucheta Dalal

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RCom starts another tariff war by offering SMS at 1 paisa  

November 27, 2009


Mobile service providers (MSPs), already bleeding due to intense competition and call tariff cuts, will have to gear up to survive another war. Reliance Communications Ltd (RCom), the Anil Dhirubhai Ambani group (ADAG) company, has launched a new tariff plan that offers to send SMS at just 1 paisa.
In a release, RCom said its new SMS tariff plans are add-on plans and are applicable for all Reliance Mobile customers irrespective of them being on a CDMA or GSM network as well as prepaid and post-paid customers.
"With select subscriber groups, SMS is a preferred communication mode over voice calls. On account of significant tariff disparity in the recent months, it has lost its due share of attention. Considering this, Reliance Communications with its first in the industry initiative, aims to revitalise SMS usage in the country,” said Mahesh Prasad, president, RCom.
The 'pay-per-call' and 'pay-per-second' initiative by Tata Teleservices has already forced almost all players, including Bharti Airtel, Vodafone Essar, RCom and Idea Cellular, to join the tariff war. The aggressive launch and lower tariff plans from new entrants are not only snatching away customers but are also hurting the top- and bottom-line of incumbent MSPs. During the recent quarter, all MSPs have reported a sharp fall in average revenue per user (ARPU) and MOU.
However, the question is why RCom wants to start a new tariff war, that too when the entire industry is suffering from lower call rates. During the second quarter to end-September, RCom's wireless ARPU fell 23% from the previous quarter, which when compared to the industry's decline of 9%-10% is very high. Even RCom's EBITDA fell about 580 basis points (bps) while the same for other operators was just 110 to 140 bps. According to a research report from a leading financial institute, in its earnings call, RCom indicated that the revenue hit was due to change in accounting for handset revenues, lower rural rollouts and hence lower income, and lower revenues from value added services (VAS).
The latest offer may be part of RCom's plan to increase its VAS revenues by launching SMS at 1 paisa. According to the release, subscribers willing to use this offer would have to pay Rs11 per month or they can go for other offer of unlimited SMSs by paying Re1 per day.
The aggressive pricing strategy by some operators has adversely impacted the valuations of the entire sector as it will have a negative impact on the profitability of incumbent operators. "We believe that the flow of negative news could continue over the next few months, resulting in continued weakness in the stock. However, such irrational pricing would hasten the consolidation process in the sector and players with strong balance sheet, scale and brand would emerge as winners," said Sharekhan Ltd in a report.
The tariff war has also discouraged fresh investment by incumbent MSPs as the payback stretch has gone beyond six years. With lower and discouraging paybacks, the capacity expansion plans of operators are likely to get delayed as such low tariffs do not justify creating fresh capacity in the industry. This also indicates that such low tariffs would not sustain after the new entrants utilise their free capacities.
The Telecom Regulatory Authority of India (TRAI) is also planning to make the one-second pulse a mandatory tariff option for all operators to bring in transparency into the tariff plans. Although this is beneficial for subscribers, such a ruling may hurt ARPUs of incumbent operators. Moreover, an increase in MOU cannot offset the ARPU decline and would therefore impact margins of telecom operators.

Mobile number portability, coming into force from 1 January 2010, will further increase competition. With an aggressive price war, now both in call and SMS, declining MOU elasticity, the ARPU and margins of all MSPs will come under pressure in the near term.
–Yogesh Sapkale [email protected]

-- Sucheta Dalal