The price war among Indian phone operators has shifted from voice to data.
Bharti Airtel Ltd. (BHARTI), Idea Cellular Ltd. (IDEA) and Vodafone Group Plc (VOD) have slashed fees for sending data by as much as 90 percent as mobile social networking and gaming surge. They are betting on cheaper rates to help add users in a market where smartphone sales, led by Samsung Electronics Co. (005930)’s handsets, almost tripled in the quarter through March.
“Data is the future and we have to lay out the best options for consumers so they become broadband users for life,” Sashi Shankar, chief marketing officer at Idea, said in an interview. “We have users who don’t have data plans but own phones that are capable of such services. They are in tier II and tier III cities and that’s where we are investing.”
The carriers are attempting to replicate a strategy that got them almost a billion subscribers for voice traffic while hurting profitability as call rates fell to as low as 0.5 rupees (less than a cent) a minute. For an industry grappling with more than $25 billion of debt, declining profit and mounting expenditure, affordable data services may help boost net income by 10 percent by 2015, said Nitin Soni an analyst at Fitch Ratings in Singapore.
Revenue from data usage for Indian mobile phone companies as a share of total sales is about 3 percent, among the least in the Asia-Pacific region. That may climb more than sixfold to 20 percent by 2017, according to Soni.
“They know they’ve spent huge amounts of money, and now they have to stimulate demand which isn’t there yet in India,” Soni said. “There will be huge growth. We’ve seen this in other emerging markets.”
After struggling to utilize their third-generation, or 3G, capacity, for which nine bidders paid a combined $11.4 billion since 2010, operators are dropping data costs on their 2G network six months after ending a price war in voice, he said. The number of mobile subscribers peaked at 929 million last year after call rates dropped from as high as 16 rupees a minute in 1997.
The local unit of Vodafone on June 18 said it cut mobile data rates in four 2G circles by 80 percent, while Idea Cellular, controlled by billionaire Kumar Mangalam Birla, announced two days later a 90 percent reduction in eight zones for three months starting July 1. Bharti, the nation’s biggest carrier, reduced rates by 80 percent in secondary markets.
“These could work as a good hook to attract new users to data services, which are still relatively low in India,” said Sachin Gupta, an analyst with Nomura Holdings Inc. in Singapore. “If this turns into price wars, the offset could be much higher volumes, which probably isn’t a bad thing.”
Operators have ended their price wars over call rates during the last six months by scaling back discounts on pre-paid services, effectively giving them less call time. Carriers have increased rates by as much as 30 percent to boost margins from their 867 million subscribers.
Data usage accounted for 5 percent of total revenue at Bharti, controlled by billionaire Sunil Bharti Mittal, compared with 32 percent at China Mobile Ltd. (941), the largest operator in the world’s most populous country. Data revenue in India grew 25 percent in the quarter ended March 31 from a year earlier, according to Soni.
Rising sales of smartphones may help the South Asian country catch up with other emerging markets, including China, Brazil and Indonesia, where growth has touched as much as 60 percent, according to Fitch’s Soni.
India is the world’s fourth-largest smartphone market after the U.S., China and Japan in the quarter ended March, with 6.6 million handsets, according to data provided by CyberMedia Research. Of those, Samsung accounted for 42 percent. Shipments grew four-times faster than the global average, at a rate of 164 percent from a year ago, according to researcher IDC.
“India is the new China,” said Neil Mawston, executive director at Strategy Analytics. “India is a low-penetration, high-growth market that no smartphone vendor, component maker or application developer can afford to ignore.”
Chance for Margins
While smartphone sales are encouraging, not all these handsets guarantee data usage as the tariffs, even after the reductions, may not be cheap enough in a country where the World Bank estimates about 800 million people live on less than $2 a day, said Urmil Shah, an analyst at Kim Eng Securities Pvt.
The carriers may also be reluctant to offer data at par with voice as that would erode margins at a time when operators need to raise finances to renew their licenses next year, according to him.
“Price wars in data can’t be as aggressive as we saw in voice, because this is the only area where operators have a chance of margin expansion,” Shah said in an interview.
Bharti’s group earnings as a percentage of sales before interest, depreciation, taxes and amortization narrowed to 31 percent in the financial year ended March 31, from as high as 42 percent five years ago. The similar gauge of profitability at Idea shrank to 27 percent from 34 percent.
Net profit at Bharti slid to 22.8 billion rupees ($379 million) from a record 89.8 billion rupees in the year ended March 31, 2010, according to data compiled by Bloomberg. Shares of the New Delhi-based company gained 2.9 percent to 314.45 rupees in Mumbai, paring this year’s loss to 0.8 percent.
While data services haven’t fully taken off in the country, some operators aren’t waiting. Billionaire Mukesh Ambani’s Reliance Jio Infocomm Ltd. is spending 180 billion rupees to roll out 4G services starting March 2014.
For now, most operators are using their 2G networks to deliver data services. Vodafone in India is offering “pocket friendly” plans and “educating” potential users about the benefits of Internet access, Vivek Mathur, the local unit’s chief commercial officer, said in an interview.
India had 138 million online users in 2012 and that number will more than double by 2017 to about 350 million, according to a forecast from Cisco Systems Inc.
“We expect the growth momentum to only accelerate, providing immense opportunity,” he said. “Overall Internet penetration in India is low while mobile penetration is several times higher. Most consumers will discover the power of the Internet via their handsets.”
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