Global Economics

Virgin's Big Cellular Shout-out in India


After scaling the Mumbai Hilton, Sir Richard Branson announces Virgin Mobile's hookup with Tata Teleservices to target the youth market

On Mar. 2, after Sir Richard Branson gratified the local media with his antics—he scaled the face of the Hilton Towers in Mumbai—the Virgin Group founder climbed down to announce his biggest move in India yet. He has become a franchisee of Tata Teleservices, a domestic telecom player providing CDMA cellular services. This is Virgin's third India play after Virgin Air's India routes and a radio station, Fever 104 FM. And it's Virgin Mobile's seventh telecom market. Others include the U.S., France, and South Africa.

Virgin Mobile's Indian service is targeting the 400 million Indians between the ages of 13 and 30 who, Branson says, the country's current telecom operators have been ignoring. Hence Virgin Mobile 's catchy tagline: Think hatke, Mumbai slang for "think out of the box." The company will be offering handsets by Nokia (NOK), Samsung, and Huawei Technologies, most of them black phones with red trim that will cost between $60 and $120 each. They have full-color screens and FM radio access—to listen to Fever 104, no doubt.

Virgin's team of 250 researchers spent nearly nine months studying their target audience. They discovered that Indian parents take away their children's cell phones at night and read the text messages they send or receive—something kids hate. Virgin's value-added service is offering a password-protected folder to the young so parents cannot read their messages. Great for the kids, too bad for the parents.

Fastest-Growing Cellular Market

Virgin thinks this new feature is not an obstacle. For one thing, parents can decide whether to let their children use the service. "This is to get under the skin of our target audience, but there are other parts of the service that parents will like, particularly the affordability," says Jamie Heywood, deputy chief executive of Virgin Mobile India. Best of all, the text messages will be the cheapest in the market, 30 paise, or less than one U.S. cent, affordable even to young rural Indians. Weekend call rates will also be 30 paise.

The market numbers are compelling. Out of India's total cellular user base of 242 million, 215 million are between 15 and 25 years old. And with India being the world's fastest-growing cellular market—India adds 8.7 million subscribers a month, and the number of cellular subscribers grew nearly 50% last year—the youth market should grow another 50 million by 2010, drawing revenues of an estimated $8.75 billion. "If you can't make it in India ," said Branson, "you won't make it anywhere."

In order to make it in India, though, Branson has had to forge an unusual deal with Tata. Because India 's telecom regulations do not permit Virgin to do what it does in other markets—buy minutes from operators and resell them to consumers (what's called in industry parlance a Mobile Virtual Network Operator arrangement)—Virgin has gone the franchise route. The partners won't discuss the financials or the revenue-sharing structure. Still, others eager to invest in India 's hot telecom market could follow that same route. Russian telecom player Sistema has just bought a stake in a domestic Indian player and Egypt's Orascom is rumored to be interested in entering the Indian market.

Lagging Behind Reliance

Getting the Virgin franchise could provide a much needed lift for Tata. Other companies in the Tata Group dominate their industries: Tata Steel, for instance, is the country's top steelmaker and Tata Motors has recently won global acclaim for its groundbreaking low-cost car, the Tata Nano (BusinessWeek.com, 3/10/08).

However, Tata's cellular operator has been a laggard. The company has just 25 million subscribers for its CDMA service (the second-generation cellular standard operating on technology developed by San Diego's Qualcomm. That's just half the 46 million subscribers to market leader Reliance Communications.

Tata had an early start but it was not as aggressive as Reliance. More recently, though, it has been competing fiercely, especially in value-added services. Reliance is also starting to focus on its GSM, or global system for mobile, services, the most popular cellular standard worldwide, which is where the majority of India's telecom players, such as market leader Bharti and No. 2 player Vodafone compete.

Custodians of the Virgin Brand

Tata executives now hope Virgin, with its clever approach to marketing and expertise in handling customer service, will help close the gap with Reliance. While Tata's existing customers won't automatically switch to Virgin, they will have access to some of Virgin Mobile's services, and calls between Tata and Virgin subscribers will be free. "We are custodians for the Virgin brand," says Anil Saldhana, chief executive of Tatatele Services. "So all value-added services we develop can go to Virgin, too."

For Virgin, the franchise arrangement with Tata provides access to the Tata Group's vast nationwide distribution system, an advantage the British company could never have had on its own. Virgin and Tata intend to launch immediately in 50 Indian cities and reach 1,000 cities by the end of the year.

Most importantly, Virgin won't be bothered with infrastructure challenges, the biggest headache of doing business in India. And Virgin won't have to deal with the country's regulators because Tata will be responsible for receiving all the regulatory approvals. Branson says all the cellular operators he has used while in India, except for Tata, suffered from a high number of dropped calls. That of course is more a problem with the Indian government not releasing enough bandwidth than investments by operators.

But Tata, as Branson points out, has a lot of capacity. It's better to have fewer customers and higher capacity in a growing market like India. And, Heywood adds, "It creates network space for us."


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