Cellular phones the rate wars


MTNL, which had taken its position as the third cellular service license in Delhi and Mumbai, made it really tough for the existing cellular players. MTNL new services became effective first in Delhi. MTNL gave a head start to its new competitive role through its aggressive pricing policy. It kept its tariffs lower than those prescribed by the Telecom Regulatory Authority of India (TRAI). In Delhi, it fixed its rates at an attractive level of Rs. 1.50 per minute for incoming calls, and Rs. 2.80 per minute for outgoing calls. It fixed the rental at Rs. 400.

The two existing cellular operators in Delhi, Essar, and Airtel, a part of the Mittal owned Bharti TeleNet, as a result, quickly slashed their rates and brought them close to MTNL proposed rates. In fact, in the process, they reduced their ruling tariffs by as much as 50 per cent. Their tariffs were now only marginally higher than those of MTNL. Essar fixed its new tariffs at Rs 395 monthly rental, Rs 1.60 per minute for incoming calls and Rs. 2.80 for outgoing calls. It offered another plan with Rs. 495 monthly rental, Re 1 per minute for incoming calls and Rs 3.95 for outgoing calls. Airtel, the other cellular operator in Delhi, cut its rental to Rs 400, the rate for outgoing calls to Rs 2.85 and that for incoming calls to Rs. 1.60 per minute. It also announced an alternative scheme. Currently all the rates are much lower than the tariffs mentioned above. The rates are mentioned above just to give an indication how a money spinning service business gets dramatically changed into rate wars with increase in competitive players.

The rate war quickly spread to the rest of India as well. Here, the other public sector FSP, BSNL, was just getting ready to launch its service, which covered cities like kolkata, Haldia, Patna, Chennai, Hyderabad and states like Andhra Pradesh. Here, even before BSNL Launched its new service, the cellular players reduced their tariffs. For example in Kolkata, Hutchison Command, one of the two existing cellular licensees, cut its rates to Rs. 3 per minute for incoming call and to Rs 6 per minute for outgoing calls. Spice Cell, the other cellular operator in Kolkata, cut its monthly rental to Rs 485. In Punjab, Spice dropped its tariff by 33% for incoming calls and made it Re 1 per minute. In Andhra Pradesh, Airtel, one of the two cellular licensees, announced a new STD service for customers within Andhra Pradesh whereby a call made to a land link in 24 specified towns where it was present to be treated s a local call, except for the airtime and PSTN charge. Users needed pay only a third of the existing STD charges in respect of these towns. It planned to add 35 towns more to the list of 24 in the subsequent months.

The FSPs, MTNL, and BSNL, were expected to be able to reduce their tariffs further when their volumes expanded. In fact, they envisaged a position to provide their service at Rs. 1.20 per three minutes for outgoing calls and zero charge for incoming calls. By no way, the cellular players could match this. Therefore, their share I the incremental growth was bound to come down. MTNL, in particular, was setting up its cellular services practically at negligible cost.

TRAI Orders the Cell Players to Refund Excess Tariffs Charged Earlier

The sob story of cellular operators did not stop there. The TRAI added to their problem by decreeing that they should refund their customers the excess tariff they had charged on them in the earlier period. TRAI decreed that the players had been overcharging subscribers since August 1999 and that they should make appropriate refunds. TRAI had earlier ordered the players to bring their tariffs down to Rs. 4 per minute with higher rental fees. It took more than a year for the cellular players to bring down the tariffs to Rs 4 per minute. TRAI also commented that while the cellular companies had been allowed to shift to a softer revenue sharing formula from the license fee regime, they did not think it ethically necessary to pass on the benefits to the consumers.

Failure to Anticipate Government Policy

The cellular players had naively assumed that the government would not permit the FSPs, MTNL and BSNL, to get into the mobile business. In as much as their license agreement covering cellular services did not grant them the right of exclusivity, they should have anticipated the development.

The cell phone operators had also indulged in a game of one-upmanship to outbid others and had landed themselves in a big mess.

They had been carrying on cozy duopolies for about five years. They had no business to assume that such duopolies would continue indefinitely.

Loss of Image

The cellular players suffered not only revenue loss, but an image loss as well.

The cellular operators lowered their rates immediately after the new entrant announced its rates. The consumer now believed that the operators had been overcharging them as there had been no competition. The consumer also alleged that the cellular players were not taking a socially responsible approach in pricing.

The cell phone operators realized the damage done to their prestige. Losing the perception game is something no entrepreneur can afford. On this score alone, the entire market could swing to the public sector telecom corporations, MTNL and BSNL.

To quote a Hutchison spokesman, ‘Clearly, we have suffered a reverse in the perception game.’

The private cellular operators also seemed to have missed another equally vital point. In this business, the potential market was huge and affordability would drive volumes. They could have kept their initial tariffs considerably lower. It might have controlled to some extent, the damage they suffered in the matter of public perception.