Indian price war puts start-ups at risk - New GSM licensees account for less than 2% of market as government prepares bailout package

The new Indian GSM start-ups that were awarded licenses two years ago are struggling to compete in the country’s highly competitive mobile market, according to new GSMA Intelligence data.

India awarded eight new GSM licenses in 2008; two to existing CDMA operators Reliance Communications (R-Com) and Tata Teleservices Ltd (TTSL) and a further six to start-ups. Our study found that R-Com and TTSL have been successful in attracting customers to their new GSM networks, but the start-ups have struggled, accounting collectively for less than 2 percent of India’s mobile connections in the second-quarter.

These new operators have struggled to build market share in the cut throat economic environment of the Indian mobile market, which has seen the effective price-per-minute of mobile calls slip well below US$0.01. Many of these operators are still to launch in some of the service areas where they have licences, and one – ByCell – has already had its licence revoked by regulators.

According to reports last week, India’s Department of Telecoms (DoT) is currently exploring ways to ease the pressure on these operators in order to avoid them having to relinquish (and be refunded for) their licences, which were bought for around US$140 million each in 2008. One such measure being considered for a bailout package is the lifting of regulations that prevent these operators renting capacity to MVNOs, which would create another source of revenue for the cash-strapped start-ups. The government is also expected to ease network rollout obligations for these licensees and lift tight M&A restrictions to encourage consolidation. Some smaller CDMA operators – notably Russian-owned MTS India – are also thought to be included in the bailout.

The most high-profile start-up has been Uninor, a joint venture between Norway’s Telenor and Unitech, an Indian real estate firm. According to the latest GSMA Intelligence data, Uninor had launched in eight service areas and reached over 6 million connections by the end of the second-quarter since launching late last year, giving it a roughly 1 percent share of the Indian market. However, the large-scale rollout has come at a high cost with recent reports suggesting that the operator has racked up operating losses of over US$500 million to date. Telenor has denied reports it is planning to exit the market and has reiterated a target of achieving operating profitability by 2011.

Telenor is not the only foreign operator thought to be studying its options in India. UAE operator Etisalat’s Indian arm Etisalat DB – branded as Cheers Mobile – soft-launched in March and is live in nine circles to date, offering local on-net calls as low as INR0.010 per minute. But Etisalat’s commitment to the venture remains unclear as it has also been linked with buying stakes in R-Com and IDEA Cellular. Under India’s current M&A laws, Etisalat would need to divest its stake in Cheers Mobile in order to buy a stake in one of its larger rivals.

Among the other new players, Loop Mobile has had a long-standing network in place in Mumbai and soft-launched in other areas via its new Loop Telecom subsidiary in August (therefore not included in our 2Q10 data). Elsewhere, S-Tel has focused early efforts in the more rural C-Circle service areas, while Videocon Mobile has launched in Tamil Nadu and Haryana.

Matt Ablott, Analyst, GSMA Intelligence:

India’s fierce mobile pricing war has impacted all players in the market but there is evidence that the start-up operators are being disproportionately affected. Rolling out the new GSM networks has been relatively straightforward for R-Com and Tata Docomo as they already have infrastructure in place, but this has not been a luxury afforded to the start-ups. As well as benefiting from economies of scale, the larger operators – notably market-leader Bharti - have been able to hone their business models to operate on tiny margins due to outsourcing and network optimisation. ARPU is generally higher at the larger firms and they will also soon benefit from being able to offer 3G services (none of the new players won 3G spectrum in the auctions earlier this year). Exacerbating the problem further is the fact that many of the start-ups have attempted to build market share quickly via low cost pricing strategies, which has seen some report ARPU at barely over US$1 per month – less than half the Indian average (which is already among the lowest in the world). With many of the foreign operators reportedly looking to exit the market unless conditions improve, the Indian authorities must act quickly to address the situation. Top of the agenda must be the relaxing of M&A regulations that will allow much-needed consolidation in India’s over-crowded mobile market.

Selected Indian GSM Operators Q2 2010
Source: Company reports, GSMA Intelligence

¹ Loop Mobile owns 51.24% of Loop Telecom the licence holder for service areas outside Mumbai