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Telecom
India
Don’t spoil the kids. Incumbents’ response to the MNP launch is at odds with the calm
shown (‘no impact’ stance) over the past two years. The temporary ‘damage control’ or
retention moves (offering freebies to select customers wanting to port out) as well as
‘port in’ offers run the risk of a permanent alteration in consumer behavior in the longrun.
A zero-sum game in terms of subs share movements post MNP may not necessarily
be a zero-impact event for the industry revenues/profitability. We remain Cautious.
Initial response post MNP launch could have long-term negative impact on consumer behavior
We are surprised at the subscriber retention moves of the large incumbents post MNP launch. In
the limited period post MNP launch, we have come across several anecdotes, tweets and blog
entries (see Exhibit 1) suggesting aggressive temporary freebies being offered to high-end subs
submitting a porting request – these freebies are in the form of some discount on monthly bill for
post-paid subs for a limited period of time (2-6 months), lower voice/data rates to match/better
competitor offers, free pizzas, discount coupons and the likes. Essentially, even as challengers
seem to be offering attractive ‘port-in’ options, incumbents appear to be pursuing aggressive
retention of potential ‘port outs’. Our initial thoughts –
Aggressive retention offers for ‘porting out’ subs may leave a bad taste in the mouth of
the loyal subs. Put yourself in the shoes of a loyal customer with no intention to switch from
her existing operator – she sees her mobile operator trying to woo new subs with attractive
‘port in’ offers, and offering freebies to (some) fellow customers showing their intent to ‘port
out’. Isn’t it natural for her to question the benefit of her loyalty? Why wouldn’t she try her luck
by sending a port request? If the operator responds and offers her freebies, that’s a bonus; if it
does not, she is no worse off than where she started – wanting to stay put.
MNP is not a temporary threat though the operators’ response suggests otherwise.
Aggressive port-in offers and retention moves run the risk of altering consumer behavior in the
long run. After all, the retention period guaranteed to an operator is just 90 days for a ‘ported
in’ sub and the same in case of a sub prevented from ‘porting out’ is essentially zero. Is the
‘ported in’ sub, that you have showered freebies on, an NPV-positive investment if she looks
out for another ‘port in’ deal 90 days down the line? What prevents the retained ‘porting out’
sub from asking the operator to make the temporary freebies permanent? Operators need not
worry about these questions if the initial MNP strategies are temporary across the board but
the question is – are they? There will always be weak operators in the market trying to
use MNP as a lever to gain a share of meaty subs with attractive ‘port in’ offers.
Fight for meaty, hitherto sticky, pre-paid and post-paid subs has just started. To be clear,
we are not arguing in favor of or against a particular operator or set of operators (incumbents/
challengers) here. Launch of MNP makes the so-far sticky high-ARPU subs base ‘at risk’ for
operators. Fight for low-end subs over the past two years has yielded little revenue/EBITDA
benefit for the challengers and they understand that, presumably. MNP/3G is possibly the last
opportunity for some of these challengers to improve their long-term viability and we expect
them to be aggressive. And, as we said earlier as well, even if MNP turns out to be a zerosum
game on subs market share, it may not be a zero-impact event for the industry – it
brings the hitherto untouched high-end segment into the competitive zone in the industry.
Bottom-line – there are no absolute winners from this event, in our view. Relative winners
are also likely to be absolute losers and on relative losers, we need not say much.
MNP is a high-impact event for the industry, in our view
Global experience suggests that MNP excitement fades off with time and that MNP has not
had a meaningful impact. However, we believe that the Indian wireless market is different
(high competitive intensity, no handset subsidies, no long-term contracts even in the postpaid
segment) and more importantly, the Indian consumer is different – hence, MNP impact
on the Indian wireless market dynamics will likely be different, in our view.
Severe price competition over the past two years in the Indian wireless market has impacted
the low and mid-end of the subscriber base. MNP now broadens competition for
subs/revenues to the entire subs base. We do believe that network quality is likely to play as
important a role in the competition within this segment as pricing. We see subscribers
opting for MNP for either of the following two reasons –
better quality network for similar (or slightly higher) price (monthly outgo, from a
subscriber’s perspective) – this could potentially hit the challengers in various circles, and
similar (or slightly inferior) quality network for a lower price – this could hit the
leaders/incumbents in various circles
There are important implications of the above. As highlighted in our Jan 20, 2011 note,
MNP impact would force – (1) challengers (mostly new entrants in various circles) to spruce
up their network quality or lose quality-driven subs; flip side is this would involve increased
capex and stress further the already-stretched balance sheets of these operators, and (2)
incumbents to dilute their premium pricing stance in their leadership markets; flip side is this
would stress the P&Ls of these operators. Either way, market is likely to become more
competitive and impact on the industry will be negative in the near term. Longer term
impact would depend on the ability of challengers to gain from the opportunity that MNP
and 3G provide them.
We also note that the quantum and quality of spectrum available to the challengers is an
impediment only from a capex perspective. New operators can match the coverage of
incumbents with inferior spectrum holding if they spend more on capex – capacity, in any
case, is not an issue for the new players at this point. To illustrate this, we take the example
of the Bihar circle, where Bharti has 3X Reliance’s (GSM + CDMA) and 6X BSNL’s revenue
market share despite similar quality and quantity of spectrum – also note that Bharti entered
the Bihar market only in Jan 2005 as against Nov 1997/Aug 2004 for Reliance GSM/CDMA
and Jan 2002 for BSNL.
The key to us, hence, is (1) the ability of the new operators to continue to find
sources of funding network expansion (as OCF break-even is still some time away)
and (2) the willingness of incumbents to continue to be aggressive in revenue share
protection while taking a P&L hit.
The stretched balance sheet situation of the challengers does entice a positive view on the
incumbents in the medium to long term but we believe a positive investment thesis base on
that would be missing a critical point – the elevated valuation of Indian wireless names
(7.3-8.5X FY2012E EV/EBITDA, substantial premium to global and EM telcos)
demands absolute winners, not relative ones. Relatively lower hit from a negative
industry event is still a negative, not a positive.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Telecom
India
Don’t spoil the kids. Incumbents’ response to the MNP launch is at odds with the calm
shown (‘no impact’ stance) over the past two years. The temporary ‘damage control’ or
retention moves (offering freebies to select customers wanting to port out) as well as
‘port in’ offers run the risk of a permanent alteration in consumer behavior in the longrun.
A zero-sum game in terms of subs share movements post MNP may not necessarily
be a zero-impact event for the industry revenues/profitability. We remain Cautious.
Initial response post MNP launch could have long-term negative impact on consumer behavior
We are surprised at the subscriber retention moves of the large incumbents post MNP launch. In
the limited period post MNP launch, we have come across several anecdotes, tweets and blog
entries (see Exhibit 1) suggesting aggressive temporary freebies being offered to high-end subs
submitting a porting request – these freebies are in the form of some discount on monthly bill for
post-paid subs for a limited period of time (2-6 months), lower voice/data rates to match/better
competitor offers, free pizzas, discount coupons and the likes. Essentially, even as challengers
seem to be offering attractive ‘port-in’ options, incumbents appear to be pursuing aggressive
retention of potential ‘port outs’. Our initial thoughts –
Aggressive retention offers for ‘porting out’ subs may leave a bad taste in the mouth of
the loyal subs. Put yourself in the shoes of a loyal customer with no intention to switch from
her existing operator – she sees her mobile operator trying to woo new subs with attractive
‘port in’ offers, and offering freebies to (some) fellow customers showing their intent to ‘port
out’. Isn’t it natural for her to question the benefit of her loyalty? Why wouldn’t she try her luck
by sending a port request? If the operator responds and offers her freebies, that’s a bonus; if it
does not, she is no worse off than where she started – wanting to stay put.
MNP is not a temporary threat though the operators’ response suggests otherwise.
Aggressive port-in offers and retention moves run the risk of altering consumer behavior in the
long run. After all, the retention period guaranteed to an operator is just 90 days for a ‘ported
in’ sub and the same in case of a sub prevented from ‘porting out’ is essentially zero. Is the
‘ported in’ sub, that you have showered freebies on, an NPV-positive investment if she looks
out for another ‘port in’ deal 90 days down the line? What prevents the retained ‘porting out’
sub from asking the operator to make the temporary freebies permanent? Operators need not
worry about these questions if the initial MNP strategies are temporary across the board but
the question is – are they? There will always be weak operators in the market trying to
use MNP as a lever to gain a share of meaty subs with attractive ‘port in’ offers.
Fight for meaty, hitherto sticky, pre-paid and post-paid subs has just started. To be clear,
we are not arguing in favor of or against a particular operator or set of operators (incumbents/
challengers) here. Launch of MNP makes the so-far sticky high-ARPU subs base ‘at risk’ for
operators. Fight for low-end subs over the past two years has yielded little revenue/EBITDA
benefit for the challengers and they understand that, presumably. MNP/3G is possibly the last
opportunity for some of these challengers to improve their long-term viability and we expect
them to be aggressive. And, as we said earlier as well, even if MNP turns out to be a zerosum
game on subs market share, it may not be a zero-impact event for the industry – it
brings the hitherto untouched high-end segment into the competitive zone in the industry.
Bottom-line – there are no absolute winners from this event, in our view. Relative winners
are also likely to be absolute losers and on relative losers, we need not say much.
MNP is a high-impact event for the industry, in our view
Global experience suggests that MNP excitement fades off with time and that MNP has not
had a meaningful impact. However, we believe that the Indian wireless market is different
(high competitive intensity, no handset subsidies, no long-term contracts even in the postpaid
segment) and more importantly, the Indian consumer is different – hence, MNP impact
on the Indian wireless market dynamics will likely be different, in our view.
Severe price competition over the past two years in the Indian wireless market has impacted
the low and mid-end of the subscriber base. MNP now broadens competition for
subs/revenues to the entire subs base. We do believe that network quality is likely to play as
important a role in the competition within this segment as pricing. We see subscribers
opting for MNP for either of the following two reasons –
better quality network for similar (or slightly higher) price (monthly outgo, from a
subscriber’s perspective) – this could potentially hit the challengers in various circles, and
similar (or slightly inferior) quality network for a lower price – this could hit the
leaders/incumbents in various circles
There are important implications of the above. As highlighted in our Jan 20, 2011 note,
MNP impact would force – (1) challengers (mostly new entrants in various circles) to spruce
up their network quality or lose quality-driven subs; flip side is this would involve increased
capex and stress further the already-stretched balance sheets of these operators, and (2)
incumbents to dilute their premium pricing stance in their leadership markets; flip side is this
would stress the P&Ls of these operators. Either way, market is likely to become more
competitive and impact on the industry will be negative in the near term. Longer term
impact would depend on the ability of challengers to gain from the opportunity that MNP
and 3G provide them.
We also note that the quantum and quality of spectrum available to the challengers is an
impediment only from a capex perspective. New operators can match the coverage of
incumbents with inferior spectrum holding if they spend more on capex – capacity, in any
case, is not an issue for the new players at this point. To illustrate this, we take the example
of the Bihar circle, where Bharti has 3X Reliance’s (GSM + CDMA) and 6X BSNL’s revenue
market share despite similar quality and quantity of spectrum – also note that Bharti entered
the Bihar market only in Jan 2005 as against Nov 1997/Aug 2004 for Reliance GSM/CDMA
and Jan 2002 for BSNL.
The key to us, hence, is (1) the ability of the new operators to continue to find
sources of funding network expansion (as OCF break-even is still some time away)
and (2) the willingness of incumbents to continue to be aggressive in revenue share
protection while taking a P&L hit.
The stretched balance sheet situation of the challengers does entice a positive view on the
incumbents in the medium to long term but we believe a positive investment thesis base on
that would be missing a critical point – the elevated valuation of Indian wireless names
(7.3-8.5X FY2012E EV/EBITDA, substantial premium to global and EM telcos)
demands absolute winners, not relative ones. Relatively lower hit from a negative
industry event is still a negative, not a positive.
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