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Telecom
India
More power to the consumer; MNP arrives. Pan-India MNP rollout expands the
power to shift operators to subscribers hitherto held captive by the need to retain their
number, raising their bargaining power in the process. Even as it is premature to predict
the relative winners/losers among companies, MNP is a landmark event for the sector,
in our view, and has deeper ramifications (mostly negative), which we discuss in this
note. We remain Cautious on the sector on account of structural over-capacity issues.
No longer captive to the number – more power, more choice to the consumer
We would broadly divide the Indian wireless customer base into four segments
` Pure price-arbitrage, ‘deal of the month’ seekers ready to change numbers frequently – typically
low-end prepaid subs, this segment does not care about number continuity and is ready to
change operators for any tariff arbitrage available. This segment is a major contributor to the
high churn in the industry.
` ‘Why one when I can have both’ subs – again, typically pre-paid subs (low as well as high-end),
carrying a dual-SIM handset, or more than one handset. These subs have more than one
connection with the first one serving as a permanent incoming number and the other
connection(s) used to gain from tariff arbitrage available in the market.
` High-end prepaid/postpaid non-corporate subs that care for their number – typically selfemployed professionals and small business owners for whom retaining the mobile number on
their business card is critical from a business continuity perspective.
` Corporate subs – typically post-paid and high-end. Operator choice is typically made at the
corporate level and number retention is critical.
MNP rollout extends the choice of changing operators (for better quality, better pricing or both) to
the 3
rd
and 4
th
segments above. Even as these segments are likely a modest proportion of the subs
base, they contribute substantially to the revenue and EBITDA base of the industry, in our view.
MNP removes operators’ ‘incumbency/ number captivity’ hold on these subs, adding them to the
‘subs at risk of churn’ list.
Whichever way the tide turns, MNP has ramifications for the industry
Jury on the MNP impact on subs/revenue market share distribution among operators is still out and
the focus of this note is not to hazard a guess on the winners and losers out of this event. Various
surveys carried out recently and Dec 2010 net adds in Haryana (the first circle where MNP was
rolled out) render an inconclusive picture as well. We have seen MNP-centric ad campaigns (Idea
and Vodafone the most visible) and port-in offers from select operators (notably Tata Docomo,
BSNL and MTNL – see Exhibits 1-3). We focus on industry-wide ramifications –
` Critical judgment time for operators – with MNP enabling the high-revenue contributors to vote
from their wallet, the next year or so will answer some key questions – whether the incumbent
can sustain their dominant market share in the high-end segment with premium pricing or the
challengers can make a dent in this segment with perceived inferior network quality.
` A stress test for operators – potential revenue loss for the MNP losers will stress test the P&Ls of
the incumbents and the balance sheets of challengers.
Competitive intensity in the industry will likely rise, whichever way the dice rolls. A verdict
in favor of the incumbents will force a long, hard look at the price-centric strategy
adopted by challengers possibly forcing them to the edge. They will need to make a
difficult choice – either invest in network quality while stretching further their balance
sheet or be prepared to be marginalized with the only hope being an eventual sell-out.
On the other hand, a verdict in the favor of the challengers will force a relook at the
sustainability of the ‘pricing premium’ strategy adopted by the incumbents (especially in
their leadership circles). Suffice to say, the end result would be either network quality
improvement by the challengers (more capacity in the system) or price rationalization by
the incumbents – increase in sector competitive intensity in both the cases.
` More bargaining power for the corporate subs and high-end prepaid subs – even as we
see this segment as the most sticky one among the four segments discussed earlier in the
note, we think MNP increases the bargaining power of this segment vis-à-vis their
wireless operator. We note that this segment has remained untouched by the recent
hyper-competitive phase in the industry as depicted in the RPM trends in post-paid and
pre-paid segments since the onslaught of new competition (see Exhibit 4). Our analysis
suggests that this segment (post-paid + high-end pre-paid) forms 8-10% of the country’s
subs base, 25-30% of revenues, and an even higher share of EBITDA. Exhibits 5 and 6
depict the tariff plans for our corporate connection for Sep 2010 and Oct 2010 – note the
change in STD (long distance) calling rates – possibly pre-MNP jitters. We have heard
anecdotes of similar cuts in a few other corporate houses and also of large players raising
their retention efforts for high-usage subs (offering freebies, lowering call rates etc.).
` Sales and marketing spends will go up, across the industry. In addition, dipping charges
for calls to ported subs (to be determined by mutual negotiations between the telecom
operators and MNP database administrators) will also increase administrative expenses for
the sector.
MNP will make an impact in India, contrary to global experience
MNP has failed to make a meaningful impact in several markets around the world and this is
a fact often used to shrug off MNP as a non-event. We disagree – the key reasons why MNP
has failed to make a meaningful dent in a lot of markets is the post-paid contract subs
market structure with handset subsidies. Essentially, changing operators involves a contract
break-up fee which could be large and serve as an impediment.
Indian market has no handset subsidies and that removes the MNP success hurdle faced by
most countries. The only other country which is similar to India is Finland, where the
regulator does not allow handset bundling. After the introduction of MNP, the churn rate in
Finland increased by >10 pps within a short timeframe. ARPU for Telia Sonera, the largest
operator in Finland, declined 16% within four quarters of the launch of MNP. Exhibit 7
discusses the Finland case in detail.
MNP – definition, administrative procedure etc.
Simple concept – Mobile Number Portability (MNP) allows a consumer to change her
operator while retaining her mobile number. Note that MNP is allowed only in the wireless
segment and only intra-circle in India. Essentially, a sub can not keep her Delhi number in
Mumbai and wireline porting is not allowed. The TRAI has mandated a Rs19 cap on porting
charges for the sub (to be payable to the recipient operator); the recipient operator has to
pay a fixed Rs19 per port to the database administrator. Maximum porting time is seven
working days (except in J&K and North East)
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Telecom
India
More power to the consumer; MNP arrives. Pan-India MNP rollout expands the
power to shift operators to subscribers hitherto held captive by the need to retain their
number, raising their bargaining power in the process. Even as it is premature to predict
the relative winners/losers among companies, MNP is a landmark event for the sector,
in our view, and has deeper ramifications (mostly negative), which we discuss in this
note. We remain Cautious on the sector on account of structural over-capacity issues.
No longer captive to the number – more power, more choice to the consumer
We would broadly divide the Indian wireless customer base into four segments
` Pure price-arbitrage, ‘deal of the month’ seekers ready to change numbers frequently – typically
low-end prepaid subs, this segment does not care about number continuity and is ready to
change operators for any tariff arbitrage available. This segment is a major contributor to the
high churn in the industry.
` ‘Why one when I can have both’ subs – again, typically pre-paid subs (low as well as high-end),
carrying a dual-SIM handset, or more than one handset. These subs have more than one
connection with the first one serving as a permanent incoming number and the other
connection(s) used to gain from tariff arbitrage available in the market.
` High-end prepaid/postpaid non-corporate subs that care for their number – typically selfemployed professionals and small business owners for whom retaining the mobile number on
their business card is critical from a business continuity perspective.
` Corporate subs – typically post-paid and high-end. Operator choice is typically made at the
corporate level and number retention is critical.
MNP rollout extends the choice of changing operators (for better quality, better pricing or both) to
the 3
rd
and 4
th
segments above. Even as these segments are likely a modest proportion of the subs
base, they contribute substantially to the revenue and EBITDA base of the industry, in our view.
MNP removes operators’ ‘incumbency/ number captivity’ hold on these subs, adding them to the
‘subs at risk of churn’ list.
Whichever way the tide turns, MNP has ramifications for the industry
Jury on the MNP impact on subs/revenue market share distribution among operators is still out and
the focus of this note is not to hazard a guess on the winners and losers out of this event. Various
surveys carried out recently and Dec 2010 net adds in Haryana (the first circle where MNP was
rolled out) render an inconclusive picture as well. We have seen MNP-centric ad campaigns (Idea
and Vodafone the most visible) and port-in offers from select operators (notably Tata Docomo,
BSNL and MTNL – see Exhibits 1-3). We focus on industry-wide ramifications –
` Critical judgment time for operators – with MNP enabling the high-revenue contributors to vote
from their wallet, the next year or so will answer some key questions – whether the incumbent
can sustain their dominant market share in the high-end segment with premium pricing or the
challengers can make a dent in this segment with perceived inferior network quality.
` A stress test for operators – potential revenue loss for the MNP losers will stress test the P&Ls of
the incumbents and the balance sheets of challengers.
Competitive intensity in the industry will likely rise, whichever way the dice rolls. A verdict
in favor of the incumbents will force a long, hard look at the price-centric strategy
adopted by challengers possibly forcing them to the edge. They will need to make a
difficult choice – either invest in network quality while stretching further their balance
sheet or be prepared to be marginalized with the only hope being an eventual sell-out.
On the other hand, a verdict in the favor of the challengers will force a relook at the
sustainability of the ‘pricing premium’ strategy adopted by the incumbents (especially in
their leadership circles). Suffice to say, the end result would be either network quality
improvement by the challengers (more capacity in the system) or price rationalization by
the incumbents – increase in sector competitive intensity in both the cases.
` More bargaining power for the corporate subs and high-end prepaid subs – even as we
see this segment as the most sticky one among the four segments discussed earlier in the
note, we think MNP increases the bargaining power of this segment vis-à-vis their
wireless operator. We note that this segment has remained untouched by the recent
hyper-competitive phase in the industry as depicted in the RPM trends in post-paid and
pre-paid segments since the onslaught of new competition (see Exhibit 4). Our analysis
suggests that this segment (post-paid + high-end pre-paid) forms 8-10% of the country’s
subs base, 25-30% of revenues, and an even higher share of EBITDA. Exhibits 5 and 6
depict the tariff plans for our corporate connection for Sep 2010 and Oct 2010 – note the
change in STD (long distance) calling rates – possibly pre-MNP jitters. We have heard
anecdotes of similar cuts in a few other corporate houses and also of large players raising
their retention efforts for high-usage subs (offering freebies, lowering call rates etc.).
` Sales and marketing spends will go up, across the industry. In addition, dipping charges
for calls to ported subs (to be determined by mutual negotiations between the telecom
operators and MNP database administrators) will also increase administrative expenses for
the sector.
MNP will make an impact in India, contrary to global experience
MNP has failed to make a meaningful impact in several markets around the world and this is
a fact often used to shrug off MNP as a non-event. We disagree – the key reasons why MNP
has failed to make a meaningful dent in a lot of markets is the post-paid contract subs
market structure with handset subsidies. Essentially, changing operators involves a contract
break-up fee which could be large and serve as an impediment.
Indian market has no handset subsidies and that removes the MNP success hurdle faced by
most countries. The only other country which is similar to India is Finland, where the
regulator does not allow handset bundling. After the introduction of MNP, the churn rate in
Finland increased by >10 pps within a short timeframe. ARPU for Telia Sonera, the largest
operator in Finland, declined 16% within four quarters of the launch of MNP. Exhibit 7
discusses the Finland case in detail.
MNP – definition, administrative procedure etc.
Simple concept – Mobile Number Portability (MNP) allows a consumer to change her
operator while retaining her mobile number. Note that MNP is allowed only in the wireless
segment and only intra-circle in India. Essentially, a sub can not keep her Delhi number in
Mumbai and wireline porting is not allowed. The TRAI has mandated a Rs19 cap on porting
charges for the sub (to be payable to the recipient operator); the recipient operator has to
pay a fixed Rs19 per port to the database administrator. Maximum porting time is seven
working days (except in J&K and North East)
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