Sunday, October 25, 2009

Reason behind India's lowest telecom tariffs in the world

India today boasts of the lowest telecom tariffs in the world. If it is down to a tariff in the range of 30 paisa per minute, that did not really happen overnight. It was the result of continuous innovation and fine-tuning of costs that operators worked on assiduously.

What transpired was India putting in place the world’s low-cost telecom model. For its part, the government lowered termination charges, offered spectrum at prices lower than many other countries and setting the base for full-fledged competition. The cost benefits were eventually passed on to the consumer.

What really happened? A combination of outsourcing non-core processes and infrastructure sharing enabled operators to shave costs to the bone. India’s largest operator by subscribers and revenues, Bharti Airtel set the process in motion which its competitors adopted quickly. The company challenging paradigms like ‘high average revenue per user per month (ARPU) is good’ or ‘post-paid is better’ or for that matter, ‘technology must be in-house’.

“We knew to succeed in this market, we had to address affordability because there is a huge disparity in the country. Since there are customers who make a one-minute call as well as a ten-minute call, we decided to concentrate on minutes and not ARPUs. We started building cost structures around minutes,” says Bharti Airtel’s deputy CEO Sanjay Kapoor.

In 2004, the company first outsourced the management of its IT functions to technology giant, IBM in a $750 million contract. This was then followed by outsourcing its networks and call centre operations.

“We started outsourcing all non-core processes to people who could handle them better than us. The advantages of outsourcing come in terms of improved productivity, scaling up and qualitative aspects,” he explains. The IBM contract was unique then and began a debate around the rationale of outsourcing. Not much later, it became a trend-setter, with other telcos like Idea Cellular and Vodafone Essar following suit.

Idea’s chief information officer, Prakash Paranjpe points out that his company’s outsourcing deal with IBM helped in reducing overall costs. “With outsourcing, the costs are predictable in percentage and absolute terms. It is a critical component of Idea’s ability to optimise costs,” he adds.

Sharing of passive infrastructure like telecom towers, generators and shelters was the next step in bringing down costs. “The advantages of infrastructure sharing are huge. It has an impact on long term productivity for a capital-intensive model and helps in conserving cash,” says Mr Kapoor.

According to Ascentius Consulting principal analyst Alok Shende, the disaggregation of the industry’s value chain freed capital from the books of operators, which facilitated the process of slashing costs. “Outsourcing allowed for conversion of capital expenditure (capex) model into an operational expenditure model (opex). This allowed operators to align costs on a per minute revenue model,” he rationalises.

According to him, the decision of the regulator in bringing down the termination charges was critical. This is paid by one operator for terminating calls on the network of another operator. Likewise, having a fierce competition scenario kept a lid on pricing which has still augured well for the consumer. Quite clearly, nothing works like a healthy value for money proposition in India.

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