Consolidation in Indian Telecom Sector... is it possible?

Tuesday, February 23, 2010 Posted by Magesh Kumar

Hi friends, in light of the panel discussion we had today on the Indian telecom sector, I would like to initiate an informal discussion amongst ourselves, wherein we can all post our views.

To begin with, I beg to disagree on the replies given by one of the speakers w.r.t. the possibility of consolidation of the existing players. As we all know, the Indian telecom sector has space for only about 4 to 6 players. But currently there are about a dozen firms fighting it out there, engaging in a price war that is probably more violent than that of the Coke-Pepsi one which occurred a few years ago. And to make things worse, Norway's Telenor is trying to butt in too, in order to have a share of the astronomical growth rate of the market.

I don't think a consolidation is possible in the near future, and here are my reasons:

a) No company is small enough to be acquired. I may of course, be wrong, but I think even Idea Cellular, one of the relatively smaller players, is too expensive to be bought out in entirety by say a Bharti or a Reliance Mobile. Also, given the lucrative market scenario, any company would fight tooth and nail, and exercise all the "poison pill" strategies it can think of, to prevent itself from being acquired.

b) I think an alliance (like the Kingfisher-Jet Airways)is a far more probable and likely to happen than a consolidation, wherein the players can form a sort of agreement among themselves to reduce competition and have a "win-win" for themselves (the current price-war is all but benefiting us customers, and not any of the telecom companies). We are witnessing that the big players are coming up with ways and means to compensate their rapidly declining market share to minnows like Aircel and Uninor - Airtel is already aggressively expanding its overseas arms (read Warid Telecom/MTNL/Zain and what not!!). It is only through such an alliance, will these companies be able to compete without further eroding each others' ARPUs.

In light of the above, please let me know what you guys think. Do pour in your opinions, ideas, strategies, etc. which may possibly be adopted by our telecom companies. (Do not forget that MNP is also an upcoming threat for most, if not all, players).

Cheers
MK

9 comments:

  1. shilps said...

    I think the price levels at which the industry is operating is not sustainable in the long run. On top of it Indian consumer is highly sensitive and the only thing holding one to a service provide is probably the cellphone number and with MNP that would go as well. To be competitive the companise would have to either offer greater value for money that can be done through acquiring greater volumes or offering a distinct advantage both of which requires pulling customers to your network. The consolidation may not happen in the big four of five player but the threat looms on the new entrants. 14 opeartors in one country even if its the size of India are not sustainable.

  2. nitesh said...

    first of all ARPU is no longer the measurement criteria , there will be some other way which can be used to measure the health of the company may be vas etc

    regarding consolidation MK may be in an 2-3 years u will see consolidation and as shilpi has said the astronomical values will be not be sustainable

    only companies which evolve from providing only voice to some other features will survive
    and consolidation can be off the type b/w companies say e.g one which is big in rural india and one which is big in urban area
    u never know Airtel + BSNL

    and we will see new players also when 3g auctions are done
    probably US giants

  3. Magesh Kumar said...

    ur right Nitesh... perhaps 5 years down the line Verizon or AT&T would have eaten into the market share of Airtel or Tata Telecom. And by the way, ARPU is still one of the major yardsticks to measure performance in the telecom space. Do u remember what the Airtel person said when he had come for our seniors final placements about a fortnight ago? Bharti's ARPU had fallen from 58 paise to 52 paise, n he was pretty worried about it. Every company is gaining more and more customers per day, but the y are paying less and less.

  4. Guna said...

    Hi Magesh!
    Nice initiative..
    Coming to the point,
    1. Consolidation is not function of firm size. Its function of fit and strategic sense. So ur reasoning for "No company is small enough to be acquired" may not be the best reason.
    Consolidation is very likely in Indian Telecom sector in medium term.
    a]If you observe any of the emerging / developed markets, you will not be able to find more than 4-5 players (result of consolidation).India is no exception and will follow this trend.
    b] "Alliance in airline industry" happened, albeit unsuccessfully after "a small consolidation phase" where Kingfisher and Jet acquired Deccan and Sahara respectively.
    c] "Alliance is not possible in growing market. Its more of a survival strategy than thrival strategy. Indian telecom is growing and not at saturation stage"

    Regards,
    Gunasekar

  5. Magesh Kumar said...

    hey, thanks a tonne guna... your points b) & c) are eye openers. Though they are so obvious, I must admit I was not smart enough to think of them...
    :-) by the way, i was also thinking of another aspect. now that Telenor is trying to get into the already cramped space, do you think our government/telecom ministry should allow/disallow Telenor's entry, in the interest of the existing players? what is your take on this?

  6. Guna said...

    :)..Its obvious na, thats y i got it. otherwise i wuldnt have. :)
    Government intervention is not a great idea dude.
    1.It tilts field in favor of existing players setting a wrong precedent..What if Middle east, Bangladesh, Srilankan govts prevent Airtel entry?
    2.If telenor sees space, it should be encouraged to step in and flourish. But enough checks have to be made to make sure it has d required capabilities to offer service of acceptable standard.
    Intellectual attacks are welcome:)

  7. Guna said...

    Hey Shilpi..
    80% of revenues are provided by 20% customers (corporates). Those 20% may not be as price sensitive as SEC B & C. They should be concerned abt the quality of service.
    @ Nitesh,
    ARPU is valid enuf metric dude. Even if a company provides VAS, customer has to pay in rupees, (revenue)..it is nothin but ARPU.
    I agree 100% tht company cant survive without moving up in the value chain.

  8. shilps said...

    Guna... nice to see the post being kept alive.
    if you read through my post I have said that the value propsition has to be either superior quality or price leadership. Revenues may be provided by 20% of customers but they also would not hesitate to switch providers if they get superior value elsewhere while retaining their numbers.

  9. Magesh Kumar said...

    okay.... i don't mind how many players actually come in, for as customers we are benefitting more and more due to the price war...

    so welcome telenor
    welcome AT&T
    welcome Verizon.......

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