The mobile usage charges typically depend on the volume of call minutes and the termination location. It reflects the marginal cost of carrying the call from the source to the destination. In general, calls terminated within caller’s networks (referred to as on-net calls) are often charged less than those terminated in other operator’s networks (i.e., off-net calls).
One reason for this is the termination charge (20 paise/min currently) to be paid to the receiver’s network for off-net calls. In a larger network with more subscribers, a typical user is more likely to find the potential recipient also to be in the same network (also referred to as the network effect). Hence it is expected that users would prefer to subscribe to a larger operator’s network to gain advantage of on-net call plans.
To counter this, new entrants with a smaller subscriber base need to offer very competitive tariff plans to attract subscribers, which is precisely what is happening today in the Indian mobile market. However, the average usage charges, especially for off-net calls cannot come down significantly due to the positive termination charges. Hence the new entrants suffer from both lower network effect and positive termination charges. However, there are strong reasons for new entrants to charge lower usage charges since the offered traffic on their network is much lower than the capacity of the networks. Since network capacity is perishable, the new entrant is better off charging a very low price and invite users to join the network and create traffic.
One of the successful methods the new entrants have used to attract new/ churned subscribers is the per-second billing as opposed to fixed time duration pulses. When more and more subscribers hook on to the network of the entrants, the network traffic also grows and the difference between capacity and offered traffic decreases. It is at this stage that the network faces congestion and the operator is forced to increase the usage charges to maintain the quality of service. However by now the new operator would have hopefully built a large enough subscriber base to sustain itself. Hence the critical mass of subscribers that the new entrant needs for sustainability is when the network effect starts dominating the price effect. The entrants who could not accumulate the critical mass are up for grabs by the larger incumbent operators.
In general, the subscriber is involved in a two-stage selection process: first on the subscription plan and second on the usage volume plan. Since these two stages are temporally separated, users can adjust their calling behaviour after subscribing to the plan. Per-second billing provides the subscriber greater flexibility in controlling the volume of usage. After the user subscribes to the plan, there are carrier-level shocks such as network signal quality and user service experience, based on which the customer selects the volume of calls to be made in accordance with her expected utilities.
Thus it is important for the operator to provide complete information about the tariff plan to the subscriber at the time of subscription so that the net welfare including that of the operator is maximised. Without this clarity, subscribers are likely to bicker about operators deliberately dropping calls or increasing the call rates after a specific duration. The regulator would do well to get the operators to publish in detail all the conditions of tariff plans for the benefit of the consumers.
Will the incumbents follow the price war and embrace the per second tariff model? With mobile number portability due to commence in December and the fact that more than 80% of the subscribers are pre-paid without much loyal attachment to the operators, the smaller incumbents have no option but to follow to reduce the churn. The per-second billing is expected to reduce the average call holding time, thus decreasing the average revenue per user, with subsequent decline in profit margins.
When will the price war end? It is expected to continue until at least a couple of new entrants accumulate subscribers to reach the critical mass. With the current mobile density touching 40 per 100, there is still some room for a few new entrants to reach the critical mass in certain service areas. This will increase the number of active operators in the service area to 9-10. What will happen to the remaining 4-5 operators who have been given licence in 2007 is anybody’s guess.
(Dr Sridhar is Research Fellow & Dr Venkatesh, CTO/CSO, Sasken Communication Technologies. Views are personal.)
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