Your bills in India. As cheap as a haircut!

The voice and data rates in India are the most affordable in the world. Have telcos in India cracked some magical formula and can others catch up?

You must have picked your jaw from the floor in some store in a foreign country at some point in life, after hearing about the shockingly expensive data and calling rates there for the first time. You must have wondered why India is so low on its rates in comparison and whined a little less about call drops when back on your soil.

Well, it’s kind of a jolt to many jaws. India keeps hovering around the fifth or third position on the ranks of the cheapest rates for 1 GB of data; the average cost is, often, somewhere between Rs 12–13 for 1 GB of data. The World Mobile Data Pricing Report 2022 put India amongst the top five countries with the cheapest mobile data plans. India (USD 0.17) is tucked comfortably between USD 0.04 for Israel and USD 41.06 for Saint Helena, a British Overseas Territory in the South Atlantic Ocean when we look at an average cost of 1GB of data.

“The average speed on the Jio network is much lower than on Finland’s DNA so the Finnish price also reflects a quality difference.”- Petrus Potgieter, Associated Partner, Strand Consult

Turns out that Sub-Saharan Africa is the fourth-most expensive region in the world for mobile data generally. The average price of 1GB of mobile data in all four North American countries goes past the global average of USD 2.59, making it the most expensive region overall—as picked in a recent Cable.co.uk report. India, again, was in the ‘cheaper’ league here at 0.16 USD for 1GB.

So, are we really that lucky? How? And how long will this gap between India and other countries persist? Let’s do some hair-splitting.

CRACKING THE ‘LOW-COST’ MATHS

As explained in the report from Cable.co.uk that measured the average cost of 1 GB in 237 countries across 5,600 mobile data plans, “Countries with long-established, ubiquitous 4G or new 5G infrastructure tend to fall towards the cheaper end of the table—as mobile data plans tend to offer considerably more data than the global median, caps usually in the hundreds of gigabytes, or even completely unlimited. The cost per gigabyte in these countries will tend therefore to be very low. Countries with little to no fixed-line broadband availability therefore rely heavily on mobile data provision. In these cases, mobile data is the primary means the population has of getting online, and adoption is often near-ubiquitous.”

Another interesting observation is that when populations can afford to pay more, and network infrastructure costs that much more to own and run, data pricing leans towards the global average. More so, when these regions haven’t reached the ‘excellent infrastructure’ category where data limits are beyond normal usage or entirely unlimited.

Sourav Gupta, Telecom Analyst, Omdia attributes India’s price card to competition. He explains that in India Data and call rates are available at cheaper rates due to the increased competition mainly from the country’s leading operator Reliance Jio. “Previously, state-owned operator BSNL was widely known for providing the cheapest mobile plans but Jio disrupted the market after its entry in 2016, providing free 4G data and voice services for more than a year. This was the major time when India witnessed a significant dropdown in mobile plan pricing. By providing the most affordable mobile plans, Jio has compelled other operators to lower their plan prices.”

John Strand, CEO, Strand Consult also throws light on how the cost of spectrum and building and operating telecommunications networks is markedly different. “In addition, you have low sales costs when you go out and get customers. On top of that, customers often use significantly less traffic than in countries like Denmark, the UK, and Finland.”

“India’s large population gives companies the economies of scale, an important factor since telcos have to invest substantially into building infrastructure.”- Lawrence A Gordon, EY Alumni Professor, Managerial Accounting and Information Assurance, Robert H Smith School of Business

Gupta also reminds us how looking at the high rural coverage and average disposable income of people in those regions, operators started focusing on tapping those uncovered areas to gain more subscriber share and hence lowered the prices of mobile plans. “This ongoing competition between operators to garner a share of the untapped market is driving India to offer one of the most affordable mobile plans in the world.”

Fundamentally, a significant part of the price difference is accounted for by the difference in the relative cost of services in the two countries, opines Petrus Potgieter, Associated Partner with Strand Consult. “Consumer mobile prices have a large component that reflects the cost of retail and marketing. Add to that the labour costs in running the network (presumably lower in India) and you can explain a lot of the price difference.”

But are we stacking up oranges against oranges or huge lemons here? We still need to look beneath the crust- with a look at the prepaid vs. postpaid angle too.

POUND-TO-POUND COMPARISON?

Well calls and data are affordable almost everywhere now, contends Potgieter as he hints at how we might need a new lens for this question. “International price comparisons usually deliver very problematic results because it is not reasonable to compare the price of a gigabyte of prepaid data in a market which has mostly postpaid customers to one in which most customers use prepaid. In a mainly postpaid market, such as the US, many customers will be on an unlimited data plan and these data points are usually not included in a comparison.”

Potgieter explains with an example. “Consider the Jio advertised rate of 181 rupees for 30 GB for 30 days which is roughly Euro 2. In Finland, we can compare this to Euro 20 for unlimited 4G data for 30 days at 100 MB/s service speed on the network DNA. The average use in Finland is about 60 gigabytes per month so, on average, this would be Euro 10 for something compared to the Jio package. Already the affordability is the same as I understand that Euro 2 can buy a men’s haircut in India and you could maybe buy a men’s haircut in Finland for Euro 10.”

A better way to compare is to look at network revenue from services and then divide it by a measure of the network traffic, he suggests. However, this data is much more difficult to obtain and handle than prepaid prices.

Potgieter stresses comparing price with quality as well. “The average speed on the Jio network is much lower than on Finland’s DNA so the Finnish price also reflects a quality difference. Add to that the value of the optionality of unlimited service and I no longer find the Jio price incredibly low.”

After the full rollout of 5G and the 2024 general election, mobile plans might become more expensive, posing challenges for operators.

Remember that the quoted price per gigabyte depends on the consumer’s ability to effectively use that much data which is possible only if network quality is reasonable, Potgieter underlines. “Finally, India has a high population density which probably reduces the cost of network rollout and very high levels of competition in the mobile market.”

There is also a play of Economics here that cannot be ignored. The emergence or expectation of a duopoly or monopoly market can also affect these price equations.

Asking an Economics expert should help. Lawrence A Gordon, EY Alumni Professor of Managerial Accounting and Information Assurance, Robert H Smith School of Business unwraps this side.

“In the US, for example, a few major telecom companies like AT&T, Verizon, and T-Mobile make up a very large percentage of the market. In India, there seems to be a larger number of key players in the telecom industry. India’s population is such that a company can more easily reach economies of scale. This is an important factor since telcos have to invest a substantial amount into building infrastructure. Besides, there are substantial fixed costs for the player in this sector.”

But Strand dismisses the angle of the number of players. “It is not the number of players that creates competition in the telecommunications market.” In a recent report, Strand Consult argued that competition in these mobile network and infrastructure markets is not driven by the number of providers, but rather, by technology. If an operator does not upgrade its network to the latest technology, it will lose market position. Similarly, if an infrastructure provider does not innovate its equipment, it will lose customers.

Potgieter explains it from the angle of static and dynamic efficiency. “Static efficiency means that competition in current products and services is high but dynamic efficiency means that there is investment that will enable future competition for new products and services. Dynamic efficiency is the basis for competition and innovations. I do not think a duopoly (or even a local monopoly) is essentially a problem, provided that there is a relatively low barrier to entry for competing products and services.”

The way he sees it, markets that are not too hemmed in by regulation rapidly discipline exploitative monopolies or duopolies. “We see this in software, where Microsoft still has an overwhelming market share in the desktop operating system and office applications but faces the discipline of competition at the edge from Apple, Google’s Android, Linux and others. Mobile operators face competition from satellite and fibre.”

Gordon reminds us how all this is more complicated than just looking at comparative advantages. “There are national security issues that come into play when thinking about the telecom Industry.” He also touches on the role of the state. “I would assume that the government plays a significant relative role in terms of incentivising the sector and regulating it to keep prices low, given that the country’s per capita GDP is quite low.

ZOOM IN ON INDIA, AND CORPORATE

Does the overall difference though mean that Indian telecom players are doing something, particularly right or differently? Scale is a keyword, just look at how the economy has developed in India after consolidating the market, Strand points out.

Frankly, a new broom sweeps clean and there are significant advantages to scale, warns Potgieter. “Because the technology, including software, becomes more efficient and new firms are less burdened by legacy applications and services, new entrants have distinct advantages, especially since customers can very easily switch. Switching cost for customers is much lower now because the mobile number is no longer the only way to reach a person.

Social networks provide the primary means of identifying the user. Successful telcos have been able to provide additional services to their users that discourage users from defecting to another network. This often includes financial and entertainment services. It is even possible that the successful mobile network of the future will make little or no money from network services but rather be profitable because of the additional services it can offer its users.”

While talking of bills, we also need to look at what comes on the desks of enterprises.

As Strand observes, “You have to shift the focus from consumers vs. enterprise. It is important to understand that many customer segments use the products differently. This is especially true among enterprises in India, with some customer segments opting for the most advanced solutions. But there also voice-centric customers who are not so advanced.”

AS CHEAP AS A HAIRCUT AFTER 2023?

The big question is whether Indian players can maintain this affordability edge and whether markets like the US and UK change in the future.

This affordable model is not sustainable, Gupta lays it down with no words minced. “Operators like Bharti Airtel have always pin-pointed affordable mobile plans and a motive to increase their prices. However, tough competition from Jio stops them from doing so,” he augurs, adding that after the full rollout of 5G in India and the general election in 2024, mobile plans might become a bit expensive.

It is a model that is probably not sustainable—in the gaze of Potgieter as well. “At current prices, operators in India can probably not fund network investment in any other way than taking on more debt. Operators are likely hoping to ride out a price war in the expectation that they will be one of the three or so operators that remain. Throughout the world, we see very few markets with four nationwide operators. There is simply no justification for that much duplication of infrastructure, plus the inefficiencies in spectrum use that it implies.”

He cites the example of South Africa, “It has a mature market with affordable and high-quality mobile broadband with only two nationwide physical networks supplemented by additional networks in the cities and large towns and extensive roaming and spectrum sharing agreements between the operators. The prepaid data prices are much higher than in India but there is competition from low-cost fibre in the cities and towns and operators can invest.”

Network economy is important and again, scale is the key word, Strand says talking about sustainability of low-price models. So, there are a lot of socks that telcos will have to pull up whether they are in the US or India. And a lot of mitts too as they touch hot, and unfamiliar, rivals and technologies.

Strand has a recommendation that takes us back to some recent industry debates. “Accept that telecommunications companies need volume, today it is the case that telecommunications companies are overregulated while OTT players such as Google, Microsoft, AWS, Facebook etc. are not subject to the same regulation as the telecommunications companies they often compete with.”

Ask him about recommendations for telcos or regulators and Potgieter also calls some elephants in the room. “Telecom firms are now heavily over-regulated, especially when compared to the software and service technology giants such as Alphabet, Amazon, Meta or Microsoft which have most of the sway in the market for online services. This over-regulation is a legacy of the time when regulators were rightly trying to ensure competition with dominant state-owned legacy operators. It should be dismantled. Regulators should oppose mergers and other forms of consolidation, such as spectrum or infrastructure sharing, only in extreme cases.”

Telecom service providers can partner with private and government players in the education and healthcare ecosystem and provide them with new-age digital technology solutions to enhance the quality of life in those rural regions, advises Gupta. “This move will act as a reduced need for expensive physical infrastructure which has been the major roadblock in both the sectors for several years while also creating a new revenue stream for telecom operators and helping them combat competition.”

As to whether the lower rates are sustainable, Prof. Gordon chooses to reverse the question and ask if the higher rates are sustainable. “In the long run, my answer to the latter question would be No.”

New bundles. New partners. New models. New customers. New rate cards. Now that would be a change that will be more than a haircut for telcos, be it in India or another country out there. And quite a jawbreaker candy for customers! When that happens.

By Pratima Harigunani

pratimah@cybermedia.co.in