AIRTEL MAGIC – SELLING A PRE-PAID CELLPHONE SERVICE

THE FUTURE – FAR FROM MAGICAL

While the players in the cellular market in India were focussing heavily on the pre-paid card segment due to its high potential, some analysts expressed doubts about the profitability of this segment in the long run. They said that low profit margins from the pre-paid segment (on account of low tariff and high advertising, promotional and customer service costs) could lead to losses in the long run.

As the fierce competition would make price-cuts and heavy investments in advertising and promotions inevitable, this seemed quite possible. However, it was believed such problems might be overcome by building up a vast customer base and making up for margins by increasing sales volumes (A company's cost per subscriber decreased with the increase in the subscriber base, thereby, resulting in increased margins.)

However, the biggest challenge came in the form of CellOne, a cellular service launched by the state-owned telecom major, Bharat Sanchar Nigam Ltd. (BSNL) in October 2002. Not only were the rental charges of CellOne much lower than those of any other player, BSNL had plans to (further) reduce tariff. Given the vast reach of BSNL and years of experience in the Indian telecom sector, the new, private players were justified in their fears. Moreover, BSNL did not have to pay any license fee (8-12% of the revenue share paid by all private players) to the government. Being a major stakeholder in the fixed line telephone network (90%), it did have to shell a large share of its revenues as interconnect charges (over 70% of the calls made from cellular network used fixed line network) for routing calls, both landline and STD.

With such control (on fixed line network) and established infrastructure, BSNL could pose a severe threat to its competitors on the pricing front. With the Department of Telecommunications announcing plans to grant International Long Distance (ILD) license to BSNL and BSNL planning to acquire a subscriber base of over 4 million (by late 2003 across 1,000 cities), the competition in the cellular market was expected to intensify further.

Meanwhile, true to the belief of industry observers that the cellular telecom sector would see product/service innovations, Bharti launched a two-in-one cellular card in October 2002. This product offered both the features of post-paid and pre-paid cards in one card⁹ . It was aimed at customers residing in places where post-paid facilities were not available. The product was available with all Magic vendors and ICICI's ATMs.

Commenting on Bharti's leadership position, representatives of BPL and Hutch said that Bharti might seem to have an advantage at present but it was a long-term game and it was too early to respond.

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