Mktg – Tata Tele;No Limits

Surajeet Das Gupta

This could be the game changer Tata Teleservices has been looking for. Recently, the Tata-promoted company, which has inducted NTT DoCoMo of Japan as a strategic partner, announced that its CDMA customers (the company also operates GSM services) can pay a fixed sum – Re 1 for a local call and Rs 3 for a long-distance call within the country – and talk for as long as they like. So far, customers have always paid per pulse – the more you talk, higher the bill. This is the first time such an offer has been made to customers.

Of course, there is a small catch which is meant to avoid misuse of the offer: Subscribers will sign on an agreement which gives Tata Teleservices the right to cut the call after 10 minutes in case it finds out that the customer regularly misuses the offer. There is another catch: The offer is available to only those who buy a handset bundled with service from the company which could range from Rs 1,250 onwards; existing customers who want to switch to this plan will have to make a payment of Rs 96 to the service provider upfront. In other words, it does not come free of cost.

Will it work?

The company is convinced that it has hit upon the formula for success. In the telecom market, rivals are quick to latch on to such clutter-breaking plans. The first mover’s advantage can be lost in a matter of months, if not weeks. But this time, it seems they are not sure this is a move worth following. Critics feel it will make the company bleed. For any call to a non-Tata Teleservices number, the company has to fork out 20 paisa per minute as termination charge to the call-receiving network. Longer the duration of the call, higher the termination charge the company pays. But the revenue that Tata Teleservices gets is capped at Re 1. Thus, any local call of more than five minutes is a loss-making proposition. On a long-distance call within the country, the termination charge is double: 40 paisa. So, any call that lasts more than seven minutes will punch a hole in the company’s book of accounts as the tariff is fixed at Rs 3.

In short, say rivals, the offer is a recipe for disaster. These tariffs, they point out, are unsustainable and will force Tata Teleservices into the red. Worse, the network will get choked as subscribers now have no reason to keep their conversations short. And this could lead to a spike in the number of dropped calls and hence in the number of dissatisfied customers. Says a senior executive of a leading mobile operator: “The new tariffs cannot be sustained; it is just a gimmick to get some customer numbers. Surely, we are not worried.”

Tata Teleservices is not bothered. The company feels it has done its homework right and there is no way the scheme can fail. It claims that subscriber additions have seen a sharp rise ever since the offer was announced. What then has made the company devise the bold offer? Tata Teleservices, after all, has been in the CDMA business for many years but has always played second fiddle to Reliance Communications in terms of the number of subscribers.

Tata Teleservices Managing Director Anil Sardana says that a survey undertaken by the company showed that 88 per cent of the subscribers are sensitive to any change in tariffs and are therefore always on the lookout for the best offer. So much so, they change their operator frequently in their search for the most cost-effective tariff plan. This makes sense. CDMA is now widely recognised as the poor man’s mobile service.

Consumers in this segment are bound to be extremely price sensitive. Only 12 per cent customers, the survey showed, are indifferent to tariff changes.

Sardana says that it was from this consumer insight that Tata Teleservices decided that it needs to come with a differentiated product to break the clutter. The idea was to come out with a transparent and simple tariff plan which others should find difficult to replicate. “The two concepts which we came out with were pay per call and pay per second,” says he. Sardana and his team implemented the pay-per-second concept for the company’s GSM service in collaboration with NTT DoCoMo, in which customers pay 1 paisa per second rather than on the basis of pulses which range from 30 to 60 seconds. The second concept has been seeded in the CDMA service.

Why CDMA?

But why did the company have to choose CDMA for this innovation? Isn’t India headed the GSM way? Sardana gives two reasons for it: “One, our CDMA network is more robust and can sustain longer calls, unlike GSM where one has only 4.4 MHz of spectrum; two, unlike GSM, which is a new service, we already have 40 million CDMA customers. They talk to each other within the network and this has reduced our termination costs dramatically.” The average revenue of a Tata Teleservices customer is Rs 160 a month out of which only Rs 14 goes out as termination charges. So, termination charges do not drain the company’s revenue.

The third advantage, of course, is the fact that Tata Teleservices has its own national long-distance service. So it does not have to pay termination charge to other networks for such calls. Industry sources say that the operating cost of this network works out to less than 10 paisa per minute. Thus, the call has to be of over 30 minutes to hurt the company. CDMA service is popular with migrant workers who use it to keep in touch with folks back home.

Sardana says that contrary to the prophecy made by rivals, he will make more money from the new tariff than the old tariff. Here’s why. Currently, the average duration of a local call is 2.2 minutes for the company, while the tariffs range from zero (between closed user groups) to 30 paisa a minute for local calls. Clearly, the average revenue from a call is way below Re 1. So, there is more money to be made on every local call with the tariff fixed at Re 1.

Of course, Sardana is aware that there could be a spurt in the length of the calls in the initial stages but the situation can be managed from getting out of hand. “There might be a sudden spurt initially but I don’t see customers changing their call style. Also, under the fair usage policy, Tata Teleservices can cut a call after 10 minutes if it thinks that the user has begun to misuse the offer. Also, the fact is that even if the call is till five minutes to a number outside its network, the company does not lose money.”

There are other concerns as well. Won’t the new offer eat into the potential GSM customers of Tata Teleservices? And why does the company think it cannot be replicated by others? Sardana says that the company’s GSM and CDMA offers represent different ends of the spectrum – the GSM offer is useful to customers who make short calls, while the CDMA offer is suited to those who make longer calls. Through the new tariff plan, Tata Teleservices is looking at serious customers who will not shift to another competing product because of a better tariff.

Sardana says that the tariff is difficult to replicate because the GSM operators don’t have enough spectrum to handle long calls without the quality of the service suffering. But what about competing CDMA players, especially new names in the business like Shyam Sistema, who have sufficient spectrum to launch a similar plan? They, says Sardana, have the handicap of not having pan-India operations; their subscriber base is smalls and most of their calls go out of the network. So, the termination charges will act as an entry barrier that will keep them from launching a competing offer.

The question, of course, is whether customers see the same logic as the company and get hooked to the aggressive new tariff.