Lifetime validity scheme – future imperfect

It stated off as a desperate effort by TATA Indicom to make its presence felt in the Indian telecom market. They were relatively confident that none of the established operators would retaliate, as network utilization was relatively very high for these players. They might have expected Reliance to follow soon but they never expected Bharti to be the first one to retaliate with lifetime validity scheme. So does it make sense for the telecom players or it’s a perfect example of prisoner’s dilemma?

DoT is now checking the viability of this scheme. To be frank in the current scenario this scheme is not only viable but also a good growth driver. All telecom operators are supposed to pay interconnectivity charges in form of termination charges to the operator on whose network the call is terminating. Hence an operator is being paid per minute utilization of its network. GSM players like Bharti do not mind the scheme as revenue per minute of network utilization is higher than cost per unit. Bharti has rightly said, “I have always said that ARPUs in our business are not that important now … If the revenues rise and our capital productivity and operating efficiencies are intact, I would not worry about the ARPUs”. This is because in GSM technology there is major limitation of network availability that is not the case with CDMA where APRU is still very relevant due to high capital investment phase & customer acquisition cost.

A CDMA operator like Reliance or Tata Indicom would prefer high ARPU per customer and would not care much about per minute efficiency because for them network capacity is not the limiting factor. Effectively what has happened with the introduction of this scheme is Tata Indicom has played in the hands of the GSM players. They have not only spoiled the market but they have spoiled the market more so for the CDMA players.

A CDMA operator would prefer a scheme of fixed monthly rental for unlimited usage. In such scheme ARPUs are higher at the same time network utilization is also higher. With the expected change in ADC guideline and shifting to revenue share method this was expected soon. To make it possible the next requirement is “Bill & Keep”. Bill and keep is a system where all the operators agree among themselves that they will bill their own customers and keep the same. There would not be any interconnectivity charges and interconnectivity would be free. The basic premise of the scheme is that on an average outgoing call more or less equal incoming calls. Bill and keep system avoids painful settlement between the operators saving cost and time.

However with the introduction of lifetime validity scheme operators like Tata Indicom might have more low-end customers who make limited outgoing calls but receive substantially higher incoming calls. No other operator would like to agree with such an operator for “bill and keep” as this would be like paying reward for spoiling the market. This could jeopardize the introduction of “unlimited” schemes. The major gainer from this would be the GSM players and loser would be CDMA players.

Another problem with this scheme is the “Legacy problem”. The operators are entering into commitment for not 2-3 years but for lifetime. Tomorrow regulatory, technological & competitive environment might change substantially making servicing this lifetime commitment a problem. Telecom industry has seen legacy problem in recent past (high license fee, limited competition etc.) they should have been more cautious before making such commitment. In the changed environment they will have to opt for costly exit options that might not be available.

Other problem with lifetime scheme is:
1. Numbers would be blocked and wasted even when the client is not using the number (to avoid that Hutch scheme requires recharge every 6 months)
2. It would be difficult to know the real subscriber numbers for a company or for the country, as operators would not be able to remove inoperative clients from the subscriber database.
3. Definition of lifetime – what happen when the license expires or in case of takeover of one operator by another.