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Corporate Sep 21, 2012

Diesel price hike starts impacting mobile tariffs

By Firstbiz Staff

New Delhi: The furore over the diesel price hike may not be without reason-not only are your monthly expenses on groceries and other daily use items going to rise, even making phone calls is becoming more expensive.

What's the connection between diesel and mobile phone tariffs? Diesel is used to run power generators for telecom towers. But the coming steep increase in telecom spectrum after the 2G auction is also contributing to the rise in mobile tariffs.

Of course, waning competitive intensity among telecom operators-no one is trying to acquire customers at any cost-and the need to improve bottomlines is also driving tariffs northwards. But as some industry veterans like to put it, the days of one paisa tariffs are over!

Reuters

Reliance Communication (RCom) has already increased the base tariff rate by 0.3 paise, or 25 percent, to 1.5 paise per second in some circles and other telcos are expected to follow suit almost immediately.

RCom has already effected this hike in four circles-Himachal Pradesh, Madhya Pradesh, Gujarat and Bihar and a pan-India increase would take another 30 days to get effected.

RCom's decision to go for the kill follows Idea Cellular's bold gambit. It has already increased tariffs across three pre-paid schemes (Rs 90, Rs 68 and Rs37) in the Madhya Pradesh (MP) circle, where it has either reduced talk-time or raised tariffs on its per-second plans to 1.2 paise for two seconds from 1 paisa.

In addition, it has also reduced the recharge validity by 17 percent, according to Gaurav Malhotra and Arthur Pineda of Citi Reserach.

These two analysts have pointed out that Madhya Pradesh is a relatively important circle for Idea since it contributes 11 percent to the topline (second highest after Maharashtra). "It is also the largest incumbent in the circle with a 36 percent revenue market share. Its strong execution on the ground can be seen from the 4 percent increase in revenue market share in the last one year despite the already high base."

A Tata Tele spokesperson said there was "nothing as of now" on tariff hikes. There was no indication from the big two-Bharti Airtel and Vodafone-of whether either would go in for tariff hikes. So we need to watch out for quiet, small hikes from all operators in the next few weeks.

Whether competition bites the bait or not this time is critical. "The response of the competition will be critical as we have seen evidence of a failed hike in 2011. We, however, believe this time things could be different and expect a gradual easing of aggression as all operators are staring at high spectrum-related cash outgo, Malhotra and Pineda said in their report in the context of Idea Cellular.

A story in this morning's Economic Times notes that in mid-2011, all mobile phone companies began raising tariffs by about 20 percent, the first call rate hike after three years of savage price cuts. This process was done in a phased manner and was completed only in March.

Coming back to the present hike, the benefits of any hike will take time to percolate to a telco's P&L account. This is because over 90 percent of subscribers today are pre-paid, and talk-time already paid for will take time to use up. The increased tariffs are not immediately passed on to the entire customer base of a telco. While all the people who will buy new SIM cards will be charged the new rates, the full impact of the tariff increase will be felt by telcos only by early in the next fiscal when the majority of the customer base is covered.

by Firstbiz Staff

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