Emerging business Challenges for Telephony service providers.

As call rates drop further and new players enter domestic telecom sector; can strategy for bottom of pyramid market help meet growth expectations.
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DOT has issued new licenses and paved way for new entrants in telephony. Good news for telephone customers, great news for vendors. It implies new wave of capital infusion into the telecom sector; already blessed with immense capital aggregation in past decade. The new wave will benefit all stakeholders ( read Bankers/PE firms/Network equipment vendors/IT vendors; each of these stakeholders will contribute to capital aggregation in economy) .


New operators are keen on model of 'resource attraction' rather than 'resource ownership and deployment' and are looking at revenue share deals with vendors. They want entire network and IT roll out on revenue share model. Perhaps this is due to success of Bharti outsourcing deal and growing popularity of strategic outsourcing in service industry like telecoms and banks. Perhaps converting capex to opex allows CEO to dramatically improve IRR, gives better control over vendors, cash flows, and there is growing acceptance from partners to accept skewed revenue share rations. e.g. content vendors share 70% of revenues of VAS.


It is common to come across discussions/speculation on when new entrants reach scale of 20 million subs each; how will they reach there, will they be profitable, and is revenue share deal with new operators commercially viable in time horizon of 3 -5 years.


However an emerging trend that is bigger challenge confronting mobile operators (incumbents as well as new operators) is possibility of free voice calls on mobile devices enabled by google and skype etc.


Recently UK mobile operator 3 announced launch of new handset that will allow users to make free calls over the Internet via Skype. This is the first time an operator has offered a mass market mobile phone specifically enabled to make VoIP calls from a mobile handset.


Google is doing similar strategy was exploring with Verizon and Sprint, its approach was trying to bundle Google phone/ browser client into handset operating systems.


Message is loud and clear: Forces like VoIP on PC that caused PSTN revenues to drop in developed markets are now being unleashed on the mobile market. Technology has tricke down effect and some day Indian regulator may allow VoIP. Logical questions ::: why would regulator do this? Whats in it for Google/Skype ?? Whats implication for operators?

Forces driving the regulator could be following:
a) peer pressure from other regulators, (Social proof, self similarity constructs of social psychology)

b) lobbying by vendors/stakeholders (like Google/Skype etc)

c) lobbying of contrarian minded telecom operators who have fully capitalized their investments and want to change rules of game (if you think this is impossible, remember Bharti outsourcing deal ; the approach was new and contrarian for its time, it changed rule of game and challenged in sourcing that was social practice. More recently Ranbaxy sellout is explained by contrarian approach.)

d) lobbying by telecom players/ISP's not getting expected subscribers and forced to rewrite rules of game.

e) Political mandate (free mobile phone per rural household makes great election pitch)

Implications for Service providers:

a) Further drop in revenues. bulk of revenue of mobile service provider comes from voice and messaging. Of course there would be some subscription revenue coming from fixed rentals from the service. One could see following rate plans :: unlimited free VoIP calls in same network for Rs 199; STD VoIP calls @ 5 paise per minute; ISD VoIP calls @ INR 2 per minute)

b) Sharp reduction in cash flow till volumes make up for loss in revenue. (Voice and messages constitute bulk of their revenues) This may result in share price correction as valuation will depreciate on discounted cashflow model. They could come down to PE levels comparable to global peers.

c) New business models for telco where they would start opening to advertising revenues. where Google and Skype will earn revenue from advertising on free calls. (on revenue share basis)

Why would google/skye etc push this?

Google would like to monetize ad revenue from over 2 billion mobile subscribers worldwide.

Indian operators can benefit immensely with free voice calls over mobile (enabled by VoIP) targeted at specific segments; (Students, rural areas; bottom of pyramid market)

I have prepared business case on this (total ad revenue possible worldwide and in India. (please write to me for details; sharable free)

There is talk of 2 sided revenue models for telco 2.0 (more on this follows) Free VoIP calls over mobile aimed at specific segments like students, rural market etc can be starting point of two sided revenue model.