Telenor which was embroiled in the 2G Spectrum scam for choosing a wrong partner – Unitech Ltd managed to win 6 Circles in the recently concluded auctions. These 6 circles cover ~600m people and almost 40% of Indian GDP. Penetration rates are lower than average, with Telenor estimating real penetration at just 40%. [Telecom strategy akin to what we recommended Reliance Infotel / Videocon to Bid for in the Auction – the Bottom 16 Circles] Telenor will now reduce its footprint from nine to six circles following the outcome of the 1800MHz re-auction process. It is possible that it will remain in Mumbai following a second auction of unused frequencies, but various conditions and the competitive interest from other operators make this unlikely in our view.
What is noteworthy is Telenor’s low cost business model is well suited to the lower than average income characteristics of these circles, and Telenor calculated that its average “cost of production” remains 20% lower than incumbents despite its lack of scale, which should support a sustainable discounter positioning. Telenor India is currently reporting a cost per minute of INR 0.24 (pan-India) and INR 0.15 in their best performing circle. Telenor calculates that the incumbents have a cost per minute of INR 0.29 by comparison which is allowing Telenor to lead on price. Its outsourcing business model brings more flexibility into the cost base and leads to less capitalization of cost than a traditional operator model.
Telenor India Targets 8-10 Mn Net adds in 2013
Telenor emphasized its need for scale in order to leverage the effective cost structure it has put in place. Its strategy is premised on taking a number two or three market position in the clusters it targets within each circle as scale within clusters is seen as a key driver of profitability. As and when Telenor achieves its target market position in clusters, it will expand coverage and it seeks to move from 40-45% coverage within circles towards the incumbent coverage footprint over time.
Address the ARPU Gap
Telenor is currently generating an ARPU 30-40% lower than the incumbents owing to it having to price aggressively and use promotional free minutes in order to attract customers. Over time, it hopes to reduce these campaigns (as it scales its customer base) and close the ARPU gap.
Use Network Efficiently, Drive heavy usage
The Product Managers at Telenor India used the Logic of Scalable Cloud Computing with Uninor Badalta [Changing] Discount Offering. Telenor India’s average subscriber MOU is 520 minutes, whereby the industry level is around 380 minutes. Telenor also uses a
dynamic pricing method, adjusting the tariffs in accordance with the utilization of the network (with the rational that they pay for the network whether its full or empty, so might as well fill it up). Management ensured that they still have 13% free space in the network measured at peak hours.
We hope to see Telenor India successful in its second innings when the management may consider M&A with other operator which will make strategic sense.