Telecom Price Wars and the Race to 1 cent – Palta Infocomm
Staring outside the glass door of a small telecom company, a young entrepreneur with aspirations to conquer the world is pondering on a decision whether to continue running this company in middle of a price war or to shut it down to minimize losses.
Thanks to Prof. Bharat Anand, Economics for managers during the first module of program for leadership development at Harvard Business School took me down the memory lane of assessing and reflecting on all the decisions I took as a young entrepreneur leading a small telecom venture in the early 2000s against all conventional wisdom of not beginning with a business as complex as telecom as one’s first business venture ever.
In my humble opinion, “there is nothing called a failure, either you succeed or you learn”. What I am about to share are lessons i learnt the hard way by making numerous mistakes some relating to science (economics, market research, technology, finance, industry structure, competitive strategy) and some relating to art (customer acquisition focus and retention, talent management, balancing long term vs short term goals). My intent is to put some important business lessons from the real world into perspective for learning during the Program for Leadership Development as well as my hope is perhaps someone would be able to walk away with some meaning to their current and potentially future business contexts in not repeating the same mistake i made. To net it out, try to capture as much value as you can. (no pun intended)
Wireline and Wireless Price Wars in India – The Race To Zero
Telecommunications industry was in middle of a price war in India early 2000s when big 800 pound gorillas were competing for each new subscriber while trying to retain existing subscribers. Big established players like BSNL, Airtel, Orange, Reliance were fiercely competing on price and willing to cut their margins drastically in response to competitive price pressures. Acquiring each new subscriber meant spread out their fixed cost investments over more volume of subscribers.
My business model centered around setting up a small scale city wide wireline telecom network infrastructure under my own brand name Palta Infocomm from the ground up in one of the urban cities of Northern India. The scope of the project was to start small at a city level and if the pilot project succeeds, expand the network to an entire state with market size of 23 million subscribers spanning 22,000 miles. In order to accomplish this, i partnered with Reliance Communications (among the top 10 companies in India by market capitalization). In this business arrangement, Reliance would sell a bulk volume of calls and gain from my experience entering this market running a pilot project. This pilot included owning and setting up all the infrastructure, acquiring subscribers and reselling a large volume of calls bought upfront from Reliance Communications.
Key business learnt here is that never start with your own money if the upfront fixed costs are high, it is wiser to raise capital than play with your own money. Some of the unknowns to me in this business opportunity were demand, subscriber’s willingness to pay, barriers to entry, competitor’s variable costs, anticipated services issues that frequently crop up in running a telecom operation as a service, customer satisfaction issues, billing errors, collections, and service disruptions due to lack of electricity in the region. These were also the mistakes i made in reading the context and assessing the future impact of my choices. Another key mistake or trend missed was that the technology was slowly shifting to wireless mobile phones as the costs of making mobile phone calls was dropping from approximately 33 cents a minute (converted to US Dollars for ease of understanding) to competitor’s willing to drop prices to 1 cent a minute. This meant war, a classic price war where players with most money muscle may survive while others wind up and leave.
High fixed costs and the break-even point
Telecom wireline services business is high fixed cost business with upfront capital investments of telephone exchanges, expensive optic fiber connecting end points between customers, and the fixed costs of installing optic fiber between end points. The potential for optic fiber was for the ability to offer internet data as well as cable entertainment in the long term over the same network of wired connections however the potential uses of the investment were far ahead of its time. Keeping the investments and potential volume of subscribers in mind, it would have taken between 5 to 7 years to break-even from the upfront investment.
Telecom is in some ways similar to operating an airline with high upfront capital investments and in some case 100 years leases and contracts in place among major players and network providers. Would recommend starting with business opportunities which demand low upfront capital investments (fixed costs) in order to scale incrementally as the business accelerates. If your break-even in not in the first 18 months, preferably first 6 to 9 months, you may want to think the opportunity through again. This is where the concept of opportunity cost is key, thinking through the cost of capital and the other business opportunities you may forgo in order to choose one is absolutely worth it.
Market entrant and the prior confusion of average Vs fixed costs among competitors
I missed a very important point in focusing on variable costs in pricing and ignoring sunk costs. Instead, kept accounting for the total costs (fixed costs and variable costs) in my pricing decisions. As an entrant into a very capital intensive industry of telecom, i was trying to recover my high fixed costs while the currently established players in the market, some multi-national, some state owned with $100 Billion+ on their balance sheets were willing to even price below their variable costs in order to gain economies of scale with subscribe market share.
Money muscle and competitive responses
Exactly what i feared happened, wireless technology entered the market with an economies of scale strategy in mind where volume was preferred over margins. Wire-line technology became almost obsolete since a better, faster, more convenient substitute was readily available at lower costs. In response to this, most big players lowered their prices offering free calls with monthly commitments. Most wireline providers like BSNL, MTNL were offering these services at approximately 4 cents a minute and time to subscribe to a new service meant long wait times due to the nationalized nature of these state owned entities. Customer service across these competitive services were generally poor and customers identified with the ownership of such as service as an identifiable means of proof of address.
My pricing was simple 1-tier pricing, pay upfront fee of $9.99 to get started and $9.99 monthly subscription thereafter with no commitments, first 200 calls were offered for free, per call charges were 3 cents, and within network Reliance to Reliance wire-line calls at the state level absolutely free. This meant two subscribers with this service could consume unlimited calls without incurring any additional cost. Wireless carriers lowered the prices to 1 cent per minute and i experienced a huge subscriber churn. Big players continued to compete fiercely while i knew it is time to close shop.
In summary, price wars are real and one must take the time to assess the monetary implications as well as opportunity costs of responses to competition before hastily jumping to a conclusion.
Overall, i am currently working on assembling all the facts such as industry statistics and competitive data in order to put together a case study related to assessing business decisions in price wars based on my learning during this telecom venture. May be fellow peers and professors at Harvard Business School would be able to assist in reviewing and getting this strategy focused case published so other entrepreneurs like me have a higher probability of succeeding in the future and not repeating the same mistakes i made.
More to come on capturing value, looking at customers and suppliers as competitors, auctions, the winner’s curse, and the importance of suppliers in my next article related to the second business venture in trading chemicals – ICI Carbon.
