Similar price wars have been observed all over the telecom sector, be it Internet services, national and international long distance services and even international leased lines (IPLC). The combined effects of technological breakthroughs (Voice-over-IP networks), regulatory quirks based on protectionism (for public sector enterprises and of end-customers) and a competitive streak based on guerrilla tactics (including price wars and short-sighted promotion schemes), left the telecom services industry in India gasping for breath. Accumulated losses in the cellular services industry had risen to almost Rs. 7,700 crores (albeit largely due to excessive entry fees). Of the 540 Internet service providers registered by 1999, only 185 are operational today. Direct investments in the telecom services and infrastructure sector started trickling, still far from the USD 26 billion required to grow telecom density over the next five years!

Ominous as the situation may sound, there is still hope for the telecom sector. The nature of India's demographics suggests that the inspiration must come not from the telecom sector experience in other countries, but from the success of companies in similar situations across other industries right here at home.
Surviving price wars will require a combination of competitor-directed and customer-focused tactics.

There is some learning for telecom service providers from the experience of companies in other industries that used these tactics.
1. Controlling operating costs
The State Bank of India realised that it could leverage its extensive presence of over 9,000 branches across the country to support an alternative low-cost channel for transaction support in the form of Automated Teller Machines. SBI today has already invested in over 1,000 ATMs and has indicated plans to grow its base to 10,000. It encouraged and counselled its customers on the use of the ATMs and found that it managed to reduce its transaction costs to a third.
Telecom companies have similar options to lower cost structures by leveraging past experience and parent company strengths (e.g. brand image, cost of funds, distribution network, captive customer base) or by minimising upfront investments through a change in business model (e.g. shared network operations, Mobile Virtual Network Operators, or bandwidth reseller partnerships). The challenge for telecom companies is to be able to identify strengths in their current business which when combined with technological and process innovations could help reduce costs.
BPL Mobile and Hutchison in Mumbai have shared BTS sites to find significant reductions in operating costs. Reliance Infocomm has leveraged its parent, Reliance Group's access to low-cost funds to be able to fund its capital expenditure requirements.

2. Signalling strategic intentions
When Coca-Cola entered a crowded bottled water market by acquiring the Kinley brand in mid-2000, it had the advantage of an existing network of franchised bottlers and distribution networks. Its low cost structure revealed its ability to match any price wars that the then market leader 'Bisleri' could orchestrate. As a result, the platform of competition shifted to packaging (smaller bottles and pouches) and distribution (presence on railway stations and within airlines) rather than pure price wars. Kinley, within two years of operations, is now the market leader with 35% share of bottled water market.
In the same vein, telecom service providers need to signal their ability to compete on price (through lower cost structures, existing distribution channels and available network capacity for example) to be able to steer competitor behaviour away from price-based competition.
The recent success of Idea Cellular in acquiring a base of 100,000 customers within a month of its launch in New Delhi indicates the ability of service providers to focus on parameters other than price in order to compete.

3. Differentiating based on customer needs and frustrations
ABN-Amro seemed to have studied the needs and frustration of its target customers when it decided to enter the commoditised business of retail banking. It introduced a credit card with adjustable spending limits to meet with customers' behavioural concerns around the use of credit cards. It introduced the 'Bancafe' model through a tie-up with a coffee chain to enliven the experience of branch banking for clients during the late evening. At the same time, it handled customers' frustration around queues related to branch banking by introducing doorstep delivery services.

The challenge for telecom service providers is to understand that the telecom services business is network-economies driven and utilitarian in nature. As a result, value from differentiation lies in meeting frustrations around the use of the telecom service (e.g. recharging of pre-paid coupons, payment of post-paid bills) and meeting customers' need for specialised services (e.g. group messaging, selective call blocking/diverting, calendar and diary management, prioritised access during peak periods). Competitors may easily replicate differentiation planks and hence, these must be bulwarked by effective loyalty schemes.
Hutchison's recent tie-up with HDFC Bank for SMS-based re-charge for pre-paid customers is an example of value-adding differentiation that addresses customers' frustration of having to find a new recharge vendor or carrying an extra coupon. At the same time, the switching cost related to transferring a bank account and the promotional benefits associated with mobile banking ensure that competitor action does not significantly impact the customer base.

4. Driving usage through service extensions
When Amul introduced its mozzarella cheese variety, the biggest problem it faced was in getting a share of the consumer's stomach - pizza, where mozzarella cheese is most notably used, did not constitute the staple food of the masses in India. Amul decided to drive usage through vertical integration by leveraging its cold storage distribution chain (for milk and ice-cream) to provide frozen pizza at a price that a large part of the masses found irresistible. Following its success with the vertical integration model, Amul now plans to launch restaurants that can help drive usage of its food products.
Telecom service providers can drive usage by first growing awareness of services offered and then linking it to daily activities. Service extensions could include vertical integration to control customer revenues (e.g. basic services to long distance services to Internet access services) or special alliances for content (e.g. contests and news).
MTNL had realised that dial-up Internet browsing could be a significant driver to telecom usage in its markets of presence (Delhi and Mumbai). In order to encourage greater usage by avoiding the cumbersome logging-in process, it recently launched a Caller Line Identification (CLI)-based system for Internet access.

5. Creating growth through creation of buying power
When Nirma introduced its laundry detergent targeted at low-income families, its main rival HLL ignored the growth potential for the product. However, Nirma's ROCE of 121% and rapidly growing market-share forced HLL to take notice of the market opportunity below the top of the pyramid and the need to revise offerings and value propositions to be able to service their needs. HLL launched Wheel, complete with process, packaging, distribution and pricing innovation to achieve an ROCE of 93% as compared to 22% on its high-end detergents.

The introduction of low-priced Velvette shampoo sachets, in the early '90s, helped companies address purchasing power requirements of the mass markets. The entire industry shifted to this new packaged form and today, the market leader HLL sells up to 70% of its shampoo in sachets.
In order to grow profitably, telecom service providers must also grapple with the need to create buying power for the currently un-served masses in India. This could require the use of new price points (e.g. telecom calling cards, pre-paid cards) and new technological solutions (e.g. two-way satellite connectivity, corDECT based WiLL systems, SMS-based bill check, Internet telephony) to be able to expand the market beyond currently targeted segments.
Telecom service providers in India have not really explored this option as yet, preferring to cherry-pick their customer base and competing for position in that limited market. A shift in focus to the part of the 'iceberg under the water' would lead to innovative approaches to growth.

The way forward for telecom service providers
In order to survive the price war telecom service providers must accept the reality of the nature of their business - telecom is a utility business! The focus must be to use any of the tactics described above to avoid the vortex of price wars. Of course, the right path will not always be the same for all players and will depend on the nature of the market (expanding or saturated) and the service provider's relative position of strength (market share, access to customers/funds for expansion).
What is clear however, is that the choice cannot by a single static objective. Instead, the focus must be on margin enhancement rather than a haphazard pursuit of new revenue fads.
This would require an approach that enables the new target markets to access telecom services (e.g. through handset bundling, refurbishment of used handsets, lower price points for services) and to be involved in the use of these services (e.g. through local language applications, lifestyle support features) even as substantially large segments of customers are offered differential treatment (e.g. prioritised access, universal messaging).

Rothin Bhattacharya is the Executive Director (Telecom), KPMG Consulting, India. Kuldeep Parikh is Senior Consultant with KPMG Consulting, India and focusses on strategic issues in the ICE sector. The views expressed in this article are the personal views of the authors and do not reflect the view of KPMG.