Already hamstrung by poor connectivity and slow uptake, the 3G – third generation - data services market is likely to head for its first turnaround. And this time it’s betting on a price war to bail itself out for increased adoption in the mass market.

In May, four operators slashed 3G rates varying between 60 to 70 per cent across all segments. The segments include the high-end unlimited or the 1GB and above data users. The other segment is the lower-end pay per use model where users pay as per their usage.

3G allows a user faster downloading capability and access to data at a speed of nearly 4 Mbps (mega bytes per second) as compared to the 97 Kbps on a regular 2G network (GPRS). Typically speaking, a 10 minute video will take a maximum of 30 seconds to download and play on a 3G network. On a 2G network, the same download takes over 45 seconds to download.

Whether lowering of 3G data charges will lead to an unsustainable price war - as it was with per second billing in case of 2G voice services leading to low average revenue per user – is, however, still the big question. But signs of the price war are imminent.

The first move

A mobile operator on conditions of anonymity said: “Airtel has made the first move. Price war is evident. But when the market leader signals a price cut, it is time for others to follow.”

Market leader Bharti Airtel with nearly 184 million subscribers (mostly 2G) was the first to announce rate cuts. The announcement was followed by Aditya Birla-owned Idea, followed by Ambani-controlled Reliance Communications. Even state-run MTNL has jumped into the fray. None of these companies reveal their 3G subscribers.

Operators are tight lipped on the strategy they want to follow. Vodafone, Idea and Docomo did not respond to queries sent by eWorld. Reliance and Airtel were yet to respond till Thursday (May 31) evening.

Market sources maintain that price cuts are an attempt to boost revenue as demand stagnates for voice services and 3G services experience slow growth. But the development comes just when the industry was expecting an end to a price war in the second-generation segment that pulled down the profit margins of most telecom operators.

“Skimming the cream through premium priced plans (on 3G) have not earned operators either a large number of data subscribers or any substantial revenues,” Naveen Mishra, Lead Analyst, CyberMedia Research Telecoms Practice, said.

Larger adoption

Despite fear of price cuts throwing up an unsustainable model, market sources point out that price cuts might lead to larger adoption of 3G services amongst users.

According to Mishra, rate cuts would allow operators “to go to the mass market with the aim of rapidly increasing subscriber base, particularly with the pre-paid segment.” This, he added, will in turn lead to a greater demand for “rich media” mobile content to a larger section of users.

After the poor response to 3G services, the market went on a backfoot. Some users, following exorbitant billing, switched back to 2G or Edge.

“We need to wait and see how users respond. But there are currently three major challenges that have to be taken care of for 3G to stabilise,” Kunal Bajaj, Director (India), Telecom Analysys, said. He adds the rates have gone down in the small user segment and not the larger ones.

According to him, the three challenges are application and content, device prices and cost of connection. While device ecosystem exists thanks to handset makers, the other two points have to be taken care of by operators to ensure higher volumes.

Network and payback

Connectivity issues such as frequent call drops and network slowdown within cities or the signal dropping down to Edge (2.5G) service still remain the primary issues in 3G. Market sources are pegging on greater awareness of customers such as closing down data consuming applications to ensure greater uptake of 3G services.

“Users who were initially doubtful about 3G data rates and usage have started to switch from Edge data plans to 3G,” Anusha Subramani, senior researcher with Bangalore-based Tonse Telecom said.

According to market sources, operators still face problems in payback as a premium service like 3G continues to have fewer users and higher rates. Cost recovery remains a big issue for operators too.

“When compared to 3G spectrum licence fees, this cannot be directly reflected on the price of service. Operators cannot expect to break even in a few years. But mass adoption of services with slashed tariff rates will definitely yield profits in the long run,” Subramani added.

(This article was published on June 4, 2012)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.