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Net Neutrality: Telcos are NOT Losing Money To Data Services – Deepak Shenoy


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deepak shenoy

By Deepak Shenoy

The arguments by Telecom Operators against “Net Neutrality” – or their desire to not just charge users but also website and application owners for allowing users to access that content – is also financial. They say a lot of things about their revenue being cannibalized, that they have to make spectrum investments and so on. Let’s meet their financial fears head on.

The basis of this article is to state that:

  • There is no loss to telcos on account of Whatsapp or Skype increased usage, or for that matter, any application. Their “loss” will get converted to profits in data, and with way more usage, substantially higher profits and revenues.
  • Data is in fact driving their revenues up, far more than anything else.
  • Regulatory changes in anti-spam regulations have already dropped SMS and call volumes.
  • The investments in spectrum and infrastructure by the telcos is a function of their regular operation, is amortized over many many years, and realizes revenues in a back-loaded manner.
  • There is no restriction on telecom operators from increasing data charges. However, they are restricted by competition, which is healthy because other players are happy to provide data at lower costs, should one operator decide to hike rates.

Data Cannibalizing Voice and SMS Revenue: “Cannibalizing” is False, Operators Welcome It

Firstly, we have to understand that by nature, revenue mixes will change. Telecom operators all over the world are seeing a substantial increase in data revenue versus voice and SMS. All technology will make one thing obsolete while other things take their place.

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Secondly data revenue is also growing exponentially. As you can see below data connections and usage per customer is going up dramatically, as is average revenue per customer. (Note: Airtel’s number of connections went down in Q4-FY14, or March 2014, as they culled incidental users from the count.)

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image15 These charts are from Medianama’s excellent report. (Click to enlarge)

From Airtel’s own presentation (Nov 2014) we have them saying that data revenues will drive their future:

image16

Note the specifics:

  • Data revenues are expected to go to 32% for India as a % of total revenue. This is even before they had the crazy idea of attempting to charge internet companies for people using their data.
  • Other developing nations like Philippines, Indonesia and Malaysia have a significantly higher data revenue proportion, closer to 50% or more!
  • Bharti Airtel by itself is seeing non-voice revenues scale upwards because of data.

This means Bharti Airtel EXPECTS data to cannibalize voice and SMS revenue, regardless of charging websites for their business. Since no other country mentioned has anti-Net-Neutrality, meaning they don’t charge Skype, or Whatsapp, or any other provider for their users coming through, it is obvious that data can be a significant revenue source EVEN if we are Net Neutral.

Financials: There is NO Loss to Telcos Because of Increased Use of Data, Data Charges Make Up For It

Indeed, people are using more data than voice, or SMS. But the increased use of data means that by and large, people are paying for that data. Let’s not get caught in per message or per call metrics, and look at the overall wallet-share of all users on average. We collated data from TRAI for India as a whole, and we separately got data for SMS revenue per user per month, and similar metrics for data and voice calls. Here’s the evidence:

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You see the picture?

From Jun 2013 to Sep 2014 – a 15 month period prior to which data revenues were not separately disclosed – we can see that:

  • Average revenues per user have gone up from 111 to 116, a Rs. 5 increase. (per month)
  • Of that, Call Revenue per user is down by Rs. 3.18 per user per month, and SMS revenues have fallen by 24 paise per month.
  • But Data revenues are up by Rs. 10.46 per month per user!
  • This is not cannibalization, this is a new business model!

And then will you believe that telcos think they actually LOSE revenue to data? They make revenue on data, and a heck of a lot of it.

image18 image19

Financials: Are Telcos like Airtel and Idea making losses?

Sure, this is revenue. But the top operators in the country: Airtel, Vodafone and Idea – are they losing money? Answer: not by a long shot! We have figures of Idea and Airtel, who are public. (Airtel loses money in Africa, but let’s ignore that)

The financials in terms of profits were ridiculously high earlier for Airtel, but the fact is that they fell and are recovering smartly.

Some people say that this is bad because of their low “Return on Capital Employed”. ROCE for Idea and Airtel are around 13% and 16% respectively (Earnings before interest and taxes, divided by Equity+Debt).

But if you use a better term for utilities, which is what telcos are (like power providers or highway toll companies) they are measured on RoE, or Return on Equity. If you take debt, and then you pay back the interest on the debt, how much return are you left with, on your total equity?

For Airtel the RoE is 20% (for India standalone) and for Idea, around 20% too. This is higher than bank FDs by a considerable margin, and utilities are expected to have RoEs of 15% or whereabouts. Plus their debt costs are coming down, as interest rates fall. (Vodafone’s traded short term debt went below 9% a year, lesser than the base rate of most banks!)

If you look worldwide, this is exactly how it works. Verizon has a 10% ROCE, but a 70% ROE, as they have a lot of debt. AT&T too, has only 5% ROCE but 10% ROE. This is how the industry works everywhere else; high debt, and juiced up ROEs.

SMS and Call Revenue : Anti Spam Regulations Would Have Already Cut Them

SMS revenue will have dropped anyway because of TRAI’s anti-spam rules. (They created the Telecom Commercial Communications Customer Preference Regulations in 2010)  Before that, Bulk SMS providers were offering rates as low as 1 paise per SMS, because they were getting these deals from telecom operators. Today, because of TRAI’s timely action, SMS packs cannot be sold in an unlimited fashion and costs of non-compliance of anti-SPAM rules are very big. Therefore, revenue from spammers, which was not earlier bifurcated but would have formed a significant chunk of the SMS revenue earned by telcos, has fallen.

(Proof – when SMS regulations came about, SMS volumes )

This timing has also impacted call minutes as the anti-spam regulation also applied to unsolicited voice calls. With the India-wide Do-Not-Call registry, telecallers who would earlier call at odd hours for advertising or marketing were no longer allowed to, and that would crimp telco revenues anyhow.

These points mean only one thing: Telco revenue from SMS and Voice would have anyway come down even without “data” coming in.

Data is more efficient, Costs Less and Increases Usage

It is simply that data is more efficient in delivering messages compared to SMS. You can’t trust SMS to actually be delivered. But you are more likely to be convinced that a Whatsapp message was read, or that a twitter message was sent. Their technology tells you when the other side has been reached, and sometimes even when the other side has read your message.

This will obviously make traffic gravitate towards data based messaging.

While this imposes a lower cost per message on the user, the increase in messaging frequency will result in larger data revenues in comparison. Which means revenues in total have to be seen, not just as a function of “per-message” revenue, which is a false metric.

Data is charged to the user on a per-kB basis, or as packs with a limited cap (effectively a per kB cost). This ensures that the larger the usage of data, the operator is paid more. If the user would send 10 SMS messages a week, he may send and receive 1000 Whatsapp messages in the same week. Even if the cost of data is Rs. 0.01 per kB, and each message is 5 kB, then the user spends Rs. 50 per week, versus his SMS usage at Rs. 0.5 per SMS would give the telco only Rs. 5 per week. Effectively, increased usage increases his messaging bill by 10X!

(And most data based messaging involves pictures or video which are more data heavy)

You can see this by the rapid increase in revenue, as shown above.

Servicing Debt Requires Money, They Say

Who’s going to pay for the spectrum auctions of 100,000 cr., they tell you. Answer: Wait a minute, boss. You don’t have to pay Rs. 100,000 cr. today – it is over 20 years. And if you see the growth they expect, then the cost per user will be even lesser and reduce as they grow!

While companies will pay about 30% upfront now, they pay the rest in the next 12 years. Idea has to pay Rs. 30,000 cr. in total, so its upfront cost is Rs. 8000 cr. with a moratorium of 2 years before it needs to pay the rest in 10 installments. Take the next three years, where Idea’s debt grows by 8,000 cr.

Idea’s debt currently is about 18,000 cr. so it will increase it’s debt by about 45% for the next three years. Or, put another way, 15% a year, which is how much its interest costs will increase. Idea’s data usage is up by 100% in the last year, and number of users too, by over 33%. With more spectrum, they can attract far more users, and that will make their revenues jump way above any impact of increased debt!

What we mean is: Their increase is debt is not as substantial as their increase in data revenues from consumers, which will more than make up for it. Even if you considered investments in infrastructure and reach, the increased revenue potential is massive in comparison.

The Financial Angle

Capital Mind is biased towards Net Neutrality, not against it. So our opinion comes from that angle. But it is time to debunk the defence of the Telecom Operators who say it is time to now charge internet companies for using their infrastructure.

It is the telecom operators who are making awesome revenue by users increasingly paying for data to access internet applications like Whatsapp, Skype and Flipkart.

It is the telecom operators who stand to make the maximum profit from people using videos and large data applications.

It is financially better for them to be great pipes to the content we want to use. If that today is Facebook, Skype and Twitter, so be it. If tomorrow it is Meerkat, Vimeo and IndiaTV, so be it. The end-website or application doesn’t have to pay the telco – the telco is effectively piggybacking the Internet Applications’ popularity by making money off the data it charges its customers for.

It’s time to make the Net Neutral. It’s time to debunk the propaganda that ooh, our Telecom Operators are losing money. They’re not, and in fact, they’re raking it in. They say one thing to investors: Data is the future. It is, and it is so because of the great apps out there, on which the telcos have made so much money charging for data already; attempt to charge those apps, and like VAS, the telcos will destroy it for us.

Charge us for data, but you can’t tell us how we can use the internet. You are making a lot of money that way, telcos.

This is a free post under the CC-BY licence. You can copy, modify, change or redistribute it, as long as you reference this post. Please also look at Save The Internet .

About Deepak Shenoy: Deepak Founded Capital Mind, which mines financial data and provides analytics. Deepak is part of the core team that helps build, grow and keep our data platform up to date. He lives in Bangalore. Connect with him at deepakshenoy@capitalmind.in.

Read the original article here.

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  • I think telcos are worried about a hypothetical future when everyone stops calls entirely and switches to VoIP. Then they will no doubt lose revenue since the cost of the bandwidth of a typical VoIP call is nowhere close to the price they charge for a regular phone call.

    But here’s the thing – that’s the way technology works. Tomorrow, the electricity company cannot charge more for the electricity consumed by LED energy efficient bulbs saying “Oh, LED bulbs are killing our business, we made so much investments boo hoo!”

    Life is tough. Technology marches on and new tech replaces the old one. That’s the nature of business.

    • dsb_dsb

      No they will still earn because then people will start using more data and data will get cheaper in the long run (With better technologies and better infrastructure availability) there are many reports about data services, just search the google.

      • I think the nature of data is such that it can never make up for lost voice revenues. They will still earn of course – but not as much as they do now. If the whole country stops making phone calls and switches to VoIP, data revenues would not compensate.

        But like I said, that doesn’t matter. The telcos are not entitled to earn money using old technologies.

        • dsb_dsb

          Exactly, they must innovate, provide better services & compete in an open environment.

        • Yes. They must compete. And they must also realize that this competition will lead to lower profits for them. That’s just too bad. We are under no contractual obligation to maintain the profits of telecom companies.

        • dsb_dsb

          Nobody knows the future & so don’t be so certain of their loss, maybe they might come up with next whatsapp or something better and again gain the upper hand or they could become dumb pipes and focus entirely on data services. There are many possibilities but user interest lies in ‘Net Neutrality’ and hence it can’t and should not be compromised.

        • The best route for them would be dumb pipes. And even if they come up with the next WhatsApp, their traditional huge voice revenues are lost forever – just like SMS.

          I’m not saying they won’t make money. They will. Just not as much as now.

        • dsb_dsb

          So fall in prices would mean increased access for consumers and more consumers will be on their networks. SMS’s were already falling, don’t believe me check the data since 2004 because that’s when SMS boom came and it was in continuous decline since 2009-2010 onwards.

  • Grimmjow

    Telcos are jealous that WhatsApp sold for more than $19B. They want some of that valuation pie somehow.