MTNL’s meat can be private sector’s poison

New Delhi, July 12: MTNL can provide cellular service at the rate of Rs 1.50for three minutes. Incredible, but true. While the private cel...

Written by NEERAJA KUMAR

July 13, 2000 12:00 AM IST

5 min read

New Delhi, July 12: MTNL can provide cellular service at the rate of Rs 1.50for three minutes. Incredible, but true. While the private cellularoperators are finding it difficult to even break-even at the current airtimecharge of Rs 4 per minute, Mahanagar Telephone Nigam Limited (MTNL)officials say that the PSU has the capability of providing mobile GSM accessat this incredible price.

While this spells good news for the mobile customers, the private cellularoperators would have already started reaching for their panic buttons.

Meanwhile, industry experts are divided in their views of whether MTNL ismaking tall claims or will it actually set a cat among the pigeons. Whileone section of the industry thinks that the airtime charges of Rs 1.50 forthree minutes is well within MTNL’s reach, another section refutes MTNL’sclaims.

So what exactly is the situation: Can MTNL do it or not? Consider:

CHEAPER EQUIPMENT: According to MTNL officials, the company can affordto give the service at this cheap price, because the cost of the equipmentprocured is nearly one third the price at which it has been procured byprivate operators: "While we got our equipment for $84 per line, the privateoperators procured theirs for $225 to $250 per line. You can call it alaggard’s advantage, since the cost of the equipment was much higher sixyears ago, when the private operators had set up their networks. Whateverbenefit we will get, we will pass on to the consumer." However, according toSunil Bharti Mittal, chairman and managing director, Bharti Enterprises,MTNL has huge legacy systems and lot of bureacratic constraints which tie itdown. "If they claim they can get equipment at one third the price, I canget it for much lower. Because, while they take one year to bring out atender, I can call for tenders every 15 days. And unlike a PSU, if I want, Ican cancel contracts and give them to someone else giving a better price,without being answerable to anyone."

NO INFRASTRUCTURE COSTS: Some industry experts point out that MTNL isperfectly capable of providing the services at the incredible price of Rs1.50 for three minutes, because it has a distinct advantage over privateoperators in terms of infrastructure costs. According to a senior officialof another private cellular operator, MTNL’s infrastructure cost for settingup the GSM network is zero: "The only investment made by MTNL is the amountit spent for buying the network elements: base stations controllers, BaseTransiever Stations (BTS’s), and switches."

While MTNL has mounted the network on its existing infrastructure, theprivate operators had to build the complete backbone from scratch. Thisincluded buying space, mounting antennas, getting power supplies, powerbackups, etc. and "ended up spending an extra amount of Rs 10,000 per linewhich is 40 per cent more than what MTNL spent," he adds.

CROSS SUBSIDIZATION: Does this amount to cross-subsidization. "No", sayindustry experts. Utilizing existing infrastructure makes good businesssense. "If I was to go into basic services tomorrow, will I not use theoffices I have already set up to provide those services as well?"

MTNL officials also insist that they do not need to cross-subsidize, tooffer GSM services at Rs 1.50. However, Mittal’s argument is that when allcellular companies are yet to make profits, even after six years ofoepration, where they were chariging rates as high as Rs 16/Rs 8 per minute,how can MTNL make money? "Operating costs are higher than Rs 850 persubscriber, per month. How will MTNL make money with no margins? The onlybenefit MTNL has is that whenever a local call comes in it gets Rs1.20 inits pocket, which I don’t get," says Mittal.

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ECONOMIES OF SCALE: MTNL officials however say that what the companywill lose in terms of margins, it will make up in volumes. "Since we willprovide almost the same price as the fixed service, the sage will increase.This increase in volumes will give the economies of scale required togenerate profits."

However, what is meat for MTNL, might well turn out to be poison for theprivate operators. MTNL officials claim that the private cellular operatorscan also provide services at much lower prices in comparison to what theyare charging right now. "The only reason why they are not doing so, is thatthe moment they reduce prices, usage will increase and their networks, whichare nearly six year old and are not equipped to handle high usage, willsimply collapse." Currently, MTNL will set up 150 base stations in Delhiand Mumbai, and in three years this will go up to 600 base stations in eachcity. However, Mittal refutes MTNL claims that the networks of privateoperators can not take the additional loads: "Currently, we have 190 basestations in Delhi. And in a couple of weeks 3,00,000 new lines will befunctional, which will enable us to cater to over 5 lakh subscribers.Therefore, MTNL can not say that we are not reducing prices, because we donot want to increase usage."

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