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Sunday, July 8, 2012

Telecom industry economics 101-a primer

Telecom pricing has always seemed opaque, random and complex. But there is logic behind the seeming madness, which I try to explain below

  1. Fair usage policy which restricts the user speed for 'unlimited speed' beyond certain limits, attempts to invert the Pareto principle on its head. After all, the specious logic used for fair usage policy is that a few users by their huge usage lower the overall experience for everyone else. Agreed, but that is what the Pareto principle is all about. By trying to avoid that, this is a novel experiment to avoid that here(i.e socialize the usage in a way). However, it does seem a success-logically and financially
  2. Call termination charges are levied by the destination network, and impose a lower ceiling on calls tariffs between operators. But for intra-operator calls, this is not applicable(except within circles where due to separate license norms, they are subject to separate P&L and transfer pricing), and so operators can offer it at near zero prices(like say 2paise for a minute!). There, the pricing would probably factor in opportunity cost of using the spectrum(since that is a finite resource) and other network effects, but not out of pocket costs.
  3. Like Dominos, Subway and Starbucks which sell a base and try to earn superprofits on the top-ups/upsize options, those economics/rationales apply more so to telecom, with its low incremental costs per minute. So lessons from the F&B industry can be profitably applied here
  4. The cost structure from the operational side is largely fixed(spectrum, network) except for companies like Airtel which have a per-time slot cost structure thanks to innovative deals with their service providers. From the marketing side, channel partners get a fixed fee for customer acquisition, and therefore churn is very expensive for telcos which cannot recoup that fee(that is why an upfront fee/activation charge/registration fee is usually charged, that generally goes to recoup these upfront costs).
  5. Telecom is intimately linked to customer behaviour(how they talk, listen to music, surf data) and so like food, it is VERY local. That is why tariff plans are also localized, and increasingly with the special offers/'best plan suggestion'; telcos are trying to refine their price discrimination by targeting offers to the n=1 target segment.
Will try to explain more later, but this is all for now. 

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