One seemingly less important budget proposal made yesterday by President Mahinda Rajapakse – many might have missed it – is the eligibility extension of the popular ‘low cost’ UPAHARA package by Mobitel to clergy and employees of co-op societies. Only public sector employees plus retirees had the privilege before.
No doubt, a private company, even a one with govt hand in it, can offer special rates for a niche market, which it finds lucrative. However, when that is recognized more as govt policy, and spelled in a budget speech, inevitably eyebrows go up and questions arise.
The most deserving beneficiaries of low cost teleuse are the poor – or the so called ‘Bottom of the Pyramid’ (BoP). That we all agree.
As LIRNEasia found from its previous Teleuse at BoP studies, contrary to the popular belief, 92% Sri Lankans in BoP use phones, though not necessarily own them. The ownership was 41% in 2006, but certainly more now.
On a scale of 1-5 (1= worsened, 5=improved) BoP teleusers in Sri Lanka marked their perceptions of the ability of a telephone at 4.58 to act in an emergency, 4.35 to build family and social relations, 3.98 to increase the efficiency of daily activities, and 3.19 to earn more or spend less on their day to day activities. Bottom line: Telecom is not a luxury for poor – but an essential part in their livelihoods.
So why doesn’t the govt offer the advantage of low cost communication to the poor?
Most in the two newly introduced categories – clergy and cooperative society employees, just like most govt employees – do not fall to the two categories D and E – the bottom-most layers in the social pyramid. They are placed at the top layers. They are not the ones who need financial support most.
Is there any logic in preventing a poor farmer the benefit of low cost communication which, for instance, the Secretary of the Ministry of Finance himself enjoys?
Why support the better-off, ignoring the poor?
(Catroon is by Anjana Indrajith of Lakbima)
17 Comments
Azit
Thts the Reality of Telecom Companies.
They are only doing Their business.So don’t Trap.
Chanuka Wattegama
If it were a pure business decision of Mobitel to extend the package to clergy, aurvedic doctors and co-op employees, I wonder why that was in the budget speech.
Why not, for example, Dialog Blaster package or Tigo simplified billing never mentioned?
Rohan Samarajiva
Will Upahara cannibalize the fixed-phone business of Mobitel’s parent?
My mother who is a government pensioner wants to get Upahara because she has been told that it is free. This despite the fact that there is a SLT fixed phone in her house. And that’s the only place she makes calls from.
I showed her the fine print about calls to fixed and Mobitel numbers being free only between midnight and 6 PM. And that she had to pay LKR 8 per day. And that she never was comfortable with the tiny mobile handsets.
But what if she (and pensioners and govt employees and clergy) simply pay the LKR 8 per day; and use the fixed phones they already have only for calls after 6 PM? What if they get rid of the fixed phones altogether?
Will SLT thank Mobitel then?
Chanuka Wattegama
For those who read Sinhala and those who have Unicode compatible fonts installed in their machines, Malinda Prasad makes two relevant blog posts.
http://malindaprasad.blogspot.com/2008/10/blog-post_13.html
http://malindaprasad.blogspot.com/2008/11/blog-post.html
The first one is about the poor QoS of the Upahara package (don’t know whether it is a onetime experience or a common issue) the second one is about the registration delays Upahara subscribers face perhaps due to the high demand of the package.
Absent
It is good that this type of a dicusiion is taking place.
I raised some of my concerns previously.
http://lirneasia.net/2008/10/price-war-ends-receiving-party-pays-in-sri-lanka/
What professor says is true.. if one could smartly use Both SLT fixed lines and Mobitel Upahara he/she can have substantial cost savings.
SLT fixed line comes with Free minutes with a rental…so one could use this upto 200 minutes during the night and 1000 minutes of upahara during the day.. 1200 free minutes for monthly rental of 740 excluding tax ( 500 + 240). Effective outgoing tarrif is approximately 0.62 per minute
I am sure SLT is facing this as this is right now happening at my place after we bought Upahara. I am sure this will happen in most of the places.
Final result.. both SLT as a group will suffer financially… and guess what next… a bail out package either from EPF/ ETF which is contributed by Private sector employeess ( Who are not eligible for Upahara)or from the money collected from MSL which is 30% on averge.
Meaning.. general public in this country pays government servents phone bills….
Remember, there is no Free Lunch….
Rohan Samarajiva
Sorry, it is not accurate to say that MSL (mobile subscriber levy) is 30%. It is 10%. It is when you add VAT and SRL and the now stayed EnviLevy and the tax-on-tax that we get around 32%.
But no dispute about the likelihood of SLT’s bottom line getting hammered. The stat to watch is people wanting to return fixed phones. It’s happening on a massive scale in India and even in Pakistan. This has been very low to absent in LK because of the high connection charges. But Mobitel may get it started.
Lahiru
There are over 1million Fixed (Copper Loop) users throughout the country who have bought the line from SLT for an amount of Rs.15,000-Rs.25,000. Definitely there is a huge ‘Sunk Cost’ for any customer who consumes a fixed phone from SLT. I don’t believe Upahara or any other mobile package can replace SLT phones due to some reasons:
1. The initial cost spent on fixed line is very high so that the resistance of dumping an SLT phone is significant.
2. The quality of service provided via a copper loop is very high along with a higher degree of reliability which cannot be matched by any Mobile or CDMA connection.
3. The broadband facilities, IPTV and several future benefits anticipated by the customers are very high.
4. Copper loop is the only available medium which gives guaranteed bandwidth for broadband via ADSL services compared against HSDPA and Wimax services.
Therefore i clearly beleive that SLT will not have a much threat from Upahara. But I believe that it made a fantastic complementary for customers so that they can keep there SLT phone at home and use their mobile phone with an Upahara connection while enjoying free outgoing calls. This may strengthen the SLT group.
But on the other hand now people have started Dumping their Lankabell, Suntel, DBN…etc CDMA phones due to Upahara package as the loss is minimum for them and the possible gain is very high. This again removes direct rivalries of SLT from the game.
So is Upahara really a threat or strength for SLT ?
Rohan Samarajiva
Agree partially.
The large installation charge (even though it is a sunk cost and therefore should not factor into present decisions) is likely to reduce the incentives to return the phones.
The wireline connections are less than one million, more like 800,000. Not all of them can deliver ADSL. And not all the pensioners and older elite families who obtained wireline when you had to work for the government or have connections to get a line are in the broadband market. In many cases, their children live abroad, etc.
My main postulate was not that SLT phones will be returned, but that their use will be reduced in the 0000-1800 hrs period everyday when calls to Mobitel and fixed phones are free. Lahiru calls this is “a fantastic complementarity.” I call it cannibalization. Losing that much of usage based revenue will harm the bottomline of SLT.
Absent
Thanks professor for your feedback.
Actually the tax the mobile subscriber pays is 27.78%, which is result of 15% VAT and 10% MSL and very “complex” tax on tax calculation. It used to be around 30% including ECL, which was removed temporary following a supreme court directive.
Yes, SLT will face erosion of revenues or ” Revenue Churn” as people will keep the phone by paying a minimum rental just to receive incoming calls until people get familiar with the new mobitel number.
Also still majority of the people use fixed lines ( especially SLT) for voice and there will be a definite canibalisation of revenue as professor says. This will be definitely reflected in Q4 financials of SLT Group.
This canibalises mobitel own base too..
My question is how can a company issue free minutes..As I understand a minute generated by a operator has costs even it is fixed for shortterm. The moment a network is filled up with free minutes the capacity needs to expand and that involves capex, which increase the depreciation and the interest if funded by commercial loan which drives down net profit. As a result return on investment drops..
this is not taking into account the network operational costs that is expected to increase with the usage ( this is a semi fixed cost not a direct variable) which drives EBITDA down.
This could be only possible for a operator who has excess capacity where the relavent capital cost of adding a minute is zero.
Probaly dialog would have offered 1000 minutes, after loosing substantial number of subcribers to Uphara, as they have excess capacity with zero incremental cost to offer( As the network was designed to handle large number of subscriber who are not with them now).
But then how can mobitel offer free minutes even to cross net… in an interconnect regime which will soon be implemented .. they will suffer a gross loss from upahara unless they increase prices. as per reports thay have added 280k subscribers in the month of September and it is a great task for network engineers to accomodate this unless they have free capacity..and this provide and indication of churn that dialog faces as majority of this 280K would be dialog customers accoding to market share statistics which justfies my argument of free minutes of dialog.
is mobitel behaving irrationally???or are they going behind market share just to claim No #1??? is some cross subsidising happening with SLT???or is it something that I do not see..
Professor, appreciate you could clarify my doubts….
Rohan Samarajiva
The key is understanding peak and off-peak use. My recollection is that Nobel Laureate Bill Vickery argued that all off-peak use on networks (public transport, telecom, etc.) should be priced at zero. Others less radical would argue that off-peak use on such networks should be priced at incremental cost and that all capex should be borne by peak users. The core argument is that these kinds of networks are built for peak use; off-peak is simply a joint product. You produce peak; you cannot avoid producing off-peak.
It is evident that Mobitel’s current peak is 1800-2400 hrs; in this period it is not offering free calls. Even during its off-peak period, it is not offering truly free calls, but a bucket of x minutes under the Fair Use Policy for a fixed fee of LKR 8/day. So in an ideal world: the peak will remain where it is currently (the “free” perception will not cause the peak to shift to the 0000-1800 hrs period); there will be no substitution of calls made during 1800-2400 either by people making those calls before 1800 or making them on some other network.
If, for whatever reason, the peak shifts (I suspect it already has, based on the complaints I am hearing about atrocious quality on Mobitel after the Upahara product was offered), Mobitel will face a serious problem. Now it is offering “free” minutes at the peak, which is silly even by business logic, let alone Vickery logic: it has to incur Capex that is unlikely to yield adequate returns and it is losing revenue that was generated in the previous peak. The consequences suggested by Absent will kick in. If it does not add capacity, the customers will leave.
The above analysis took Mobitel alone. Now what happens if we throw SLT into the mix? If a substantial amount of SLT’s 0000-1800 traffic (its so called peak; at least, its expensive calls) moves to Mobitel, it will suffer at the bottomline. Once people become accustomed to using Mobitel from their homes during the day, they are likely to keep using it even after 1800 hrs. Now Mobitel’s losses are reduced but SLT is suffering serious damage.
Given features like numbers being stored in phones etc. over time people will figure it’s much easier to use mobiles for voice. A few years from now, SLT customers who are not in the market for broadband and who are not hung up on the installation charges paid years ago (sunk costs), will start returning their fixed phones. This can be accelerated by SLT trying to stanch the early losses by increasing the fixed part of its two-part tariff, the rental.
Interesting times lie ahead for SLT/Mobitel. Especially now that they have got on the President’s radar as a goody-distributing agency:
“Hon. Speaker, I propose that the SLT/Mobitel public service Upahaara package offered to public servants and pensioners, be extended to the clergy,indigenous doctors and workers in the Co-operative service. SLT is able to full such social responsibilities in view of the majority Government holding in Telecom Ltd.”
This is just the beginning. And he will keep asking for exemptions and deals that will be very expensive to administer. Original Upahara eligibility was determined easily: pension slip or letter from Department Head. What is the equivalent for clergy? What is it for indigenous doctors?
Government has pushed SriLankan on to a loss-making path; now it is starting on Sri Lanka Telecom. Recommendation: sell.
Absent
Thanka you very much for the detailed explanantion.
is my argument on Dialog offering free minutes is still valid? assuming they already developed a network to carry X number of traffic which is not today due to churn , and therefore the cost of offering free minutes is zero.
if SLT see a drop in traffic during 00-18 will they aslo offer free minutes ??
don’t you think offering free minutes within the network ( worst case at the network peak) is suisidal as i under stand such minutes consume network resources at two locations…
Rohan Samarajiva
Is Dialog offering free minutes? You can charge for minutes as part of a “bucket” or you can charge by the minute. Neither is free. Mobitel is offering a bucket of minutes (limit is set in FUP) for LKR 8/day. That is not free.
Optimist
Prof, I have a question, in my opinion Mobitel can offer these “free” packages because they are cross subsidized by SLT. Not long ago, CEO of Mobitel said that they expect to have a profit of over 1 billion this year. Isn’t it since their costs are hidden in SLT’s books. I remember sometime back SLT had a USD 100 million bond issues and if I am not wrong 80 million of that was used for Mobitel’s expansions. Who pays the interest and takes the hit of exchange loss on the bonds, SLT or Mobitel?
So, aren’t the SLT customer paying for Mobitel’s Upahara ? if not why cannot SLT in the minimum offer 1000 minutes free on SLT network to it’s customers? Why has the SLT customer need to go to court to get their tariff reduced?
Rohan Samarajiva
Cross subsidy is a violation of the SLT and Mobitel licenses. Only the TRC can investigate this and make a finding. We do not have the data to establish it.
Sandun
Professor has analyzed Mobitel Upahara Package and the impacts of it on SLT & Mobitel Group’s bottom line. Shall we have a look at Dialog blaster package as well. Because that is the next closest topic in relation to this topic on Upahara. I have identified some serious loop holes of Dialog blaster package when compared against Upahara, which make it just an irrational business decision taken by Dialog in order to safeguard their so called 5millions subscriber base.
first thing is, Dialog is giving 1000 On net minutes where as Mobitel offering 1000 (on net+) off net minutes. Mobitel package leads Dialog, from customers point of view as it offers free minutes to 5 networks (Mobitel, SLT, Lankabell, Suntel & DBN) where as Dialog offers just on net calls. From network’s point of view, Dialog has increased their network traffic by offering expensive on net calls free.
Second thing is Mobitel gives 1000 minutes with per minute billing which effectively gives lesser number of free minutes (at least 30% less). But dialog offer 1000 minutes with per second billing which means 60000 seconds exactly. Again dialog has gone acted too aggressively. Subscribers rarely recognize this difference.
The most significant point is the effect of this on Dialog’s bottom line. Shall i do a rough calculation. Dialog’s current ARPU levels for postpaid are above 1600LKR. They have comparatively high postpaid base. The blaster package with 300 rental will result in a lesser ARPU level of around 600LKR. If we assume 500,000 of internal cannibalization of Dialog, this will roughly results in at least 6billions LKR loss per annum which is very adverse.
From Mobitel’s point of view, they have attracted a new subscriber segment. For example, Professor’s grand ma is a new addition for Mobitel which results in at least 500LKR average guaranteed ARPU level. If Mobitel attract 500,000 new additions from this package (which is possible if we compare it against 1.5millions of potential base comprised of govt employees, pensioners, clergy…etc). This results in an increased fixed revenue stream. Which is wiser compared against Dialog blaster.
Therefore i think that, Dialog blaster is a disaster for Dialog compared with the impact of Upahara on SLT bottom line.
Absent
partially agree.
Dialog has a strong coporate base and ARPU of 1600 would be including Roaming etc etc…. However, 1000 minutes are not offered to the corporate base and they are not per second as well.
the 1000 minutes were offered to individuals who paid something like 100 rental. in that sense they have increase the rental from 100 to 300 to offer free minutes. in that way they have covered up most of there revenue loss. further, there is Rs.500 of transfering fee. this should also partially absorb the revenue loss. Do not know how do they treat this revenue stream. According to my undertanding this has to be treated a differed revenue and need to charged to P & L on monthly basis.
But your argument is still valid of offering free minutes on per second basis.. do not know whether they practice is actually..
Rohan Samarajiva
More thoughts on the subject at LBO.
The politicization of mobile pricing that is extremely dangerous for all is evident in a letter to the editor of Irida Lankadeepa on 23 November 2008 asking that Upahara benefits be extended to Middle East returnees.
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