Free Pricing takes toll on non-life insurers

Today’s ET had a front page article with the same headline “Free Pricing takes toll on non-life insurers” where it reported that the once lucrative Fire Insurance segment now makes private General Insurers bleed.

Its an interesting and important development because it could well become the case study in What not to do in a free pricing regime. Coz most of the current losses are being blamed on the price undercutting taken by these players to get more sales.

Non Life InsuranceSo one might be tempted to ask-Is price undercutting a good strategy?

I would say it is a good approach to capture the market share, but only if the following conditions exist:

– The final margins after the price cuts, still allow you to make “normal profits”

– If the above is not there, you have access to a source of funds that can sustain you for a long period in the market place.

– Also the nature of industry/product allows you to lock in the customers from shifting to competition or ensures a high wallet share.

If you ask me, Fire insurance which requires periodic renewals does not guarantee that the customer will be back with the same insurer next time also.Moreover given that most of these are corporate customers, it can be safely assumed that they would shop around for the lowest priced deal.

The worst impacted are the Private sector players, coz they had not built a large enough book, whose corpus could have given them returns to cover the operational losses in the interim. All these are relatively new entrants in the market.

It is not a surprise then, that some of these private sector players are looking for additional influx of funds or a party to even buy them out.The regulatory changes in General Insurance sector have just started and how the Insurance business pans out, will make for interesting case studies for Strategic Management 101.

TRAI on overdrive ! Telecom business to see a complete overhaul…

The last 7-10 days have been filled with a lot of action in the Telecom sector, and the regulatory authority TRAI seems to be at the centre of it all.

TRAIConsider these:

– 3G policy is launched

– BSNL MTNL given a go-ahead for an early 3G launch

– Net Telephony proposed by TRAI supported by DoT

– Legal threats to GSM players for failing to provide interconnect to Reliance’s GSM

– Proposal to allow takeover of 2.5G players without the wait period

– Allow callers to choose their STD/ISD carriers

While the 3G announcements were much expected, a few others have indicated a growing discomfort of TRAI with the current players.Else why would all these suddenly be proposed in a matter of 3-4 days.

I personally feel the option to strongchoose the STD/ISD player /strongwill see the light of the day much earlier than other proposals. Here’s why:

– Existing players will not oppose it as much as other changes coz adoption of calling cards etc requires a lot of marketing muscle from stand alone players. I am unaware of the technical issues involved in ISD traffic where the current players will not be able to sell the purchased minutes of talk time. But am sure they will be able to adapt soon with some kind of a predictive tool.

– Customers will be happy with the announcement and TRAI would have scored a brownie point ot two.

– Primary impact would be the ISD calls as STD are not considered so costly that consumers would pull out a card punch the long series of numbers therein.Even if look closely at the ISD market, that itself is very segmented coz

a) Well off people who have relatives/friends/clients abroad will not bother too much unless the differential is high

b) most empeople with internet connection /emcalling family friends aborad are using Skype/Google talk for longer regular conversations. So they would rather wait for a Skype phone to be allowed in India

c) People without internet access typically calling Middle East SE Asia locations will be the first ones to adopt this. But typically here also, the Indian party more often than not recieves the call- not originates it.

d) Corporate- they should be the only ones to see significant cost reduction by choosing the service provider. And they would want some smart solutions, wherein the code is automatically punched in when the user calls from an enterprise connected device.

The most disruptive proposal of it all would be the Net Telephony– as that would not only take away the key revenue drivers for all existing players, it would suddenly reduce the entry barriers in a very significant way.As consumers we should welcome this, coz the rates would surely plummet, but if you have expsoure to telecom in your investment portfolio (through the current players)- it could hit you hard. Though the new players waiting to enter the market with their Net-Telephony-only services, highlight that this is as secure as the incumbent technology- I have my doubts that they would be able to convince the final decision makers. Given the strong lobbying from existing players the recent terror experiences – security issues could become the Achilles heel for Net Telephony.

The other proposal to do away with the waiting period for a new player strongto take over an existing player/strong- seems to send a very strong and positive signal for Foreign players- Indian Telecom sector is now ripe for M&As. With

– Vodafone already having its wide operations

– Virgin running an MVNO with TATA Tele

– MTN having courted dumped both Airtel Reliancebr /Indian Telecom market is already high up in the radar. With Chinese market still being unaccessible- many more foreign players will try come down to experience the Incredible India.

One might ask- what will tempt them to come here with falling ARPUs and an even worse scene predicted. Apart from the sheer numbers, I think Indian players have been able to sell the idea to the world that they know how to operate on a large scale with lower costs (playing on volumes rather than margins). This was what everyone felt when the MTN courtship was taking place in full media glare.

Phew! So much action is anticipated that most of us had forgotten about the iPhone launch for a while…. Over to some more exciting glamorous developments in the business of staying connected !

Killer Apps in motorbike industry

Was reading an article in the ET today, which talked about how Bajaj was trailing behind Hero Honda in the Motorcycle sales in the country. The article went on to identify the reason for the widening gap- Bajaj’s lack of focus in sub 125cc segment where the volumes are still high.

While all this might be true, but if you have not been tracking this industry, you would fail to identify Bajaj as the maker of the last Killer App seen in the Motorcycle industry.

The action in motorcycle industry heated up in mid 1990’s when they started selling instead of scooters- not just in Tier 1 but Tier 2 3 towns… Those were the days when both 2 stroker and 4 stroke vehicles were available. Since petrol was not that costly, buyers didnt keep mileage as the top criteria- and this era saw strongYAMAHA /strongemerge as the clear winner with its strongRX100 /strongrange of 2 stroke bikes.

These bikes were known for their pick-up and soon became a rage amongst the young population.But then came the Euro 2000 norms and 2 strokes were banned all together. Yamaha tried hard to gain a foothold in this segment with its YBX range but failed to do so against Hero Honda- a really entrenched player.While Yamaha (before 2000) had focussed on power and styling Hero Honda had kept on building brands that delivered mileage and relied on the 4 stroke technology. By 2000 Hero Honda had CD100 and Splendour as its two main products. With Yamaha RX100 being banned, Splendour took over the market like anything. It had already started overselling RX100 due to increasing fuel costs and the Euro norms just consolidated their leadership position.This ensured that Hero Honda was the undisputed leader in the motorcycle market in India.

It was against this background that Bajaj launched Pulsar- a single product which helped them bridge the gap with Hero Honda. Bajaj had not only taken a big risk by introducing a model in the 150 cc category, it had also brought with it a fresh hope for the industry

Pulsar caught on the imagination of people – with its disk brakes, flashy design – and soon Pulsar was the new mean machine for the young with money to spend.Pulsar’s success saw many more brands being launched in the 150 cc segment but none of them failed to come up to the same level …

So while Bajaj might trail behind Hero Honda, I think the company has shown a clear understanding of how to create launch a killer app in the market.

PS: in all this discussion of bikes, I have knowingly not mentioned ENFIELD- coz I think the Bullet in all its variants Machismo, Electra, Thunderbird (my fav)- are in a different league 🙂

3G now in India… immediate impacts on Telecom Sector

Today’s biz papers were all shouting out loud about the 3G telecom policy now finally being here. For the uninformed like me, it meant too much excitement about half a mark (thats how much of technology leap we would take by this costly migration from strong2.5G to 3G/strong ) on the score card…

3g MTNLSo I decided to read more about it and understand the business logic behind all the fuss. It seems 3G promises the platform for real convergence on the small screen (read handset)- with streaming video, media rich applications, high speed data transfer and what not. But the real low hanging fruits for the telcos lies in the 3G’s strongspectrum handling efficiency/strong.

As mentioned in a previous note-Spectrum is the biggest fixed cost for telcos and better utilisation in circles of high user base will reap immediate rewards.

So here I go again, trying to predict how the 3G roll-out will happen/strong in India:

  • The top players like Vodafone & Airtel will have to adopt 3G when it happens. There will be too much reputation risk (from the premium segment customers) for them to delay this. Coz in my mind, this premium segment customer has either tasted a better user experience abroad or feels that he would use these “cool” features once 3G is here
  • If the 3G license is available by circles- the top players will go about doing this in phases. I would have done it coz that way you dont need to implement it in smaller towns – barring a few like Ludhiana, Chandigarh etc
  • The battle for content will start- albeit with a substantial lag of 6-7 months, before the critical mass of consumers builds up
  • The initial 3G consumption on the consumer side will be high in the school & college/strong going segment- where entertainment will be the underlying theme- music, music videos, sports clips etc
  • Over a longer period of time- once the novelty factor fades out, it would be easy to segment the 3G consumers by category of content consumed/strong .Hence the Telcos will have to be tied up with the perceived leaders in each vertical.
  • It would create a whole new industry of applications , content providers. VAS as a term would now mean more than ring tones amp; wall papers 🙂
  • The average cost of phones bought will rise in short term, before 3G phone prices start coming down. 3G capability will become a decision criteria at the handset level- possible death of mid-segment phones.

The Changing Business of Cricket

Cricket has always been the only rich game in the country- with rights being sold for an unimaginable amount- BCCI has always been flushed with funds. But with the new 20-20 format (in its multiple avtars) coming in- the business of cricket will surely see a lot of changes.

So lemme try amp; put on Nostradamus’ hat amp; predict what all could happen in what was once the gentleman’s game….

– The ones who must be partying really hard are the bookies  the ones who play satta through Cricket. For them IPL & ICL is like dream come thru-like they suddenly have 48 hrs in a day to “work hard” & make money :-). Where there were only some 40-50 days of business in a year.. looks like now they can punt- the year round.

– Lot of proven overseas talent will retire early and come to play in the Indian leagues. Gilly’s recent century in 42 balls shows that he is still one-of-the best batsmen even in this young format of game. And am sure the fact that he would earn twice or thrice as much playing 20-20 will be noticed by many others. So what I see happening is this- the overseas players who manage to be consistent amp; would have made a name in the ICC tournaments would retire slightly early and pack bags for India- play 2-3 seasons and buy the perfect retirement home.

– The span county cricketwill lose further sheen as there is not enough money to attract talent. And with little marquee talent, they would make still lesser money and the cycle will go on.

– Indians will be overexposed to cricket. Am not a great follower of the game but I feel that even for the most passionate fan- tracking all the league teams- ICL amp; IPL- &  their individual players etc etc will become a pain. This could lead to potential drop in viewership which could mean a drop in advertising rates OR it could lead to monopolisation of the 20-20 format (which both of em are hoping for)

– Ranji will be in doldrums- with so much action the self-proclaimed guardians of this game will align themselves to focus on recruiting talent for the smaller over game at the domestic level. Even the players who would otherwise have been happy to be in a Ranji Trophy match- will now be keen to play for their city team. A Kolkatta player would want to share a moment with ShahRukh as the Knight Rider rather than some non-glam manager for the WB teambr

– Glam quotient (GQ) of cricket will see a lift. Am from Delhi- but my favourite team is the Bangalore Royal Challengers- simple logic- if BRC wins amp; plays till the finals- will get to see more of Katrina 🙂

Same with the cheerleaders- the current dress code being imposed has taken the GQ down by a few serious notches… but am sure this should be back to its opening levels by the next season :-)Coz the media companies do realize that there is a market that is made or lost coz of this also …

Rural mobile telephony: Show me the money !

Remember the famous lines from “Jerry Maguire”-” Show me the money”

With the next battles for telecom shifting to the countryside- I guess most of the telco honcho’s are rattling along the same lines…Coz exciting as it may seem, rural cellular telephony doesnt seem “profitable” enough in all its entirety- or maybe I am missing something.

Now, from what I understand of this business- the two major costs are infrastructure (read that as towers etc)  bandwidth- both of which are semi-fixed costs. I say semi-fixed coz- these can be acquired only in batches- you cannot buy tower or bandwidth capacity for one incremental user. Even if the government subsidises the bandwidth in thr rural circles, the tower cost is not expected to come down.

Basic economic principles say that one should aim for demand maximisation in such conditions to ensure maximum utilisation of the installed capacity- assuming the Variable Revenue is more than the Variable Cost. Now given the population density in most of rural India, I can safely assume that there will never be (atleast in the next 5-7 years) enough # of concurrent calls to utilise the tower amp; bandwidth 100%. This is coz most villages do not have enough households (or househlds that can afford a cellphone connection).

Most rural users would not also relate to the “value-added-services” which currently account for a healthy 40% of revenues (in urban circles) and have been the key reason for rising ARPU in a market with reducing call-rates. The uneducated cell user will not really use the SMS/MMS functionality- which is 60% of the VAS revenues. They would infact need voice-activated services where content is also delivered as voice, unless the cell co’s decide to make the rural youth addicted to porn on the handset 🙂

Rural telephony

Add to this the govt’s keen involvement in tarriffs in this sector and one can safely assume that the cell co’s cannot experiment with higher tariffs in the rural circles. So how would these cellular operators make money in the rural circles?

There have been talks about shared infrastructure but even then the shared entity would not break even on its tower cost.I read somewhere that the govt. had experimented with giving a cell connection to the local postman in the villages- to be used by the village residents – something like a truly mobile STD booth. There were clear commissions demarcated for the telco amp; the postman- BUT the service never took off too well. So why are most telco biggies so excited about the rural circle. Well, to be honest- am not sure, but had I been a decision maker at Vodafone, I would have looked at it thus:- Most co’s want to get access to bandwidth at low rates- under the disguise of rural telephony. I would want to hoard on to this bandwidth for future or for roll-out in non-rural areas (see below) – The roll-out would be viable only in the villages of Punjab, Haryana,UP (W) etc ; not really the poorer states of the country.

– The villages that will see the roll-out (in other states) will be the ones close to some decent sized town amp; not the really interior villages. This is coz- in these villages one can expect substantial migratory population with enough disposable income. It could also lead to shared infrastructure between the town amp; the village at a much lower average cost (given that the bandwidth was acquired at the rural circle rate).

– The next lot of villages would be the ones closer to a busy highway or railway line- coz then I could provide roaming connectivity to my existing users and also look at some local customers in the circle.

So there’s some logic in getting to the village first amp; having that critical bandwidth( the only supply-constrained resource in this industry) and wait for the demand to pick up. But what beats me is why is the govt so keen on getting connectivity to the villages?I have been to many a villages during my road-trips and I can confidently say that this will only lead to an additional expense item for the rural households- something which is best avoided. What our villages need are low-cost, efficient and maybe shared resources of more basic kinds- irrigation, sanitation, healthcare,education,microfinance.