RCom's free talk-time strategy

Reliance Communications' third entry into the telecom business, starting with the time it was run under a different name when the Ambanis were an undivided group, has predictably got the mobile industry in a tizzy.

While no one is using the "predatory pricing" phrase, the complaints being levelled deserve to be considered. While keeping the entry fee for a Sim card at just Rs 25, RCom is offering 5-10 minutes of talk-time free every day for three months.

RCom justifies this as standard entry-level strategy and compares it with the price of a Nano - has anyone asked Tata Motors to justify the price, group executives argue with more than a degree of indignation.

Or, for that matter, a new hotel when it offers free room nights to entice customers to sample its wares.

Their rivals, however, point to some simple maths. Forget the money that RCom will not make from subscribers to whom it gives free talk-time, they argue, look at what RCom will fork out by way of termination charges - each time a call from one network lands on to another network, 30 paise have to be paid per minute to the network where the call is landing.

So, if you take an average of 600 minutes of free talk-time for the first three months, RCom will end up paying Rs 180 per subscriber.

That may look like a lot, but multiply it by the 5 lakh subscribers that RCom needs to qualify for the next 1.8MHz of spectrum under the subscriber-linked policy, and it works out to an expense of just Rs 9 crore (Rs 90 million)!

Contrast this with the cost of Rs 375 crore (Rs 3.75 billion) for one MHz under the GSM licences given to firms like RCom, and six times that if you take into account what Etisalat and Telenor paid for buying their stakes in two of the firms which got GSM licences last year.

RCom, for its part, argues that this is nothing but sour grapes. For one, it says that if it encourages people to use its phone, they will also get incoming calls (roughly 75 calls incoming for each 25 that go out) which will earn them money; and then there's the money to be earned from the long-distance calls these subscribers will make.

In any case, almost every telco that has grown in the past has done so by offering lower tariffs than those prevalent at that point in time.

The arguments will go back and forth, and it is obvious that logic rides with self-interest. There is also something to be said for having a price warrior active in a market. So the issue is not whether RCom is deliberately "buying" free subscribers in order to bag more spectrum.

The point is that the rules of the game make that possible. And that, while the other players are accusing RCom of playing foul, they too are rapidly dropping prices and offering huge incentives to dealers to bring in customers.

The point is that such a strategy, whether RCom and/or any others are guilty of employing it, is open to everyone. That then makes it obvious once again that the government's policy of using the subscriber-linked-criterion for giving out free spectrum is open to abuse.

Just how open it was to abuse was in any case highlighted by the government itself when, last year, it increased the subscriber requirements for extra spectrum several times over.

Until the government formally junks this system, there is always going to be some player who will come up with a strategy to give away phones free to grab spectrum - in a spectrum-starved system, the bigger and quicker bucks to be made are in the spectrum.

It is the government that needs to appreciate this somewhat obvious point, and take corrective action.