The inefficient operators (read Tata DoCoMo / Indicom, Uninor, Aircel) simply aren?t able to respond as well given their limited
capabilities with an inability to sustainably price aggressively. Telcos are after all mostly a scale business with a large number of expenses being fixed.
Revenue risk is a real risk for a number of telcos in Asia as new players try to grab revenue share, price points are cut and data allowances are increased. Revenue reductions could have potentially devastating effects on company earnings given the predominantly fixed cost base of the telcos. This is why efficiency matters. In a price war scenario, the one most likely to survive and thrive would be the lowest cost producer. Lowest cost producers have significantly more leeway to cut revenues and yet stay profitable while high cost producers end up suffering more.
It thus doesn?t make sense for an inefficient player to compete on price especially in the long run as they end up suffering more. Desperate operators losing market share would engage in irrational pricing activities in order to halt their slippage. While this in theory is possible, we believe such would be improbable over the long-run given the potential for backfiring if the perpetrator isn?t the most efficient producer or have larger excess capacity vs. peers. This is because the efficient competitor can simply continue pricing more aggressively vs. an inefficient price cut instigator and yet sustainably make more money. Unless you are the lowest cost producer, it makes no sense to price most aggressively within the market even if you have deep pockets.
If the markets aren?t organically growing fast enough, a new player taking market share simply means reduced revenues left to share for the incumbents. This in turn potentially collapses revenues. This concept of collapsing revenues with new entrant is best demonstrated with the new entrants in Europe. As new players entered France and Belgium for instance, we?ve seen significant collapse in revenues for incumbents as new operators take share.
