Tariff cuts may sharpen VSNL's market edge
Telecom major VSNL has decided to lower prices of its enterprise and carrier data services by 25% in the case of international private-leased circuits (IPLC) and 40% in internet-leased lines (ILL).
It’s puzzling when a company drops the price of its service and then follows it up with a steep increase in capacity. Telecom major VSNL has decided to lower prices of its enterprise and carrier data services by 25% in the case of international private-leased circuits (IPLC) and 40% in internet-leased lines (ILL).
And, after investing Rs 2,500 crore in expanding its global presence and connectivity, it has committed an investment of Rs 2,800 crore for two new submarine cable systems.
VSNL’s confidence in its strategy stems from its experience in ’06. It had affected a 35-70% drop in IPLC charges in March ’06. IPLC and ILL fall under the enterprise and carrier data segment of VSNL. The reduction led to volumes in enterprise data growing 100% in ’06, while revenues grew 20-30%, despite a fall in tariff.
IPLCs are point-to-point international private circuits used to connect multiple locations across geographies and ILLs are dedicated high-speed connections to access the net. The growing demand for telecom services, especially from sectors like IT and BPO has benefited VSNL.
During FY06, the enterprise data segment contributed 33% of VSNL’s Rs 3,781 crore revenue, but contribution to the segment profit of Rs 1,025 crore was higher at 65%. Better profitability is attributable, apart from higher volume, to lower network costs. During FY06, its network costs were flat, despite higher volumes. By lowering tariffs, it gains from economies of scale, which will translate into improved profitability.
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The fall in IPLC and ILL prices was expected and comes after a drop in international long distance (ILD) prices. VSNL’s move to reduce tariffs will make it more competitive, furthering its quest to be the leader in this space.Start a SIP with as low as ₹500 with ET Money App!
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