Thursday, January 10, 2008

Private Telephone Exchange?? Huh?

Ya that’s my first reaction when I heard about it. I was just talking with my gym instructor about whether he goes to other gyms as well to teach, how much he is paid and how does he manage with the salary etc. It so happens that the job as a gym instructor is just a hobby that gets him some extra cash. He owns a printing business and a PRIVATE TELEPHONE EXCHANGE.
I don’t know about you guys, but my only memory of a telephone exchange is that of a dilapidated building, with pan chewing babus who think they are doing a big favor even if they let you stand in front of them and listen to you. But those were the days of the monopoly of state owned telephone companies. With the liberalization in the telecom industry and entry of private players this has changed. “So what exactly is this private telephone exchange? How does it work?” I asked him. So here is the model. I will apply for 7 or 8 telephone lines from a private telecom company, Relaince or Tata Indicom for example. Then I will install a “box” which will let me create 150-200 lines. Something like a PBX we have in offices, or some kind of a multiplexing device I guess. Then you give these lines to customers in a local area of say 1-2 km radius. You charge them rental and on a per call basis.
“Is it legal? Do the companies know about it? How do you make money?” I ask.
Well for starters the companies know about it. Each of the 150-200 users gets a proper and unique telephone number from the telecom company itself. Its cheaper for the users because the private exchange guy will charge them lesser rental and lesser call rates than charged by the teleco. “So whats in it for the telecom companies?” One it reduces their investment in terms of infrastructure and marketing since these are borne by the pvt. exchange fellow. It helps them quickly increase the subscriber base. They get a share of the revenue from the pvt exchange. Here is how it works, the teleco will charge rental and call charges to this guy for the 7-8 lines he uses. The teleco will give this guy a better rate say 90p per call as against 1.30p charged to a retail user. This guy will give a rate of Re 1.00 or 1.10 to the user, and half the rental of a normal telephone connection. Even so, contrast full rental of 8 lines vs half rental of 150 lines. The numbers are evident. Since he charges 10p or 20p less than the teleco, users wouldn’t mind going to him. He breaks even and then pays some percentage of profits over and above the breakeven to the teleco.
Sounds like a win-win for all right? So where’s the catch you ask. I did too. “What about the quality of the line?” He assures me that there is no drop in quality, and I would agree with him, cos at the end of the day, the box is just a router, which connects your line to one of the 7 lines. So you might face a problem of delay / line being busy when you call someone or when someone calls you. “Nobody uses the phone all the time, so we have an idea of how many lines we can branch out from a single line without effecting availability or quality” he tells me. Don’t know much about the details of the technology, nor can you be sure that there is no drop in quality, but in the Indian context, I’m sure that people would be willing to sacrifice a bit on the quality if the cost is low enough. Besides in voice communication, a minor loss of quality might not be easily perceptible compared to data where your page loads slower. Doesn’t this model remind you of when broadband first came, and cable modems cost in 5 digits. Your local cable operator would buy a cable modem between 5-10 users and you would get shared broadband.
Interesting isin’t it? The teleco gains cos it gets a higher customer base, quick penetration, share of revenue, lower infrastructure costs. The customer benefits because he pays less with almost the same quality, the exchange fellow benefits because he is able to utilize his infrastructure at high utilization rates, have his own business and earn a decent return on his investment. Sounds too good to be true, the zero sum mentality in me doesn’t let me leave it at a “win-win for all” so looking forward to your suggestion / comments on flaws, problems in this model.

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