Agency Theory in Action

Airtel recently announced a hike of 20% in its tariff, which was taken quite positively by the investors – Airtel’s stocks reached a 22-month high yesterday. But I am sure the customers won’t be happy by this decision. The investors are thinking that this 20% increase in tariff would translate into better profits, and hence increase the valuation of the company. This in turn would lead to stock price appreciation, and would be kind of an inversion point in the attractiveness of the Telecom sector as a whole, which had taken a beating earlier.

What the analysts and investors have failed to factor in is how this move would be taken by the customers. Their theory is based on the fact that other players would follow suit and increase their respective tariffs. They believe that after all the bloodshed in this sector due to price wars, the players are finally back to their senses - their priority has changed from increasing the customer base to increasing the profit margins.

But why would a customer want to shell out the extra money in the present scenario is one question that the leaders at Airtel have forgotten to factor in. With the inflation never seeming to bow down – and the RBI and the inflationary pressure having resorted to going at war with each other in order to soothe their egos – why would an existing customer of Airtel want to shell out even a paisa more for the existing service? I don’t see any marked improvement in their services – now that they have even started charging for calling the famous customer toll free number -121. , as a customer, don’t see the value proposition of paying 20% more, with the MNP (Mobile Number Portability) in place. Thinking on tangential lines, I see this price rise as a measure to serve the enormous loans that Airtel has taken for acquiring the 3G license. The financial planners at Airtel would have been asked how to break even early -  and the outcome is the rise in the tariff rates. It would have been more justified if Airtel would have passed on these costs to the 3G customers.

Well, what I see from my side is that this is a temporary rise in stock price witnessed by Airtel. As the customers start switching to other players - those who can’t afford to raise their tariff rates and still have their focus on acquiring customer base- this strategy of Airtel is not going to work. Also, one must remember that Vodafone was the biggest beneficiary of the MNP. This makes me conclude that customers see more value proposition in Vodafone than Airtel. Vodafone will take over Airtel as the No 1 player. Just because Airtel is the No 1 player as of now doesn’t mean that the whole industry is going to follow suit. Remember, Tata Docomo was the first player to introduce 1 paise per minute, which compelled the other players, large or small, to follow suit. . I believe Airtel should start counting its days now, as it has dug up its own grave. Is this an example of one of the cases of classical Agency Theory? Only time can tell….