RATAN TATA UNVEILED Tata Docomo’s pay-per-second tariff plan, calling it “a moment of triumph for the consumer”, in June 2009. Till then, billing for calls on mobile phones was based on a pulse rate of one minute, meaning a 70-second call would cost as much as a two-minute one. The per-second plan saw Docomo’s subscriber base nearly double from 37 million at the scheme’s launch to 72.5 million the following year. Other operators followed suit, with 50 million to 60 million new users getting connected every month, from 10 million to 15 million a year ago.

But the industry’s revenue took a beating. On the drawing board, the revenue loss, which was expected to be around 10% to 12% per minute, was to be offset by more people talking more. But the reverse happened. People were talking less: Minutes of usage, which stood at 484 in 2009, fell to 349 in March 2011. The average revenue per user also slipped from Rs 205 for GSM and Rs 99 for CDMA to Rs 100 and Rs 66, respectively.

As subscriber numbers swelled, the loss per minute rose to 25% to 30%. In the per-second plan, a call had to last at least three minutes to be profitable, but on average, they ended in less than a minute. The 60 paise or less paid by the customers failed to cover the cost of operation.

Operators suffered a double whammy when they had to shell out Rs 67,700 crore for the 3G spectrum auctions in 2010. The sector went through a near-death experience, with investments drying up and each operator waiting for the other to blink and move to a more rational tariff plan.

It was not before 2013 that the industry recovered—Airtel was the first to pull the plug on discounted rates—but Tata Docomo kept slipping as the charm of per-second tariff wore off. In FY09, the company posted a loss of Rs 1,814 crore after taxes on revenue of Rs 6,773 crore, and had a debt of Rs 11,692 crore. By FY11, the loss had risen to Rs 3,508 crore and debt to Rs 17,651 crore. In April, NTT Docomo of Japan announced that it would sell its stake if the Tatas failed to achieve the performance target by March 2015. (Tata Docomo came into being with NTT Docomo taking a 26.5% stake for $2.7 billion, around Rs 13,000 crore then, in Tata Teleservices.) There’s buzz in the industry that the Tatas also want to sell off and exit the consumer telephony business.

WHILE THE PER-SECOND exercise discredited growth based on price wars, it should not have come as a surprise. Reliance Infocomm’s experience with its Rs 501 Monsoon Hungama scheme—launched in 2003—should have raised the red flag. Driven by Dhirubhai Ambani’s vision of telephony for everyone, the scheme allowed customers to own and use cellphones at tariffs less than 50 paise per minute—the cost of a postcard—by paying a one-time fee of Rs 501. The cost of the handset was to be recovered in the next two years, along with the phone bill.

It gave Reliance what it wanted—a huge spurt in subscriber numbers, albeit only on CDMA. At the end of FY03, Reliance had a mere 0.54 million customers for its GSM operations. Bharti had crossed 3 million, BSNL was at 2.26 million, and Hutch (now Vodafone India) was at 2.16 million. But in the next six months, Reliance jumped to the top of the table, adding 5 million CDMA customers. This was a third of the total addition of mobile telephony subscribed in the same period. By the end of FY04, Reliance had registered a 1,250% growth in subscribers. However, other operators were sceptical about Reliance’s bets. That proved right.

At the 2004 AGM of Reliance Industries, Mukesh Ambani admitted Reliance Infocomm had run into logistics, billing, and collection problems. As a percentage of service revenue, bad debts had touched 16%. (For Airtel, this was around 4%.) After depreciation and amortisation, the net loss for FY04 stood at Rs 390 crore.

Reliance had insured the handsets—in case customers defaulted—and did not lose money on the hardware. But fickle user behaviour meant that the network was not used to the optimum, nor was there a long-term assurance of revenue. Rather, the scheme positioned CDMA and Reliance as the poor man’s mobile service, from which it is still struggling to recover. The company—rechristened Reliance Communications after ownership switched over to Anil Ambani—had debt of nearly Rs 40,869 crore in FY14.

The failure of the Monsoon Hungama scheme also killed handset bundling in India: The predominantly prepaid market here lacked a mechanism to recover costs in case customers defaulted. In Reliance’s case, many simply dumped the handsets after the free call period, and vanished. Monsoon Hungama started the race for subscribers as spectrum allocation was linked to the numbers. But 10 years later, the entire sector had to assess how many customers were truly connected. Reliance Communications knocked off 22 million users between March 2012 and March 2013, the largest such clean-up in the industry.

As Mukesh Ambani prepares to re-enter telecom through Reliance Jio and 4G, fingers are crossed that he doesn’t bring similar disruptions again.

Follow us on Facebook, Twitter, YouTube & Instagram to never miss an update from Fortune India. To buy a copy, visit Amazon.