Come December and a new telecom operator will be born—Reliance Jio—the telecom arm of Reliance Industries. As always, there’s both the apprehension and excitement that accompanies the entry of a new player; incumbent operators are full of trepidation while consumers can’t wait to see what’s in store. Indeed, even the state-owned MTNL’s entry into the cellular space way back in 1996-97, caused a bit of a flutter while Reliance Infocomm’s debut in 2002-03 was more than just a Monsoon Hungama. From licence scams to arbitrations, tax tussles and missing towers, there’s never a dull moment. For consumers it’s all about lower tariffs and better deals and hoping for better service; the telcos however, have had a rough time, negotiating the regulatory environment which hasn’t always ensure a level playing field, leaving some players an opportunity to arbitrage. But, they’ve survived it all—spectrum shortage, new entrants with disruptive prices and the rise of the over-the-top (OTT) pack.
The last time there was a serious threat to incumbents was in 2008 when the then telecom minister A Raja grante
Post-2012 the market stabilised with operators weeding out freebies to boost realisations. The de-linking of licences from spectrum wherein spectrum had to be bought in open auctions ensured that only serious operators remained in the game and led to a scenario where only three operators —Bharti Airtel, Vodafone India and Idea Cellular—consolidated their market position cornering around 75% of the subscriber market.
Although the country today has six to seven operators per circle, the remaining three are weak suggesting the much talked about consolidation has already happened in consumers’ minds. The Indian telecom sector is among the most competitive globally, with as many as 13 players across the country and seven-eight players in most major circles.
This creates a constant struggle on two fronts—pricing remains under pressure with predatory behaviour every now and then and bidding for spectrum tends to be more aggressive, leading to higher payments and lower ROEs (return on equity).
This time around, the competition is somewhat different nature given there are no issues of regulatory or policy arbitrage or of the lack of a level playing field. The challenger is no minnow but a big operator with deep pockets, a pan-India spread and armed with apps and technology. Will RJio threaten and derail existing operators like Bharti, Vodafone or Idea or will its entry be a momentary blip for them with serious ramifications only for the smaller existing players?
To begin with, RIL chairman Mukesh Ambani’s assertion at the company’s 41st annual general meeting last month that the company would come out with 4G-enabled handsets with an entry price of below Rs 4,000 and voice and data services at Rs 300-500 per month does pose a serious challenge to the incumbents who have been operating in stable tariff regime for the last couple of years. Memories of the company’s predecessor—Infocomm—which offered handsets and services at R500 per month way back in 2003 remain fairly fresh in the minds of operators.
“We believe that the initial target would be high quality subscribers and enterprises—the high ARPU segment would demand higher quality data services and have the affordability of more expensive devices,” Jefferies wrote recently.
“Clearly, the significant outlay of $14 billion (R850 billion) from the company is depending on not just the proliferation of data usage, but also on a cannibalising voice, data, direct to home (DTH) for television and content into a single umbrella of network, services and content,” the brokerage added.
According to a head of big telecom firm, the only real challenge which RJio could pose for incumbents is a low tariff.
Incumbents are readying themselves for a price war, prepared to take a hit on the profit & loss (P&L) account but are confident their strong balance sheets will help them weather the storm. “We may bleed for a bit but should recover,” a senior executive at a large telco observed.
Incumbents are readying themselves for a price war, prepared to take a hit on the profit & loss (P&L) account but are confident their strong balance sheets will help them weather the storm. “We may bleed for a bit but should recover,” a senior executive at a large telco observed.
However, analysts point out that a high payout for spectrum has already resulted in stretched balance sheets, which would limit the ability to spend on capex. “A fixed monthly spend pattern that causes demand elasticity would also play into data vs voice. Data proliferation will also necessitate increased capex, where Indian operators have meaningfully lagged global peers,” Jefferies wrote recently.
To be sure, the quality of RJio’s service, in the initial stages, is likely to be superior to that of the incumbents. That’s because the network of a greenfield operator will not be clogged, or far less clogged, than those of incumbents which will stay congested thanks to the higher subscriber load. RJio will try and leverage this. Moreover, industry watchers say, being the challenger, it would want to disrupt the market.
That, however, isn’t giving incumbents sleepless nights. The top three incumbents and RJio are more or less equals when it comes to holdings of spectrum. A comparison across bands and of the mix of airwaves would see Bharti at the top; the Delhi-based telco has close to 16% of the total allotment and 80% of this is liberalised covering the largest share of its revenue for 3G and LTE at 98% and 75% respectively.
Further, the top three operators are a shade better off since they own spectrum in the more efficient bands of 800 MHz and 900 MHz; together they hold 20-25% of the spectrum in these bands compared with RJio which has around 13%. Also, because RJio will be offering its services via LTE technology it won’t have the luxury of falling back on traditional 2G/3G services. In contrast, Bharti is deploying LTE selectively while Idea Cellular is expected to commence trial runs next year. So, the incumbents may have a slight edge here.
Citi Research sums it up best pointing out that while there are valid concerns about RJio, the impact of new launches on existing operators globally has been mixed. Moreover, it feels network quality and coverage is more important than pricing. That apart, large existing operators are also better placed since they have an existing base and will not need to acquire new subscribers for which the speed of the network rollout needs to be faster. “Our sensitivity analysis of Jio launch on the incumbents’ market shares show that even though the top three players control 70% of the data market and will see some share erosion, the weaker and smaller operators with lower network quality/coverage are likely to be impacted more,” the report notes.
Citi’s analysis shows that new launches don’t generally affect stronger incumbents; a study of the revenue market share in the nine new circles of Idea and six of Uninor, which they entered around five years back, showed Idea’s nine circles contribute 30% of the industry’s revenues while Uninor’s six circles contribute 37%. Both the companies
have good execution capabilities but despite the competitive intensity in 2010-2012, the newer launches haven’t been able to grab significant revenue market share. Idea has a 7% market share in the nine circles and while it has been gaining share, the pace has been quite slow –it gained 1% in the last four quarters and 1.8% in the last eight quarters.
Similarly, Uninor currently has a 6.4% market share in its circles. Here, too, the pace of gain has been quite slow – 0.7% in the last four quarters and 1.6% in the last eight quarters.
have good execution capabilities but despite the competitive intensity in 2010-2012, the newer launches haven’t been able to grab significant revenue market share. Idea has a 7% market share in the nine circles and while it has been gaining share, the pace has been quite slow –it gained 1% in the last four quarters and 1.8% in the last eight quarters.
Similarly, Uninor currently has a 6.4% market share in its circles. Here, too, the pace of gain has been quite slow – 0.7% in the last four quarters and 1.6% in the last eight quarters.
Meanwhile, the revenue share of incumbents in these circles shows they have not only retained their revenue share in those circles but increased it over time. This means the newer operators have been gaining share at the expense of the weaker operators and not the operators with better network. Of course, while Idea and Vodafone have gained steadily through the last eight years, Bharti has seen a phase of steady erosion in 2008-12, a function of higher market share and heightened competition.
There has been much debate around data, which is poised to grow faster than voice; one view is that data gives RJio an edge over its incumbents. Since the average revenue per minute (ARPM) for voice is decreasing while that for data is on the rise, any cut in data tariffs by RJio would impact the stronger incumbent operators like Bharti, Vodafone and Idea. That might be true but analysts maintain that such tariff cuts would be accompanied by elasticity in usage leading to an increase in per user metrics and faster penetration which would moderate the impact of RJio’s launch.
Therefore, while it is indisputable that the launch of RJio will impact the mobile telephony market, it’s the weaker operators that are likely to be under pressure and not the stronger incumbents. On the contrary, Jio’s launch would be positive as it would boost the growth of data services currently constrained due to supply side issues like limited spectrum and under- investment.
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