Sounding the Bugle
The launch of Reliance Jio's cheap data plans will set off a price war. But will it be at the cost of the industry's profitability?
The launch of Reliance Jio's cheap data plans will set off a price war. But will it be at the cost of the industry's profitability?
Finally, the cat is out of the bag. It’s a ferocious cat giving sleepless nights to 800-pound gorillas of the Indian telecom sector. At the 42nd annual general meeting of Reliance Industries, CMD Mukesh Ambani launched the much-awaited Jio telecom services. In his 87-minute speech, a large part of which was devoted to Jio, Ambani made a slew of announcements, including of free voice calls, which seemed to have rocked the boats of incumbents Bharti Airtel, Vodafone India and Idea Cellular.
At present, around three-fourths of the revenues of telcos operating in India are generated from voice calls. For instance, Airtel’s voice calls accounted for 70.9 per cent of its total mobile services revenues for the June 2016 quarter, while, for Idea, it was at 71.8 per cent. With its unlimited free calling offer, Jio is hitting the telcos where it hurts most. The biggest threat, therefore, is the possibility of
customers migrating to Jio. If operators match Jio’s offers, it would make a significant dent on their overall revenues and profit margins. If they bring down calls to near-zero, even that would result in major losses and, in fact, they would have to pay the interconnection charges (14 paisa for wireless-to-wireless calls) from their own pockets.
What's worse is that contribution of data revenues is not enough for the telcos to make up for the loss in voice revenues. Even on data front, Jio’s dirt-cheap plans leave no scope for telcos to jack up their data rates. In short, top telcos are caught between a rock and a hard place. “We believe that Jio’s strategy of offering free voice… is an innovative way for enticing consumers to upgrade to 4G phones... Jio’s focus will be to retain majority of the subscribers when they commercially launch… first as a secondary SIM and over time by offering better network as primary SIM… Incumbent telcos will not aggressively match Jio’s offering but try to be at a mild premium to Jio, thereby providing some space for Jio to gain market share. Else, it would lead to Jio getting more aggressive to gain traction but at the cost of impacting industry profitability,” says a Bank of America Merrill Lynch September 1 report.
Jio has come out with 10 plans ranging from `19 to `4,999 with different validity periods. Interestingly, all these plans offer free voice calling, both local and STD, which is a new concept in India. The impact over the next four months ending December 31, 2016 – till the time Jio’s welcome offer gives free access to its entire range of services – is going to be even bigger. Data users – heavy or light – are likely to buy Jio connections to access data, whereas the free calls will attract low-value users. “High-end voice subscribers will still rely on their primary number for the time being,” says Rajan Matthews, Director General of industry body COAI.
Idea and Vodafone could be the biggest losers in this all-out war. Airtel is relatively better positioned with sufficient spectrum to compete with Jio, but the most crucial question is whether it is ready to lower tariffs. “RIL has essentially turned the game decisively into a battle of capacity and capital,” says a Kotak Institutional Equities Research report. Kotak has reduced its (consolidated) revenue estimates for Airtel for 2017/18 and 2018/19 by 10.03 per cent and 11.38 per cent, respectively.
Several analysts believe that market leader Airtel’s piecemeal approach ahead of the Jio launch turned out to be futile. For instance, Airtel launched unlimited voicecalling for postpaid users under its ‘my Plan Infinity’ in August. The lowest- priced plan was for ` 1,199. Subsequently, it launched data plans of `51 per 1 GB, but the users had to do a one-time recharge of `1,498. Both plans seem weak when compared to Jio’s offerings.
Airtel holds 4G spectrum in 1,800 MHz and 2,300 MHz bands. Jio, on the other hand, has spectrum in 800 MHz, 1,800 MHz and 2,300 MHz bands. Both telcos have been acquiring 4G spectrum over the past five years, but Jio has taken the lead for the time being with its aggressive tariffs.
For Idea and Vodafone, however, it’s more than a tariff war. Idea has 4G spectrum in just 10 circles (out of 22), while Vodafone is present in nine. Except for 700 MHz, where the prices are too high (reserve price of `11,485 crore per MHz), the upcoming auction does not offer much to help Idea and Vodafone overtake Airtel or Jio in terms of spectrum strength. “Idea faces some tough choices… while it has improved its preparedness on the capacity front in the past couple of quarters, it needs to do a lot more in quick time,” says the Kotak report, which predicts Idea to post losses of `957 crore in 2017/18 and `888.8 crore in 2018/19.
After December 31, the scenario is likely to be somewhat different, but even then, Jio is going to give tough competition. Reportedly, existing telcos are working on new tariff plans to take Jio head on. “For existing operators, it has become a question of survival,” says an analyst. The sector has debts of about `3.8 lakh crore.
In anticipation of a big- bang launch by Jio, analysts had become skeptical of Airtel and Idea Cellular. Since early this year, stock prices of Airtel and Idea fell by 8.76 per cent and 41.4 per cent, respectively. The BSE Sensex gained 8.64 per cent during the same period.
However, there are a few silver linings for existing operators. One, Jio is not going to work on feature phones and non- 4G phones. Therefore, it will have to rely on fast adoption of 4G phones, going forward. According to some estimates, India has received shipments of over 300 million smartphones since 2011. Two, calls on Jio's network are based on new Voice over LTE ( VOLTE) technology, which converts voice to data packets. Jio is the first Indian operator to use VOLTE. Just like any new technology, there will be hiccups initially, which could slow the churn of users. For Jio, things seem fine (due to large cash flows from other businesses) at the moment but as things stabilise, there will be pressure on the telecom business to become profitable. The telecom start-up that has raised questions on the existence of seasoned players has to fight off the same issues at some point in the future. ~
IDEA AND VODAFONE COULD BE THE BIGGEST LOSERS IN THIS ALL-OUT WAR. WHILE AIRTEL IS RELATIVELY BETTER POSITIONED WITH SUFFICIENT SPECTRUM TO COMPETE WITH JIO, THE MOST CRUCIAL QUESTION IS WHETHER IT IS READY TO LOWER TARIFFS