What is next for Telecom Sector in India?

Market in retrospect

In the last 10 years telecom has transformed from a multi-player sector (10+ Service Providers) to just 4 service providers including the public sector operator.

Incumbent players who could weather competition from several weaker new operators have been brought to their knees by Reliance Jio with disruptive 4G product and relentless price attack

To quickly recap the sequence of events:

In year 2012 Supreme Court cancelled (most of) the licenses issued in 2008. This saw the exit of many operators, most of whom were in any event were still trying to figure out a market entry strategy and had only a token presence

In the second phase operators who could not put together critical mass or achieve national play redefined their scope and restricted themselves to select markets or technology or products

And finally the disruptive entry of Reliance Jio, offering services completely free for a good period of time, hastened the exit of laggards such as RCOM, Aircel, Telenor and Tata Teleservices.

Airtel, Vodafone and Idea did not use their head-start over Jio to build a 4G network and were scrambling to catch up after Jio’s launch. Incumbents were counting on some network or marketing glitch in R Jio’s service and were surprised by the robustness of the service and the intensity and length of price attack

The current stage where the incumbents’ players – Airtel, Idea+ Vodafone and BSNL+MTNL (Public sector) are haemorrhaging has possibly reached the last lap. The last lap is run to the pace that RJio is setting to the entire market.

Financial Health of the Sector

a. Gross revenue has dropped by 15% to 20% for the year 2017-18 over the preceding year for the incumbents and overall sector revenue has dropped

b. Idea’s net loss after tax has ballooned to Rs.4160 Crores (15% on gross revenue) while Airtel’s net profit has declined by 74%

c. Interest costs are at 20% to 25% of gross revenue

d. Voice revenue per minute has come down from by 50% to 18p per minute (in the last one year. The declining trend has started even ahead). Data revenue per MB has come down by 90% to 1.5 paisa per MB

e. Voice Usage per user has gone up by 40% while data usage has gone up by 600%. This sharp inflection in usage and significantly lower rates has created a dichotomy of demand for sharp spike in usage against falling revenues

i. In their current debilitated state where the operation is not generating cash flows, the operators are forced to expand network by raising further debt and by monetising tower and other such assets

National Telecom Policy

The draft policy which has been circulated to invite views, among other things calls for

a. Deployment of common sharable, passive as well as active, infrastructure

b. Roll out of Fibre to connect towers and also for the last mile

c. Making adequate spectrum available and also for its optimal pricing and efficient deployment

d. Service roll out to unreached areas

Sector transformation

a. Telecom operators have been seeking the following succour from the government

i. Reduction in GST

ii. Reduction in revenue share/spectrum usage charge

iii. Setting transparent and non-discriminatory minimum pricing levels

iv. Realistic pricing of spectrum

The government is likely to extend support but not to the degree expected by the operators.

b. Telecom straddles Voice communication, data/internet connectivity, access/exchange to social networking and to entertainment, Machine to machine connectivity and Payments/transfers

i. Except voice, telecom operators have not been able to effectively monetise all their channels/service

ii. Data is monetised as a commodity – dumb pipe and the initial attempt to build alliance with portals was scorched with the net neutrality furore

iii. Telecom service providers are yet to put together a concerted strategy to monetise their subscriber base in providing access and connectivity

Telecom trends

In the run up to 5G the following competitive and regulatory scenario could emerge

a. US, Japan, China and Korea are at advanced stage of testing and deployment of 5G. The debilitated financial condition of telecom operators notwithstanding, it is likely India will roll out 5G with minimum time lag as compared to international leaders by the year 2022

b. As the coverage radius would shrink at higher frequency band the Telcos are likely to sweat the existing spectrum and tower assets for voice and deploy incremental resource for 5G data. Ofcourse this has to in consonance with global trends on network ecosystem

c. 5G is likely to be launched in 3300-3400 MHz & 3400-3600 MHz and with the reduced number of operators the spectrum prices are likely to remain sober

d. It is possible the operators will be required to pay the spectrum prices over the entire license period and the upfront payment may be kept low

f. Rolling out Wi-Fi networks may get bypassed and integrated with 5G roll out

g. It is possible 5G will be launched as a premium service to start with and create the path for revenue and margin recovery

h. 5G will impact education, business and entertainment in far deeper ways than we can envisage at this point in time and will be crucial in the digital development of the economy

i. Telecom operators will eventually improve their subscriber profiling and build alliances across other categories to be able to monetise the customer asset for adjunct services such as payments, e-commerce, advertising and entertainment

j. R Jio will come to terms with the futility of bundling handset and service for the low-end market and cease aggressive pursuing of volume market share and hopefully focus on value market share

k. R Jio would scale down the price attack on reaching 35% revenue market share and start focusing on quality of service for high value customers

l. Airtel and Voda-Idea combine are likely to leverage their passive infrastructure alliance and stitch an alliance for active network for spectrum cost optimisation. They may however do it partially if their competitive interplay limits their courage to go the full distance

i. In many sense that would be the best response to the R Jio onslaught

ii. R Jio in turn is likely to explore a similar active network sharing with the public sector enterprise

The next stage will mark a qualitative transformation and bring stability to the telecom sector. But that is still some distance away and in the meantime incumbents will have to dig in and pour more investment to hold their market share.

Annexure-1

Idea’s Financial Performance ( Rs. Crores)

Annexure-2

Airtel’s Financial Performance ( Rs. Crores)

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