It’s been nearly three weeks since Reliance Jio Infocomm Ltd announced its disruptive tariffs. But incumbents haven’t budged yet on their own pricing. This is despite reports of long queues at Reliance Jio outlets and, by incumbents’ own admission, a tsunami of traffic emanating from Reliance Jio’s networks. What gives?
Sunil Bharti Mittal, chairman of Bharti Airtel Ltd, suggested in an interview with ET Now that any pricing response may happen only by the end of the year, when Reliance Jio’s free services end. After all, one may argue, “How do you compete on pricing with a free service?” No amount of price cuts will stop customers who are signing up for free services. Reliance Jio has said it will start charging its subscribers from 1 January.
But according to an analyst with a domestic institutional brokerage firm, that argument is too simplistic. By not announcing any pricing cuts, incumbents stand the risk of ceding market share to Reliance Jio, as it sends a message to customers that their service provider is not interested in retaining them. But the trade-off of cutting prices is that while market share losses will be contained, overall revenues will take a hit.
Analysts at Bernstein Research say in a 12 September note to clients, “For the incumbent...the ‘dilemma’ is whether to match pricing to protect their existing share and scale—but impacting revenues broadly. Or to keep pricing at a premium level and accept a small amount of share loss. In most cases, the short-term value maximizing decision is to cede some share. However, in many cases, the longer-term value maximizing strategy is to forego near term revenue to maintain a scale advantage over their rival.”
Needless to say, it is far from an easy choice for incumbents. For now, anecdotal evidence suggests those customers that are approaching incumbents with porting requests are being offered higher usage limits at lower tariffs. Besides, some segmented pricing offers have been tweaked for higher value customers. The approach, for now, seems to be to retain high-value customers.
As the chart above shows, Reliance Jio’s target appears to be the mid- and high-end of the market, which together account for only 38% of the subscriber base, but as much as 68% of revenues. Incumbents can be expected to keep a keen eye on subscribers in the higher end, and may well be willing to let go of low Arpu (average revenue per user) customers.
Bernstein’s analysts say, “In the case of Reliance Jio, Mr. Ambani has been very clear about his target to reaching 100 million users ‘within the shortest period possible’. If the existing players gang up to try to prevent this, they risk greater and greater discounting by Jio—to the detriment of the long-term value of the industry. The challenge is to find a way to allow Jio to reach its target, while ceding the lowest value subscribers possible.”
Of course, this will be easier said than done. Most of Reliance Jio’s efforts are targeted at high Arpu customers. Even if incumbents are successful in retaining their cream, there will be collateral damage in terms of lower revenues and profitability. As analysts at Kotak Institutional Equities said in a note to clients, “There is always the possibility that competition forces Jio to get even more aggressive.”
Incumbents may appear calm right now, as far their pricing response goes. But it appears to be the proverbial calm before the storm.