Mukesh Ambani-promoted Reliance Jio Infocomm Ltd (RJio) has changed the metrics of the telecom business in India to such an extent that market leader Bharti Airtel Ltd has taken note.
After a series of allegations over issues related to points of interconnection, predatory pricing and Internet usage charge, there seems to be a truce between Airtel and Jio.
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In an interview, Airtel chief executive Gopal Vittal said Jio’s entry strategy is “good and bold" and that the firm is here to “stay". Vittal, however, said Airtel will continue to bank upon its spectrum assets, brand, network expansion and capital expenditure. Edited excerpts:
How do you look at your operations in the wake of Jio’s entry?
We still feel there is an opportunity in the rural areas and we are going deeper there to drive penetration. We believe managing price volume trade-off to maximize Arpu (average revenue per user) is very important. Driving penetration of data is a very important piece; we have seen a slowdown in last six months. We have put in a bunch of initiatives in the last three months and we see some early signs of success.
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The metric we chase is our revenue market share (RMS) because we believe that RMS is the only metric that determines if customers are giving you a higher share of their wallets. And in the last one year, the highest increase we have seen is an almost 1.5% growth in market share and the incremental revenue that is generated in a year, we got about 50% of that last year.
The long answer to your short question is, it’s not about the next three or six months, it is really about continuing to drive this passionately because we have seen competitors come and go. I mean in the last 10 years, it’s been a brutally competitive industry. There used to be 13 players and many players were operating at half the pricing of what we are operating at. We have had bumps, ups and downs on the road, it is not that every year has been great. We have had years where we have actually lost market share and then we had to come back. And consequence of losing market share is that you lose everything, revenue and margin, you lose it all. So this is a metric which is very important to us to make sure we are competitive.
Why is the slowdown in data happening?
I think the barriers to it are many, one is the price of the device—the difference between a Rs3,000-3,500 phone which is the cheapest device for data and let’s say a Rs1,000 device which is a feature phone is still a big deal for many customers. Second is that a lot of customers don’t know what to do with the Internet; even if they need it, they don’t know how to use it. The other part is that they have a perception that it’s expensive and there is a perception of value that you need to create. So, it’s a combination of all of these things. Amongst women, it’s much lower than men, penetration rate is substantially low even in urban areas, let alone in rural.
So, contrary to the perception that Jio’s entry will boost data consumption, it hasn’t really?
I think there is a difference between penetration and consumption. Consumption will continue to grow. As pricing comes down, people use a lot. I think in the long term, penetration will grow, there is no question about it. I am just saying that this is an important piece that we should acknowledge, do a bunch of things to actually shape it.
Do you think what Jio is doing is sustainable?
I think it is sustainable. Ultimately, it’s got linked to revenue. To that extent, they have chosen to play in a certain way, which is good and bold. Hopefully, it works for them.
But the strategy that they have come out with, has the industry seen similar strategies before?
Firstly, you have not seen that. You have seen one of the players who operates in six circles, who operates in voice pricing, which is 50-60% lower, which is Telenor. There again, they have bundles. At certain price points (for voice), speak as much as you want. That we have seen.
They also have very simple tariff plans, which has worked for them, but they have come under some pressure in terms of what’s happening in the context of the industry.
How will you assess the impact of Jio?
I would say they are certainly going to stay. You would see consolidation in the market. Even today, you have eight players; and in the next three years, you may see four players. That’s a good thing.
From our position, it would come back to whether we have spectrum assets, capex and financial wherewithal to invest in the network and the answer to that is, yes.
How do you see the data and voice play turning out in the coming quarters?
We have seen erosion in both voice as well as data. Data has been more secular. It has been growing year on year. I think the data tariff erosion is okay as long as we get data-driven revenue growth. What we have seen most recently is revenue growth softening. Part of that is on account of free services because there are people who want to try it for free.
On voice, we have seen elasticity. We have seen strong growth on volumes and erosion on tariff for us. Voice revenue growth has been pretty good. Last quarter we had 9-10% growth, which is reasonably good. We will see some softening of this growth because of free services being offered and some point when they get priced in, we will come back and look at how do we respond to that.
Which of the two—data or voice—will have more growth?
In India, the average use of minutes is 415 or 420. It is among the highest in the world. The only market which is higher is the US because you have voice free in all their plans. But the pricing starts $40-$50. So, there it is 50% higher. There is a finite limit to how much I want to speak to the other person. That will see more secular growth. On data, sky is the limit because you can do everything through the Internet.
Do you see a point where voice can be made completely free like you said about the US?
I think there will be a duality to the market. Voice will be free when someone is paying for the data. If everything is free, then we are not having this conversation. But if you are making something free, then you have to charge something else. So, the key question that comes out is, how much Arpu do you get? I think there will be a set of customers who will demand that through bundles. So, that will happen. Will that happen all across the market? I don’t think so. I think there will still be some amount of duality in the market.
So, you do not see a tipping point for making voice free?
Even today, we are doing it. The 1599 price has come down to 999. At 999, voice is free with a bundle of data. But, people are paying for the package. Whether I am paying for voice or data, it does not really matter. I am paying for the aggregate. If that numbers comes down then the question is for competing what’s the price you want to compete at? That’s a stroke of the pen decision.
This market is complex and nuanced enough that you can’t do a call and odd approach. It is not this or that. You have to play together because the scale that we have, the number of customers we serve, we will have to play them together. This is true for the industry: 20% of customers give you 50-60% of your revenue. This is true for all categories.
Does that mean that 40-50% of the revenue is not important? No. It is absolutely important but we will have to find the right cost to serve them. So, that’s where the and comes in. You have to do both.
For a new entrant, it is easier because you will say I will only operate like this.
In the context of planned investments by Jio and Vodafone, how do you look to fund your expansion?
We generate close to Rs. 15,000-16,000 crore of cash on an annual basis. Our net debt to EBITDA is 2.2, which is very comfortable and very competitive with the best run telcos around the world. So whether you look at it from the spectrum perspective, or rolling out capex a year and half in advance, or brand in terms of who owns 4G today, or best broadband experience or whether its our customer base of 260 million, in all respects we are in a solid position.
But from a financial position, the fact is that this industry is in deep debt and the return on capital of the entire industry is less than 1%, which is really low. Even for us as a leading player, we earn just 8% which is no different than a fixed deposit. So that is the function of the humongous cost of spectrum that we have purchased and some of that was a function of what happened in 2014, where we did the renewals. Where we were actually forced to buy, there was not enough spectrum and so if we didn’t buy we would be forced out of business and we may have overpaid because of the design of that auction.
What is your road map on cutting down the debt?
We have just announced a process with a proposed significant stake sale of Infratel. A committee of directors has been appointed, they will look into it, study it and look at all the options on the table for the board. Beyond that I cannot comment right now.