The shakeup in India’s telecom sector
The Airtel -Tata deal is the latest step in a wave of consolidation sparked by the entry a year ago of Reliance Jio Infocomm. MintAsia chronicles the ongoing disruption in the world’s second largest telecom market
The acquisition of Tata group’s wireless phone business last week—virtually for free—by Bharti Airtel Ltd is just the latest outcome of the tidal wave of consolidation that has swept through India’s telecom industry over the past one year.
Reliance Jio Infocomm Ltd can take credit for triggering the long-heralded consolidation in the telecom sector and ushering in a data revolution in the country. The first outcome was the collateral damage from the latter, a well-thought-through strategy by the Mukesh Ambani-controlled telco to destabilize the incumbents.
Among the most notable deal making since Reliance Jio started commercial services in September 2016 is the merger between the country’s second largest provider Vodafone India Ltd and third ranked Idea Cellular Ltd, a combination that is set to end Bharti Airtel’s more than two-decade-long reign as India’s No. 1 once the merger is completed.
Prior to Reliance Jio’s entry, Bharti Airtel, Vodafone and Idea managed to increase revenue and earnings, even as smaller carriers struggled to make a profit in an industry that needed huge investments in infrastructure and spectrum acquisition even as tariffs were among the lowest in the world.
The financial state of the industry has worsened since.
Even market leaders such as Bharti Airtel and Idea Cellular have seen a reduction of as much as 35% in operating profit and around a 10-percentage-points contraction in operating margins as they looked to match the cost of Jio’s services, initially free and, later, in the form of ultra-cheap pricing.
Idea Cellular has posted losses for three straight quarters.
Anil Ambani-promoted Reliance Communications Ltd is now staring at an uncertain fate after the merger of its wireless business with Aircel Ltd collapsed.
In February, Telenor sold its Indian operations to Bharti Airtel in a deal similar to the Tata-Bharti one, where the Sunil Mittal-controlled company paid virtually nothing.
Both Telenor and Tatas aimed at exiting the market to cut down on the massive losses that they had incurred over the years, losses that would have only expanded had they continued to struggle on.
Even for the likely new market leader, Vodafone India, once its merger with Idea is complete, the going isn’t smooth.
Vodafone India has seen large-scale employee attrition in the wake of its proposed merger with Idea.
With the merger itself likely to lead to a number of complexities, many employees are choosing to bail out ahead of the rationalization that is inevitable once the merger goes through: for every two jobs, one person is expected to lose his job; for every three sites, one is expected to be shut, and out of every two vendors, one will be chosen.
As the storm that was caused by constantly changing regulations and a tariff battle appears to be settling down, the industry is once again looking at an upward curve in terms of revenue.
Two clear phenomena have emerged. One, Jio is now a force to reckon with and it’s clear that the initial euphoria around its launch was not just a marketing gimmick and, second, it won’t be easy, even for India’s richest man Mukesh Ambani, to surpass Airtel’s founder and telecom czar Sunil Mittal.
Bharti, leveraging its huge customer base as well as one of the highest monthly billings in the business, has literally fought Jio on the beaches and the trenches.
Bharti matched the ultra-cheap offers of Jio, and expanded its 4G coverage and spectrum footprint, while increasing its revenue market share to 34%—an all-time high.
The two clever deals with Telenor and Tatas mean its revenue market share now stands at over 40%, a tad lower than the 42% projected for Vodafone and Idea combined—and it is neck and neck with Jio in terms of spectrum footprint.
“Bharti’s acquisitions have been opportunistic and inexpensive. Bharti has significantly enhanced its revenue and spectrum market share through acquisition of weaker operators such as Videocon, Telenor and now TTSL (Tata Teleservices Ltd). In most cases, the seller was running out of options and Bharti Airtel managed to get assets at attractive valuations. We think the same is true with this acquisition,” Kunal Vora, an analyst at BNP Paribas, said in a note to clients on 12 October.
Vora believes that Airtel has made all the right moves and remains well positioned as the industry recovers.
“After this (Tata) deal, Bharti will have almost caught up with market leader Idea-Vodafone, and seems well positioned to regain market leadership in the medium term,” he said.
Indeed, Airtel’s stock has jumped 40% in the past one year.
As for Jio, its latest numbers show the consolidation in the sector has been to its advantage. Gaining in market share at the expense of weaker market players, it is also looking to post operational profits in its December quarter results. That would be a huge boost for the company after its initial success in winning over customers was written off as being the product of freebies.
In the 13 months since it began operations, it reported its earnings for the first time on Friday, 13 October, and said it generated a revenue of Rs6,150 crore, of which 20% was from the June quarter of this fiscal. It added 15 million subscribers, taking the total subscriber base to 138.6 million and about 12% subscriber market share. Its average revenue per user stood at Rs156 and the firm in an analyst call said it should be able to post a profit in the December quarter.
Platform utilization, the new game
According to a chief executive at one of the top telecom firms, the story from now will revolve around the basics, which is the quality of customer experience and quality of networks. The other important issue will be how companies use their platforms to create fresh revenue streams.
“Telecom is a strange category; you are remembered only when you fail, and with the physics of the spectrum and mobile networks, you will have failures, you cannot have success all the time,” said the executive requesting anonymity.
“What is happening right now is incredible investment will have to be put (in) because the return is not going to be commensurate because of the tariffs. In the long-term, that investment will pay off because in the long-term, tariffs at this level are not sustainable. As the industry consolidates and the industry structure changes, the tariffs will rise,” the executive added.
That is what will lift companies in round two, when it becomes imperative to build multiple revenue streams on their platforms, the executive added. Yet, the importance of the core, which is telecommunication as a service, will stay intact.
“I think the core of the business, which is telecommunications, is going to drive scale and cash flow for any firm, regardless of what other things you do on your website. So, if you do that well without this, you have no right to exist anyway,” the executive said.
“Sitting on top of that, some of the services give you sheen, differentiation. They might generate some revenue as well. I don’t think it is going to be as material as it is on the telecom side,” he added.
Nevertheless, the value-added services on a telco’s platform will indeed help it raise its valuation; but that, then, will need to be decoupled and driven separately. It isn’t necessary, though, that these services will result in extremely profitable ventures since in India people do not have a habit of paying for the services.
Today, Airtel-controlled Wynk is the largest app-driven music service in the country, but very few users actually pay for it.
The question is how many people will pay Rs50 a month. If a company has 20 million customers at the rate of Rs50 a month, its revenue is Rs100 crore in a Rs1,000 crore industry size.
“So, will this substitute Rs200,000-crore telecom category? No. But will it be something which is built on top of it? Yes, possibly,” the executive cited above said.
To be sure, almost all the top telcos in India have an ecosystem around their telecom service, which ranges from financial services and entertainment to healthcare and education. Jio, for example, has huge plans in the healthcare and education sector, where it wants to capitalize on Prime Minister Narendra Modi’s Digital India campaign.
The new order
Post-consolidation, the industry is likely to turn healthier and more stable than it did a year ago. Still, challenges remain. The industry is saddled with a debt of around Rs4.5 trillion, and also owes close to Rs3 trillion in spectrum payment charges.
With rapidly declining revenue, some of the weaker operators have found it difficult to service their liabilities. The government is getting concerned about the financial health of the sector and has formed an inter-ministerial group to look into the problems facing the industry. The Telecom Commission has offered a welcome relief to debt-laden telecom firms by giving them six more years to pay for spectrum purchases and lowered their interest burden.
As things stand now, at least 90% of the market is now controlled by top four telcos, with Jio being the fourth one.
Among positive developments, Jio has started charging for its services, effective June quarter. Its new customer additions have slowed. As a disruptor, it has sought to challenge Airtel, but the market leader is now as strong as ever.
To rule out the impact of Idea-Vodafone will be a mistake, and not much of their combined efforts have been seen yet. The merger, one of the most complex, is aimed at dominating a market, which Jio has disrupted with free voice calls and low data prices. Jio, in which Ambani has invested $20 billion, launched in September 2016.
The merger will create the world’s second largest and India’s largest telco, surpassing Bharti Airtel. It will have almost 400 million customers, with 35% customer and 42% revenue market share. It will have a revenue of Rs81,600 crore and an operating profit of Rs24,400 crore. Together, Idea Cellular and Vodafone India have a debt of Rs1.08 trillion. The merger is expected to be completed in 2018.
Telco mergers do allow for meaningful synergies on costs. One easy way is network rationalization—as the combined entity of Vodafone and Idea will have the freedom to shut each other’s sites wherever they overlap, without much penalty costs to worry about. There could be cross synergies on capacity—as Idea’s spectrum can radiate from Vodafone’s sites, and vice versa.
Clearly, the counter-attack on Jio is being planned.
But, for Idea, there are a lot of concerns.
“I think the recent market development has drastically altered the dynamics of the industry... Introduction and subsequent proliferation of bundled usage plans, outcome of a lack of regulatory intervention has had a deep impact on the industry. No industry can survive if mobile voice tariffs have fallen by half in a year. Data tariffs have fallen between 1/10th to 1/15th just in the span of one year,” Himanshu Kapania, managing director, Idea Cellular, said on 27 September at the India Mobile Congress.
The industry, at least for now, is moving towards a structure where the market leader will have a 40% share, followed by 35% and 20%, for the No. 2 and No. 3, respectively.
“And nobody will complain about it,” said another industry executive, who also did not want to be named.
“Increase in profitability is out of the question at the moment because of the way tariffs have gone down,” the person added.
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