India telcos prepare for survival of the fittest

Competition set to heat up with arrival of Reliance Jio, though one beneficiary will be the consumer, with prices set to fall.

A rickshaw puller speaks on his mobile phone as he waits for customers in front of advertisement billboards belonging to telecom companies in Kolkata. Reuters
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India’s telecom sector is braced for a shake-up, with profits expected to come under pressure, while some operators could be completely squeezed out of the market as companies prepare to battle for survival, according to analysts.

This challenging outlook for the world’s second largest telecom market is largely driven by the impending entry of Reliance Jio, a new operator due to be launched in the next few months by Reliance Industries, controlled by Mukesh Ambani, India’s richest man. Reliance Jio has invested 1 trillion rupees (Dh55 billion) into building its network and is gearing up to offer fast and cheap data services to grab market share.

Among Reliance Jio’s rivals will be Reliance Communications – which Mukesh was forced to hand over to his brother, Anil, in 2005 amid a family feud.

Existing operators have expressed concerns over the entry of the new company. Sunil Mittal, the chairman of Bharti Enterprises, which owns one of India’s biggest telecom operators, Bharti Airtel, has said that its launch will certainly result in lower tariffs.

"Should we be concerned about Jio? I think we should be about all kinds of competition, be it Vodafone, Idea, or Jio, and yes, when Jio is coming in, one has to take it up very seriously," Mr Mittal told the Economic Times, an Indian business newspaper. "Let me say we are prepared to face the onslaught. We have a large pool of airwaves across bands. We have a very extensive network now."

As it aims to fend off competition, Bharti Airtel this month unveiled plans to invest 600bn rupees in upgrading its network over the next three years. The huge investment strategy, known as “Project Leap”, will see Bharti Airtel upgrading its infrastructure and expanding its data network in rural India.

“We only hope that Reliance, which is very prudent and seeks returns for its shareholders and its investments, will be prudent but we will be too optimistic if we say they won’t have some price pressures,” Mr Mittal said. “Ultimately, they are entering the market and will do something for acquiring market share. So, I hope it is within reason.”

Vodafone India last month announced that it would inject an extra 13bn rupees to upgrade its network.

There is a great deal at stake. The number of mobile phone connections in India is set to rise to 880 million this year, up from 837 million connections last year, according to Gartner. Spend on mobile services, meanwhile, will increase by 4 per cent to reach $21.4bn this year, it forecasts.

Debasis Chatterji, the chief executive of Netxcell, a telecommunications application provider based in Hyderabad, says that next year the “industry will witness some consolidation. Mergers and acquisitions will happen”.

Expanding competition in the telecom market prompted ratings agency Fitch Ratings to last month issue a negative sector outlook.

“Five to six operators will emerge from the industry shake-out,” Fitch says. “The top four: Bharti Airtel, Vodafone India, Idea Cellular and Reliance Communications – are likely to raise revenue market share to 80 per cent in 2016 (compared with 77 per cent this year) as weaker ones exit. Weaker unprofitable telcos including Videocon, Aircel and Tata could exit the industry as they make operating losses and lack key spectrum assets and financial flexibility to invest in data networks. Such telcos will seek M&A among themselves or trade their spectrum to larger telcos.”

One beneficiary of the increased competition will be the consumer, with prices set to fall.

“We expect data tariffs to fall by at least 15 per cent to 20 per cent as incumbents compete on price with Jio, which is likely to offer cheaper data tariffs to build market share,” Fitch says.

It estimates that industry revenues will grow by 2 to 3 per cent next year compared to 9 per cent. This will be “driven solely by data services as voice matures and subscriber growth slows”.

The revenue contribution of data will rise to 25 to 27 per cent compared to 18 to 20 per cent last year, it adds. Fitch predicts that data traffic will double because of the growing number of cheaper smartphones available in India, while lower data tariffs will also drive greater use of data services in the country.

Naval Seth, a research analyst at Emkay Global Financial Services, based in Mumbai, explains that the fact that operators are being forced to increase their capital expenditure because of Reliance Jio is bad news for the attractiveness of the sector to investors.

“We maintain our cautious stance on the sector given the structural issues that are expected to pan out in near-medium term,” he says.

A key focus for Reliance Jio is to offer an extensive 4G network. Bharti Airtel this year rolled out 4G services. Vodafone India is scheduled to start its first 4G services in Kochi on Monday as it readies itself for its new rival. Vodafone aims to launch 4G in a few other major cities including Mumbai and New Delhi next year. Reliance Retail, a sister company of Reliance Jio, is producing a range of 4G smartphones to help spur demand.

“Most of the Indian telecom operators are focusing on data and betting on the data revolution happening in the country,” says Mr Chatterji. “Voice revenue is not growing at a high pace but still contributes the major share for most operations. 4G licence auction and sharing of spectrum among the operators for a pan India presence is getting stabilised. However, SMS services have suffered a loss due to the rise in apps.”

This all comes as Indian telcos have come under fire because of the high frequency of ‘call dropping’ in the country. The industry in India has grown at a rapid pace but many believe that the quality of the services is lacking.

Mr Chatterji says: “The future is data, no doubt - but voice business is the core business of any telco. It cannot be neglected. Call drop has become a major concern.”

India’s communication minister Ravi Shankar Prasad last week said that the government was well aware that problems were plaguing the sector and he criticised telecom companies for their “very bad” services. He said that the government was striving to address the problems and that telcos had been ordered to improve, while steps would be taken if they did not comply.

“I think Reliance Jio is a huge variable factor in this space,” says Pankaj Sharma, the head of equities at Equirus Securities. “I also think that the company would be more prepared to handle the customer service and could offer attractive offerings, which is a combination of price as well as quality.”

There are other challenges that operators face, he adds.

“The capex requirements are still huge and as technology continues to evolve, this would not get eliminated altogether. Apart from these issues, we think that there are company specific issues like high debt levels and not so successful geographical expansion outside India.”

Call drops set to cost operators

India’s telecom regulator intends to move ahead with a plan to force operators to pay customers one rupee in compensation for each telephone call that gets disconnected, in an effort to solve the nation’s widespread problem of “calls drops”.

The penalty, being enforced by the Telecom Regulatory Authority of India (Trai), is set to come into effect from January 1.

Call drops are a huge issue for mobile phone users in India, with it being commonplace for calls to be cut off mid-conversation because of connectivity issues.

Customers will receive compensation for up to three dropped calls a day under the scheme.

But this could end up costing operators US$8 billion a year, according to some estimates - although the regulator has pegged the total cost at about $120 million annually - Bloomberg News reports.

“There are many quality of service issues,” RS Sharma, the chairman of Trai, told the newswire in an interview earlier this month.

But objections have been raised to the scheme by operators and industry bodies.

“Compensation to the consumers for call drops is not the correct approach and will not resolve the underlying problems which are in the main, beyond the immediate control of the operators,” says Rajan Mathews, the director general of the Cellular Operators Association of India (Coai), an industry trade body, based in New Delhi. “Until and unless adequate infrastructure is allowed to develop, the issue cannot be resolved. Fixing the problem of adequate network infrastructure, mainly cell towers, adequate and affordable spectrum, educating citizens on EMF (electromotive force) safety norms to address their fears and opposition to cell towers, removing local government delays and opposition to cell towers, are the effective ways to address the problem.”

Mr Mathews points out that there are a number of problems and implementation issues that the penalty system might face, including how to distinguish calls which have been disconnected because of network issues and those that are cut off because a user is in a lift, for example, and is perhaps deliberately trying to make the call drop.

Coai estimates that about 100,000 mobile towers will be needed over the next two yearsacross the country “to support a burgeoning subscriber base and cellular operators are working to bolster existing networks to be able to meet the demand”.

It says that to facilitate this “operators will need the continuing assistance of the government and the citizens, so as to facilitate seamless connectivity”.