RJio vs rest of telcos in India. Is that the big picture?

The 3G binge, and a 4G bloodbath!

By Deepak Kumar

Three years ago, Reliance Jio Infocomm had not launched its services and its launch dates were speculative at best. Yet, it was still very much clear that the greenfield behemoth was going to have a VoLTE engine in place for all of its 4G networks. It was also evident that since there was no legacy baggage to deal with, RJio would be using an IP Multimedia Subsystem (IMS) architecture to build the networks.

It was therefore surprising to see that the incumbents were not panicking. Yes, they did think of RJio as a serious competitor, but that was it; they never really saw it as potentially massively disruptive powerhouse. They did have a defense plan in place, but they didn’t seem to feel the need to go with an all-out offensive beforehand. On the contrary, the general mood was the RJio threat could be managed by upgrading to a matching network and architecture ‘just in time.’

As time has shown, the incumbents grossly misjudged, and eventually, were taken by the surprise in varying degrees. There just has been no time to be just-in-time.

The genesis of consolidation

The industry has hopefully learnt it the hard way that there is a big difference between being launch-ready and actually launching. As one is witnessing now, that difference could become a matter of survival and existence.

The industry was expected to have known, from the past numerous experiences, that in a mostly prepaid market like India, it takes only a few freebies for customers to switch operators. True, customers have also been known to switch back when the freebies end, but then history is not bound to always repeat itself. With the financial muscles of RJio being in the fray, the likelihood of customers being swept away was real enough at the very outset.

An oft-repeated argument is that ever since the 3G auctions of 2010, the incumbents have been in knee-deep debts, which rendered them less agile when it came to investing in the deployment of new networks and technologies. Frankly, this may well be considered to be a self-deceiving argument. Why, in the first place, should one buy the spectrum at an exorbitant price if one didn’t have the pockets to put that asset to use after acquiring it? After all, the spectrum is just a means toward an end!

It’s another matter that scrambling for 3G spectrum at a time when the world had already started to deploy 4G networks was just bad strategizing by the decision makers at that point in time. India had been so late to the 3G party that it would have been best to skip it altogether and start getting dressed up for the 4G event instead.

Once the decision makers chose to buy 3G spectrum assets, it was expected of them to have the network deployment funds in place. If the thinking was that there was a latent demand for 3G data so overpouring that it would pay for the spectrum investments in no time, it was too wishful to say the least. In a prepaid-dominated market, where even voice ARPUs were among the lowest in the world and the smartphone phenomenon was yet to kick off, how could subscribers have paid handsome premiums to consume 3G data, which was initially priced at several times the current prices?

It appears now that 3G spectrum buying was done more as a shopping binge than as part of a strategic business plan. In the spectrum auctions that followed the 2010 auctions, however, there have been attempts to correct the mistake, albeit only with limited success.

The inevitable fallout

Soon after the auction hangovers got over, the industry was able to see the ground realities of the market. There just wasn’t enough market for too many players and almost none at the then price points, which were more than five times of what we had even before RJio rolled out. All but three to four of the players wanted an exit route but the then prevailing policy on M&A allowed none. The telcos had no choice but to wait until 2014, when the new telecom policy and its subsequent provisions paved the way for exits.

The long and short of the discussion is that consolidation is not necessarily a fallout of RJio’s splash entry or the continued ‘dhana dhan’ offers. Rather, the balance sheets of the incumbents were so deeply leveraged that they were left with little staying power in the wake of this RJio onslaught.

Not that RJio’s entry would not have triggered any consolidation waves, but then, the intensity and impact would not have been too severe if the incumbents had done things strategically right. Most importantly, had the incumbents invested in the next-generation network and architecture, it would have been painstaking for a greenfield behemoth like RJio to grow its presence organically, and it would have likely preferred an inorganic option. That alone would have ensured that the valuations of the telcos were not adversely impacted and a bloodbath would have been avoided. Also, the job losses could have been contained to a reasonable extent.

A total of nine players have exited the market since the 2012-13 timeframe, and a few more are speculated to follow suit. The Vodafone-Idea merger is already on the cards, subject to necessary approvals. Post that, if one considers BSNL and MTNL to be effectively one operator, given that they operate in mutually exclusive circles, the market would be left with seven operators. Also, given that HFCL is present in just one circle of Punjab, there would be six operators in effect.

What the pros are

Better spectrum utilization: In the recent years, as some of the players were not able to adequately invest into network buildouts, a good part of the spectrum they bought remained underutilized. On the other hand, some of the larger players didn’t have enough spectrum in some of the circles to serve their large subscriber bases. With consolidation, they get access to larger pools of spectrum, which also leads to a better utilization of this precious resource.

More pricing power: Hyper competition has put enormous pressure on revenues and bottom lines of the telcos. Recent data shows that while the bigger operators have managed to keep growing their subscriber bases, their ARPUs also increased between 2015 and 2016, from around Rs 125 in September 2015 to Rs 131 in September 2016, as per Telecom Regulatory Authority of India’s (TRAI) data. This was also a period when some major M&A deals were announced. However, the big-bang entry of RJio had a disruptive impact, which was visible as early as the quarter ended December 2016, for which published results are available. The country’s largest telco Airtel reported a decline of 8.4 percent in its ARPU for the quarter while Idea suffered a decline of 9.2 percent during the same quarter. The full impact of RJio’s entry is in the financial reports for the quarter ended March 2017. Nevertheless, once the industry has re-consolidated to adjust for the entry of RJio, the ARPUs could be expected to move upwards before they have bottomed out.

Improved user experience: With consolidation, the operators would not only grow in scale but also acquire larger pools of resources, including spectrum and network infrastructure. This would enable them to provision more bandwidth and voice channels for users in more locations, which would lead to better user experience.

Greater business predictability: Hyper competition often leads to desperate measures by operators to grow their subscriber and revenue shares. This disrupts the strategic business path of the industry as a whole and forces other players to respond with counter offerings, as we have most recently seen in the aftermath of RJio’s entry. The greater the number of players, the higher the chances of such disruptions, as each additional player amounts to an extra business variable. With consolidation, the number of these variable would come down, which in turn would lead to a more predictable business environment. This means that operators could focus on long-term business growths in a more sustainable manner.

More bargaining power with suppliers: The ability to draw more strategic business plans and stick with those, supported by a greater scale, would give operators the leverage to better negotiate with equipment suppliers. The suppliers too would also be able to better meet those demands due to improved economies of scale.

And the cons

Increased network complexity: M&As would amount to bringing together of diverse network elements and technologies to an operator’s fold. This would increase the complexity of the already heterogenous network environments. The OSS/BSS systems and sub-systems employed by the operators are also often different. A consolidation would require migration of those subsystems as well to a common platform.

Duplication of assets: No matter how mutually exclusive the operations of two merging telecom entities are, there still would be overlaps and redundancies in terms of infrastructure and spectrum. While some of these redundancies would enable the new entity to provide improved network performance and user experience, the rest of it would at best become non-performing assets. For example, in the event of a Vodafone-Idea merger, the combined entity would have 30 MHz of spectrum in the 2500 MHz band for the circles of Gujarat and Maharashtra, as against a cap of 20 MHz, which would amount to a surplus of 10 MHz. The combined entity could also exceed the cap in the 900 MHz bands for at least the four circles of Maharashtra, Haryana, Kerala and UP West.

Reduced attractiveness of the sector: The industry is already reeling under a wave of layoffs and stagnating wages amidst ongoing consolidation. A report by HR consultancy firm Aon Hewitt expects wage rise in telecom to be 7.6 percent as compared to India Inc.’s average of 9.5 percent in 2017. This has already reduced the attractiveness of the telecom sector among the existing as well as potential employees, who are understood to be scouting for alternatives in other sectors.

Plateauing of growth: The India telecom market is already quite saturated in terms of addressable voice subscribers. While the addressable data market is still sizable enough, organic growth has been hard to come by in a normal course. In fact, in the absence of the RJio phenomenon, the number of broadband subscribers was expected to grow from 120 million in December 2015 to around 160 million in December 2016. While the uptake of RJio subscriptions, on the back of its big-bang promotional offers, gives the notion that the number of subscribers have increased, the more likely reality is that users are holding multiple subscriptions for now and could drop one of those subscriptions over a period of time. Also, the growth in subscriptions has come at the cost of tariffs, to the extent that both data ARPU and revenue are likely to suffer declines for the coming few quarters. In the absence of the internet subscriber base significantly expanding, the broadband subscriber base will always face the risk of a plateauing growth. In a consolidated market, which is down to four to five players per circle, that reality will likely hit harder.

Adverse social impact: A consolidation in the given market conditions has a high potential of creating large-scale job losses across the sector. The consequent social impact of this would be against the very fundamentals of corporate sustainability goals of the individual companies as well as the sector as a whole.

The big picture

Unarguably, mobile broadband is a key enabler and catalyst for Digital India. The stakeholders, including the industry, the policy makers, the licensor, and the regulator, must all ensure that a market consolidation further strengthens that linkage. That’s a big picture, which all stakeholders must be privy to.

Market forces, if allowed to move too freely in their elements, could become wild and destructive. A collective rationality must be prepared to step in to tame those forces before a mayhem gets caused. As discussed earlier in this article, consolidation loses its positivity if the job losses are too many and too sudden. In the given business environment, when thankfully there is no economic crisis staring at us, a social impact that counters the corporate sustainability principles, cannot be justified.

That is only possible when the industry as well as the government are on the same side in the context of Digital India. Bloodless consolidation is the economic need of a sustainable hour!

(Deepak Kumar is Consulting Editor at Voice&Data and Founder Analyst at market research and business advisory firm B&M Nxt.)

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