Reliance Jio Spurs Competition, Consolidation Among Telcos

by Sohini Bagchi    Feb 24, 2017

rjio

India’s telecom sector is going through a consolidation, thanks to the aggressive entry of Reliance Jio in September 2016, causing rivals to cope with the intense competition. A number of deals over the past few months further suggest that the sector will be ruled only by a handful of large telecom operators, compelling the weaker telcos to exit altogether, said rating agency, Fitch Ratings.

Bharti Airtel’s buyout of Telenor’s India operations is the latest sign of a shakeout in the sector. The rating agency also warned that even with fewer players, pricing power would not return to the industry in the short term. In a recent release, it said, “We retain our negative outlook on the sector for 2017, as fierce competition and rising capex will put pressure on most operators in the short term.” 

However the Sunil Mittal-owned company maintained that Airtel’s credit profile will remain unaffected by the planned acquisition as the benefits from additional spectrum assets will offsthe spectrum liabilities taken over. In late 2015, Bharti Airtel acquired Augere Wireless which followed it by buying Videocon Telecom’s spectrum in six circles and Aircel’s 2300 MHz spectrum in eight circles.

Other players are also gearing up to win the race. Reliance Communications has plans to acquire Aircel’s remaining spectrum in addition to MTS. Vodafone is set to strike back with its buyout of Idea Cellular, as with the combined entity it hopes to far exceed Airtel and other rivals in terms of subscriber numbers. 

Catching up with the leader

The entry of Jio, which is offering free data and calls over the past six months, and only recently has announced to make its services paid, has further accelerated the consolidation. As expected, it may result in the further loss of user base for incumbents Airtel, Vodafone, Idea and others. Moreover, as the Happy New Year offer by Jio will end on March 31, Jio has announced a new plan called the ‘Jio Prime’ where consumers will be able to get similar services by paying nominal prices. If you are a Reliance Jio subscriber, you will have to pay Rs 99 for a year, where you can get 1GB of data for free each day at a monthly charge of Rs 303.

Rival companies now are expected to take some measures to retain their subscribers. For example, Airtel’s acquisition of Telenor may open up more opportunities for the company. As of now, it provides 30GB of 4G data at Rs 1,495 for a period of three months. If you do not have an Airtel connection and wish to shift to its 4G service, by paying Rs 9,000 for 12 months. 

Vodafone said it is offering 6GB data per month for Rs 349, along with unlimited voice calls. Also, any user who buys the 1GB data pack for Rs 250, will now get 4GB data with a validity of 28 days. The telco is also offering 22GB of data on recharge of Rs 999. For that price, earlier customers could get only 10GB of 4G data. 

Earlier, RJio rivals asserted that its anti-competitive practices are hurting the industry. This has prompted the government to ask the telecom sector regulator TRAI to review the impact of Reliance Jio’s free voice and data services upon the industry, which it said has led to the exchequer losing potential revenue.

Nonetheless, Reliance Jio’s offering to its customers is exceptionally low when compared with other network providers. This may suggest that Jio has planned to draw top customers of Airtel, Vodafone and Idea, most of whom already use Jio as a secondary SIM. 

Survival of the fittest[s]

Analysts believe that post consolidation when market shares stabilise, it’s also expected that a five-player market - Vodafone-Idea combined entity, Airtel, Reliance Jio and BSNL, Reliance Communications - would work in tandem to raise prices. In the absence of smaller (and lesser market share-hungry) telcos, the large telcos are unlikely to compete on tariffs. In such a scenario, the consumers will have limited choice, and large operators will have a upper-hand when it comes to deciding tariffs.

telcos

But it’s not that these reasons alone have triggered consolidation, believe analysts. The current consolidation is largely triggered by two things: the entry of Reliance Jio, and the fear of losing out, in the telecom space. In a market with few players, spectrum holding, market share and profitability will segregate losers from winners. 

The ongoing consolidation drive will also lead to massive layoffs in the Indian telecom industry with as many as a third of over three lakh employees becoming redundant in the next 18 months as consolidation plays out, according to an ET report.

The news site reported that massive job losses are inevitable as telecom operators merging operations will streamline their respective businesses to remove redundancy and cut costs. Indian telecom industry’s overall revenue is estimated at Rs 1.3 lakh crore annually, while people costs stand at Rs 34,000-35,000 crore.

Most affected departments could be circle chiefs, human resources and finance teams at the central and service area levels, reports suggest.

While some are betting that consolidation in the telecom sector among large companies will more than offset the drop in revenues and profit owing to a drop in pricing, others like Fitch are doubtful and retain negative outlook for telecom business throughout 2017. “We continue to believe that competition will continue to remain high, and the consolidation is not likely to return any pricing power to the operators in the near term,” the agency said.