The Great War Is Here

By 11.35 am on 1 september, some twenty minutes into his speech to the shareholders at the 42nd Reliance Annual General Meeting (AGM), Reliance Industries chairman Mukesh Ambani had made it clear that their 4G LTE services under brand name Reliance Jio (RJio) — to be launched on 5 September — will come with free voice calls, zero roaming charges, simple tariff plans and a host of attractive offerings, making the worst fears of incumbents such as Airtel, Vodafone and Idea come true. For consumers, there can be no better news. Voice and data services bundled together at such low price points from RJio now mean that other telecom operators will have to come out with counter offers to prevent their subscribers from jumping on to the Jio bandwagon. Businesswise, experts say RJio’s entry will lead to further consolidation in the sector. Here are some quick numbers. Voice accounts for 80-85 per cent of the revenues of present players, while data accounts for the balance. This is set to change going forward. The average revenue per user (ARPU) for telecom players is less than Rs 195 per month — one of the lowest in the world. Incumbents are already saddled with heavy debts and now the ensuing tariff war with RJio can make things worse for them.

Leading up to the Reliance AGM, there were bitter and public fights between the new entrant RJio and the incumbents over interconnect points. Referring to that Ambani said, “Healthy competition is welcome and the incumbents are better placed with their wider distribution network. However, during the trial period, we witnessed 5 crore call drops as points of interconnect were not provided by incumbent operators. Incumbents should not create hurdles for the new entrant.”

The Writing On The Wall
During end-July to mid-August, four things became absolutely clear to everyone in the telecom business. One: the government will not intervene in any fight between telecom operators. Two: the trial runs or test services of Jio and the subsequent acquisition of over 1.5 million users (or more) forced rivals to slash data rates for their 3G and 4G services. Three: consumers will become king with lower bills for voice and data services going forward irrespective of the financial implications to the operators. And four: spectrum auctions will start 1 October where the government expects to put on the block Rs 5 lakh crore worth of precious airwaves.

The biggest fear of incumbents is the anticipated loss of loyal subscribers to RJio once it’s commercially launched. Why? Because RJio is expected to offer attractive schemes on data and voice. For average consumers, RJio services will mean a direct cut in their monthly outgo on wireless services — voice and data. For existing players, who are already witnessing drop in their average revenue per users on one hand and mounting debts on the other, the upcoming tariff war may just prove extremely costly.

What’s The Ruckus About?
Everyone and anyone connected to the business of Indian telecom sector knew for several months that RJio, the telecom arm of Mukesh Ambani’s Reliance Industries, will get into the business of providing 4G services (high speed data and voice) at some point in time during 2016. But when reports emerged about Jio cornering over 1.5 million users during only its trial services, it enraged the GSM industry comprising Airtel, Idea, Vodafone and others. Last month, the Cellular Operators Association of India (COAI) with the GSM players’ body locked horns with RJio over the interconnect issues. While COAI accused RJio of choking their networks by offering subscribers free calls, the latter maintained that it did not violate any laws.

On 8 August, COAI wrote a letter to the Department of Telecommunications (DoT) claiming that RJio was providing “full blown and full-fledged services to more than 1.5 million users on its network, purportedly to test/trial users”. The letter stated that RJio was generating data volumes which were 25-30 times the Indian average and bypassing government regulations with predatory pricing and unfair competition. The letter requested the telecom department and the regulator to intervene in the matter and instruct RJio to stop providing services under tests. In response, RJio shot back a letter stating: “The top three of the dominant incumbent operators, who are opposing the downward revision of IUC (interconnection usage charges) command a market share in excess of 65 per cent in the one billion-plus subscribers’ market. It is simple math to decipher, who will end up paying more IUC.” The letter was sent to DoT secretary and Telecom Regulatory Authority of India (Trai) chairman.

On 19 August, Ambani met senior officials in the DoT to discuss the rollout plans of RJio. COAI representatives too went and met telecom minister Manoj Sinha and other senior DoT officials, each accusing the other of foul play. When asked if government will intervene between the warring telecom giants, Sinha said: “Where it will be needed, we will definitely intervene, but I don’t think there is any such thing that government should intervene.” That has settled the matter for now.

Telecom expert Mahesh Uppal, who is also the director at consultancy firm ComFirst says: “Reliance Jio is a formidable, ambitious player which at the moment is a new entrant and is faced with advantages of incumbency enjoyed by current GSM players.”

Defending the letters to DoT, Rajan S. Mathews, director general of COAI, says it presented COAI’s argument. “Now, it is up to DoT and Trai to take the matter into consideration and give clarification on this issue.” Taking note of the arguments presented by both parties, DoT is said to be in the process of sending across a reference to Trai to start a consultation process on the norms that should be clearly spelled out for any new entrant during the test runs/trial period.

Unnerved by RJio’s entry, state-run BSNL says it is confident of sustaining any price war on data. “RJio launch is definitely going to impact the market. BSNL will be the only company which will sustain that kind of price war on data because of our data revenue from the landline and optical fibre network, where we are head-and-shoulders above other operators. We will match the RJio rate step-by-step on whatever they offer,” says Anupam Shrivastava, chairman and managing director of BSNL.

But here is what was happening behind the scenes between end-July and 15 August, according to industry insiders.

Airtel has revised its data pack plans for its prepaid and corporate customers by slashing its Internet prepaid tariffs by 80 per cent and over 150 per cent for its corporate customers. Effectively, Airtel has brought down the internet tariffs to as low as Rs 51 per GB for prepaid customers and Rs 99.5 per GB for corporate customers. With its current offering, Airtel customers have to shell out Rs 1,498 for 1GB (3G/4G data) and post exhaustion, they can enjoy 1GB (3G/4G) for just Rs 51. For a year-long period, 12 GB (3G/4G) data will now come at Rs 2,110 (13 packs of 1 GB each), but the validity for 1st GB data is 28 days. Vodafone is giving 1GB data (3G/4G) for Rs 297 with validity for 28 days which means Rs 3,861 for 13 GB of data for 12 months. State-owned BSNL is providing 1GB (just 3G data) at Rs 198 and Rs 2,574 for 13 GB data for a year. Idea Cellular is providing 1GB (3G) at Rs 249 for 28 days and Rs 3,237 for 13 GB for a year.

Commenting on the declining data tariffs, Prashant Singhal, global telecommunication leader, EY, says, “The telecom sector is already reeling under financial stress, high debt burden and a slowdown in revenue growth. Further decline in data tariffs may impact operators profitability and sustainability. It may impact the outcome of the upcoming spectrum auction critical for the Digital India vision.”

Spectrum Auctions: The Real Test
According to Tanu Sharma, associate director, India Ratings and Research (Ind-Ra), the upcoming spectrum auctions will accelerate the industry consolidation, whereby the top telcos will strengthen their spectrum holding positions, further marginalising smaller telcos, which are unlikely to meaningfully participate and invest further. “Ind-Ra expects Vodafone India and Idea Cellular to be active bidders in the upcoming auctions for their 4G network rollout and Bharti Airtel — the most diversified spectrum holder — will look to bridge the gaps in its spectrum,” says Sharma.

Airtel has the largest spectrum holding at present — 770MHz across bands 900MHz, 1,800MHz, 2,100MHz and 2,300MHz; followed by RJio, with 596MHz spectrum across 800MHz, 1,800MHz, and 2,300MHz bands. “This puts Vodafone (302MHz) and Idea (271MHz) at a disadvantage since they don’t possess airwaves in the 2,300MHz category,” says a telecom analyst. The top telcos are likely to bid in their respective top five circles by revenue, to plug in the data spectrum gaps and thus strengthen their operations.

“We believe that the spectrum auction is going to be a failure,” Chris Lane, a Hong Kong-based analyst for Sanford C. Bernstein told Huffington Post. “Overall, we don’t see carriers bidding like they did in previous years,” he said. The reason for concern is because the 12 wireless companies together carry more than $61 billion in debt and their ARPU is declining as customers replace voice calls with apps that use data plans.

Experts say the lower frequencies improve range and penetration thereby improving call quality while higher frequencies have greater data carrying capacity.
Let the party begin for consumers!