Indian Telecom Industry: At the crossroads

The Indian Telecom industry has de-grown by 7.35% in GR (Gross revenue) & 15.6% in AGR (Adjusted Gross Revenue) in the FY 2016-17 over the previous year courtesy the Jio launch that has hastened consolidation & accelerated layoffs. The Voda-Idea merger announcement pushed the consolidated entity into the numero-uno position in RMS (Revenue Market Share) while the Airtel-Tata propinquity is a strategic attempt to narrow the gap by the dethroned leader; Aircel-MTS -Reliance Communications merger completes the picture with BSNL-MTNL being the PSU challenger. It shall henceforth be a 5 player game.

Jio’s launched officially in Sept ’16 & by end May ‘17 had quickly accumulated over 11.72 crore customers of the total mobile broadband usage base of 27.28 crores (43%). India with a total mobile base of 118 crores & wireless tele-density of 91.74% leaves very little space for customers acquisitions, new to the category.  Wireless internet user base, end Mar ‘17, was 40.06 crores – of which 14.5 crore is a narrow-band base, albeit shrinking - indicating that 78 crore users are pure voice customers. The industry’s VLR fig of 86.34% also indicates a steady increase in customer quality & retention although it varies across operators with Idea highest at 101% & MTNL lowest at 47%.

Jio Strategy

Jio’s brand promise of perpetually charging only for data & not for voice is a clever attempt at doing what they know that competition cannot replicate. Their plans: Unlimited voice at Rs 149/- & unlimited voice + data of 1GB per day at 309 for 28 days simplifies tariffs in an over-communicated world; however, their net revenues are likely to be low, perhaps negative, since the IUC(Interconnect charges) at 14 paise per min (PPM) for Mobile calls has to be paid to the recipient operator. Had Jio launched a starter pack at Rs 49/- with all voice calls at 14 PPM, it would have been a better proposition despite denying them the opportunity to showcase “voice free”. Hence their attempts to push the regulator to remove IUC charges would continue despite protestations from the other operators.

Post securing a large 4G base in wave 1, Jio attempted to target the Hi Value 2G/3G customers in wave 2, vide JioFi launch that provided 150Mbps upload & 50Mbps download speeds for upto 32 devices - smartphones, laptops, tablets & smart TVs - with a heavy duty 2300mAh battery that promised a 5-6 hour surf backup – thereby providing mobility while relieving the need for an electrical connection. At a cost of Rs 1999/- - much lower than the cost of a new 4G handset - you could make Video and HD Voice calls, send SMS and set up even (5+1) Audio & (3+1) Video conference calls with the Jio4GVoice app. They now seem poised to target the 78 crores pure voice customers, under wave 3, with the launch of a 4G handset at Rs 499 - 999/- which would involve a heavy subsidy of over Rs 1000/- per handset; since it is likely to be a pure 4G handset – not supporting 2G/3G - a customer is unlikely to "unlock" the device & shift to competition till the time their 4G networks too are not ubiquitous which is at least a year away. Lower the subsidy, higher the chances of targeting the replacement market alone reducing the size of the pie.

Looking back, the “Monsoon hungama” offer, of 2003 - when Rcom offered handsets at Rs 501/- -  it can logically be presumed that the proposed offer too would attract subscribers at the "bottom of the pyramid"; the corollary to such an induction is that it would put off Hi Value customers. By launching JioFi before the proposed roll out of the low cost handset, Jio appears to have factored this in; however, it would be difficult to make a Hi-Value iPhone customer sustain the Jio connection comfortable in the knowledge that a daily wager too uses the same brand; jio, therefore, could face a brand related challenge.  Likewise, Jio’s Lyf handsets lack robust service centres & that could impede "customer experience" & consequently "word of mouth".

Wave 4, would concentrate on broadband; reliance is already testing its broadband services of 100 Mbps & 100GB in key cities; armed with an MSO (Multiple System Operator) licence it would use the same infrastructure to attack the cable business as well. Expect therefore a consolidation in the cable industry as well.

Jio would be better advised consolidating penetration in "family" as a unit by offering a quad core product – broadband with a cable connection plus 2 mobile connections at Rs 1499/-; their attempts at rate revision by offering unlimited voice with 1GB data per day for 2 months at 399/- would help in ARPU accretion & earn analysts praise in the expectant hope that full charging would commence by Q3 FY 2017-18.

The Strategy of the Incumbents

Airtel-Tata & Voda-Idea could follow a different strategy of segmented offers taking advantage of their entrenched UnR (Usage & retention) machinery. They currently appear to be operating on the following 3 broad customer segments

(a)Customers not showing a dip in usage: Manage customer loyalty through better service with a disproportionate focus to "ring-fence" Hi value prepaid, postpaid mobile & broadband customers. The postpaid product of Jio lacks teeth & that helps the incumbents.

(b)For customers showing a dip in usage:

(1) Offer them full talk time offers & rate cutters to induce higher usage

(2If the above fails & customers show a persistent dip in usage over consecutive months, a Rs 349 plan that serves unlimited voice + 1GB data per day - a marginal premium over the Rs 309 plan of Jio.

(C)Customers who have migrated to Jio: Match Jio on voice & data while protecting the SMS revenue – despite the SMS segment shrinking.

The incumbents also appear to be veering towards the following broad strategies

(a)Retain the advantage of top ups as low as Rs10/- which Jio lacks; students with low pocket money or daily wagers have been traditionally seen to prefer low sachet packs.

(b)Don’t burden their distributors with handset sales in a bid to preserve the channel’s working capital; this is a wise attempt at avoiding the risks of technological obsolescence, non-receipt of price drop differentials to the channel & the consequent channel angst. Instead, allow handset operators to push 4G handset sales vide “bundled offers”. This is inherently a cheaper option as compared to handset subsidy.

(c)Get aggressive in the post-paid & enterprise segment where Jio lacks an effective product & service back up. Airtel – Tata merger would be attractive on this count alone despite Tata Tele being burdened with a Rs 30,000 crore debt; of course bundling Tata Sky & Tata Communications - which are otherwise profitable entities - with Tata Tele in the merger talks makes it a win-win. The combined entity can strengthen their hold on the 2.41 crore customer wire line segment, where Bharti has a 16% share to Tata’s 7.6% against the dominant PSU (BSNL+MTNL) share of 69.6%; other private players have no significant play in this segment yet.

Conclusion

Mergers however induce its challenges of manpower rationalization, channel resizing & reopening of vendor negotiations & that could change the RMS stack rankings. While Airtel- Tata, Idea-Voda & Jio have the financial muscle to sustain a long bloody game, the same cannot be said of BSNL-MTNL or the Reliance – MTN – Aircel combine. A 3 player scenario eventually seems to be a distinct reality; if idea-voda delay investments on fibre it could well be a 2 player game. While players shall regain pricing power, with further consolidation, it is unlikely to happen soon. Therefore, expect the industry to seek & secure concessions from the govt. on reduction of SUC (Spectrum Usage charge) & rationalization of licence fees instalments; a rethink on net neutrality in a bid to gain a revenue share from the OTT (Over the top) players like Facebook could be their other demand.

It would be safe to assume that the next 6 quarters would see a lot of action & bloodshed in this sector eliminating a lot of professional careers & corporate brands in the bargain.