Home & Office

Is India headed for telecom wars or will Reliance keep the peace for now?

The manner in which Reliance Jio, Indian telecom's newest entrant, choses to grow its subscriber base will determine the shape of pricing in the years to come.
Written by Rajiv Rao, Contributing Writer

A few years ago, oil-to-retail billionaire Mukesh Ambani, planned one of the most audacious, single-largest bets in perhaps the history of Indian business by plunking down some $16 billion on a newly-minted 4G network while the rest of India was still negotiating 2G contracts.

Being forced to exit a previous telecom venture because of a family feud with his younger brother, Ambani had not quite ended his ambitions of also becoming a telecom tycoon.

Apparently, he also was not much deterred by Bharti Airtel's expenditure of close to $23 billion to rise from its birth in 1995 to become India's market-leading leviathan. That's not counting $9 billion in network upgrades that the Gurgaon-based company has been spending to date.

It takes a special kind of courage to be able to dip your toes -- or in this case, wade -- into an industry that is already clogged with competitors of every possible size. It also takes a bold vision and quiet conviction to be able to plan such an elaborate game so many years in advance of its fruition, especially with blinding speeds of technological change and disruption happening around you.

Reliance Jio is on the brink of introducing internet speeds in India that it said will be from 40 to 80 times faster than its rivals at prices that could be considerably cheaper. Of course, it doesn't hurt that you have one of corporate India's biggest warchests at your disposal.

From today's vantage point, making such a big bet is a no-brainer -- India's mobile consumer base has swollen from a mere million in 2002 to a billion connections. According to Gartner, smartphone volumes are expected to touch around 326 million by 2016 year-end, and almost 90 percent of some 151 million broadband subscribers hop on to the internet using their mobile devices according to the Telecom Regulatory Authority of India (TRAI).

Consequently, Indian e-commerce and digital content consumption is sky-rocketing, making the country a must-be place for firms who can intelligently tap into this vast consumer base.

Still, the big question dogging Reliance in its maiden telecom voyage is: Does it has the ability to hit its publicly admitted goals in the time frame it has allotted to itself while keeping its financial obligations, and in doing so, how much will it really disrupt the market?

Formidable Challenges

To start off with, the company apparently has to shell out Rs 12,000 crore of interest ($1.79 billion) on Rs 1,00,000 crore ($14.925 billion) of debt and has to earmark another Rs 12,000 crore ($1.79 billion) for depreciation.

But the more onerous target it has set for itself is becoming profitable within a year of launch, with a subscriber base of 100 million -- or 10 percent market share -- and an Average Revenue Per User (ARPU) of Rs 300 ($4.47), it appears to be a near-impossible task to achieve this considering the current industry ARPU is at Rs 165 ($2.46).

According to research firm CLSA, Reliance will need to attract between 140 million and 180 million subscribers who fork out double the existing ARPU to hit that 10 percent pre-tax return on capital employed on its $22 billion capital expenditure.

In other words a pipe dream.

"Achieving this within five years may be seen as a success," notes research firm CLSA in Mint.

It projects the number of smartphone users to go up to 500 million for 4G smartphones in India by 2021 and 300 million subscribers with ARPU over Rs. 300 by as late as March 2018. Even that looks overly positive, with analysts at research firm Bernstein thinking that will happen even further down the line, in 2023.

Hitting that subscriber base by either creating new customers for phone and data -- possible, considering India's smartphone penetration is only around 25 percent of the 1.3 billion population -- or poaching those of existing carriers would mean offering dirt-cheap data rates in a potentially unsustainable price war with its rivals, even though Bharti has more than 250 million customers, Vodafone 198 million, Idea 174 million ,and RCom 102 million, and the top three collectively have less than 100 million 3G or 4G customers.

It will find itself between a rock and a hard place; it needs customers, yet slashing rates will mean causing ARPUs to plummet which means less cash to pay off its debt.

Slowing Data Consumption

If the aforementioned challenges aren't bad enough, another huge hurdle has cropped up recently: An unexpected slowing down in mobile data revenue, the very thing that Reliance wants to make its fortunes in. According to Mint, in the quarter ended 30 June, Airtel said data revenue grew just 4.5 percent from the previous three months at a rate that is the slowest ever for India's largest telco.

Vodafone saw its quarter data revenue growth slump from 65 percent a year ago to 22 percent. Additionally, data penetration is far behind smartphone penetration according to recent reports which means that smartphone users haven't exactly been gobbling up data packs. Another scourge is the proliferation of WiFi -- increased penetration has apparently dented data revenues further.

Meanwhile, the place that all the incumbents are making money is paradoxically in old, faithful voice. Voice growth has been the fastest in six quarters and today total voice revenues are three times that of data. What this means is that while Reliance is trying furiously to make its money in a segment that has slowed, its competitors will continue to milk their 2G and 3G customers -- basically, the bulk of India -- on voice revenues.

Price Wars?

Reliance's ability to slash prices will hinge on how much of a hit it is willing to take on ARPUs. Ultimately, data prices which are currently astronomically high in India, will fall significantly just as voice revenues have in the past decade due to increased adoption. Reliance can be thanked for this, just as much as it should be for upping the game in the quality of data speeds that the entire industry will be forced to offer.

For now, however, most industry hands think that there may not be the kind of price wars you would expect in this kind of face-off. Already, Bharti and Idea are beginning to offer more 'bang-for-the-buck' deals on data that effectively double your data for the same price at night.

Jio will probably try and focus on leveraging its vast stable of acquired content to woo customers, in addition to other fripperies such as mobile pay wallets, Jio Money; cloud storage, Jio Drive; and streaming filmed entertainment, Jio Play, in order to differentiate itself.

Slashing rates may just prove to be a suicidal strategy.

However, if Reliance has trouble in getting all those new customers it has talked about and find difficulty poaching from rivals, it may just be forced to go for broke by doing things like offering free voice with its data packages.

If so, the gloves will come off in a hurry and what you will see if a telecom slugfest of gigantic proportion. The only ones smiling will be Indian consumers.

Editorial standards