Anil Ambani's telecom monopoly forecast unrealistic, unless rules change

While experts remain divided in their views over the new pecking order, unlike Ambani, no one seems to be concluding that there might be a monopoly

Anil Ambani’s Reliance Communications has been one of the casualties of changing dynamics in India’s telecom services market since the entry of Reliance Jio Infocomm, part of his elder brother Mukesh Ambani’s group. Against this backdrop, the younger Ambani sparked a debate when, speaking at his Reliance Group’s annual general meeting on Tuesday, he referred to the telecom business as one that could become a ‘monopoly’.

Though he did not name any company, the indication was hard to miss for telecom experts, as Jio’s coming a like juggernaut and capturing 227 million customers in just over two years has forced several telcos, including Reliance Communications, out of business.

Will the telecom services market in the next few years be controlled by only two players — Bharti Airtel and Jio — with a small presence of BSNL? Or will it be a three-cornered battle, with Vodafone-Idea, the newly merged entity, now the largest player in terms of subscriber base, forming the third corner? Vodafone-Idea is also the biggest in terms of revenue market share, but that is depleting rapidly.

Experts remain divided in their views and a debate over the new pecking order rages on. But, unlike Anil Ambani, no one — not even a Jio insider — seems to be concluding that there might be a monopoly, with just one private player apart from BSNL dominating the market. BSNL, of course, might someday get divested, if the government is able to tackle the issue of its huge employee base.

There are several reasons by the idea of a monopoly is far-fetched.

For one, the competition law does not allow any one player to control a market share of more than 50 per cent in both revenue and subscriber base in any circle. So, even Vodafone and Idea had to pare their revenue and user base in some circles where together they controlled over 50 per cent market on both counts. In simple terms, Jio, which already controls 22.4 per cent of the mobile market by revenue, cannot increase its share to more than 50 per cent. Is that a monopoly Anil Ambani was referring to?

Secondly, even in the face of Jio’s huge investments, its rock-bottom rates, and an ability to leverage its new network with lower costs, Bharti Airtel has not ceded ground. There certainly has been some pressure on its margins — even India operations might be slipping into the red — but through a deft acquisitions of Telenor and TTSL (still awaiting approval), and by matching Jio tariffs wherever possible, Bharti Airtel has been able to maintain its revenue market share at 34.7 per cent. And it has not lost subscribers. So, it now has the ability to expand further by eating into Vodafone-Idea’s 300 million 2G customers by offering them a 4G alternative.

Bharti may not have the kind of cash surplus that Mukesh Ambani’s Reliance Industries generates from its other businesses to keep investing in Jio and raise debt at a low rate. But Bharti has a stable and financially sound partner in Singtel, for which India is a crowning glory outside of Singapore. Also, Bharti has low leverage, with a debt-to-Ebitda (earnings before interest, tax, depreciation and amortisation) of just four times, compared with Vodafone-Idea’s estimated 20.7 times even after cost reduction and synergies.

Thirdly, Bharti has valuable tower assets and a 42 per cent share in Indus Towers which it can monetise to fund investments in network expansion.

Fourthly, it also has the potential to monetise its Africa telecom business — it recently sold towers in Africa and telecom business in some countries and is also looking for an IPO for the business there — which has got over its problems and is now poised for growth.

The question now is whether Vodafone-Idea, which has seen its revenue market share fall steeply from over 42 per cent in the first quarter of 2017-18 to 34.7 per cent in the first quarter of 2018-19, be able to stem the tide. It will need a lot of investments to catch up in the 4G space. And network upgrade, especially with competitor Bharti investing Rs 240 billion this year, will substantially increase its own outgo in the next few years. According to analysts, Vodafone-Idea could require a fresh equity infusion as it hardly has any leeway for debt. It has some opportunities of monetising towers, but the question is whether the two partners are willing to put all the money needed to fight the battle. The new management team will have to answer the questions soon.

Those predicting a market with only two big players hypothetically assume two things: The merged Vodafone-Idea entity will lose subscribers and revenues, or it will sell out to one of the two other big players. Yet, any such deal would again come under the competition law, until of course the combined entity sees a dramatic erosion in its revenue and subscriber base. The only event that could clearly change the scenario — and Anil Ambani would then be right — is the government deciding to change the rules of competition in the telecom sector.