Declining ARPU, shrinking profits may make survival hard for smaller telcos

Telenor, Tata Tele (Mah), Aircel likely to face price pressure, as industry heads for consolidation

As plummeting ARPU (average revenue per unit) and shrinking profits make survival difficult for smaller players in the telecom business, the industry is poised for consolidation in the coming years, the process for which began with the announcement of Idea Cellular and Vodafone's merger.

Bharti Airtel, the country's largest telecom operator, reported a 55 per cent fall in its net profit for the third quarter (Oct-Dec) at Rs 504 crore. The decline in income can be attributed to the impact of Reliance Jio's entry and its free voice and data offers.

During the last three quarters of the current financial year (2016-17), Bharti Airtel has reported a steady decline in its ARPU. The company's ARPU fell nearly seven per cent quarter-on-quarter to Rs 123 in the October-December period.

Smaller companies are expected to find it difficult to sustain price pressure and the industry may witness consolidation in the coming years.

Experts are of the view that the current situation in the sector is becoming difficult for companies like Telenor, Tata Teleservices (Maharashtra) Ltd, Aircel etc to survive. "The current challenge for a smaller player is to ensure that it does not lose out on its existing customers," an analyst said.

The talk of consolidation in the sector can be partially attributed to the entry of Reliance Jio, which forayed into the Indian telecom market in September 2016, starting a price war in the industry with its competitive tariffs.

The new entrant also forced the incumbents to re-think their business strategy which was evident from the announcement of Idea-Vodafone deal.

On January 31, UK-based telecom giant Vodafone said it was in talks for an all-stock merger of its unlisted Indian subsidiary with rival Idea Cellular.

The proposed merger excludes Vodafone India's 42 per cent stake in Indus Towers.

"Logically it makes sense for smaller players to merge with bigger players more so in order to sustain price pressure," another expert said.

However, the experts are divided on their view about the number of telecom players remaining in business post consolidation.

Given the escalating cost of doing business the revenue opportunity is decreasing and consolidation is an inevitable part of the industry, Rajan S Mathews, Director General, Cellular Operators Association of India (COAI) said.

He added that consolidation in the industry is good at this point in time as it would lead to greater economies of scale, optimum utilization of spectrum and efficient use of marketing-spend by the companies.

But the flipside of consolidation in the sector is birth of a cartel. However, Mathews says that can happen even when there are 10 players. It requires a strong regulatory focus to stop cartelization.

According to a senior analyst, India is a $40 billion industry compared with the US, which is $150 billion, and from India's standpoint 4-5 operators should be there in the medium to long term.

Consolidation in the Indian context means 4-5 companies and not three, as India is not just a country but it is 22 circles, where some players are dominant on one circle and some in other circles, the analyst added.