Jio vs the rest: Next round of telecom sector consolidation has just begun

From an industry that had a profit after tax of 15% of its revenues in 2007-08, its losses hit more than Rs 180 bn in 2016-17 even though the revenues doubled in the same period

In a six-part series, Business Standard looks at the best- and worst-performing large sectors of the past 10 years. In the first part, we look at the turning points in the telecom sector

For a customer using a mobile phone since 2007, it has been a dream run with voice calls now becoming free and unlimited compared to Rs 1 you had to fork out in 2007. Now you pay only for data at rock-bottom prices and monthly bills have dramatically halved in the past 18 months. 

Yet in stark contrast, the story of telcos in the last decade has been a topsy-turvy downhill battle, bruised by cut-throat competition, policy paralysis and Central Bureau of Investigation probes, high spectrum prices, and the stick of the Supreme Court, which cancelled over 122 licences. But the incumbents have also faltered, misreading the dramatic change which 4G data would unleash, thanks to the entry of Reliance Jio. 

From an industry that had a profit after tax of 15 per cent of its revenues in 2007-08, its losses hit more than Rs 180 billion in 2016-17 even though the revenues doubled in the same period. And its debt burden just went through the roof, increasing five-fold through the decade, which is close to double its overall revenues (see chart). As a result, many telcos like RCom that were unable to pay back loans sold their assets or, like Aircel, filed for bankruptcy.

The inevitable impact was that as many as eight companies such as STel, Loop, and Etisalat closed down operations, some like Telenor and MTS, which tried once again by acquiring the licence for a second time, failed miserably again. And desi players like Tata Teleservices and RCom that could not take the heat of competition unleased by the entry of Jio also called it a day. Together, estimates say, they lost more than Rs 1,500 billion in cash. 

Jio hastened the consolidation by its disruptive pricing, and now analysts say there will only be four players — Bharti, Vodafone-Idea, Jio and BSNL. 

So why did the dream story go sour in a decade? In 2007, two decisions made by the then telecom minister, A Raja, sowed the seeds of the tumultuous years ahead. First, he announced and then successfully conducted the auction for 3G spectrum in 2010, but limited the amount to only 5Mhz and with just enough for three players. This led to fierce competition. Incumbents forked out a staggering Rs 670 billion and this payout, together with large investments to roll out 3G, forced telcos to borrow. The combined debt of telcos nearly tripled between 2008-09 and 2011-12. 

Raja also changed the rules by giving licences on a first-come-first-served basis, allegedly to help his friends (he was found not guilty by court). He allowed five new players (two CDMA players were allowed to also offer GSM services) to come in. As a result, players doubled to 14. What ensued was cut-throat competition from 2010, with tariffs going down by half while the losses of the industry nearly doubled in just one year between 2010-11 and 2011-12. 

But the CAG in its report alleged that as a result of this method, the government made a notional loss of revenues of over Rs 1,760 billion. And in 2012 the Supreme Court decided to cancel 122 licences that were given following the Raja method. That forced many new operators to call it a day, raising questions on whether India was a safe place to invest. 

Yet fewer players did not mean the mayhem was over. In 2013 the government decided all spectrum would be auctioned and it would be delinked from services, providing telcos the opportunity to launch 2G, 3G and 4G from any spectrum band.

But the ensuing auctions, especially in 2015 for the valuable 900 Mhz band across the country (the licence for usage of this spectrum was expiring for incumbents and but it was popular for 4G services), led to a bloodbath and their prices went up three to five times the reserve price. Telcos forked out over Rs 1,090 billion to buy 900, 1800 and some 2100 band spectrum. So there was no respite from debt. 

But the bigger challenge was to take on Jio’s 4G LTE, whose potential most of them underestimated. But Jio, which launched in 2016, changed the game. It introduced unlimited voice calls and offered data at tariffs which were 95 per cent lower than what incumbents were offering. As a result, the average data use per subscriber shot up eight times within a year. 

With 160 million 4G data subscribers currently, Jio has left incumbent operators far behind in the data game. But incumbents say Jio has been given undue help by the Telecom Regulatory Authority of India (Trai), which has allowed it to offer free services for six months, slashed interconnect charges, reduced international roaming charges, and made it difficult for them to cut tariffs to take on Jio. As a result, they have lost revenues as well as margins. Trai denies these charges. 

Also any speculation that Jio might end the price war was belied when, in January, it unleashed the second phase of its war by reducing tariffs by over 50 per cent, forcing everyone to follow suit. Taking the Jio challenge of a 4G device at Rs 1,500, incumbents also looked at ways to bundle 4G phones for their customers.   

Analysts estimate that incumbents have to invest about Rs 750 billion in the next two years to build a pan-Indian 4G network and migrate their customers on 4G LTE rather than having varying networks (2G and 3G). That would also help them in reducing costs and increasing spectrum efficiency. Surely the next battle before full consolidation has just begun.

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