Mobile telephony becomes a three-horse game

Market share of Airtel, Vodafone & Idea rises to 70% from 60% in 2010 and 50% in 2008

Mobile telephony has become a three-horse game in India, with the big three operators — Airtel, Vodafone and Idea — continuing to grab market share from their smaller rivals. The three now account for nearly 70 per cent of the industry’s revenue, compared with 60 per cent three years ago and about 50 per cent five years back.

Their gain has coincided with a steady decline in the revenue market share of BSNL, Reliance Communications and Tata Tele. Aircel is the only small operator that has been successful in protecting its turf. But, with a national revenue share of less than five per cent, it has stayed limited to a regional player in a rapidly consolidating industry. Analysts expect this trend to continue making it tough for existing small operators or new entrants to break into the industry (see chart).

“The mobile industry is fast maturing and it’s increasingly behaving like a consumer industry, where top brands account for the bulk of the industry’s revenues and profitability,” says Shobhit Khare, telecom analyst, Motilal Oswal Securities. (Click here for charts)

Mobile telephony is highly scaleable and the only way to stay profitable is through grabbing a larger share of the industry’s revenue pie. The operators that have been successful in achieving this have seen a dramatic improvement in their finances. That gives them the fire power to grow even faster. But those that have failed are financially struggling and risk losing out to winners.

The biggest gainer in this regard has been Idea Cellular, followed by Vodafone. Over the past five years, Idea has nearly tripled its quarterly adjusted gross revenues (AGR) — to around Rs 5,400 crore in the June quarter of this year from Rs 3,000 crore in the corresponding quarter of 2010 and Rs 1,800 crore in that of 2008 — according to Telecom Regulatory Authority of India figures. This has enabled the Aditya Birla group company to nearly double its revenue market share in five years to a little over 15 per cent. A higher revenue enabled Idea to remain profitable, despite the price war in industry that started after many new operators won new 2G licences in 2008.

During this period, Vodafone’s quarterly revenue doubled to Rs 7,500 crore in June this year, from Rs 3,800 crore five year ago.

The UK-based telco now accounts for 22 per cent of the industry’s revenue — up from less than 17 per cent in 2008. Bharti Airtel’s revenue growth kept pace during the period, rising around 50 per cent and allowing the company to maintain its revenue share at around 30 per cent.

In comparison, the revenues of Reliance Communications (RCom), BSNL and Tata Teleservices were nearly unchanged or grew marginally during the period, putting the companies in financial difficulty. RCom’s quarterly revenue declined to Rs 2,741 crore in June this year, from Rs 3,018 crore five years ago, while Tata Teleservices’ revenues increased around 40 per cent during the period to Rs 2,645 crore in June this year. BSNL’s revenue from its mobile operations increased just 10 per cent over the past five years. The net operating cost rose much faster during the period, leading to a sharp contraction in profitability for these operators.

“A majority of a network’s operating costs is fixed and not directly linked to revenues and subscribers. A slow movement in revenues puts a lot of pressure on profitability and balance sheet,” says Sivarama Krishnan, executive director (risk advisory services), PwC India. RCom’s net profit has shrunk nearly 70 per cent over the past five years, while Tata Tele’s losses have doubled.

A larger revenue share also provides operators scaleability in their branding and marketing spends. As mobile connections are increasingly marketed and sold like FMCG products, it favours bigger operators.

Experts, however, say it is too early to write off small operators. “It takes time to establish oneself in the telecom business and the big three are three of the oldest operators. That has aided their dominance. The situation on the ground mifght change in a few years as others get more time to establish their brands and recover their fixed cost,” says PwC’s Sivarama.

India is a huge market with a lot of upside potential and not every operator has to worry about a national presence for being financially successful. There could be strong regional operators that might co-exist with national players. “Aircel dominates Tamil Nadu and Assam. It can leverage this to grow in neighbouring circles, without being outflanked by the biggies,” says Motilal Oswal’s Khare.