Reliance Jio offer may cap telecom realisations

The impact on telcos is not likely to be as much as initially expected

The launch announcement of a fourth-generation technology (4G) feature phone by Reliance Jio on Friday led to a sharp fall in telecom, cable and direct-to-home entities’ shares. 

The market was reacting to worry that the new phone and Jio Phone TV offer would lead to further downward pressure on these companies’ realisations. While the new phone and the plans are targeted at the mass market, and could see some response from users wishing to migrate to the multimedia experience, the impact on telecom companies is not likely to be as much as initially expected.

This is because the Street was expecting a phone in the Rs 500-1,000 range, with monthly rates at Rs 100 or less. Neither came through. While the device’s deposit is Rs 1,500, paid upfront (refunded in three years if the device is returned), rate plans start at Rs 153 a month, higher than the current sector average of revenue per user (Arpu) of Rs 120-130. The Rs 153 a month plan is almost similar to Jio’s current Rs 309 plan for two months (56 days). 

As the monthly Arpu of the 500-million feature phone users is typically around Rs 100, rates closer to this would have been a major worry for the incumbents. Especially Idea, which gets many users from smaller cities and towns. Still, it will be interesting to see how many users Jio can attract to its network with the new offerings that aims to deliver a better experience and value, at a slightly higher cost. Last September’s offers were targeted at data users, a relatively small segment but growing fast. Now, it is targeting a much larger market, which has potential users looking for an upgrade.

UBS analysts led by Navin Killa believe launch of the JioPhone should support mass market adoption of 4G data but the prices are not Arpu-dilutive. They expect Jio to improve its market share from smaller operators, leading to further consolidation of the market.

The disruption could come from the lower-priced and shorter-duration plans of Rs 24 and Rs 54, ranging from two days to a week, respectively. Analysts at Bank of America Merrill Lynch (BofA ML) believe the plans would increase the affordability of phone services and could prove disruptive, with other telcos forced to float similar plans. They don’t expect Jio to penetrate the mass market, as the monthly price of Rs 153 and deposit of Rs 1,500 is steep for low-income consumers. Low-priced voice plans of smaller operators, however, will be hit, as they lose their ‘value proposition’.

Investors, though, are especially worried about the impact JioPhone TV will have on Dish TV, the largest direct-to-home (DTH) company in the country, among others, including cable television operators. Jio also said subscribers to the Phone TV offer would get a cord which can connect to a TV, allowing users to view content for three-four hours. However, the 500 megabyte per user data cap will restrict the consumption to larger screens, given bandwidth constraints.  The fall in data prices has had an impact on the sector, as content consumption is increasingly tilting towards mobile phones, both due to lower prices and over-the-top applications of broadcasters, beside the declining cost of owning feature/smart phones. 

The Jio offer itself might not see many users switching, given the limited time they can watch TV. However, this could start a trend of long-term DTH Arpu coming under pressure, believe analysts at BofA ML. The DTH sector is already reeling under the impact of Free Dish and downtrading (users recharging with lower value monthly packs). Dish TV, given its larger share of rural customers, is impacted the most. Its realisations have been trending down, with the March 2017 quarter Arpu at Rs 134, from Rs 165 in the March 2016 quarter. Further, as Jio expands its fibre-to-home presence, both DTH operators and cable operators could face heat on the Arpu front.