Reliance Jio's success is still a long distance call

Despite the seemingly sharp discount at which Reliance Jio is offering its products, analysts have just reduced the profitability of the two existing telcos

Don't want to miss the best from Business Standard?

As the dust begins to settle after Reliance Jio’s tariff card was made public, analysts and telecom experts are separating the wheat from the chaff.

What was expected from Reliance was that it would come to the market with a bang, and it did not disappoint. Prima facie the tariffs look disruptive resulting in analysts reducing earning forecast of other players in the sector like Bharti Airtel and Idea Cellular. Broking firm CLSA has reduced Bharti Airtel’s FY17-18 EPS by 9-16 per cent, while that of Idea Cellular by 13-19 per cent during the same period.

So despite the seemingly sharp discount at which Reliance Jio is offering its products, analysts have merely reduced the profitability of the two existing telcos. Neither of the two is expected to post losses in the foreseeable future. The way the stock prices of Bharti Airtel and Idea fell it gave an impression that their survival was at stake.

Furthermore, there are still a lot of uncertainties that needs to be taken into account. First and perhaps the most important factor is the quality of service. Service levels by the existing telcos leaves a lot to be desired. But Reliance’s foray in telecom in its earlier avatar was not too good either. The only way Reliance Jio can make a dent on the existing players, especially in the higher end consumer bracket is by way of quality service. This is the segment which will not fall for freebies or would switch service providers for a small change in pricing.

Second point is also slightly related to the first. The technology Reliance Jio is using has not been tested at such a wide scale anywhere in the world. Earlier reports pointed to the issue of stability as a reason for delay in the launch date. Initial experience is important to retain consumers.

Third is the ‘free’ element in the offering, that is the voice calling. Nothing in this world is free, same goes for Jio’s offerings. Reliance uses an all IP network, which means even voice transmission uses the data network as pointed out by Director General of GSM industry body Rajan S Matthews. Thus while there might be no bill for voice calling, data bill will keep on accumulating even though a consumer might not actually use any data app.

There is further complication in this ‘free voice calling’ offering. Former Airtel CEO Sanjay Kapoor, pointed out in a CNBC interview that in the present system the receiver of a call does not pays for a call. But when voice is using the data pipeline both receiving party and calling party will pay because data gets consumed both ways.

It will probably take a few billing cycle for a consumer to realise why his data bill is increasing despite his low usage. Indian telecom markets are still voice heavy with nearly three-fourth of revenue coming from voice. Though data is faster growing and more remunerative, voice is still the preferred mode of communication, especially since instrument costs are high. Reliance has tried to address this issue by launching its own cheaper handsets, success of which will be known over the next six months.

The real test of the impact Reliance Jio will be making in the market will be post December 2016 when the current plan of freebies expire. CLSA rightly pointed out that the key for Jio will be customer retention beyond free offers. Reliance Jio with its launch might be successful in moving the price sensitive costumers to its fold, but the real test will be in retaining them and attracting the bigger consumers to its fold.

Irrespective of who wins in the price war, competition will ensure that consumer will be the king. Bharti Airtel and Idea Cellular will not be giving away their clients on a platter, they have already reduced rates and giving the high operating margin levels, they have room for some more. The key will be in controlling debt levels in the price war, the winner will be the one with lowest leverage.