Telecom Trouble: Can data services offset the decline in voice revenues?

Reliance Jio's strategy of not charging for voice segment is not innovative, but the move could end up hurting incumbents in the near term

While its competitors may contend that Reliance Jio’s strategy of not charging for voice segment is not innovative, the move could well end up hurting incumbents in the near term. Though data revenue is expected to grow in the coming years, the question is whether the decline in voice revenues can be offset by the rise in income from data.

Voice revenues currently account for roughly 70% of total wireless revenues for the top three telecom operators in the country, down from roughly 80% two years ago. For Bharti, voice revenues grew by a mere 3.8% in the quarter ended June 2016, from a year ago, while for Vodafone and Idea, the comparable figures are -0.9 and 4.6 per cent.

By comparison, revenue from data services has shot up sharply. For the top three telecom operators, data revenues account for 21-24% of total wireless revenues, up from 11-12% two years ago. While more customers are now subscribing to data services, data usage per customer has also risen sharply over this period. For Bharti, data per customer has gone up from 495 MB at the end of the first quarter of 2014 to 904 MB at the end of the first quarter of 2016. For Vodafone, the comparable numbers are 427 MB and 671 MB

But how quickly the decline in voice revenue is offset by people paying more for data services is debatable. Analysts are skeptical and predict RJio’s entry will hurt incumbents. Kotak Institutional Equities has lowered its earnings forecasts for both Bharti and Idea. In the current financial year, it expects EBITDA for Bharti and Idea to fall by 0.3% and 1.4%, respectively. Its forecasts for the next few financial years have been lowered by a much larger magnitude presumably because by then Jio will have gained significant size.

Share of voice revenue for telecom operators has dipped to 70% from over 80% two years ago

Voice revenues as a percentage of wireless revenues

	14-Jun	14-Sep	14-Dec	15-Mar	15-Jun	15-Sep	15-Dec	16-Mar	16-Jun
Bharti	81.8	79.8	77.4	76.3	74.7	72.6	71.1	71.1	70.9
Vodafone	82.5	80.0	79.1	79.3	76.1	74.3	73.1	73.2	72.9
Idea	82.2	78.9	76.9	75.5	73.9	72.1	71.1	71.7	71.8

But revenue from data services has seen a sharp uptick

Data revenues as a percentage of wireless revenues

Bharti	12.4	14.5	16.2	17.7	19.2	21.5	23.1	23.3	23.7
Vodafone	12.0	14.4	15.2	16.2	18.9	20.6	21.2	21.1	22.4
Idea	11.5	14.0	15.7	16.9	17.7	19.6	20.3	20.2	21.0

 

While data subscribers have gone up, data usage per customer has also shot up

Usage per customer (MB)

	14-Jun	14-Sep	14-Dec	15-Mar	15-Jun	15-Sep	15-Dec	16-Mar	16-Jun
Bharti	495	563	622	656	706	765	843	859	904
Vodafone	427	477	512	532	560	618	652	641	671

 

With the entry of R-Jio, incumbents are under pressure

EBITDA margin (%)

	Earlier			Revised
	2017E	2018E	2019E	2017E	2018E	2019E
Bharti	36.1	36.6	39	35.8	33.7	34.6
Idea	32.6	32.6	33.1	31.2	28.2	28.7

(Source: Kotak Institutional Equities)