Reliance Jio's latest gambit will cause another round of disruption

Price wars, capex to hit earnings growth of top telecom players

Reliance Jio’s latest gambit will cause another round of disruption in the telecom industry. To recap, Jio will offer free 4G feature phones with locked SIMs. It will take a deposit of Rs 1,500 per phone, to be refunded after three years. The tariff will be Rs 153 per month, or Rs 54 per week, for all-you-can-eat plans in voice and data. The handset will be pre-loaded with multiple entertainment apps and also be capable of net-surfing. About 650 million Indians use feature phones, mostly for voice calls, on 2G or 2.5G networks. Most feature phone users have a monthly spend, or average revenue per user (ARPU) of between Rs 75 and Rs 100. Jio is targeting the creamy layer of feature phone users and might persuade 100 million-odd to scale up. Jio will mean doubling monthly spends, as well as putting down the deposit. In return, they may consume more entertainment and make unlimited voice calls. 

Carriers offer similar deals of free phones with locked SIM everywhere. Jio gets an interest-free loan of Rs 1,500 per phone. The instrument probably costs about that much and the cost of the phone is being amortised in tariffs. The deposit is worth about Rs 450-500 interest-equivalent and of course, subscription revenues are Rs 5,500 over three years. In addition, Jio channels gain traction. (Incidentally, the deposit concept could be tax-efficient if it avoids the Goods and Services Tax but the implications are unclear.) Reliance has sunk Rs 2 lakh crore into the telecom subsidiary. Jio is funded by equity of Rs 70,864 crore and debt of Rs 1.24 lakh crore. The equity component includes optionally convertible debentures for Rs 33,785 crore issued to the parent, and the debt includes deferred spectrum liabilities, and credit from suppliers. 

Jio has around 110 million users at present, all on smartphones. Subscriber growth is said to have slowed a lot after services became paid. The current base mostly consists of dual SIM users, who also use another operator.  

That can be inferred from sector data.  Jio has acquired  9-10 per cent of the market in terms of subscriber base. But, revenue market share is estimated at only about four per cent. The disruptive impact is visible — overall, sector revenues declined by 15 per cent year-on-year in the March quarter. Estimates from analysts suggest Jio needs to generate around Rs 45,000 crore in revenue to hit break-even after interest and depreciation. It would need about Rs 22,000 crore for break-even at operating level, before interest and depreciation. Assuming Jio does line-up 200 million-odd customers, back of the envelope calculations indicate it would need an ARPU of Rs 185-plus to hit break-even. This could be possible. For comparison, Airtel has 265 million Indian users, with a standalone India revenue of Rs 62,000 crore. The ARPU is Rs 196-plus. 

Subscribers to the new offer will be single SIM and, probably, migrate from other operators. Other operators will then be pushed into launching similar schemes to try and retain voice-focused users. They will have to spend on 4G networks to compete on data offerings.  Unlike Jio, which has a pure 4G network, others must also maintain their 2.5G and 2G networks for low-end customers, who don’t migrate to 4G. That means more expenditure. The industry is already struggling due to high spectrum auction bids, which forced operators to take on huge debt. Competition makes it impossible to charge high tariffs and this ‘free handset’ offer will push them into more such offers. Consolidation is already happening. Smaller operators have already been pushed to the wall and soon, most will be unable to continue operations.  A year or so down the line, there could be a situation where only three operators are left in the fray. Again, that mirrors the situations in other mature markets. 

Jio is backed by the massive resources of its parent. Vodafone-Idea also has deep pockets. So does Airtel. But, it’s possible that none of them will make serious profits for a long time, since it’s really hard to see earnings growth in a scenario of continuous capex and unending price wars. 

India is now a mature market, in the sense that there won’t be much subscriber growth, with over a billion active connections already. Subscribers will surely move up the ARPU ladder. But, that’s dependent on overall per capita growth. Sector valuations are likely to depend on merger rumours, and on projections of how the revenue market share is sliced up long-term.