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The telecom sector is likely to face tough times with Telecom Regulatory Authority of India (TRAI) expected to announce base rates for spectrum auction. More importantly, the sector also faces the imminent launch of Reliance Jio in early 2015.
Reliance Jio is expected to launch its 4G services in March 2015, but the sector is already nervous. Bharti Airtel said that it will offer 4G services at or below 3G rates. Within 24 hours of this announcement, Reliance Communications announced an Rs 999 monthly rental plan with unlimited downloads. Bharti Airtel offers 10 GB of data on 4G at Rs 999 which is 33% cheaper than its 10 GB data variant on 3G which is priced at Rs 1,499.
Broking firm Credit Suisse (CS) terms this development as a significant event in the lifecycle of 3G in India. CS says that they foresee a situation where 3G networks will be competing against newer networks of far superior capability (on speed, coverage and cost). This, CS feels, is a good reason to be worried about the fate of 3G investments/ profitability in India. What’s more, the CS conclusion does not take into account the added threat from Reliance Jio.
So what impact does 3G have on the performance of telecom companies that has CS worried?
According to CS, for Bharti Airtel and Idea Cellular 60% and 40% of increase in mobile EBITDA over the last two years was driven by 3G data growth. Indian telcos currently enjoy a high EBITDA margin of about 70% on their 3G data business (on an incremental costing basis).
Over the past few quarters, contribution from data services to the topline as well as EBITDA have been increasing. CS has retained a negative stance on the sector on account of aggressive pricing in data segment even before Reliance Jio has entered the market.
Meanwhile, Reliance Jio is gearing up to launch its 4G services across the country. The company has approached Department of Telecom for a network test to be conducted along with security agencies. In the first phase of the launch, 5,000 towns and cities accounting for over 90% of urban India, and 215,000 villages will be covered. In the second phase, 600,000 villages are likely to be covered. The company has already entered into agreements with telecom tower companies for leasing their assets.
Rating agency Fitch had in a report on the telecom sector said that Reliance Jio’s entry would intensify competition in the data segment and may cause data tariffs to decline by 20%. CS points out that data/3G growth remains the only major positive factor that one can build a bull case on for Indian telcos.
CS says that 3G on 2100 MHz is inferior to 4G on 1800 MHz in almost all aspects (less efficient technology on a higher spectrum band)—except probably in terms of device price point, a factor that will likely fade with time. There may not be any market for 3G on 2100 MHz left in India unless operators price 3G on 2100 MHz at a significant discount to 4G on 1800 MHz.
In order for 3G service to survive, they will have to beat Reliance Jio at its own game. But whether they have the room to bear the financial cost of competing on Reliance Jio’s pricing is something only time will tell.
