MUMBAI // The launch of Reliance Jio in India's already competitive telecoms market has created a frenzy.
Companies are locked in aggressive price wars and a bitter feud is raging between Jio and rival operators over regulatory issues. As the battle intensifies, companies will have to fight for their survival, analysts say.
A US$84 billion airwave auction, which launched on Saturday, could be critical in determining the fate of operators, as they compete for spectrum to expand in the 4G data market.
Reliance Jio, part of Reliance Industries, an oil products-focused conglomerate controlled by Mukesh Ambani, India’s richest man, stormed into the market earlier this month, offering free calls for life, what it described as the world’s cheapest data and three months of free services. Mr Ambani has described data as “the new oil”. Reliance has ploughed more than 1.3 trillion rupees (Dh71.74bn) of investment into Jio so far.
“Jio is turning out to be a game changer,” says Ambarish Gupta, the chief executive and founder of Knowlarity Communications, a cloud telephony company. “Jio’s entry will give a boost to the consolidation to the industry. Weaker players will find it difficult to survive and hence will either merge or get acquired.”
Other observers note that they may be forced to exit the market completely.
Other operators have been rising up to the challenge, cutting tariffs in recent weeks. On Monday, Vodafone India cut its 3G and 4G data prices for new users to as low as half the rate of Jio, at 25 rupees a gigabyte. BSNL, a state-owned operator, has promised free voice calls for its users from next year, while Bharti Airtel has slashed data tariffs.
Vodafone, with it headquarters in the UK, armed itself in preparation for the spectrum auction, pumping more than $7bn of equity into its Indian subsidiary in the past six months.
There is a lot at stake, considering the demographics, with a population of more than 1.2 billion, more than half of which is under 25, and an expanding middle class.
“The telecommunications sector in India has grown exponentially to become the second largest network by subscribers in the world,” according to a report by KPMG.
It highlights that the sector contributes about 6.1 per cent to India’s GDP and directly creates about 2.2 million jobs and is one of the highest contributors of foreign direct investment (FDI) to the country. Meanwhile, investment into the industry has surged by about 220 per cent in the past four years, the report reveals.
Beyond price wars, there are other disputes brewing.
“The entry of Reliance Jio has also opened some contentious issues around various regulatory matters, principally around interconnect, which have pitted the major operators against Reliance Jio,” says Rajan Mathews, the director general of the Cellular Operators Association of India (Coai), a lobby group that has the major operators as its members, including Jio.
Letters to the Telecom Regulatory Authority of India (Trai) that have been made public show Coai describing Jio as “a backdoor operator”, while Jio has accused existing operators of “cartelisation”.
The arguments, between Jio and the three major telcos, are over interconnect points, tariff norms and number portability. Jio is maintaining that it has not been given enough interconnect points by Bharti Airtel, Idea and Vodafone, which, it says, results in millions of call failures a day when its users phone these other networks.
Reliance said in a statement on Tuesday that the call drops had “caused severe hardships to Indian customers”. “Airtel’s contention that the congestion has been caused by large-scale subscriber acquisition by [Jio] is not only unreasonable but also anti-competitive,” it said.
There has been some consolidation in the telecom sector in the past few years, with the number of operators reducing from 12 to five principal operators, says Mr Mathews. This consolidation is expected to continue.
“An effect that Reliance Jio has had is to hasten the consolidation in the market in order to compete with Jio,” says Mr Mathews. “Reliance Jio’s 4G network has been a differentiator but this is quickly being matched by competitors. Revenue growth is expected to be subdued but not materially altered as data usage by customers picks up. The major effect will be on profitability and margins which will continue to face downward pressure for at least the next four to six quarters.”
Tata announced earlier this year that it was looking for a buyer.
“It is expected that the top three or four will generate enough profits and market share to remain in business, while there will be increased pressure on the others to further consolidate or exit the market,” says Mr Mathews.
Meanwhile, the airwave auction will add to telcos’ already large piles of debt, says Mr Gupta. And it is not only Jio’s competitors that are suffering because of the rivalry. “How much and when will Reliance benefit from its telecom venture remains to be seen because Reliance is also incurring a huge cost on challenging the incumbents,” Mr Gupta says.
“Competition is indeed going to increase in the coming months. The consumers are going to benefit from the pricing war but it is yet to see how sustainable this model is.”
Telcos will be forced to go beyond simply offering the best prices. “With the consumer mindshare and loyalty switching at the drop of a hat, telecom operators must undividedly focus on what truly matters: delivering unparalleled customer experience,” says Mr Gupta. “The recent technology investments by Airtel and Vodafone on data analytics exemplify this. I believe, in the end, the winners in this game will be the ones who offer consistent and reliable experiences and not necessarily free services.”
Srividya Kannan, the founder and director of Avaali Solutions, a consulting and technology implementation services company based in Bangalore, says that Jio “is shaping the future of the marketplace” and is “forcing a shift towards a better network … and importantly acceleration in the movement towards 4G”.
She says that the telecom sector “remains the epicentre of growth and innovation for India”.
It is “the smaller and over leveraged telcos [that] will be most impacted”, Ms Kannan says.
“While in the short run, [the entry of Jio] may force existing providers to recalibrate their tariffs and put pressure on the earnings margin, in the mid to long run, this will definitely lead to a significant increase in volumes. There is also likely to be very aggressive bids in the upcoming spectrum auctions – a double whammy given that pressure on margins is also coming at a time of higher capital expenditure.”
Ultimately, there is a silver lining, Ms Kannan points out.
“The good news is that in a high-level context, all this is in complete alignment towards a truly digital India.”
Also, while Jio’s launch has been creating friction with other operators, its launch has led to something of a mending of ties between Mukesh Ambani and his younger brother, Anil. Mukesh was forced to hand over the telecom division, Reliance Communications, to Anil Ambani in 2005 as their late father Dhirubhai Ambani’s group was carved up between them amid a family feud.
Anil Ambani told shareholders on Tuesday that amid sharing of spectrum, towers and networks, there was a “virtual merger” between Reliance Communications and Jio. “Anil Ambani & Mukesh Ambani are working hand in hand to create the India that Shri Dhirubhai Ambani dreamt of”, Anil’s Reliance Group posted on Twitter.
business@thenational.ae
Follow The National's Business section on Twitter
