In any mature market there is space for only three big players who can be in all segments. Those three right now are Airtel, Jio and Vodafone-Idea.
The rest must become niche players, or MVNOs – mobile virtual network operators, who focus on niches using networks owned by the big boys.
The astonishing speed at which the Indian telecom industry is consolidating and weeding out the weak players suggests that competition will now be down to the Big Three private operators and one from public sector, BSNL (plus MTNL).
The industry’s changed shape and colour in just about a year after the entry of Reliance Jio is noteworthy. In the last 12 months, we saw one mega merger (Vodafone-Idea), two distress sales (Telenor and Tata Teleservices to Bharti Airtel), one merger collapse (Reliance Communications and Aircel), and tariffs nosediving.
Thanks to its plans unravelling, Reliance Communications (RCom) is now effectively in exit mode, after announcing a closure of its 2G services and asking lenders to take 51 per cent in the company post-debt conversion. Effectively, RCom’s assets will be acquired by one of the big boys through an auction process.
With a triopoly now the only reality, since the public sector can be counted upon to remain a laggard, competition will depend on whether the regulator’s norms for the creation of a new licensee category in mobile virtual network operators (MVNOs) allow new players to enter profitably.
Under the regulations announced last year by the Telecom Regulatory Authority of India (TRAI), MVNOs are essentially defined as operators who can own no spectrum; they will have to lease it from the main mobile players. The regulations say the following: “Any Indian company having a net worth of Rs 10 crore for Metro and category ‘A’ telecom circles, Rs 5 crore for category ‘B’ and Rs 3 crore for category ‘C’ service area, and with paid-up capital of 10 per cent of the prescribed net worth and satisfying licence conditions like foreign direct investment (FDI) and substantial equity would be eligible to apply for MVNO licence.” MVNOs will have no specific rollout obligations – which means they can enter and exit when they want – and can be 74 per cent foreign-owned. They will exist as appendages of the main operators, but can focus on any profitable niche they find.
MVNOs can provide competition by being low on overheads, and by their ability to focus on segments where the competition is low. Since they will use spectrum already owned by the main mobile operators, they will essentially buy unused or underused spectrum in bulk, thus helping the big boys with higher revenues. However, the downside is they may also target the latter’s high-value customers.
Logically, weak players like RCom can seek to restyle themselves as MVNOs, assuming they want to stay in the business over the long term. Internet service providers can also enter the business if they want to. Telecom players who put optical cables into your home or office to offer high-speed Wi-Fi services could conceivably also offer additional wireless services in high-penetration office areas as MVNOs.
Apart from the possible entry of MVNOs, it would be interesting to speculate on how the next year will unfold, now that the consolidation is effectively nearing completion, with the only unfinished business being Malaysian Maxis-controlled Aircel. It will get sold at some point in the coming year, one presumes.
Here is what the crystal ball shows right now.
First, tariffs have possibly bottomed out, with Reliance Jio now announcing an increase in tariffs, and proposing to rationalise them further in the coming months. This means the industry’s profit curve will now bottom out and start stabilising before rising again. For consumers, this means slightly rising tariffs, but much better data services.
Second, the industry is rapidly moving out of 3G services and focusing on 4G VoLTE (Voice over Long-Term Evolution). 2G services are almost gone, and Airtel has announced a 3G phase-out over the next two years. Voice over LTE will mean improving call quality as data speeds are much faster than on 2G and 3G networks. With Reliance Jio using IP (internet protocol) for voice, voice has effectively become data, and it will be offered at bare minimum prices to all users. Data is the future of telecom growth.
Three, as the industry consolidates, the chances are tariffs will move from being purely usage based, to monthly package-based fixed payments, as pioneered by Jio. The monthly packages will come with data plans and calls attached. Post-paid plans may well shrink further, except for enterprises and large users.
Four, government revenues from spectrum and other charges will have to taper off, as the industry consolidates and optimises the use of spectrum already bought at high prices. We will not see aggressive bidding in future auctions, and the number of bidders will be fewer, with those exiting the business leaving enough spectrum available for their acquirers.
Five, the one player that has done absolutely nothing while all these mating dances were going on in the industry is the public sector Bharat Sanchar Nigam Limited (BSNL), and it smaller sibling Mahanagar Telephone Nigam Limited (MTNL). With the dust settling after the private sector scrimmage, one can expect two possible moves from government: a merger of BSNL and MTNL which allows the former to list indirectly (as the latter is already listed). This will allow the government to offload equity, and – at some point – privatise BSNL, if it can summon up the political will to do so.
A short-term improvement in BSNL’s revenues cannot be ruled out as tariffs bottom out in the industry from now on. BSNL can survive as a small player if it scales down staffing and manages to become leaner. But it will always be a distant No 4 in the telecom game.
Six, the endgame is still not clear on several fronts even after this rapid consolidation. For example, we still do not know how and when Aircel will choose to exit. Also, we do not know whether the Vodafone-Idea merger will finally be consummated, since both partners continue to maintain their separate identities. Logically, only one brand should survive; having multiple brands offering the same services makes no sense. Also, mergers of equals do not survive the test of time, and it is doubtful if Vodafone and the Birlas will want to stay in an uneasy marriage of convenience forever. At some point, one of them must exit, or agree to remain a secondary investor with less say in management.
Seven, the clear winners in the game so far will be Reliance Jio and Airtel. The former will benefit from bidding for RCom if it comes up for auction, and has the advantage of being bankrolled by Reliance Industries which has huge cash flows from its oil, refining and petrochemicals businesses. Airtel, which will end up with nearly 370 million subscribers (as at the end of July 2017), will also gain traction as it seamlessly incorporates the customer acquisitions from Telenor and Tata Tele, mostly without their liabilities.
Eight, with 104 million subscribers, BSNL and MTNL can remain niche players if they keep staying lean and shed excess manpower. If the government wants to retain one foot in the telecom business, it can keep them and run them professionally, while containing losses to a minimum. But the better option is still to divest steadily, and/or offer the merged BSNL-MTNL combine for partnership with a private entity after staff are taken care of through voluntary retirements. As a permanent fixture in the state’s control, BSNL risks the possibility of becoming another liability like Air India.
The Rule of Three, an idea developed by Professors Jagdish Sheth and Rajendra Sisodia, says that in any mature market there is space for only three big players who can be in all segments. Those three right now are Airtel, Jio and Vodafone-Idea. The rest must become niche players, or MVNOs – mobile virtual network operators, who focus on niches using networks owned by the big boys.
(A part of this article was first published in DB Post)