Telecom will not be a cash cow in the foreseeable future, and the shift to 5G will need more imaginative spectrum pricing policies than those followed in the past.
High spectrum charges are no longer viable.
Three years after Reliance Jio upended the existing order in the telecom industry with super-low tariffs and data-driven market expansion, the industry is now clearly putting its bloody tariff wars behind it.
Not only are price wars over, but free voice calls are also over. Revenue bonanzas from telecom will taper off for a while, and future growth will demand more investment in networks and equipment, which implies that tariffs will have to keep rising steadily.
The only reason why this is happening now and not six or 12 months later is the Supreme Court’s verdict in the adjusted gross revenues (AGR) case last month, which went against the telcos. With past overdues and penalties of Rs 1.4 lakh crore now hanging like a Damocles’ Sword over the industry’s head, both Airtel and Vodafone Idea lost no time in reporting mind-numbing losses in the last quarter of Rs 23,045 crore and Rs 50,922 crore respectively.
If that set the stage for both companies to announce tariff increases from December, Jio followed suit for another reason: the decision of the Telecom Regulatory Authority of India (TRAI) to review its old decision to abolish interconnect user charges (IUC) from January 2020. This forced Jio to start charging for voice calls, and it may now not be unhappy about raising tariffs from December too. The biggest beneficiary of the initial cut and proposed abolition of IUC was Jio, which could then offer free voice calls on its VoIP (voice over internet protocol) network, by focusing on selling data. This is what made Jio No 2 in three years, and India the largest per capita data consumer in the world, consuming 9.8 Gb monthly.
But, clearly, low tariffs and high data usage are not sustainable. November-December 2019 is when the industry’s flight path has been decisively altered.
A close look at the crystal ball reveals the following:
One, growth in future will come from a deepening of the market and increases in average revenues per user (ARPUs), not growth in subscriber numbers alone. At 1.173 billion users, the market for users is saturated in all urban and semi-urban areas, with only the rural markets available for low-value growth. But with ARPUs stuck in the Rs 100-130 range, and tariffs set to rise, even that is in question.
In September, Jio’s subscriber additions dipped below 7 million, even as Airtel and Vodafone Idea lost 2.38 million and 2.57 million subscribers. The era of Jio growing at the cost of the other telcos is tapering down.
Two, in a three-player market (we can assume that public sector Bharat Sanchar Nigam Limited will not seek to grow its current under 10 per cent market share by resorting to more price wars). The battle will be among the remaining three, where Vodafone is No 1 (barely) with a subscriber market share of 31.73 per cent, followed by Jio with 30.26 per cent and Airtel with 27.7 per cent. It is difficult to envisage a stable market with three nearly equal players. At least one has to shrink and become a niche player.
One should bet on Vodafone Idea being the one, even though it is more than likely that Singtel, the key foreign stakeholder in Airtel, will play a larger role in future as more capital is needed for investment. Airtel could remain in the game with new owners. In the case of Vodafone Idea, the partnership between Vodafone Group and the Birlas, currently nearly equal, could tilt in favour of the one who is willing to invest big bucks in the company.
Three, free voice calls are a thing of the past, though it could survive in a limited form within the same network, where IUC charges will not apply. Revenue growth, though, will come only from data and higher ARPUs.
Four, given the dramatic shift in market demand towards data consumption, the Top 3 incumbents will now have to invest more in networks and equipment, since data growth cannot be sustained without regular additions to bandwidth. This is another reason why tariffs have nowhere to go but up.
The government has to play a facilitative role in future, and revenue growth can come only from rapid growth in industry incomes and not high spectrum charges. Telecom will not be a cash cow in the foreseeable future, and the shift to 5G will need more imaginative spectrum pricing policies than those followed in the past. High spectrum charges are no longer viable.