By Aman Bagaria
Reliance Jio entered the telecom industry in the second quarter of FY16 and brought with it a price war that changed the way that all major players in the sector used to operate. How this price war came about is pretty easy to understand. RJio was a newcomer in the market while telecom operators like Bharti Airtel, Vodafone and Idea—the top three—had consolidated their positions in the market by controlling a majority of the market share. RJio was interested in a significant share of the market and could afford to keep its prices low, even run into losses, as it was a newcomer and already had expectations of running into losses for the first couple of financial years. Thus, started the price wars.
The price wars
When RJio entered the market, the top three telecom companies had over 75% of the market share. These numbers changed as RJio adopted aggressive pricing that included a free trial period with frequent extensions to grab the market share. In only the first couple of quarters, the company added 50 million subscribers. RJio provided for free, voice services that accounted for over 80% of the sector’s revenue. Their data rates were also priced well below the market leaders. This had a double impact on the market. With RJio offering free deals left, right and centre in its first financial year, the market incumbents were forced to take steps towards customer retention. The market incumbents started pricing their products aggressively and even went so far as to re-adjust to a lower ARPU (Average Revenue per User) to retain subscribers. Another impact was the increase in the utilization of fourth generation technology (4G) services. A situation arose where Bharti Airtel and Idea reported a fall in their operating profits while trying to bridge the gap between RJio’s data offering and its own rates. The need of the hour for the top three was to showcase their ability to retain their higher ARPU customers, keep costs down and to maintain their market shares through all of this.
What followed over the next year was consolidation by the players in the market. Players without a major share in the market exited while big players like Vodafone and Idea started the process of merging with RComm, MTS and Aircel while Bharti Airtel has acquired Telenor’s India business. With RJio acquiring RComm’s spectrum, the telecom sector could enter its most bitter phase in 2018 between the three big players and the other players will be completely marginalised.
With this deal, there are three companies with enough spectrum, enough customers, the correct technology and enough resources to fight it out over the dominance of the telecom sector. While RJio shows no signs of slowing down, Bharti Airtel is persistent to not cede its hard position in the telecom field. Vodafone and Idea by combining forces have also become so big that they can battle until the very end.
The future for the sector
For a continuously growing economy, FY16 had seen a growth rate of only 6% in the telecom industry while the industry had seen double-digit revenue growth over the previous four financial years. The reduction in revenue growth was caused due to the price wars as has been already been discussed. This has created pressure on the cash flow situation of the companies and the expected return on their investments. Bharti Airtel declared a 39% fall in its profit for the quarter ending December 2017. Their ARPU has fallen from Rs 145 to Rs 123 and that seems to be the least of their worries. The major focus for each operator still remains on increasing the revenue base with RJio’s rampage does not seem to be nearing its end. RJio slashed its rates once again last month with the intentions of attaining the 250 million subscriber mark which shall enable it to have more than a twenty percent share of the market, containing only three major players.
For the consumer, the price wars have been a blessing in disguise. With the telecom operators fighting over gaining more subscribers, the prices have been at an all-time low and this was the budget solution to all their communication needs. In the short run, the prices may still get cheaper with attractive offers all around. However, what the price wars have resulted in is that it has left only three major companies in the sector and that could become harmful to the consumer in the long run.
Another approach to the issue at hand is the one taken by the Fitch Ratings Inc which is one of the big three credit rating agencies. The price wars shall have to cease sooner or later, with RJio having to switch gears from gaining customers to making reasonable returns on its investment in their sector. This could ease the pressure on the other players in the market. It should also lead to an increase in the ARPU for each of the companies. The outlook for the Indian telecom industry is improving and the results in the just-concluded sector could have been a low point for Bharti Airtel and other established players. Fitch reports have said that the telecom sector outlook has been changed to stable in 2018 from negative in 2017 as the competition may ease now that the industry consolidation is all but complete. Fitch has also said that the industry revenue growth is likely to be in the mid-single digits after a decline in 2017. However, it remains to be seen, as to when RJio actually decides to make the switch from focusing on market share to focusing on their revenue. Till then, the consumer can enjoy services at relatively low costs, while the companies shall continue to battle it out.
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