I am not going to predict when Jio is going to launch, because the company has constantly delayed it but it’s widely believed that once Jio manages to deploy its own and Rcom’s 850 MHz band all over India, the launch would finally happen. Anyhow, whenever Jio launches, it’s going to have significant implications on the industry, some of which I am going to detail here.
1. The telecom industry would bleed
Reliance Jio is entering on a pan India basis and with a lot of network capacity. The operator aims to have 100 million subscribers in the first 12 months of its network launch. Currently the top three telecom operators in India i.e. Airtel, Vodafone and Idea combined also don’t have 100 million 3G/4G subscribers. So if Jio is to hit its 100 million target within a year of launching operations, not only does it have to poach data subscribers from other operators, but also convince people who have not previously subscribed to data packs to start using data. The easiest (and possibly the only) way for both scenarios would be to reduce prices. If Jio provides data at cheap rates, then other operators will have to reduce their prices as well. Most Indian telecom operators have razor thin margins and a very big reason why they’re able to operate at such razor thin margins is because of their scale. If Jio starts drawing millions of subscribers from other operators, then inevitably other operators would have to reduce their prices as well in order to be able to maintain their scale. During all this, expect quite a lot of the currently profitable operators to go in the red.
2. An expanded market for data
While the price war with Jio would make some of the currently profitable operators face losses, it would ultimately lead to an expanded market which would be a big positive for the industry as a whole. A big reason why voice calling is so cheap in India is because of the sheer number of subscribers Indian telecom operators have, while almost all of these subscribers make calls, the number of subscribers who use data is just a fraction. But even mobile voice calling used to be something that only a few people in India could afford initially but intense competition in the Indian telecom industry had made voice calling so cheap that a large number of people could afford it later on. The fall in calling rates was accompanied by an equally meteoric rise in volume because existing voice users were talking for more minutes than before and newer voice subscribers were coming. This huge expansion in volume helped Indian telecom operators operate profitably even though the price per minute had fallen. Of course the key here was competition. Reliance Jio is going to bring similar competition to the data market. If the price per GB/MB falls, then not only will current internet users use more data than before, but even people who have previously resisted using data because of its high price would start using data. Just like voice calls, this expanded data volume would let telecom operators price data cheaper and still make profit as the cost would distributed amongst a larger set of users using more data than before.
3. Difference between voice and data
Even though I believe that an expanded data market would reduce the price per MB/GB, there are quite a lot of differences between voice and data, the three key differences I’ll mention here –
a) Price per second vs price per KB
Currently, voice calling rates on a per second basis are extremely cheap ranging from 1-1.5p/second. This really helps voice to be used even amongst the poorest, as a 15-20 second call costs less than 50 paise. Although call rates on a per second basis are very low, the same is not true for data. Currently if you don’t have a data pack, operators charge anywhere from 4p/10KB – 10p/10KB of data. This is extremely expensive considering that most Android apps consume several MBs of data in the background. If you use data without a data pack, then safe to say your balance would be over in a couple of minutes. However leaked pricing indicates that Jio could price its data as low as 0.5p/10KB without a data pack which means even a short 10MB data session would cost only Rs 5 on Jio whereas the same today without a data pack can cost as much as Rs 40 – Rs 100. The reason why the price per KB matters is because not everyone is going to able to pay upfront for a data pack and there would be several people who would use data only occasionally. Of course, considering the amount of data Android apps consume in the background it makes sense to subscribe to a data pack, but there is always the chance that price per KB can fall even further.
b) Free user
As far as voice calls are concerned, even if a user is on a telecom operator’s network and has zero balance, he’s still a profitable consumer as long as he gets a lot of incoming calls. In case of voice calls, the concept of termination fee meant that even if a user on a telecom operator’s network didn’t have any balance, the termination fee the operator got for every minute of incoming voice call made having user on the network worth it. This meant that even if someone didn’t have the balance to make a call for a long duration or didn’t want to have his balance cut, he could just give the person he intends to call, a missed call and have that person call him back. In the above mentioned arrangement, everyone wins financially, as the operator from where the call originates charges the user who has placed the call and the operator where the call terminates is paid termination fee by the origin operator. Also the user who receives the call doesn’t have to pay anything.
As far as data is concerned, a termination fee like arrangement did come across in the form of Airtel Zero where companies would pay operators for the data usage of end users but considering the public uproar on Net Neutrality, Airtel quietly pulled backed Airtel Zero and the net neutrality ruling in February made Airtel Zero and Facebook Free Basics illegal. However, TRAI brought in a new consultation paper to discuss ways to provide free internet to those who cannot afford data. One such proposal was a telco agnostic platform that zero rated websites and apps, if this consultation paper becomes a regulation with the telco agnostic platform implemented, then soon we’ll have the “termination fee” equivalent in the case of data as well. The only difference being that while in case of voice calls, termination fee is paid by origin operator, in case of data it would be paid by destination websites.
c) Voice is natural, data isn’t
Voice is more like an end product and users pretty much know how to make use of it, it’s just a way to connect with people who aren’t near. As long as you know to use a keypad and can dial a number, using voice is no big deal. However data is more like a platform and how to make use of this platform is not clear to everyone yet. Plus making effective use of data through apps and browsers is definitely more complex than simply dialling a number. The three points mentioned above is how wide adoption of data would differ from wide adoption of voice. Although reasons a and b are mostly financial, and can be ironed out in the future, reason c is a bigger problem which may hinder data from being as widely adopted as voice.
4. More Mergers and Acquisitions
Mergers and Acquisitions have already been on this rise even before Jio’s launch. Reliance already bought MTS and is in the process of merging itself with Aircel. Airtel acquired Aircel’s BWA spectrum and has also acquired Videocon’s spectrum. The latest rumour is that Vodafone is in talks to acquire Telenor’s Indian operation and that may very well be true. The current M&A’s are happening largely for spectrum to deploy LTE. Rcom acquiring MTS was a part of Jio’s plan to acquire a good chunk of low band 850 MHz spectrum. Similarly Airtel buying Videocon’s spectrum and Aircel’s BWA spectrum is again largely to facilitate 4G launches in the respective circles. If you look from that angle, then Vodafone’s rumoured purchase of Telenor makes a lot of sense. Telenor’s subscriber base isn’t all that attractive to Vodafone as it’s primarily low ARPU voice centric user base but what is appealing to Vodafone is Telenor’s spectrum portfolio. Acquiring Telenor will give Vodafone access to liberalized 1800 MHz spectrum in a lot of crucial circles like Maharashtra, A.P, Gujarat, Haryana etc where Vodafone can use it to improve its current LTE service or launch LTE. If Vodafone is to acquire Telenor, then the only weak player in the market is Tata Docomo. Idea or Vodafone seem the most likely contestant to acquire Tata Docomo. Tata Docomo has 850 MHz and 1800 MHz spectrum in all circles of India barring N.E, J&K ,Assam and Delhi (1800 MHz alone) that can be liberalized for LTE deployment and Tata’s vast fibre network in India is also very attractive to Idea and Vodafone for providing fixed broadband or backhaul. BSNL and MTNL also aren’t in a great financial position but considering that these telcos are state owned and have worker unions, a shut down or sale of these telcos is unlikely. At the end of the day, any private telco that doesn’t have spectrum or capital for 4G deployment would be either acquired or merged. Surviving in the Indian telecom market without 4G airwaves doesn’t seem like an ideal long term strategy. Telenor tried to do the same with only 2G and no 3G and its clear what their position is today.
5. Data % higher, voice % lower
Currently, voice revenue dominates the revenue pie for most telecom operators in India with data contributing only a quarter of revenues, but with the expedite roll out of 4G networks considering the upcoming Jio launch, data will eventually contribute more than 50% of revenues.
The effect will be two fold. With Whatsapp being present on more than 95% of smartphones in India, Whatsapp calling is becoming more popular than ever. While VOIP lags on 2G and doesn’t work flawlessly on 3G networks, it’s perfect on 4G. With ever improving 4G coverage and higher smartphone sales, if two people own smartphones and have an LTE/Wi-Fi connection, chances are higher rather than lower that they’ll place a Whatsapp call rather than a normal carrier based call. So while LTE will cut into calling revenue with the help of OTT apps, LTE data consumption is also higher than 3G or 2G. It’s been widely observed that when speeds improve, then data consumption also increases, even if the user is spending the same amount of time on his smartphone. This two-fold effect i.e. a boost to VOIP apps and increased data usage per subscriber compared to 2G and 3G will increase data revenues past 50%
6. More regulatory tussle
With Jio breathing down the necks of telecom operators, regulatory tussle would increase rather than decrease. As mentioned in the previous point, 4G networks would only help OTT apps and network operators are already in a fight with TRAI as to whether OTT apps should be regulated or not. The primary issue is that while telecom operators are required to build networks, buy spectrum and pay termination fee, SUC, USOF etc, OTT operators need to pay none of that and can provide the same voice service. Similarly, telcos already dragged TRAI’s dropped call compensation scheme to Supreme Court and won. They have already showed interest in challenging TRAI’s differential pricing ruling as well, and if TRAI’s Free Data consultation paper doesn’t help them much, then a court battle is pretty much on the cards. Apart from this is the case of SUC (Spectrum Usage Charge), while TRAI has been advocating for a uniform SUC which should gradually be reduced to zero, Reliance has made it very clear than any attempt to increase its 1% SUC would mean a court battle on the grounds of a change to NIA (Notice Inviting Application) of the 2010 BWA auction.
