Exactly three weeks after the 3G spectrum auction ended in May 2010, leaving the government richer by a whopping Rs.67,000 crore, a little known company called Infotel Broadband Services was in the news. This was because it was the only company that won the pan-India license for broadband wireless access (BWA) spectrum. It paid close to Rs.12,850 crore at a time when a large player like Idea Cellular did not win the bid for any circle, while Bharti Airtel chose to buy spectrum in just four circles.
There was some element of curiosity about Infotel and what its plans were. All that was put to rest when Mukesh Ambani-owned Reliance Industries bought a 95% stake in Infotel and the story suddenly looked very different. After Ambani handed over the telecom business in 2005 to his younger brother, Anil, he was now back in the sector, one that he was known to have a soft corner for. At a time when the large operators were paying huge amounts for 3G spectrum, what Ambani had in mind through a BWA foray, was intriguing, to say the least. It had just been a few days since the non-compete agreement between the two brothers had run its course and there was nothing that came in between Mukesh and telecom now.
In a terse statement, he said that there was an opportunity in wireless broadband, and India could provide world-class 4G services. The critical part was the mention of how a single 20 MHz spectrum, when used with long term evolution (LTE) could provide greater capacity, compared to existing 3G infrastructure. If incumbents were betting on 3G and voice, Ambani was looking at data and beyond with a planned investment of Rs.100,000 crore. Clearly, the die had been cast for another full blown telecom war in India.
Pushing the envelope
Very little was heard from or about Reliance’s telecom plans till Ambani addressed his shareholders at the annual general meeting early this month. Ambani announced a slew of benefits for those signing up with Reliance Jio, which is the new brand, and these include free voice calls, free roaming and a substantial cut in data tariff. There is no entry barrier either, since handset prices start at Rs.2,999 topped with simplified tariff plans. In all, Jio has just ten tariff plans, a point Ambani did not forget to emphasise on to drive home the point of simplicity to the user.
Sanjay Kapoor, former CEO, India & South Asia, Bharti Airtel, thinks incumbent operators will have to look at Jio’s entry tactically and strategically. “In the short-term, they will choose to match tariffs by offering more bucket plans, where for a committed amount the user will get unlimited minutes, for instance. Going free on voice is a difficult proposition, given that at least 75% of the revenue for large operators comes from there,” he says. Kapoor goes back in time to 2011, when new operators like Uninor and Videocon entered the fray with very low tariffs. “Even then, the incumbents waited for a while before reacting, and that is how it will play out this time as well,” he adds.
The bigger question is, how they will deal with a new technology and the imminent worry that it could be superior. The huge investments in 3G are still a long way from capturing a large user base. Kapoor thinks usage is at best sporadic leaving the user with no great experience to speak of. “Besides, it is still restricted to large cities. Now, if 4G works for Jio, the incumbents will have a serious problem,” he says.
While Bharti Airtel has quietly acquired spectrum for 4G, through the auction route and has bought spectrum from Qualcomm, Videocon and Aircel for a tab of over Rs.9,800 crore, the story is very different for Vodafone and Idea. If Airtel can boast of a pan-India 4G presence, Vodafone and Idea have spectrums in eight and ten circles respectively. “Operators could shell out $2 billion for 4G spectrum, with most of it being accounted for by Vodafone and Idea. That will only add to their already large debt (at an industry level, it is around Rs.300,000 crore, with the top three accounting for half),” points out Tanu Sharma, associate director, India Ratings(See: Bleeding edge). She expects the EBITDA margins for this year across operators to drop by 200-300 basis points. “This is assuming adoption of Jio takes place at a normal rate. If they get it right on service, that number will be larger,” she adds.
In a world of disruptive technology, this could not have come at a more challenging time for the incumbents. According to Kapoor, the longevity of technology has shrunk sharply from 10-15 years in the past to barely 5-6 years now. “That means cost amortisation has to be done quickly. Operators will now be forced to invest in expensive 4G spectrum in a very complex tariff scenario,” he says.
Cracking it, finally
The big Jio tariff plans start at Rs.149 per month, which apart from free voice calls, comes with a miniscule 0.3 GB of data. The next set of plans start at Rs.299 and go up all the way to Rs.4,999, that come with as much as 75 GB of data. The target customer is quite clearly the high-end user, who accounts for a disproportionate value share of the overall subscriber base. Even by the most conservative estimate, around 20% of the user base brings in over 50% of an operator’s revenue. It is this base that gives an operator his profit and one that he cannot afford to lose.
The problem of all telcos is that the quality of service in the recent past has suffered, leading to call drops. Data download speed too, is not as reliable as it is claimed. Today, around 30% of the revenue comes from data and for that to take off, service quality will have to improve drastically. According to Romal Shetty, national head (telecom), KPMG, in developed markets like South Korea, Japan, UK and the US, close to 60% of a service provider’s revenue comes from data. “In India, we can move to 45-50% from where we are,” he thinks. This is the market that Jio has set its eyes on.
Today, 1 GB of data from an incumbent costs Rs.249, and Jio is offering this at Rs.50. If 4G delivers what it promises, this usage can increase sharply. Sharma says the average data usage in India is 500-600 MB. “It is quite obvious that Jio wants to accelerate this. With data prices falling, this can easily increase to 2 GB,” she maintains. With Jio’s suite of apps on the phone like JioMoney, JioCinema and JioMusic, the objective is clearly towards getting the user hooked on to data.
If the data offered at the entry level of Rs.149 is limited, it also cushions Jio with a revenue floor. This is the minimum they will make from any user, which compares rather favourably to the average revenue per user (ARPU) of Rs.180 that the largest player, Airtel makes. “Jio is adopting a cherry-picking strategy where it is not interested in the user who is making that small recharge of Rs.20 or Rs.30 each month. The focus is only on the user who will be ARPU accretive,” says Kapoor.
How Jio goes about its customer acquisition strategy will depend a great deal between September and end-December, when all its services including data are offered free of cost. From the user’s point of view, his existing handset will need to be compatible with 4G technology, else he will have to buy one that is. The broad consensus is that existing users will make Jio their second mobile number, which they’ll use to test voice and data before deciding to switch operator altogether, if at all. “The call drops on networks has already left users frustrated. As the incumbents will face a tough decision to invest in expanding networks, Jio will at least give them an option to consider,” says Sharma. That, of course, could just be the beginning, as Ambani spoke of investing in fibre to home wired connections for internet with speeds of upto 1 Gbps. This will allow him to go mass in larger cities, while low-cost handsets could facilitate the penetration of broadband services in rural India.
Kapoor throws up a slightly different perspective on data and insists the users will spend if the experience is good. “They have realised that in the case of voice, the low tariffs were at the expense of customer experience. If Jio gets it right here, it will result in a lot of customer stickiness,” he says. By any yardstick, Ambani is looking into a distant future, where technological disruption will be more the norm. “4G is the first step and it is inevitable given that 5G will be in India at some point,” says TV Ramachandran, president, Broadband India Forum. The question then is, how much has really changed in the telecom story since the 3G auction in 2010. “Jio bought spectrum at a time when data did not seem like an attractive option. The thinking then was that if the 3G market itself had not developed, where was the scope for 4G,” he explains.
Today, with Jio’s entry, there is not too much leeway available to the existing players. Given the new entrant’s thrust on the big-ticket user, it gets even trickier. Sharma thinks there is some room between the Rs.199 and Rs.499 tariff slabs (where there is only a Rs.299 offer today) to corner market share. “It is definitely an opportunity, but they have to get it right on data as well. It is all about a comprehensive offering now,” she says.
This is Ambani’s second tryst after the much-awaited Reliance Infocomm project in 2002. There was many a teething issue as an offer to sell handsets at a cheap cost the company dearly and the customer interface suffered due to poor billing systems. Three years later, as a part of the family separation, the business went to his younger brother, Anil.
With the interest in telecommunications intact, Ambani, now, sounds very aggressive and equally determined. Even if the network quality has been sorted, he will need to get it right on customer service for sure. The free voice and data offer will be the acid test, in a way, to test the quality of this technology, which is still unproven in India. It marks the first instance of any operator across the world launching a 4G service of this magnitude. With this, he has managed to trouble the incumbents. Whether the shake-up will be temporary or redefine the sector permanently, the next few months will tell.