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Lead Story

Who Will Be Left Smiling In The Data War?
Will Reliance Jio lead the explosive growth in data or trigger a sector implosion?

Krishna Gopalan

In June 2010, a little-known internet service provider called Infotel Broadband Services emerged as the sole pan-India winner in the auction broadband wireless access (BWA) paying 12,850 crore for BWA spectrum in 22 circles. It was an auction that Vodafone walked away from citing high prices, Idea didn’t win a single bid and Bharti Airtel won just in four circles. Hours later, on the same day, Infotel announced that Reliance had picked up a 95% stake in the company. And just like that, in one swift move that clearly caught the industry on the wrong foot, Mukesh Ambani was back in the telecom game.

Soon after the acquisition, in one of the brainstorming sessions where he and his A-team were drawing up the blueprint for the telecom business, one of the team members asked, “If we can create a petroleum business out of pipes, why can’t we do that with telecom?” In fact, the brand name Jio is said to have evolved from the mirror image of oil. The idea was to push data through pipes making it easily accessible to the end consumer. Ambani knew there was very little juice left in voice with tariffs at an all-time low and demand turning inelastic. But a high-quality data offering could be a potential game changer. 

That’s how Jio began its journey six years ago to turn the telecom industry on its head yet again. By making voice free, it has opened up a fascinating battle for the consumer’s wallet, marking a turning point in the industry’s two-decade old story. With growing concerns on how companies will recoup their investments, this has the making of a bloody war, sure to bruise many a player.

Déjà vu
In December 2002, Ambani launched Reliance Infocomm’s services to a packed audience marking a defining moment in the industry. Subscribers didn’t have to pay for incoming calls and they had to pay just 40 paisa for making calls. For consumers who were paying at least three times more to make calls and were charged for receiving calls, Christmas had come early. When they discovered that the high costs of handsets still put mobile telephony out of reach for many consumers, Reliance came out with its Monsoon Hungama offer and made handsets available for just 501. The money was to be recovered over time as a part of the monthly billing. 

While the scheme was launched with much fanfare, Reliance Infocomm faltered in its execution. Billing glitches, bad customer experience and payment default eventually meant the scheme was a monumental mess. To Ambani’s credit, he made mobile telephony a lot cheaper. Incoming calls did go free in May 2003 and that marked the beginning of a surge in subscriber numbers. Over the next five years, India grew from 13 million subscribers to almost 350 million.

Cut to 2016, with Jio, it was a war on prices again, but one that the industry didn’t think was possible. This time, Reliance made voice calls free, a business that brings in at least 80% of any operator’s revenue. The next move was to make data affordable. Its price was knocked down by at least 90%, and was offered free for the first six months. On committing to a one-time payment of 99 followed by a monthly rental of 303, the subscriber would get 1 GB of data per day apart from free voice calls.

It was an unprecedented move to shake up competition and Ambani has managed to do that by garnering 100 million users since Jio’s launch in September 2016. These users, he said recently, have used 100 crore GB of data per month, compared with
20 crore GB before Jio entered the fray.

At a meeting with analysts early this month, Manoj Modi, Ambani’s close aide, made it clear that this was just the beginning of data explosion in India. Over a presentation that lasted two hours, he spoke of how the market could double by 2021 totally in favour of data. The presentation also included demos for Jio’s offering across ecosystems like payment solutions, entertainment, gaming, connected cars and education. Reliance Jio demonstrated home automation, IoT and surveillance systems. The company is in the process of laying an optic fibre network which will provide high speed data and through which consumers can convert their normal TV into a smart TV using a shield box and access apps such as JioTV and JioCinema which offers a lot of regional content as well. More than a data story, for Reliance, Jio is a digital project that plans to offer seamless connectivity with a device, which could be a mobile handset or a hotspot through wireless technology or fibre optic cable.

Reliance expects the voice and data market to transform from 150,000 crore to 300,000 crore (all data) by 2021, with Jio garnering 50% market share. Sanjay Kapoor, former CEO (India & South Asia), Bharti Airtel, thinks Jio has done the smart thing by taking the data route. “There has been a clear graduation from text to pictures or from pictures to video. What was standard definition is moving in the direction of high definition 4G and that is what they are looking at,” he says. While Jio’s network still needs to be tested across the country with the projected usage of consumers, it can’t afford to falter in areas like billing and customer service. This cost them dearly the last time around. 

Talk is free
While competition is no pushover, the incumbent operators so far have done nothing remarkable except attempting to match Jio’s tariffs. “Competition was very well aware for five years that the new player would come in and be aggressive. They did nothing in anticipation of that and now they are just being reactive,” says Kapoor.  “Be it the ushering in of 4G for video consumption or offering bucketed plans in place of metered plans, it is all being led by the challenger and not by any of the incumbents.”

Bundled offerings have become the order of the day. That said, incumbents have had to sharply rework their offering from charging a high fixed amount with a lot of talk time to offering free voice. On most plans, the data on offer has doubled. Avneesh Khosla, executive vice president (products & services), Vodafone India admits to a change in consumption and buying behaviour among subscribers. “They are definitely looking for integrated plans and propositions that offer both voice and data. This will help in simplifying the large number of offerings that subscribers have been subjected to,” he says.

But to win the race from here on, telecom companies have to get their data offerings right not just on pricing but also have the right infrastructure in place. As a first step, last October, all the players put together coughed up a massive 65,000 crore to acquire spectrum in two bands, 2300 MHz and 2500 MHz, of which close to 62,000 crore was paid by Bharti Airtel, Vodafone, Idea and Jio.

But the benefits from the spectrum will only start accruing when the network rollout happens. And that’s what the telecom majors are doing.  Between the four players, the total capex outlay for FY17, including spectrum, is in excess of 100,000 crore.  “This capex will go into enhancing data capabilities like putting up more cell sites and fibre optic. For incumbents, this is an investment that has to be made to take on Jio,” says Tanu Sharma, associate director, India Ratings. She estimates that four players will spend 77,000 crore between them for the 2018 fiscal with Bharti (25,000 crore) and Jio (30,000 crore) expected to spend the most. The spectrum surplus industry will not need an auction anytime soon.  “The next round of spending on spectrum is most likely to be in the fiscal 2019 or 2020,” predicts Sharma. 

Right now, Jio claims that its current cell capacity is 4.7x industry’s capacity, which gives it a head start of 3-4 years over competition. It currently caters to 85% of the mobile data traffic and 60% of the forecasted FY21 data demand.

Jio has 4G spectrum across 22 circles in India and that gives it a significant headstart. Bharti Airtel is the only other player with pan-India spectrum, that came its way initially through the government auction and later through acquisition from Qualcomm, Videocon, Aircel and recently Uninor. Vodafone has 4G spectrum in 17 circles and Idea in 20 circles. Jio not only bought the 4G spectrum in advance but has followed it up with putting up its own cell sites or entering into infrastructure sharing arrangements with others. Now, each of the three big operators will need to spend $2-3 billion over the next couple of years (not including spectrum) to catch up with Reliance Jio’s 4G capacity.

As far as its fibre optic cable network goes, it has a network of over 250,000 km across at least 7,000 towns. It has also started to roll out its ‘Fiber to The Home’ service in Mumbai and has plans to roll out the network to Pune, Delhi and Chennai. It eventually wants to extend its network to the top 100 cities in India apart from providing wireline services to enterprise clients.

According to Barnik Maitra, partner, McKinsey & Co, fixed lines, too, can form an important piece of the story. According to him, HNIs consume a lot of data through this route and that can easily increase 4-5 times. “In India, fixed broadband households consume around 30 GB per month whereas in the US they consumer over 190 GB per month,” he explains.

Tail that wags the dog
Prior to Jio’s entry, for a well-run operator, no more than 20-22% of its revenue came from data. Even after the deluge of eight new operators in 2011 (including Uninor and Videocon), the incumbents did not react immediately. “They adopted a wait and watch strategy since nobody wanted to lose out on revenues. They did the same thing initially with Jio as well,” points out Kapoor.

In 2011 that approach worked since the challengers found it difficult to invest beyond a point. Once their operations struggled, the incumbents were back on track protecting revenue and margins. They followed up that phase by investing in 3G spectrum. This time around, they are up against a competitor who is not short of funds and was right in identifying that data was ripe for disruption. Khosla admits that voice is inelastic beyond a certain threshold for a consumer. “Therefore, despite reduction in prices, voice elasticity will not be high going forward,” he says.

Given that the voice story was progressing smoothly, operators did not push for data and priced it well beyond the reach of the average subscriber. Kapoor says operators have historically constrained the usage of data and that is hitting them hard today. They had also not anticipated how quickly 3G would make way for 4G.  Since most of them had serious debt on their balance sheet (Bharti had acquired Zain, while others had bet big on 3G), acquiring spectrum to push a newer technology was certainly not on top of their priority list. 

The low level of smartphone penetration was another reason to not push 4G. If data was going to be available at affordable prices, who was going to consume it? They were not betting on device costs dropping. In fact, they aren’t.  It’s just that Jio is pushing the envelope and forcing them out of their comfort zone. “Unlike voice, 80% of data was earlier consumed indoors. Jio’s network has been created to make sure most of it is consumed anywhere and that is forcing the incumbents to invest more in data,” Kapoor says. Its JioFi helps any 2G/3G device access its LTE network and can connect up to 32 devices. With its Jio4GVoice app, it allows the 2G/3G devices to make calls over its VoLTE network. Jio is planning to set up around one million WiFi hotspots in public places such as cinema halls, parks, schools and colleges across the country.

Jio’s initial plan was to offer free data till December 31, which then got extended by another three months to March 31. In Q3FY17, the pressure was already being felt by the incumbents. It has been a forgettable third quarter for all of them with Idea Cellular, the third largest, registering a loss of 385 crore and Bharti Airtel seeing a 76% drop in profit to 422 crore. The last quarter of FY17 is expected to be as bad if not worse.

Sanjay Kapoor Former CEO, Bharti Airtel

According to Khosla, the industry has witnessed a rapid drop in yields over the past three quarters. “One cannot exclude further drops given the intensity of competition, though there will be elasticity on usage with the dramatic fall in data costs,” he says. The investment in spectrum has already ensured that their debt levels have increased exponentially (See table: What the numbers foretell) leaving very little leeway to put in more money. Sandip Das, former managing director of Reliance Jio & ex-CEO of Hutchison Max Telecom, says the operators are caught in a tricky situation. “Operators are caught between the devil and the deep sea. On the one side they cannot afford to lose market share and need to remain relevant without appearing out priced, while on the other hand they have to continue to invest in infrastructure to match data speeds and coverage being offered.”

Golden goose
In the midst of all this, the need to retain the core base of subscribers can hardly be exaggerated. Often referred to as the “cream”, these users usually have been with the operator for a long time and contribute a substantial portion of the revenues. For any of the top three players, it is estimated that this core, which is around 15% of the overall subscriber base, brings in at least 50% of the revenue. 

Barnik Maitra Partner, McKinsey & Co

The next few quarters for telcos is not just about how quickly their 4G network is up but how they are able to get subscribers to use data services. According to Das, the incumbents must focus on protecting their revenue. “The clever thing to do is to not allow revenues to spiral down in the current whirlpool by giving existing consumers extraordinary voice and data offerings without reducing bill value. It is unlikely that consumers bar a few will use that much. But it will not hurt the operators cost to serve,” he thinks. Offering reliable data connectivity will also aid the process of not adopting the dual SIM (Jio for data in all probability) in the phone. Subscribers will need to perceptively see the benefit of staying with the incumbent. That is the big challenge ahead of them.

Clearly, the new entrant is blurring the lines for the subscriber and is offering just one technology, which is 4G. Even an entry level user with a smartphone can quickly move from a 2G or 3G network with an incumbent to a 4G Jio network. That is exactly what they need to prevent at any cost. The priority is, therefore, to get cracking on not just the 4G rollout but ensure that there are attractive data offerings that come with it. In this world where technological upgradation is a given, there is a huge appetite for new applications and things like video. None of that can be supported on a 2G network and there is a need to move those subscribers to 3G and those on 3G to 4G. “If that does not take place, an operator will find it very difficult to amortise costs,” says Kapoor.

Waiting to explode
There is enough evidence from other parts of the world to demonstrate how much data can grow. In late 2013, the US saw data revenue exceed that of voice for the first time. Compare this with 2002, when mobile data revenue in the country was just $1 billion. Today, it has crossed $100 billion. Japan was the first country where data got past voice and that was in 2011.

Avneesh Khosla EVP, Vodafone India

In several countries, most notably the US, data in the early days was hugely expensive till falling prices triggered its mass adoption. Rafiq Dossani, director at the Santa Monica-headquartered Rand Centre for Asia Pacific Policy explains that the internet boom of the late 1990s was when data became affordable. “The service providers were charging as much as $1,500 before that for a very limited quantity of GB. Obviously, the user base was small,” he explains. Those in the fibre optic business saw an opportunity and created a lot of capacity. “They raised a lot of money and put in so much fibre that most of it today is still dark,” he says.

Once the internet boom took off starting 2000, mobile data services dropped to a very affordable $75 for a five-user family pack that comes with 10 GB. “Every mobile phone in the US comes with data today. Overall data penetration is definitely more than 100%,” he explains. Even for China Mobile, the world’s largest operator, data exceeded voice revenue for the first time last year. 

According to Maitra, the recent growth in data traffic has been clearly driven by video. “On an average, Indians spend about 4-5 minutes watching video on their smartphones, compared to at least 35 minutes in developed markets like the US. With easier and cheaper availability of data, there is no reason why it will not take off in India,” he says.

That is really the rub since smartphone adoption has been slow in India. Jio’s presentation to analysts pointed to 496 million feature phone users and 263 million smartphone users. The existence of more than one SIM on each of them is what adds up to the one billion plus mobile connections in India. Jio estimates that the ARPU for a smartphone user is 329 per month compared with 172 for a feature phone user. 

The price of a smartphone has been a challenge. At 4,500 for the cheapest device, it is at least 5x more than a basic feature phone. For a large player like Vodafone, the more important component revolves around smartphones, points out Khosla. “We need to work with smartphone brands to drive their larger adoption on our network. This will help in subscribers experience the internet on high speed networks,” he points out. 

Smartphone adoption is the most important element in driving data usage and operators are only too aware of it. “It is the key to getting in new users and also for existing users to upgrade their data experience,” maintains Khosla. Reliance Jio is working on launching its low-cost 4G VoLTE feature phones costing anywhere between 999 and 1,500 in the coming months. The phone will come bundled with its apps – Jio Chat, TV, video on demand and wallet.

Until now the high cost of data ensured that its consumption was muted at about 624 MB per month on average. Going by global trends, there is little to suggest why data consumption should not increase by at least 10X as prices drop. “Unlike voice, data has infinite ways of being used. Just the transformation of the mobile device to becoming a personal entertainment medium will lead to more time spent on the internet to access pretty much anything. That can ensure data grows exponentially,” says Khosla. The availability of a high-speed network would also bring in a new set of consumers. “Those in rural geographies will be able to access the internet on their mobile. It will be possible to have more content and in regional languages as well,” he adds. 

Rafiq Dossani Director, Rand Center for Asia Pacific PolicyBetting big
Ambani is not known to think small and Jio has worked on building a strong content library through its app to retain its customers. The Infocomm project had a capex outlay of 25,000 crore when it went off the ground in 2002. This time around, he has announced a plan to invest a whopping 175,000 crore. More than 90% of the amount has already been invested in rolling out networks and buying additional spectrum. Of the total investment, the debt component is 49,000 crore. By any stretch, this is his biggest bet to date.

The duration of his BWA licence is 20 years and it has been close to seven years since Reliance Jio entered the fray. There has been no revenue so far and there are substantial fixed costs to take care of like tower rentals, spectrum costs, salaries, depreciation and interest. Going by their estimates, Reliance hopes to clock revenue of 150,000 crore by 2021 and expects to have an Ebitda margin of at least 50%. Bharti Airtel after a two-decade presence in the business has revenue of 60,000 crore (India revenue) and Ebitda margin of 39.5%. A lot of Reliance’s optimistic projections are based on the explosion in data consumption to 500-600 crore GB per month. They believe that despite falling data tariffs, the increase in data usage will leading to higher volume and ARPUs and hence building capacity will be critical.  Its target audience is the 400 million subscribers that it claims can spend 500 on digital services.

Today, subscribers use 624 MB of data a month translating to an average of 21 MB daily. Even if we take the consumption on the data-heavy Jio network, it is about 12 GB or 400 MB per day. Now, under its 303 plan Jio gives about 1GB of data of which nearly 60% remains unused. To reach the kind of data consumption that Jio is predicting, it is clear that company is looking at becoming a one-stop shop for the digital needs of its consumers, be it mobile data, internet, entertainment, home automation, etc. So a lot is riding on not only getting a lot of subscribers but also getting them to use Jio services. 

For that matter all telcos will have to first win the data war and they can only do that by getting a higher share of the customer’s wallet by providing a range of services. The benefits of creating a state-of the art infrastructure will only start accruing when the capacity is optimally utilised and hence a robust network and seamless customer experience will dictate who wins the race.  

Tanu Sharma Associate Director (Telecom),  India Ratings The incumbents are clearly not in the best situation. The big three are saddled with a total debt of 150,000 crore and need to cope with a new business model, where tariffs continue to drop. Not surprisingly, consolidation is underway in an industry which since 1995, when mobile telephony made its debut, has seen more players exiting than surviving. Barely seven months after Jio’s offer was unfurled, there has been activity on the M&A front. In late January, Vodafone and Idea Cellular said they were in talks for a possible merger. If it goes through the combined entity will have 387 million subscribers and revenue of 78,000 crore.  Three weeks later, Airtel, itself, acquired Telenor’s India operations for an estimated 1,500 crore. It gave the buyer spectrum in seven circles where Telenor has a presence. Also, the Anil Ambani-owned Reliance Communications (RCom) and Aircel, both mired in debt, have been in talks to merge their operations. This was preceded by RCom’s merger with Russia’s MTS. Media reports have also spoken of the struggling Tata Teleservices being a part of this larger merged entity. 

Sharma predicts a very difficult year ahead for all players. “Operators will do anything to protect their top 15% subscribers but margins will have to be sacrificed in the process. Eventually, with four large players, some kind of rationality will prevail,” she says. Jio will start charging its subscribers from April 2017 and once the freebies are gone it will become clear if the company has got its math right. There is a great opportunity in data but that depends on too many things coming together. With the changing dynamics of the industry ensuring that smaller players go out of business, it will be a game played only by the top players. With data consumption going up and only a handful of players in the fray, the economics may actually work in their favour once IoT and other services push up revenues. Till then it is a stream and watch game.

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