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How Has Jio Affected the Telecom Industry?

05 August 20226 mins read by Angel One
How Has Jio Affected the Telecom Industry?
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There almost seems to be a negative correlation between the aggression shown by Reliance Jio and the price performance of other telecom stocks. When the free telecom offer was first launched by Reliance Jio on September 05th, listed telecom stocks like Bharti Airtel, Idea Cellular and RCOM lost nearly Rs.22,500 crore in market cap. The impact would have been much bigger if Vodafone too had been a listed company, which it is not at this point of time. The issue is not just about lower prices or tighter competition. The issue is a lot more fundamental. Reliance Jio not only looks likely to disrupt the voice and data business in a big way but it will also stretch the financial and strategic resilience of competitors to the hilt. Here are 5 ways the Reliance Jio offer could spell further trouble for other Indian telecom players…


ROI on investment will be a major challenge for Telecom Players…


Even in normal times earning a reasonable ROI is a challenge for the telecom industry. This is true the world over. The reasons are not far to seek in the Indian context. Firstly, setting up the telecom network requires huge investments towards towers, communication infrastructure and customer acquisition. That is typically a sunk cost for every telecom company and the challenge ahead of them is how efficiently they monetize these assets. The second big challenge to ROI stems from the huge spectrum license fees that telecom companies need to pay to the government over a period of time. Most of the large telecom players like Vodafone, Bharti Airtel and Idea have sunk over $15 billion into investment in spectrum. The assumption was of their ability to maintain certain level of ARPUs (Average Revenue per User) both from the voice and the data business. But, due to the virtual price war unleashed by Reliance Jio, the fundamental ARPU assumptions are coming into question. That could have serious implications for ROI of telecom companies in the quarters ahead.


Voice business will get increasingly commoditized…


Even when the free offer was launched by Reliance Jio, they had given their commitment to keep voice calls free for life. Today there are complaints of congestion and call drops in Reliance Jio Voice services, but that is more a matter of time. By end of 2017, Reliance Jio network is likely to cover over 90% of the Indian population. But that time, one can safely expect the quality of voice service from Jio to improve substantially. That is not good news for other telecom players. Firstly, by offering free voice service Reliance Jio has virtually commoditized the voice business. This will put the existing telecom players in a spot as they will have to either offer free voice calls soon or cut the price to an unsustainable level. Secondly, as voice gets commoditized the other telecom players will increasingly rely on data for the ARPUs. That will be a different challenge altogether.


Reliance Jio has already booked a sweet spot in data services…


By any yardstick, Reliance Jio has managed to position its data services at an extremely sweet price point. When Jio goes priced from April 01st, they will be offering 30GB of data at Rs.303/month. This will ensure an incremental ARPU of over Rs.300/- for Jio from data alone. Of course, voice will be free on the Jio network. Telecom companies like Vodafone and Airtel have data ARPUs that are almost below the Rs.150 mark and that too at much higher data charges. This basically means that Airtel, Idea and Vodafone will have to drop data prices, furthering depressing their ARPUs. But, with its sweet spot positioning, Jio will end up cornering a lion’s share of the incremental data business and will stand to benefit the most when the demand for data explodes in India


Forced mergers may not always be in the best interests of stakeholders…


Reliance Jio has already sunk in $25 billion into building its telecom business and it may guzzle another $4-5 billion. For RIL, this is the cash generated from the highly profitable refining and petchem business. Both Airtel and Vodafone are predominantly telecom players and they do not enjoy the currency which Jio enjoys. That is driving telecom companies into forced mergers. Consider these examples. Vodafone and Idea are already in advanced stages of discussions for a possible merger. Bharti Airtel has added 52 million customers to its kitty via its acquisition of Telenor India, which is looking to exit India. RCOM and Tata Teleservices are exploring the possibility of an alliance and this may include MTS and Aircel too. Many of these mergers and acquisitions may be more of knee-jerk reactions rather than strategic business decisions. That is the big worry as the actual consequences may manifest only over a period of time.


Risks of network congestion and number portability…


Then there are some other risks that the telecom industry overall runs. Firstly, the free offer from Reliance Jio has already caused tremendous network congestion for other networks. That is because when calls originate from Jio and terminate at other service providers; their networks are capable of handling only a specific load. The free offer led to the number of calls burgeoning which brought other networks also under pressure. It also remains to be seen if other players cut data charges and the data usage actually explodes; then whether the existing network will be able to manage the stress. Secondly, there may be a huge risk of portability that other telecom players may face if the offer differential is too wide and most existing users opt for Reliance Jio. The Jio management is already looking at rapid strides in market share by end of 2018. The next 2 years could be really testing for telecom industry as a whole.


To say that Reliance Jio has disrupted the telecom sector may be an understatement. Jio may actually push the telecom industry in India to the limits of their endurance.

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