And Then There Were Three: Fitch Says Jio Will Prompt Consolidation And Only A Few Will Survive
Fitch Ratings has a negative outlook on the Indian telecom sector, as it expects Reliance Jio’s discounted services will trigger a price war, prompting a race to the bottom. This will impact revenue and profitability and will create considerable churn among consumers, away from incumbent telecom service providers towards Jio.
In this interview with BloombergQuint, Nitin Soni, director, Fitch Ratings talks about the impact of Jio’s launch (September 5), consolidation in the telecom market, the impact on profitability and the survivors.
Reliance Jio is offering all services free till December 31, 2016 and voice services free forever, besides a students discount of 25 percent and other discounted or free services. As competitors rush to do the same, will this be a race to the bottom?
We have a negative outlook on the Indian telecom sector and we think there will be a re-run of the price war as Jio’s offering for free voice and SMS and a tariff of 70 cents to $1 for per GB for data services, is about 25 to 30 percent cheaper than what the incumbents are offering right now. I think that will affect their EBITDA margins by 250 to 300 basis points. The incumbents blended revenue per user will fall anywhere by 10 to 15 percent from the existing $2. And there will be a lot of churn in the market towards the Jio network because of this attraction that you can get the free services for the next three months. So there will be a lot of mobile number portability requests and a lot of churn toward the Jio network from the incumbents. And the incumbents will start feeling lot of challenges and pain in the next 12 to 18 months, especially for the smaller telecom companies like Idea Cellular and Reliance Communications which don’t have pan India 4G network services and also they have a lower subscriber base and don’t have so much of financial competing power like Bharti Airtel and Jio. So they will feel most of the pain in the coming 12 months.
Will this prompt more consolidation in the telecom sector?
We have already come a long way. There used to be 12 to 15 operators in India and the market is already consolidated with many smaller telecom companies have either exited or which have merged with each other. And the consolidation is still going on with Reliance Communications wanting to merge with Aircel. Going forward in the next three to five years, we believe that there’ll be around four to five players in this market. Even now this market’s nature has changed drastically. Today onwards this market will have rock bottom prices and very high volumes, so only a large telecom company with larger economies of sale will be able to make money in this market. It’s a game of large economies of scale now, and the smaller telecom companies with small subscriber bases will find it very difficult to make money in this market. So, I believe that smaller telecom companies including Telenor, Reliance Communications and Aircel are anyways trying to merge with each other, public sector companies like BSNL and MTNL, they will be the first ones who would clamour to either merge with each other or try to exit the market or be acquired by larger incumbents because there is no way they can compete at such lower prices.
How will the launch of Reliance Jio impact profitability across the sector? Should investors bid farewell to profits and returns?
I think in the medium term, pricing power will come back to the sector. In the short term what we will see is a price war that will happen in the next 12 to 18 months as Jio comes out with its low tariff and the incumbents will, more or less, have to retaliate with the same kind of tariffs to retain their existing consumer base. But in the medium term they will have to raise prices at some point of time, innovatively, or will come out with tariffs which will give them better price realisations. Because at this pricing I am not sure even Jio will be making EBITDA (earnings before interest, tax, depreciation, amortisation) profits in the next three years. They have invested $20 billion in this sector and at a $2 ARPU (average revenue per user) with free voice and SMS and with all these free applications for next one year and three months, it will be very difficult for them to make any money. Also remember that they will be paying lot of inter-connection revenue, even though they are not charging their customers but they will have to pay a lot of interconnection revenue to the incumbents for the voice calls which are terminating on their network. And they are also paying lot of rental leases for leasing the telecom towers. So their operating expenses bill is quite large. For them to make positive EBITDA, it will take two to three years. So at some time the incumbents and Jio will have to raise prices to make sufficient return on investment, on the large investment they have made in this industry.
Which telecom players will survive the race to the bottom and the consolidation? Who will the survivors be?
I think Jio, Vodafone and Bharti Airtel will still be there and the small telecom companies would either merge together under a new name or will be acquired by the larger telecom companies. At the moment I don’t think Idea and Reliance Communication have robust competitive positions to sustain on a long term basis, so they will have to find some merger and acquisition opportunities to improve their competitive strengths in the long term.
Consumer Experience, Not Price, Will Determine Winners: Former Bharti CEO
Former Bharti Airtel CEO Sanjay Kapoor says, “I don’t believe that the price will be the determinant of the winners. It will be the consumer experience that will determine the winners.”
One of the biggest announcements made by Ambani during his speech was free voice calls for Jio’s customers. Kapoor, however, believes that the tariff will be accommodated in some form or the other. “The perception of voice getting free for life is ‘partially true.’ So instead of voice, the consumer will end up paying for data. This will be a challenge for the industry as explaining this to consumers will not be easy.”
He sees severe pressure on incumbent players in the near term which is likely to dent their market share, “There will be room for three to four players in the market but there will be huge pain for the incumbents in the short-term,” the former Airtel CEO said.
Incumbents Will Innovate: Deloitte Haskins and Sells
Hemant Joshi, Partner, Deloitte Haskins and Sells echoes Kapoor’s views and says “Everybody will have to be concerned about the consumer experience.”
Sounding somewhat optimistic, he says the incumbents in the telecom industry will continue to innovate to meet the challenges thrown up by new entrant Reliance Jio. In the near term, though, he expects these companies to see severe pricing pressure.
Bonanza For Customers: KPMG
Referring to Ambani’s announcements on free voice, data discounts and student offers, Romal Shetty of KPMG says, “This is a bonanza for customers because you not only have freebies for the next three months but even after that, for the next 12 months, there are a number of things which are free.”
In line with the view of most analysts and industry experts interviewed by BloombergQuint, Shetty says telecom operators will remain under pressure for the next 12-18 months due to competition from Jio.
Free Voice Calls Proposition Expensive For Reliance: Mahesh Uppal
“I expect them [other telcos] to respond with competitive offers that make sure that they don’t get beaten either on voice or data prices by Jio,” Mahesh Uppal, Telecom Analyst and Director of Consultancy Firm Com First India told BloombergQuint in a phone interview.
It’s not just the incumbents who stand to lose from Jio’s decision to make voice calls free, Uppal says. It’s a fairly expensive proposition for Reliance as well, because it costs 14 paise per minute to terminate a call on incumbent networks, he adds.
“This means now they will have to pay 14 paise per minute for almost all the calls that they originate in their network because currently, they have very few subscribers. Most of the calls will be to the networks of the pre-existing players. And if they are not going to charge anything from their subscribers that means they will have to pay out of their pockets even to complete each call. So that is a fairly significant expense for them,” he said.
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