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Pricing war in the Indian telecom industry

The world is at dawn of a digital revolution. The emergence of disruptive technologies such as artificial intelligence, machine learning and Internet of Things (IoT) is fundamentally reshaping the human civilisation. Concurrently, its posing major challenges for businesses in terms of innovation, reskilling, development of new age products and solutions and most significantly survival in the technological storm.

The Indian telecom sector with a history of disruptive innovations is not an exception. The 37 billion USD industry has seen the emergence of messaging apps, big data and GPS-based free services, a cut-throat pricing on per second tariff plans and shifting business model from voice to data. However, the most significant development in the recent years is the entry of Reliance Jio. This created a flutter in the market and set the cat among the pigeons. The magnitude of this launch can be estimated from the fact that in the 45-minute speech of Mukesh Ambani (Chairman, Reliance Industries Ltd.), the top 3 listed Indian telecom companies lost INR 13,165 crores in market valuation.

Moreover, for a sector that was witnessing double digit growth till the FY15, the FY16 marked a reversal. What was hurting the sector despite strong voice growth and subscriber addition? This was due to intense competition in the past 1.5 year which was further aggravated by the entry of Reliance Jio. 

Additionally, prior to Jio’s launch, the top players could have consolidated their position and increased their market share. However, post the launch the scenario has reversed. This was driven by extended free trial period, Jio gathered around 52 million subscribers at the end of December 2016 and reached 100 million subscribers by mid-February 2017, within 170 days of its launch.

The telecom pie in India is extremely big and subscribers’ addition by rival telecom companies have never hit hard on the players. However, the pace at which Jio is adding subscribers is a matter of grave concern for all the existing players. They have launched unlimited voice plans bundled with data, which underline their willingness to adjust with a lower ARPU in order to retain subscribers. Although, despite the aggressive pricing there is no significant uptick in data volumes. The operators were achieving 100% data growth in the past 1.5 year, but in September 2016 growth was recorded at the slowest 22%. 

     

Note: Data provided for only top 2 listed players as others have inconsistent reporting

The data growth is expected to decline further, which is worrisome for the telecom operators. Jio presently accounts for the 80% of the industry data volume at 16,000 million Mbps per day. In addition, voice revenue which is the bread and butter for telecom companies may remain flat due to slowing volumes and cannibalization of data. Most operators reported a steep decline in their net profit margins. While, the top 3 players have a big war chest to sustain losses, the rest are not fortunate enough, thus, resulting in the consolidation of the industry.

     

However, Jio seems confident on their aggressive pricing and robust customer addition strategy, but there are sufficient challenges up their sleeves. Jio is facing resistance from operators for not providing adequate points of interconnectivity (PoI) causing massive call failures. The exponential growth of Jio’s subscriber base has impacted its data speed, this declined from the initial 50 Mbps to 6-10 Mbps currently. According to the latest media reports, Reliance Jio’s 4G speed is slower than Airtel’s 4G. Furthermore, impacting the user’s experience are faulty apps and frequent technical glitches. Jio’s 4G services are restricted due to the lower penetration of 4G devices. Additionally, Indian customers, which are known for non-preference towards a brand may abandon Jio once the freebies are over.

In conclusion, Jio with extremely low tariffs (40% lower at current levels) has bled other operators. The firm already invested heavily in procuring spectrum and rolling out 4G networks, this resulted in Jio having a stretched balance sheet. This, in turn, will make it difficult for the company to play the discounting game for a long period of time. How the rest of telecom operators fare will depend on their ability to retain high ARPU customers, keep costs down and maintain their market share.

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