The Indian mobile communications market has consolidated around three players.
Going around in circles
India’s wireless sector didn’t have the best start in life. As wireless developed in India, mobile service licences and subsequent spectrum awards were broken up into a patchwork of 23 telecom ‘circles’ (roughly along state boundaries), rather than offering nationwide licenses. This proved less than ideal for the operators, with the approach resulting in multiple subscale operators and inefficient use of valuable spectrum.
At the time, including the two state-owned operators BSNL and VSNL, there were nine operators vying to provide services across various circles. Some were backed by international telcos eager for a slice of the seemingly high potential Indian telecoms market. Operators such as Telenor, Vodafone, SingTel and Maxis all invested in Indian operators.
A combination of lack of scale, intense competition, insufficient spectrum, heavy capex & spectrum payments translated into very low returns on invested capital, even for the largest of the operators and initially no operator was able to offer pan-India service. The drip feed of spectrum into the market didn’t help either. Competition in the 2G and 3G eras saw tariffs fall sharply, but this was only a taster of what was to follow in 4G.
Over the years there has been slow attrition of operators. This process accelerated more recently after the regulator allowed spectrum trading. However, greater impetus for consolidation came when new operator, Rjio launched in 2016. Owned by Reliance Industries, a US$115 billion behemoth with deep pockets, Rjio’s entry put it in direct competition with Mukesh’s brother’s telco Reliance Communications, until the latter filed for bankruptcy in 2019. Rjio stunned the market by acquiring 16 million subscribers in just its first month of operation.1 Its rise since then has been phenomenal and represents one of the fastest subscriber base ramps globally.
Rjio were immediately disruptive, launching with a 4G-only data-centric service, and to gain scale, initially offered its 4G data services free in combination with cheap handsets (smartphone and 4G feature phones). This was aimed at attracting previously predominately voice-only customers, and stimulate data consumption. This certainly worked. By December 2018, Rjio had 280 million subscribers2, and a subscriber market share of 24%1, while its share in 4G traffic is around 70%.2
Since Rjio’s entry to the market, data consumption has surged. Rjio’s subscribers’ per capita data usage is 10GB/month, equivalent to more developed markets such as Hong Kong. Voice minutes of use (MOU) also remains high at a massive 794 per month. Total data traffic on Rjio’s network is now 3.1 Exabytes (2x the 1.5EB seen in December 2017). The subscriber base notches up 4.6 billion hours of video streaming per month, that’s around 16 hours/sub/month.2
Rjio began charging after an introductory period, but its tariffs were substantially lower than incumbents, Bharti AirTel and Vodafone-Idea, and so caused market yields to collapse. Incumbents also had to accelerate 4G rollouts and improve network quality to compete. With incumbents’ earnings under pressure and balance sheet expanding, leverage at Bharti AirTel and Vodafone-Idea surged to uncomfortable levels. Both have recently announced large capital raises to strengthen their balance sheets.
The good news for the sector (and it certainly needs some) is that the market has consolidated around three players: Vodafone-Idea, Bharti Airtel and Rjio. Three player markets are usually regarded as desirable market structure, so this at least sets the scene for India’s telco market to become more rational and eventually translate to improved returns.
Investors need to see Rjio end its aggressive subscriber acquisition drive and switch to harvest mode. In other words, drive up profitability via better data monetisation through tariff increases. This would allow the other two operators to follow suit. In such a scenario the sector would be more profitable and see returns rise.
Rjio has targeted a much larger market share longer-term, and if it pushes towards this, the challenge in the sector will continue. We believe, however, that if the current large capital raises by Bharti AirTel and Vodafone-Idea are successful, it will give them the buffer needed to fight on and this could cause Rjio to pause for thought. The next few months will be crucial for the Indian telecom industry and we shall be tracking developments closely.
Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.
1 Source: Telecom Regulatory Authority of India. Highlights of telecom subscription data as of 30 September 2016.
2 Source: FactSet: Reliance Industries 3Q FY2018-19 Financial Results.