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Three Wireless Carriers Set To Dominate World’s Second Largest Telecom Market

Darwinian forces are at work in India’s debt-laden mobile network operator market where fierce competition has brought forth a wave of consolidation which is expected to result in an oligopoly of three major carriers, namely Bharti Airtel (BOM:532454) (NSE:BHARTIARTL), Reliance Jio (BOM:500325) (NSE:RELIANCE) and a merged entity between Idea Cellular (BOM:532822) (NSE:IDEA) and Vodafone India which is the Indian arm of British telco Vodafone PLC (LON:VOD) (NASDAQ:VOD). Brokerage firm CLSA says the trio could account for as much as 90% of industry revenues going forward.

India’s anticipated triopolistic mobile operator market is akin to the mobile operator market in countries such as China (China Mobile, China Unicom and China Telecom), South Korea (SK Telecom, KT Corp and LG Uplus Corp), Japan (NTT DoCoMo, KDDI and Softbank Mobile) and Canada (Telus Corp, Rogers Communications and Bell Canada Enterprises).

The catalyst is newcomer Reliance Jio, the telecom arm of Reliance Industries which is owned by India’s richest man Mukesh Ambani. Founded less than a decade ago (in 2010) but having begun operations in September last year, the new kid on the block disrupted the Indian mobile operator market with free voice calls and ultra-low price data services - a game-changing move in India’s price sensitive market. In less than a year of its launch, Reliance Jio amassed over 100 million subscribers (132.67 million subscribers as at August this year according to data from the Telecom Regulatory Authority of India) and emerged as India’s fourth largest wireless carrier by subscriber number.

Pie chart showing Indian operators’ wireless subscriber base market share as at August 2017. Bharti Airtel led the way with a market share of 23.70%. Other players ranked in order of market share are Vodafone (17.55%), Idea Cellular (16.11%), Reliance Jio (11.19%). BSNL (8.88%), Aircel (7.52%), Reliance Communications (6.51%), Telenor (3.96%), Tata (3.96%). Sistema (0.31%) and MTNL (0.30%).

Jio’s aggressive entry forced India’s Big Three operators - Bharti Airtel, Vodafone and Idea Cellular - to cut tariffs which squeezed profits and put pressure on smaller, financially distressed operators. The turmoil spurred a wave of consolidation in what was a Darwinian moment in which the weaker players were gradually being forced into extinction while only the fittest survive and thrive. Heavily indebted Tata Teleservices, owned by Tata Group was acquired by Bharti Airtel at a bargain price, marking Airtel’s seventh acquisition in five years.

Malaysia’s Maxis-owned (KLSE:MAXIS) Aircel which is heavily in debt may be forced to close shop according to news reports after a failed merger with Reliance Communications (BOM:532712) (NSE:RCOM), which is owned by Mukesh Ambani’s younger brother Anil. Reliance Communications, also faced with its own set of financial troubles, is now forced to make operational changes to pay off its debt such as by scaling down operations (it is shutting down its voice services for its 2G and 3G customers which account for the majority of its revenues and customer base) and selling assets (such as its cell towers). Having missed local and international debt interest payments this month, Reliance Communications’ stocks and bonds tumbled are at record lows.

Meanwhile, Vodafone India (India’s number 2 telco) and Birla-owned Idea Cellular (India’s number 3 telco), have agreed to merge, which would create India’s largest telecom company with over 400 million customers and a market share of 34%, overtaking Bharti Airtel which will have a market share of less than 32% after its acquisition of Tata Teleservices and Telenor (India) Communications (the Indian arm of Norways’ Telenor). According to data from the Telecom Regulatory Authority of India, as of August 2017, Vodafone India had 208,144,702 subscribers while Idea Cellular had 191,059,301. By contrast, Bharti Airtel served 281,043,837 subscribers.

Reliance Jio’s advantage could partly be attributed to its new all 4G LTE network, touted as the world’s largest 4G LTE network when launched in September last year. The network cost US$ 25 billion and six years to build which meant Reliance Jio was a late entrant to India’s 4G arena, given that competitors Bharti Airtel, Vodafone India and Idea Cellular launched 4G services much earlier, despite all players receiving the spectrum at the same time in 2010. Reliance Jio’s 4G LTE network, based on the VoLTE protocol, offers lower operational cost, spectral efficiency and better user experience compared to previous telecommunication technologies.

VoLTE is essentially HD voice calling services over a 4G LTE network rather than over 2G/3G networks. This means voice calls and mobile data are sent over one network i.e. 4G LTE, rather than managing different network layers for voice and mobile data. This compares with the traditional circuit-switched networks in which data would be sent through 4G for instance but the customer would switch to 2G during a voice call. For the customer, call quality is inferior on the older technology compared to VoLTE. For the wireless carrier, a VoLTE network is considered to be more cost efficient to operate, compared to managing multiple network layers i.e., 2G, 3G and 4G. Additionally, with a VoLTE network, operators can free up spectrum that had been used for traditional voice services and put them to use for more lucrative data services. The end result is that VoLTE network operators can deliver voice services at a lower cost per minute compared to traditional voice and it is this technology that enables Reliance Jio to offer ultra-cheap data services and free voice calls without a significant dent to their bottom line. Reliance Jio surprised analysts when it reported a solid ARPU (Average Revenue Per User) of 156.4 during the quarter ended September 2017, and is expected to post a net profit in its next financial year.

Reliance Jio’s disruptive entry with its all-VoLTE network hastened the demise of 3G in India. Reliance Jio is currently the only operator offering VoLTE services throughout India and while the company has the first mover advantage, incumbent operators, which currently offer voice calling services on legacy circuit-switch technology, are moving quickly to narrow the technology gap. Bharti Airtel, Vodafone India and Idea Cellular all plan on introducing VoLTE services throughout India in the coming months. Bharti Airtel is particularly aggressive having plans to, shift its 3G users to 4G, shut down its 3G services within two years and refarm the spectrum linked with it for 4G services.


Enormous growth potential

The surviving trio stands to gain from India’s mobile market, the world’s second-largest. India has witnessed a steady increase in its mobile phone user base over the past decade. However, with nearly 1.2 billion mobile subscribers currently, the vast majority of India’s population (estimated at some 1.3 billion) has a mobile subscription, and thus subscriber growth in the country is likely to have reached its zenith even if the potential growth of users with two or more handsets is considered. According to data released by the Telecom Regulatory Authority of India (TRAI), the number of mobile phone subscribers in India fell by nearly one million from 1,186,790,005 at the end of July this year to 1,185,841,228 at the end of August this year.

The growth opportunity is likely to lie in mobile data consumption which is projected to rise exponentially as India’s telecom sector shifts from a voice-based model to a data-centric one driven by rising smartphone penetration among other factors.

This year, India overtook the US to be the world’s second largest smartphone market in the world, behind China according to tech analyst Canalys. However, nearly half of India’s over 1 billion mobile phone users are on feature phones, making up the largest feature phone population in the world. The majority of India’s feature phone users are located in rural towns and villages where smartphones are relatively unaffordable for compared to urban dwellers. This may explain why despite offering data services at cut-throat prices, Reliance Jio’s customer base is relatively urban-centric compared to the incumbent telecom operators Bharti Airtel, Vodafone and Idea Cellular which all have a balanced mix of urban and rural subscribers.

Bar chart showing the proportion of rural vs urban subscribers of Indian wireless carriers’ mobile subscriber base. The breakdown is as follows: Idea Cellular (55.2% rural, 44.8% urban), Vodafone (54.2% rural, 45.8% urban), Bharti Airtel (50.3% rural, 49.7% urban), Aircel (35.5% rural, 64.5% urban), BSNL (32.2% rural, 67.8% urban), Telenor (28.8% rural, 71.2% urban), Reliance Jio (24.8% rural, 75.2% urban), Reliance Communications (21.8% rural, 78.2% urban), Sistema (21.8% rural, 78.2% urban), Tata (20.4% rural, 79.6% urban) and MTNL (1.3% rural, 98.7% urban).

Noticing a business opportunity, Reliance Jio launched a cheap 4G enabled feature phone, targeted at price-sensitive rural customers. To counter Jio’s move, Airtel quickly moved to launch its affordable Airtel 4G smartphone in partnership with Indian handset manufacturer Karbonn, and is also reportedly partnering with Lava, another homegrown manufacture to launch another affordable Airtel 4G smartphone.

Smartphone companies are also getting into the game. China’s ZTE (SHE:000063) is targeting India’s rural mobile phone user base with its entry-level smartphones while Xiaomi and Samsung (KRX:005930) are ramping up their retail networks to better serve rural customers. Over the long run, these feature phone users will upgrade to smartphones, which should drive India’s mobile data consumption.

Indian telcos currently derive bulk of their revenue from traditional voice however the ratio is expected to reverse as the country is expected to follow a trend playing out in major telecom markets in which rising mobile data usage is leading to rapid data revenue growth while voice revenues decline. For instance, in China, the world’s largest mobile market by subscriber number with about 1.3 billion subscribers, booming data consumption is a major growth driver and the country’s Big Three carriers China Mobile (HKG:0941) (NYSE:CHL), China Telecom (NYSE:CHA) and China Unicom (HKG:0762) (NYSE:CHU) have seen mobile data emerge as their largest revenue source, surpassing the combined revenues from traditional voice and text messages.

By contrast for wireless operators in India, the world’s second biggest mobile market after China, traditional voice remains their biggest cash cow although this is changing. According to a report by Deutsche Bank, in FY 2015, voice revenue accounted for 80% of India’s telecom industry revenues. In FY 2016, this declined to 74.3% and to 73.45% in FY 2017. It is expected to fall to 69% in FY 2018, 61% in FY 2019, 56% in FY 2020 and will make up less than half of total industry revenues in FY 2021 which means data revenues will emerge as the sector’s dominant revenue source for the first time.

As the battle for mobile data revenue heats up, the incumbent operators may have a near term opportunity in their hands that disruptor Reliance Jio may be unable to reach. Reliance Communications has announced its intentions on exiting the 2G business by the end of November this year, which means all of the company’s 2G customers, numbered at approximately 40 million, would need to port out to another network operator, presenting an opportunity for Bharti Airtel, Idea Cellular and Vodafone India which operate 2G networks. This customer base is out of reach for Reliance Jio, a pure-play 4G operator and while Jio could woo them with its 4G feature phone, how many take the offer remains to be seen.


2G likely to remain strong

The world has been moving away from 2G. Japan was the first country to begin switching off 2G networks and South Korea followed suit, setting off a trend worldwide as countries see declining numbers of 2G users. For instance, when Singapore switched off its 2G networks in April this year, the country’s 2G user population amounting to about 100,000 people made up less than 3% of the country’s mobile user base at the end of March according to data from the Infocomm Media Development Authority (IMDA). In Australia, where 2G networks were retired a few months later, less than 2% of mobile phone users were using 2G services.

By contrast, about 50% of India’s mobile phone users are still on 2G networks. According to the Indian Cellular Association, India has about 400-500 million feature phone users (roughly half of the country’s total mobile phone user base) with 130-140 million feature phones being sold each year. These feature phone users, mostly located in rural towns and villages, are still on 2G networks, primarily to make voice calls. Although they will account for a shrinking portion of mobile subscribers with cheap 4G LTE devices are gradually penetrating the market such as those by Reliance Jio and Airtel, the high number and proportion of 2G users means 2G is unlikely to fade away in India in the near future - offering a captive market for operators Bharti Airtel, Idea Cellular and Vodafone.