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Competition Overload: Are aggressive tariffs sustainable in the long run?

May 16, 2017
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Reliance Jio Infocomm Limited’s (RJIL) entry into the telecom market in September 2016 kick-started an aggressive tariff war among operators, with the incumbents resorting to a never-ending spiral of price reductions to arrest user churn and get more customers on board. This resulted in a sharp drop in the ARPU over the past few months, putting sustained pressure on operators’ profit margins. However, the situation is likely to change with RJIL withdrawing its promotional offers, though its tariffs still remain extremely competitive. Meanwhile, the ongoing wave of consolidation in the sector is likely to give the incumbent operators more resources to compete more aggressively. These developments augur well for the data services market as affordable tariffs will drive increased traffic. Industry experts share their views on the impact of the end of RJIL’s free services, the incumbents’ future strategies and the outlook for the data services market...

How is RJIL’s withdrawal of its promotional offers likely to impact its existing and potential subscriber base? Are the company’s new tariff plans sustainable in the long run?

T.V. Ramachandran

It is axiomatic that the withdrawal of any promotional offer by any operator, new or old, will inevitably have some effect on the retention of subscribers availing of the offer. The same axiom would apply to RJIL, which added 100 million subscribers in 170 business days. Despite discontinuing its initial free offer, RJIL has been able to retain nearly 85 per cent of its subscribers. As many as 83 million customers have signed up for its subscription-based service, JIO Prime. This is highly creditable. With the extension of the subscription deadline for its paid plans to April 15, 2017 and waiver of monthly recharges for three months for those registering within the timeline, the number of subscribers is expected to go up and the 100 million milestone may be crossed again.

The telecom market in India is extremely dynamic and operators have to frequently tune their tariff plans to stay relevant. Thus, the sustainability of any tariff plan is a slightly difficult question to address. With the subscription available for Rs 99 and tariff plans starting from Rs 303, even if one assumes a yield of only 50 per cent on the rack rate, RJIL might still be able to earn an ARPU that either matches or exceeds the industry ARPU of about Rs 130 (as of September 2016). Moreover, being a late entrant, RJIL enjoys the economies due to the low cost of equipment, as prices have come down significantly over the years. It has also incurred lower spectrum costs. In a way, RJIL has the benefit of earning more than the industry average ARPU at less than the industry cost. In the above scenario, there may be no difficulty in the short term. However, in the long run, the sustainability of the tariff plan will depend on various other factors such as how effectively the operator addresses the market and how effectively it creates “customer delight” in a highly competitive market, besides ensuring quality of service (QoS). In mobile communications, the most important aspect of service quality is the ubiquity and quality of signal coverage. Overall sustainability is crucially dependent on these rather than on tariffs alone.

Brijendra K. Syngal

There is a lot of difference in customer perception/behaviour when it comes to choosing between a free service and a paid service. Customers who have had a good experience with a free service may continue once the service becomes paid, but those with a not-so-good experience may not subscribe to the paid service. Also, it must be understood that for most, if not all, RJIL would have been the second or third SIM, not the primary one. Hence, for them to continue, good service quality is necessary. It appears that the quality of voice over long term evolution (VoLTE) has not been that great.

The new tariff plans are not sustainable at all. They should be making a blended ARPU of at least Rs 500 per month for at least 100 million customers to service their debt, unless oil (RJIL’s parent unit’s business) compensates for the revenue loss from free data offers. This can be achieved only by weaning high-end consumers from the competition.

Dr Mahesh Uppal

The withdrawal of promotional offers is likely to hurt RJIL’s subscriber base significantly. However, we should not overestimate this impact. RJIL allowed a large number of people to access data services for the first time and the majority of them are likely to stick with it. Moreover, even after the expiration of free offers, RJIL’s tariffs continue to remain very competitive. It is difficult to say if the operator’s tariff plans are sustainable, but I would not rule it out. Being a new entrant, RJIL has some cost advantages. For instance, unlike most of its competitors, it does not have multiple networks to run. It only has a 4G network, whereas Airtel, for instance, has 2G, 3G and 4G networks. Moreover, RJIL has put in a lot of effort into bundling data with content. If it is able to successfully cross-subsidise data with content, it would make the tariffs sustainable.

How successful have the incumbents’ strategies been in curbing customer churn due to RJIL’s entry? In your view, what strategies are operators likely to adopt going forward?

T.V. Ramachandran

It would be better to look at RJIL’s SIMs as low-priced additional SIMs that customers have subscribed to. While such SIMs add to the total connections/subscriber base of the country, there is very limited addition in the total number of unique subscribers. Thus, in terms of subscriber churn, we see very limited movement. Churn should be viewed as how much ARPU is moving from one operator to another. And here, we would see a substantial impact. The financial performance of all the incumbent mobile operators took a substantial hit during the quarter ended December 2016, and visibility on the timescale of improvement remains low. While tariff is an important factor to play with, the strategies going forward should focus on improving the QoS.

Brijendra K. Syngal

The strategy has been more reactive than proactive. A more proactive strategy exudes confidence and thus, a consumer would think twice before churning out. A reactive strategy is nothing but negative gazumping by making a lower offer for a service than others and thereby succeeding in acquiring customers. However, this is not sustainable. There has to be a scientific rationale for tariffs to justify the simple matching of a competitor’s offer. Any arbitrariness in tariffs would harm the health of the industry, as is the case now. How long and to what extent can one drop prices to retain market share are the key concerns. This is a very unhealthy practice. The regulator, competition commission and the government must look at the ground realities.

Dr Mahesh Uppal

Although there has been a large uptake of RJIL’s services, there has not been a considerable subscriber churn. Most users are using Jio as their second SIM. This implies that people haven’t abandoned their existing service providers. Hence, if RJIL does not live up to its promise either in terms of quality or tariffs, people could easily go back to their original operators.

Going forward, the incumbent operators would primarily want to protect their revenue generating customers because a small minority of people deliver the majority of revenues. Thus, if operators can ring-fence their high-worth customers by offering additional facilities or perks, the risk of competition from RJIL would be significantly reduced. This is because these are the customers who are not so price sensitive. I think the incumbent operators are competing quite aggressively with RJIL on quality as well as price, even though it has resulted in a fall in their revenues.

What will be the impact of the ongoing consolidation on the 4G market in general and on RJIL’s operations in particular?

T.V. Ramachandran

The impact of escalating competition from RJIL is being felt in many ways. The financial pressure on operators and continuous pressure on profitability have kick-started sector consolidation. Although consolidation began in 2016, the regulatory and business/culture integration processes are likely to take at least a couple of years for completion. Hence, the sector may stabilise in only about three to four years with four to five players. Besides, the growing trend of affordability in data tariffs, coupled with the availability of cheaper smartphones and increased operator investments in improving network coverage is likely to continue. This augurs well for consumers at large. With more operators adopting 4G technology, the GSM Association predicts that the number of 4G subscribers will grow to 280 million by 2020. Data consumption will continue to rise with the average Indian consuming data for using social media, watching movies, gaming, etc., while data tariffs are expected to reduce further due to increasing competition. The year 2016 saw the beginning of consolidation and it is likely to be taken to a more advanced level in 2017. We believe that this will help improve the overall financial health of the industry.

Given the importance of digitally empowering citizens, it is important that policy actions prioritise between the short-term benefits of immediate revenue generation and the long-term dividends that a robust, connected economy can create. The regulatory taxes and levies are extremely high at 25-30 per cent as compared to other Asian countries where it is no more than 5-7 per cent. India, therefore, needs to urgently rationalise the total regulatory cost. In the absence of this measure, there could be an adverse impact on the telecom sector as well as the overall economy, not merely causing a significant loss of revenue to the exchequer but also harming public interest.

Brijendra K. Syngal

Consolidation in the telecom sector was long overdue and RJIL has acted as a catalyst. Consolidation would bring in economies of scale in spectrum utilisation, infrastructure sharing, manpower costs, etc. These economies of scale may bring some more rationalisation in tariffs and all types of services across the country. RJIL will have to get its act together. It will be a tough competition for it.

Dr Mahesh Uppal

Any consolidation brings with it certain efficiencies and a reduction in wasteful investment. In that sense, consolidation would free up resources for 4G deployment. While RJIL is the catalyst for the ongoing consolidation, in the medium term, it will also find the going tough because a merged entity will be able to mobilise a lot more resources to fight back aggressively.

What is your outlook for the data services market in terms of service uptake, tariff movement and revenue realisations in the next six months?

T.V. Ramachandran

The entry of RJIL has led to an explosive uptake in data services. As per the latest CISCO VNI forecast for India, mobile data traffic will grow sevenfold from 2016 to 2021, a compound annual growth rate (CAGR) of 49 per cent. Mobile data traffic will reach 2 exabytes per month by 2021, up from 266 petabytes per month in 2016. Mobile data traffic will grow two times faster than fixed IP traffic from 2016 to 2021. Sixty per cent of mobile connections will become “smart” connections by 2021, up from 19 per cent in 2016. Mobile traffic per user will reach 2,154 MB per month by 2021, up from 393 MB per month in 2016, a CAGR of 43 per cent.

It is also likely that the market will usher in bundled voice and data plans, with more innovative and segmented packages being offered to customers. Due to falling revenues in the business-to-consumer space, it is expected that operators will change their strategies and focus more on the enterprise side to push revenues. Also, disruptive market trends may drive collaboration and partnerships between operators and content providers/aggregators/platform providers/over-the-top players. The Indian telecom space is likely to remain as vibrant and exciting as it is today, if not more.

Brijendra K. Syngal

The future clearly is data. Even voice is now transmitted through data, as in the case of voice over IP, VoLTE, etc. We have only seen the tip of the iceberg in terms of data uptake. In order to accelerate the growth of data, some innovative tariff formulation strategies need to be adopted. To put it simply, tariffs should be Rs 10-Rs 15 per GB. Data should be charged per use and the concept of data packages should be done away with. This would definitely improve realisation through renewed consumption.

Dr Mahesh Uppal

The outlook for data services is good because a much larger number of people have now experienced data services. This is likely to expand the market. It is also clear that in order to expand the uptake of data services, it is critical to have affordable tariffs. The recent experience has only reinforced this. Thus, operators will have to ensure that the prices are affordable, although this will not necessarily be good for their bottom lines or for their revenues. In the future, ARPUs will certainly fall. However, the expansion in subscriber base will help operators expand their absolute revenues and if these revenues are significantly higher than the implement costs, then this would not hurt them much. Although it will take them longer to break even, they will still remain cash positive.

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