During 2017, data consumption increased manyfold with a strategic shift from voice-oriented offerings to data-driven ones. This did not, however, provide any financial respite to operators, who continued to report sliding revenues and profitability. Going forward, their key priority will be to devise new revenue models to stay competitive. Moreover, the policy landscape is expected to evolve significantly as the National Telecom Policy, 2018 gets finalised. Industry analysts comment on the sector’s performance, key challenges and future outlook…
How would you rate the industry’s performance during 2017? What were the highs and the lows?
Hemant Joshi
TMT Leader,
Deloitte India
Hemant Joshi
The telecom sector went through many important changes in 2017. The hypercompetitive market with 12 telecom operators witnessed numerous mergers and acquisitions (M&As), which are expected to have a deeper impact on the sector. Apart from consolidation, 2017 can also be referred to as a year of data revolution in a country that was predominantly voice-centric, with the internet subscriber base reaching 420 million. Further, the commercial launch of 4G services across the country and the rising competition helped in reducing data service tariffs significantly. Amidst all the positives, the debt issue (cumulative debt of Rs 4.5 trillion) in the industry and the high spectrum prices were major challenges.
Inderpreet Kaur
Analyst,
Ovum
Inderpreet Kaur
While 2017 will be viewed as one of the most challenging years for Indian telecom operators, it will also be marked as a year of disruptions. The entry of a new formidable competitor, Reliance Jio Infocomm Limited (RJIL), disrupted the market with rock-bottom pricing for data services and the introduction of free lifetime voice calling. The year 2017 also proved successful for mobile broadband services, and 4G long term evolution (LTE) finally crossed the 10 per cent penetration mark, five years after 4G services were launched in 2012.
The M&A announcements in the sector indicated that the industry will move to a more sustainable structure, which will help operators cope better with challenges. Moreover, 2017 saw new collaborations between service providers and local handset vendors. In an industry first, the incumbents introduced low-cost voice over LTE-enabled feature phones to migrate the large base of existing GSM subscribers to LTE. Operators also partnered with content providers to offer new and exclusive content to their subscribers.
Parul Malhotra
Associate Director,
Telecommunications,
EY
Parul Malhotra
The year 2017 was a watershed year for the Indian telecom industry; a year marked by disruptive changes that are set to redefine the Indian telecom growth story. Demonetisation powered the rise of digital payments, indicated by an 80-85 per cent increase in the value of digital transactions in 2017-18. In 2017, there were close to $1.5 billion worth of investments in m-payments. Unified Payments Interface (UPI)-supported payment platforms are further pushing India towards a cashless economy. With over 350 million smartphone users and the impetus provided by the government, we are well on the way to realising the Digital India dream. India witnessed a massive upsurge in data consumption, marching past China and the US to be the leading data consumer worldwide, averaging 1.5 billion GB per month. In fact, it is expected that by 2023, India’s total mobile data traffic per month will grow eleven times to reach 14 exabyte from 1.3 exabyte in 2017. A dramatic shift from the bits to the bytes model, increased data allowance on floor plans and free digital content with new subscriptions were pro-demand, pro-consumer strategies.
Nitin Soni
Director, Asia-Pacific
Corporate Ratings,
Fitch Rating
Nitin Soni
The industry was characterised by intense competition in 2017 led by Reliance Jio. The industry’s revenue and EBITDA declined for the first time in years, mainly due to the free voice, text and data offerings started by Reliance Jio during September 2016-March 2017. The incumbents struggled to compete against the aggressive pricing behaviour of Reliance Jio and had to cut their tariffs to retain subscribers, which affected their financial performance in 2017.
On the positive side, this intense competition resulted in the consolidation of the industry from 10-12 players to three telecom companies now, excluding government-owned telcos. We believe that the industry structure has now corrected, which will gradually provide pricing power to the incumbents once Reliance Jio’s pricing behaviour stabilises.
How has the policy and regulatory landscape changed over the past one year?
Hemant Joshi
There have been many policy and regulatory developments in the past year to keep the sector competitive. Interconnection usage charges and quality of service (QoS) for basic and cellular services remained the highlights in 2017. Further, amendments to the spectrum trading guidelines, recommendations on ease of doing business, net neutrality and internet telephony are soon likely to see final regulations. Moreover, the sector is expected to see more regulatory changes under the upcoming National Telecom Policy, 2018 (NTP, 2018).
Inderpreet Kaur
The regulator and the government have been considering new policy initiatives to ease the financial burden on operators. Policymakers held discussions on reducing spectrum usage charges, extension of the deferred payment period for spectrum, reducing the universal service obligation levy on operators, and revising the goods and services tax rate for telecom services. Policymakers have also been reviewing spectrum caps to further ease sector consolidation. The regulator has also recommended changing the current limit that allows operators to hold up to 50 per cent of the total available spectrum within a band in a zone. The Telecom Regulatory Authority of India (TRAI) also favoured increasing the limit for overall holdings across all bands to 35 per cent from the current 25 per cent. For the sub-1 GHz bands (including 700 MHz, 800 MHz, 900 MHz), TRAI suggested a combined spectrum holding limit of 50 per cent.
Nitin Soni
The telecom industry benefited from a benign and favourable regulatory environment in 2017. The Department of Telecommunications’ decision to allow operators to pay spectrum liabilities over 16 years, rather than 10 years, is a positive development. The longer time frame allowed for the payment of spectrum liability will provide a cushion to telcos’ declining cash flows. The regulator’s decision to relax spectrum caps will further add to the consolidation. The increase in spectrum limits will provide a relief to Vodafone-Idea Cellular and Reliance Jio as they earlier had the problem of returning some excess spectrum in some circles to the government following their spectrum acquisitions. However, TRAI’s decision to reduce interconnection charges by 57 per cent on voice as well as the recent deduction of international interconnection charges proved to be negative for the incumbents and positive for Reliance Jio. However, the asymmetry of traffic between Jio and the incumbents will gradually narrow as Jio gains more subscribers.
“The sector is witnessing major M&A activity and is expected to consolidate into a market with three to four major players.”
Hemant Joshi
How has consolidation changed the dynamics of the telecom sector? What impact has it had on stakeholders in the industry?
Hemant Joshi
The sector is witnessing major M&A activity and is expected to consolidate into a market with three to four major players. Consolidation has helped some major operators gain market share and increase their spectrum holdings in a short span of time. Further, consolidation will eliminate weaker and uninterested players and only serious players who want to stay in the business for the long term will remain. From an end-user perspective, consolidation has helped in reducing tariffs as well as improving service quality. However, the QoS needs to be aligned with global standards.
Inderpreet Kaur
Owing to consolidation, bigger changes are expected in the tower space. Telcos are disposing of non-strategic assets amid a changing industry. In March 2017, Bharti Airtel sold a 10.3 per cent stake in Bharti Infratel to raise Rs 62 billion ($958 million) to pare debt and combat competition from RJIL. More recently, Bharti disposed of an additional 3.65 per cent stake in the tower business for about Rs 25.7 billion ($397.5 million) to build its core business, mobile services. As the industry prepares itself for consolidation, most operators have started separating their core and non-core businesses. For Vodafone and Idea, the decision to sell off their respective tower business shares is the first step towards deleveraging their balance sheets before the two entities begin their merger. Like Bharti and Reliance Communications, the decision to dispose of their tower assets will help Vodafone and Idea raise additional funds for expanding their mobile broadband networks and improving their QoS for consumers.
Parul Malhotra
Operator consolidation in the sector was preordained; however, the pace at which things unfolded is fairly interesting. The upside of consolidation is price discipline, market share gain for the incumbents, a focus on customer and network experience, and a path to recovery in the latter part of 2018/early 2019. Operators are transitioning to digital service providers through content partnerships and alliances with handset makers. Equipment vendors have been under pressure with the decline in telco spending on networks. A revaluation of contracts is expected as telcos look to unlock merger synergies. However, the onward thrust on deployment of networks is set to drive long-term growth for the players. The shift towards data is causing operators to drive asset sales. The exit of marginal wireless operators is impacting peripheral tower players and forcing them to relook at their own business models. There is likely to be the emergence of three to four dominant pure-play infrastructure players. All this will pave the way for a robust infrastructure market as the cornerstone of the sector’s digital endeavours.
Nitin Soni
Industry consolidation has corrected the industry structure to three large telcos – Jio, Bharti Airtel and Vodafone-Idea – with better balance sheets and the possibility of a gradual improvement in pricing power. Spectrum assets have also consolidated among these operators, supporting network expansion and decongestion of 4G networks. Smaller and weaker telcos exited the industry following aggressive competition from Reliance Jio in 2017. We expect that consolidation will improve the internet experience and the ability to invest in 5G networks, and provide pricing stability to telcos in the medium to long terms. Most Asia-Pacific telco markets do not have more than three to four large telcos.
“While 2017 will be viewed as a challenging year for operators, it will also be marked as a year of disruptions.”
Inderpreet Kaur
What are the key challenges facing operators? What should be the key operator strategies/focus areas in the coming year?
Hemant Joshi
The Digital India initiative to bring everyone into the digital ecosystem has provided numerous opportunities to operators. Further, the ease of doing business has improved in the past few years. However, operators still face many operational challenges:
- Reduced revenues: Operator revenues are falling due to declining tariffs and diminishing demand for voice services. Operators are providing bundled services to sustain profitability.
- High capex requirements: Capex requirements are high due to the growing demand for new technologies, infrastructure development for better QoS, high-priced spectrum, etc.
- High taxation: The cumulative tax of around 33 per cent for Indian operators, compared to those in markets like China (22 per cent), the European Union (20 per cent) and the US (17 per cent), puts additional pressure on their balance sheets.
- OTT: Over-the-top (OTT) services are gaining popularity and are using operators’ channels to provide voice and messaging services without any revenue sharing options. However, operators are constantly improving their business models to withstand the disruption brought in by OTT services and new entrants. Some major telcos are expected to start high-speed broadband services via fibre-to-the-premises, which could be a game changer in the telecom market. Further, the key performance indicators of telcos are shifting from QoS to quality of experience.
Inderpreet Kaur
In the short term, telcos will try to gain subscribers from operators exiting the market to maintain their lead in subscriber market share. This means industry will continue to struggle to establish any pricing discipline in the short to mid-term. However, offering quality services to subscribers amid the ongoing consolidation will remain a challenge. Maintaining good service quality with the increasing data load will require operators to improve capacity on access and backhaul networks and, therefore, demand higher capital commitments. Subscriber churn will be a bigger concern in the new age of data services as subscribers will not be tied to phone numbers as they were in the case of traditional voice services. Operators will have to emphasise on user experience to retain subscribers on their data networks.
Parul Malhotra
Debt, estimated at Rs 4.6 trillion, continues to be a major deterrent to the industry’s sustainability. Capital intensity is likely to remain elevated from a capacity and coverage standpoint. The return on capital employed (RoCE) profile for most operators is below the cost of capital. The financial state of the sector is under distress.
We could call 2017 a foundation year that will pave the way for onward growth. To emerge from the grim situation, operators will have to take a strategic call on their wireless businesses and deleverage non-core assets to repair their balance sheets. A focus on innovative business models and an enhanced customer experience will be central to operators’ strategies. Building a digital portfolio through strategic partnerships will witness increased play. Handset-telco bundling is likely to be on the rise.
Nitin Soni
The key challenges faced by the industry are declining blended tariffs with limited pricing power, a high subscriber churn rate and “no growth” capex. Industry revenue and EBITDA declined in 2017 on lower tariffs, despite significant growth in data usage, as blended tariffs declined significantly. Free cash flow generation declined for most incumbents as higher data usage required larger capex investments to decongest networks. Therefore, a large part of the capex proved to be “no growth” capex as telcos invested a significant part of their capex to just maintain their EBITDA.
The revival of pricing power, led by a change in pricing behaviour by Reliance Jio, will be a key driver for telcos in 2018. Pricing discipline and a focus on profitability need to be a priority for the sector in order to provide sustainable industry growth. Telcos will need to continuously invest more to expand their 4G networks in Tier II and III cities and rural areas to expand the coverage and capacity of their data networks.
“2017 was a year marked by disruptive changes that are set to redefine the Indian telecom growth story.”
Parul Malhotra
What are your expectations from 2018? What will be the key trends driving the growth of the telecom sector during the year?
Hemant Joshi
During 2018, the NTP, 2018 is expected to address various regulatory issues faced by the sector, such as simplification of telecom taxes, licence reforms, ease of doing business and right of way. The new policy will also focus on granting internet access to every citizen, which will help the government’s Digital India initiative.
The major trends in the sector are likely to be:
- Consolidation: Consolidation in the sector as well as in allied sectors will continue in 2018. Players with a strong financial background are expected to dominate while weaker players could merge with others as an exit strategy. The new policy on spectrum caps could help in consolidation.
- New business models: Telcos will move to innovative business models to counter declining revenues. Converged services with voice telephony, wired and wireless broadband, and television services along with relevant content will help in improving revenues and profitability.
- 5G and emerging technologies: The rising demand for data and innovative services will see more investment in 5G research and development in the country. Emerging technologies such as internet of things (IoT), machine-to-machine communications, artificial intelligence (AI), drones and robots will create more demand in the market.
- Spectrum auction: The government is expected to hold another spectrum auction to make the ecosystem ready for upcoming technologies. The highly efficient 700 MHz band spectrum, which remained unsold in the last auction, is expected to be in focus.
Inderpreet Kaur
The short-term approach of competing on price alone will not be an effective strategy, and operators will need to more than just sell subscribers access, which means telcos will have to evolve from the dumb pipe route. Digital services and solutions will become the top priority for telcos. Incumbents are already taking steps toward becoming digital service providers. Market leader Bharti Airtel has announced multiple initiatives to build a set of digital services for its future customers. Under Project Next, Bharti has allocated Rs 20 billion ($310 million) to improve the customer experience by digitising 2,500 retail stores and developing a suite of digital services over the next three years. Bharti’s recent partnership with Amdocs to focus on machine learning and AI technologies is aimed at transforming the customer experience across multiple touch points. Further, previously known price leaders will have to think about establishing a good cost structure model that is sustainable. To grow in the game, operators will have to add rich content offerings to the strategy framework. Operator strategies will have to move beyond just focusing on traffic numbers and will have to look at designing a broader approach that will encourage loyalty and a shift towards post-paid subscriptions.
Parul Malhotra
After weathering the year gone by, this year is likely to ring in stability for the sector. Pricing power is expected to return to operators. Revenue and profitability are expected to hit the growth trajectory in the backdrop of data consumption and innovative asset-light business models. Feature-rich phones will continue to be displaced by smartphones. Whatever can be connected will be connected – IoT will be on the rise. Alliances and partnership will be high on operators’ agendas. The sector, which is the spine of the government’s Digital India vision, is looking forward to a promising NTP, 2018.
Nitin Soni
We revised the outlook of the telecom sector to stable in 2018 from negative in 2017 as we expect competition to ease with three large telcos emerging out of the industry shakeout. Their combined revenue market share will increase to around 90 per cent in 2018 (2017: 80 per cent).
“The revival of pricing power, led by a change in pricing behavior by Reliance Jio, will be a key driver for telcos in 2018.”
Nitin Soni
We believe that Reliance Jio will gradually change its pricing approach to monetise its large investment ($31 billion-$34 billion) from hunting for a larger subscriber base. We expect that mid-2018 could be an inflexion point for the industry, when Reliance Jio could gradually start increasing tariffs. The incumbents would definitely welcome such tariff increases and it will help their financial performance for 2018-19.
Data usage growth will continue in 2018. Data usage per subscriber per month increased five-fold for market leader Bharti Airtel to 5 GB in the quarter ending December 2017. A small growth in industry blended tariffs from a low base along with growing data usage will be a positive, leading to revenue and EBITDA growth for the industry. In addition, growing data usage will increasingly cannibalise voice and text usage, leading to a decline in traditionally profitable services.
In terms of spectrum auctions, we do not expect any major auctions to take place in 2018. The government plans to auction the 700 MHz spectrum, which may find limited participants given that 700 MHz is expensive and the ecosystem has not yet fully developed. However, the regulator may take additional positive steps for the industry in the form of lower spectrum usage charges and low revenue sharing with the government.
