The competitive intensity in the Indian telecom space has reached an alarming level following the entry of Reliance Jio Infocomm Limited (RJIL). Its predatory pricing strategy, coupled with aggressive roll-outs, has helped it acquire over 70 million users within four months of service launch – a record in itself. But what it also triggered was a wave of consolidation, which took an interesting turn recently when Vodafone India confirmed that it was contemplating a potential merger with Idea Cellular.
The proposed deal, which would be the biggest ever in the industry, comes on the back of highly pressured margins and cash flows of the incumbents. This was first reflected in the disappointing results posted by the two operators for the quarter ended September 2016, when their data realisations declined by 10-12 per cent. The following quarter, October-December 2016, has seen an even worse financial performance by operators with their profitability taking a major hit. As per a recent report by India Ratings and Research, the telecom industry lost about 20 per cent of its revenue due to the free voice and data services offered by RJIL.
Besides Idea-Vodafone, Reliance Communications (RCOM) and Aircel too are looking to merge their wireless operations to create a new merged entity. RCOM is separately in the process of acquiring Sistema Shyam TeleServices to execute a three-way merger involving Aircel to create the country’s fourth largest telecom operator by subscribers. Telenor is also looking to either merge with the RCOM-Aircel combine or be acquired by Airtel.
The consolidation drive is not just limited to the telecom operator space; it is visible in ancillary operations as well, especially towers. RCOM is currently in the process of selling its tower business to Brookfield for $1.6 billion, and both Vodafone and Idea Cellular are reportedly mulling selling their stand-alone operations. Bharti Infratel and Indus Towers may also see a change in control with divestment.
Such a rush of activity reflects that consolidation in the sector is at its peak and is likely to result in a 5+1 player market, which is considered to be an “ideal” number for a healthy, competitive industry.
What needs to be ensured is that the trend is arrested at this level as, all said and done, for a market as large and diverse as India, a little higher than usual competition is fundamental to growth and success as well as consumer protection.
