The dust seems to be finally settling in the telecom industry after a period of consolidation.
The year 2018 saw some semblance of stability returning, as the industry realigned its strategies and geared up for the next level of growth. The key themes of the year were: market consolidation, surging data uptake, policy and regulatory impetus, and the convergence of the digital and telecom ecosystems. Besides, the year saw telcos exploring new strategies to improve their revenues and business prospects. Interestingly, despite shrinking margins and mounting debt, operators continued to infuse capital into network roll-outs. Fibre emerged as a key focus area and is set to become the backbone of the networks of tomorrow. 5G became the buzzword, with the government lending its weight to a rapid roll-out, in line with global timelines.
Of course, the key highlight of the year was the release of the National Digital Communications Policy (NDCP), 2018. Endorsed as a major reform move, the policy is expected to catapult India into the digital era. NDCP 2018 seeks to address key sector issues and presents several new avenues for growth. Well-received by most industry stakeholders, the policy underlines the telecom sector’s role in facilitating India’s transition to a digital economy. It talks about massive investments of around $100 billion and puts the spotlight on fibre and satellite communications as key means to achieve ubiquitous connectivity across the country. Overall, NDCP 2018 is pivoted on ensuring long-term sustainability of the sector and encouraging investments in futuristic technologies.
On the flip side, the industry continued to be under severe financial stress during the year, with its collective debt growing to about Rs 7 trillion. This compelled the incumbents to explore new innovative revenue streams and monetise their assets to deleverage their balance sheets.
tele.net takes a look at the key developments that shaped the telecom sector during 2018 and their likely impact on 2019…
A 3+1 player market
The sector finally achieved the “ideal” industry size as the market consolidated into a three-plus-one structure. Traditionally, the Indian telecom sector has been one of the most overcrowded markets in the world, and the need to move to a sustainable industry structure has always been felt. Market consolidation has helped in weeding out the laggards, leaving only serious players with deep pockets in the fray.
The exponential growth in mobile data is a silver lining amidst the ongoing financial turmoil in the sector. The pace of 4G proliferation in 2018 has been exemplary. Besides the expansion of telco networks, the rise of over-the-top (OTT) platforms and social media networks such as WhatsApp and Facebook, and the adoption of video services and other rich multimedia services are driving the data uptake.
The public Wi-Fi space has evolved significantly, with data services now available in various public places, even on trains. In fact, with the government’s green signal to in-flight and maritime connectivity, users will soon be able to access data during air and sea travel.
A maturing data ecosystem is also giving the much-needed fillip to government programmes such as Digital India and the Smart Cities Mission, which are seeing significant participation from telcos and other industry stakeholders. These programmes have opened up new avenues for towercos, which are now looking to expand their offerings beyond towers to in-building solutions, Wi-Fi, fibre, etc. Phase II of BharatNet also picked up pace during 2018, although the programme has recently been criticised for poor maintenance of the Phase I infrastructure.
There is also a healthy dose of optimism in the industry around 5G. Industry confidence in the technology is evident from the various collaborations and partnerships announced through the year. The government, in particular, is keen to not miss the 5G bus and has been at the forefront of preparing the country for a 5G future. NDCP 2018 also highlights the role of 5G in paving the way for the large-scale adoption of new-age technologies such as internet of things and artificial intelligence.
Customers are increasingly becoming digital citizens and telcos are looking at this as an opportunity to diversify revenues beyond traditional services. They are pursuing service differentiation and cross-industry partnerships in the areas of mobile payments, video streaming, digital marketing, mobile entertainment, cybersecurity and cloud-based services. These value-added businesses may be margin dilutive, but they are essential to keep telcos relevant in the digital ecosystem. Bharti Airtel, Reliance Jio and Idea have secured payments banks licences to engage in the digital payments business. They have also launched their own apps to provide content such as music, entertainment and education. In 2018, the industry saw several telcos collaborating with content players to ensure customer stickiness. This, however, means that operators now have a new crop of entities such as OTTs, digital payments companies and content players to compete with.
Struggling with huge debt, the companies decided to monetise their assets by transferring them to subsidiaries. Recently, Bharti Airtel decided to sell stake in Bharti Infratel to its wholly owned subsidiary, Nettle Infrastructure Investments, to monetise its stake in the future. Prior to that, Vodafone Idea Limited (VIL) decided to demerge its fibre infrastructure business by transferring its assets to a new subsidiary. Reliance Jio also announced that it would hive off its fibre and tower businesses and form two separate companies.
In many ways, 2018 can be considered a watershed year, a precursor to a major turnaround in 2019-20. With the rationalisation of the industry structure, the market is poised for a relatively more stable pricing environment. Having already cornered substantial market share, Reliance Jio is finally expected to tone down (and eventually abandon) the pricing intensity (in terms of tariffs and discounts) with which it has been wooing customers so far. It is instead expected to focus on high-ARPU customers, resulting in a positive impact on industry ARPUs. Fitch Ratings expects a 5-10 per cent growth in industry ARPUs over the next 12 months, from the current level of Rs 100-Rs 105, driven by factors such as a positive impact of the minimum recharge plans rolled out by the incumbents.
That said, these early signs on price recovery will not be enough to make good the revenue loss that the industry has suffered in the past two years. Clearly, a full recovery is still a few fiscals away. Moreover, effective January 1, 2020, interconnection charges will become zero, which will impact the incumbents’ revenues.
Meanwhile, it will be interesting to see whether VIL will be able to maintain its lead (in terms of revenue market share [RMS]) in the coming quarters. The industry believes that Bharti Airtel and possibly even Reliance Jio could pull ahead of VIL, if it does not address the challenges related to network integration at the earliest. As per Fitch, VIL’s cash flows may be insufficient to draw level with either Reliance Jio or Airtel on 4G capex spends. The rating agency further states that Airtel and Reliance Jio could end up holding roughly 33 per cent RMS each by end 2019, while VIL’s share could drop to below 30 per cent from its near 33 per cent at present.
As for capex guidance, India Ratings and Research expects telcos to invest around Rs 700 billion during 2019-20, which is more or less similar to the capex undertaken by them during 2018-19. Much of this will be spent on 4G network enhancement and fibre roll-out. In fact, analysts expect the overall industry data traffic to rise 20 per cent year on year in 2019, owing to telcos expanding their 4G coverage. On the wireline side, the fibre-to-the-home (FTTH) segment is maturing and with the launch of JioGigafibre, 2019 will see FTTH emerge as the new battleground for telcos.
Of course, 5G will continue to be the catchword of the industry, with trials expected to gain traction during 2019. However, much would depend on the success of spectrum auctions, slated for mid-year. The government would have to fix reasonable reserve prices in order to attract players. While the government’s aim of commercialising 5G in India in line with global timelines seems a bit of a stretch given the current ecosystem, the impact of 5G will be felt beyond telecom, across several other industries. 5G will, no doubt, be a game changer in India’s digital journey.
(This section presents a detailed review of the key developments in policy, regulation, telco businesses, technology and infrastructure during 2018, as well as the outlook for 2019.)
Akanksha Mahajan Marwah