The telecom sector did not see a dull moment through 2017. There were a series of changes  – in terms of structure, business dynamics, operating models and growth drivers. Competition and consolidation were undoubtedly the two central themes that defined the action in the industry. and these, in turn, were driven by the entry of Reliance Jio Infocomm Limited (RJIL), which disrupted the market in more ways than one.

As a result of the intense competition, arch-rivals Vodafone India and Idea Cellu­lar joined forces to cement their position in the market. Meanwhile, large conglomerates like the Tata Group and Reliance Communications (RCOM) exited their telecom businesses, either partly or wholly, in 2017. Regional players like Telenor and Sistema Shyam TeleServices Limited also exited the sector, selling off their businesses to bigger operators. According to Sigve Brekke, global chief executive officer (CEO), Telenor Group, the significant in­ve­stments needed to secure Telenor India’s fu­ture business on a stand-alone basis wo­u­ld not yield an acceptable level of return. Meanwhile, Aircel, following its merger fallout with RCOM, scaled back its operations significantly.

The sector’s competitive landscape has undergone a complete revamp, with only six players operating in the market. “The sector has become a money guzzler where only those with deep pockets can survive,” said Anil Ambani in a press statement as RCOM announced its exit from the wireless consumer business.

Ironically, the companies with deep po­c­kets are also finding it hard to keep their finances healthy. Pricing power continues to elude the incumbents, as does profitability. Price wars have pushed earnings before interest, taxes, depreciation and amortisation (EBITDA) margins to an all-time low and debt levels to an all-time high. ARPU growth is stifled. The sector’s financial health is in bad shape. High debt levels, almost to the tune of Rs 5 trillion, are preventing the incumbents from in­vesting in network expansion and augmentation. According to the Economic Survey 2018, the telecom sector is going through a phase of financial stress and the revenues of the sector have fallen.

The recommendations of the inter-ministerial group constituted to look into the sector’s financial health have also failed to bring much cheer to the sector. The incumbents believe that recommendations such as extending the tenor of payments for auctioned spectrum and reducing the rate of interest charged on delayed payments are just piecemeal remedies, which may not yield adequate long-term benefits.

Amidst all the volatility, there was a silver lining for the industry. The year 2017 was clearly the year of broadband for India. The country outpaced the US and Ch­ina markets to emerge as the largest consumer of data services in the world. Moreover, BharatNet, the government’s flag­s­hip broadband programme, saw the completion of its first Phase in end-December 2017. Under the project, a fibre-based broadband network is now available across 100,000 gram panchayats and will serve as a major tool to tap the broadband potential of rural India.

Further, several encouraging regulatory and policy actions revived the general mood of the industry. The Telecom Com­mis­­­sion accepted the Telecom Regulatory Authority of India’s (TRAI) recommendations to relax the current spectrum holding caps for an entity. This is likely to ease consolidation transactions, as merging entities would be able to retain the majority of their spectrum. This will, in turn, allow operators to provide better quality services.

As far as the formulation of the Natio­­­nal Telecom Policy, 2018 is concerned, significant headway has been made. In­dustry stakeholders are optimistic that the policy will address the long-pending issues and pave the way for sustainability and profitability.

Finally, some ground has been covered on the 5G front. Operators have started collaborating with network equipment vendors to build a 5G implementation roadmap. Given the growth momentum, the country may see 5G sooner than the 2022 timeline.

Net, net, 2017 was a high voltage year for the industry. The sector saw several ­em­­erging trends on the back of growing competition and consolidation. tele.net takes a look at key trends that shaped the Indian telecom sector and the outlook for 2018…

Impact of consolidation and competition

The industry is going through testing times as is evident from the weak financial performance reported by the incumbents in successive quarters. There has been a sharp drop in realisations on a year-on-year basis even as data uptake has grown at a rapid clip. For instance, revenues from Bharti Airtel’s India operations registered a decline of 15 per cent from Rs 180.12 billi­on in the quarter ended December 2016 to Rs 152.94 billion in the corresponding quarter in 2017. Meanwhile, Idea Cellular’s revenues declined by nearly 25 per cent from Rs 86.62 billion to Rs 65.09 billion during the same period. The operators attribute this reduction in revenues to the cut in interconnection usage charges (IUC). In an unprecedented move, TRAI slashed the IUC by 57 per cent, much to the disappointment of the incumbents, who have been lobbying for a hike. According to Gopal Vittal, managing director and CEO, India and South Asia, Bharti Airtel, “The regulatory fiat in the form of a cut in domestic IUC rates has exacerbated the decline in industry ARPU in the third quarter of 2017-18.” Surpri­sing­ly, RJIL went on to post its first quarterly net profit during this quarter.

The impact of consolidation and competition, however, was not limited to the services industry; its repercussions were felt across ancillary businesses as well, particularly the telecom tower industry. The year saw a decline in tenancies as several duplicate sites were shut down. There was also a correction in the industry’s structure, with stronger players consolidating their positions by acquiring the tower assets of operator-led ventures. The Ame­rican Tower Corporation’s acquisition of Vodafone and Idea’s towers ahead of their merger is a case in point.

Consolidation led to fewer players and fewer jobs. Driven by uncertainty, the attri­tion level of the industry also reached an all-time high. According to a report by CIEL HR Services, in 2017, around 40,000 people lost their jobs. This number is likely to touch 80,000-90,000 in the next six to nine months.

Broadband takes off

The year 2017 was a defining year for mo­bile broadband uptake. The year saw India leapfrogging from the 135th position to the number one spot in broadband usage globally. The massive data uptake recorded on operators’ networks through the ye­ar was the only respite amidst their  finan­­cial woes. Airtel’s mobile data traffic re­corded a 543.6 per cent growth (more than 6x), from 172 billion MB in the quarter ended December 2016 to 1,106 billion MB in the corresponding quarter of 2017. The monthly data usage per subscriber for Idea Cellular too increased more than six times from 703 MB to 4,742 MB during the period under consideration.

Meanwhile, RJIL recorded total wireless data traffic of 4.31 billion GB on its network during the October-December 2017 period. This growth was not driven purely by extensive 4G roll-outs or higher quality of service, but at least partly by the free/lucrative tariff plans offered to customers. In fact, “effectively free” has become the new “affordable” for the sector, a trend started by RJIL. The company took the operator battle to a new ground – the handset market. RJIL’s launch of Jio­Phone led to a new category of 4G feature phones targeted at first-time data users. Growth in 4G networks and devices also provided an impetus to the voice over long term evolution technology.

Mixed response to critical regulatory interventions

The policy and regulatory landscape evolved significantly during the year. TRAI remained true to its cause of safeguarding consumer interests and deliberated on various important issues such as net neutrality, quality of service, public Wi-Fi, spectrum auctions and data protection.

However, the incumbents felt that the regulator did not do full justice in terms of ensuring a level playing field, and free and fair competition. To this end, there were several recommendations and regulations that evoked strong opposition. Further, TRAI’s decision to slash the IUC was criticised, as was the imposition of 18 per cent goods and services tax on telecom services.

Meanwhile, moves such as recommendations on the ease-of-doing business and relaxation of spectrum caps were welcomed by the industry.

Emergence of innovative business models

With changing business dynamics and declining ARPU growth, operators are now moving beyond their conventional role as utilities and providing a range of different services. Strengthening their position in non-core areas such as direct-to-home services, content creation, internet of things (IoT) and financial payments will provide the much-needed boost to declining revenues. In 2017, Bharti Airtel bolstered its content play with a slew of partnerships including deals with Amazon Prime for video services. Airtel already has partnerships with Eros Now, Sony­LIV and HOOQ, and it recently made its Airtel TV app free for all its customers. Airtel also launched it payments bank busi­ness during the year. Meanwhile, Jio renewed its partnership with Eros Inter­national to offer the latter’s digital content to Jio customers.

Outlook 2018

Just when the industry thought that the excitement over free offers was subsiding and the sector was on the path to stability, RJIL, in January 2018, slashed its tariffs considerably, taking its peers and industry analysts by surprise. This will not only reduce the ARPU levels of the incumbents but also affect the sector’s recovery. Besi­des, there are several regulatory hurdles, levies and taxes that may impact infrastructure roll-out and slow down the recovery process.

These challenges notwithstanding, 2018 is likely to be a turnaround year for the telecom industry on several counts. Firstly, the wireless operator pecking order will undergo a marked change once Voda­­fone and Idea start operating as a single entity in April 2018. As the country’s largest telecom entity (in terms of subscriber base), the merged company could well dethrone Bharti Airtel from its pole position.

Moreover, the year is likely to bring a major respite to consumers from the problem of call drops. To this end, the Depart­­ment of Telecommunications (DoT) has directed the leading operators to complete the installation of additional towers, small cells and towers on wheels by March 2018 as per their commitments made during 2017. DoT has directed the operators to fast-track tower installations in Delhi, Mum­bai, and areas in Bihar and Uttar Pra­­desh that are worst-affected by this prob­lem. DoT has also noted that RJIL and Bharti Airtel have committed to invest a total of Rs 740 billion during 2018-19 to expand infrastructure.

Investments in new technologies such as edge computing, massive MIMO (multiple-input, multiple-output), artificial intelligence and IoT will also improve job pros­­­­pects in the industry over time. TRAI’s recommendations on in-flight con­nectivity and ease-of-doing business will, moreover, open up opportunities for operators. In ad­d­ition, significant ground is expected to be covered as 5G trials pick up pace during 2018.

The government is set to announce the National Telecom Policy, 2018 by April this year, which will infuse optimism in the sector. The industry has high hopes from the policy. It is expected to offer “permanent fixes” by relaxing some of the levies, charges and taxes imposed on the sector. It is also expected to address the regulatory issues impeding infrastructure roll-out.

Industry experts are extremely positive about the course correction in the sector and expect long-term profitability to prevail, once the consolidation phase ends. This will help lower the cost of operations and bring back pricing power to operators. Above all, they expect 2018 to restore the much-needed financial stability in the sector and revive the growth momentum.