In a way, 2017 turned out to be a defining year for the Indian telecom sector. After several operator permutations and combinations, the market finally consolidated around four major operators, consi­derably changing the contours of the competitive landscape. This is an ideal scenario, industry analysts say, as a three- to four-player market generates an optimum balance between competition and investment. Therefore, with the dust now settling post the shake-up, the industry is anticipating some revenue growth and pricing discipline.

Market consolidation is likely to im­­­­prove ARPUs and capital efficiency, and en­sure stable long-term realisations for ope­­­­rators. The telecom industry has had to write off as much as $50 billion since the entry of Reliance Jio Infocomm Limi­ted (RJIL) and it is now desperately waiting for stability to return.

In such a scenario, there is serious speculation about what the future holds for the sector. Has the industry finally weathered the storm and is the era of bitter competition over? When will profitability return to the sector? Will the traditional growth drivers work in the changed scenario? Will traditional voice become redundant as voice over data takes over? What will the future revenue streams be?

As the industry attempts to find ans­w­ers to these and other questions, takes a look at some of the key trends that are likely to shape the sector in the next few years…

Revenue outlook

No significant revenue surge is likely in the near term, according to analysts. They hope that mid-2018-19 will be an inflection point when pricing power may return to the incumbents. But this is subject to RJIL’s pricing strategy and consumer reactions to a tariff hikes. Operators  may then finally stop promotions and discounts, and focus instead on returns on investments.

Further, revenue growth throughout 2018-19 is likely to be highly uneven across operators. RJIL’s ARPUs and earnings be­fore interest, taxes, depreciation and amortisation margins are likely to remain higher than the industry average since it serves a 100 per cent broadband user base, as compared to the incumbents, which have a big proportion of subscribers using 2G and 3G services. The lowering of interconnection usage charges has already had a negative impact on operator profitability during the third quarter of 2017, and this may continue for a few successive quarters. In the me­dium term, gro­wing data penetration and consumption will lead to a spurt in industry revenues.

Surging data consumption will be the single biggest driver for revenue growth owing to the expanding 4G coverage. In fact, over the longer term, mobile broadband will become synonymous with 4G. As such, industry analysts are speculating whether 3G networks will be phased out in India, well ahead of most countries in the world. Bharti Airtel already has plans to upgrade all its 3G subscribers to 4G over the next two years.

Voice and data bundling

Operators are expected to continue the bundling their voice and data offerings during 2018-19 in a bid to curtail subscriber churn. Bundled plans are helping the incumbents to get their voice customers to subscribe to data plans. Idea Cellular, for instance, is targeting low-end pure-voice customers to upgrade to higher ARPU levels through a series of innovative offerings. Bundled plans are also driving the transition of users from feature phones to smartphones.

Bundled plans currently account for nearly 20 per cent of the total plans in the market and may go up to as much as 40 per cent in 2018-19. Further, about 25 per cent of the total subscribers have switched to bundled plans during the past year, and this share is expected to increase to about 50 per cent in the next two years. Opera­tors expect the bundling strategy to discourage conversions from single SIMs to multi-SIMs and thus push industry ARPUs to as much as Rs 200 in the next two years, from the current Rs 130.

Market consolidation is likely to improve ARPUs and capital efficiency and ensure stable long-term realisations for operators.

Voice gets a new face

Voice in India will finally start moving towards voice over long term evolution (VoLTE) in 2018-19. VoLTE promises a significantly improved voice call experience – lower call drops and greater clarity – for users, and a substantially lower operational cost for operators as they do not need to maintain separate networks for voice and data transmission. According to Nitin Bansal, head of network products, Ericsson India, “VoLTE represents a great opportunity for telecom operators that are looking to route voice calls over 4G LTE networks, enabling a lower cost per mi­nute for voice calls as well as freeing up legacy spectrum bands for refarming.”

VoLTE got a big boost in India post RJIL’s entry.  Until recently, RJIL was the only player providing these services in the country. But now, the incumbents, which are managing 2G and 3G networks in ad­dition to LTE, are stepping up their game in the VoLTE space and are looking at a nationwide roll-out by end-2018.

In the near term though, the prevailing circuit switched fall back (CSFB), technology and VoLTE will coexist. Coverage is an important factor in offering VoLTE and mass adoption will take place only after a wide enough roll-out has been achie­ved. In developed markets too, the shift to VoLTE has been gradual. Several of those markets, which launched VoLTE three to four years ago, still continue to have traditional voice standards. In India, widespread VoLTE adoption can be expected in only two to three years. By then,  4G handset penetration, which is already growing at a sharp pace, will reach significant levels. That said, VoLTE will initially be an urban phenomenon and up­take in rural areas will be much slower. As per industry estimates, the VoLTE subscriber base in the country will reach 370 million by 2020.

Same platform, new services

Having faced intense competition, operators have realised that playing on price alone cannot bring revenue growth. They have thus started leveraging their existing platforms and networks to create new and innovative revenue streams. They are expanding their portfolio to offer services such as mobile wallets, mobile TV, music apps and a host of other value additions, and this trend will continue in 2018-19 too. Operators are also expected to soon start offering high speed broadband services through fibre-to-the-premises. Whi­le these new business areas can in the short term help operators improve ARPUs, in the long term, they can prove to be steady revenue streams.

Telecom today is at the focal point of the digital ecosystem that the government is striving to achieve. From financial services to healthcare, education to entertainment, all verticals are focusing on a comprehensive digital transformation. In the next two years, operators will be seen stepping into the role of end-to-end information and communication technology (ICT) providers by building digital portfolios through strategic partnerships.

Operators will also make significant inroads into the internet of things (IoT) space in 2018-19. Since connectivity forms the backbone of IoT, foraying into this space is a logical and natural progression for operators. Operators know what it takes to manage millions of phones, tablets and other devices on their networks, right from SIM activation and up­gradation management to secure de­com­­missioning. Building on this expertise, operators are expected to make viable business cases in areas such as smart citi­es, home automation, smart lighting, digital healthcare and connected cars over the next two years.

QoS and QoE take centrestage

Amongst the many positives of the ongoing competition in the sector, a key one is the growing operator focus on quality of service (QoS) and quality of customer ex­perience (QoE). QoS and QoE have emerged as key differentiators for retaining customers. Also, regulatory intervention in terms of regular test drives and penalty imposition on defaulter operators has significantly helped in arresting call drops. The new call drop norms require measuring of call quality at the tower level as compared to the circle level earlier. In fact, the Telecom Regulatory Authority of India has recently released a consultation paper on fixing service quality norms for LTE calls too. Going forward, the regulatory framework around QoE and QoS will become more stringent, thus resulting in better quality services for users.

Rising capex requirements

While debt mitigation continues to be the top priority for operators, the need for investing in network and technology augmentation and upgradation will be­come increasingly important. Faced with intense competition, operators have no choice but to pump in more funds to strengthen their broadband networks in order to stay competitive. In end-2017, Bharti Airtel increa­sed its capex guidance for 2017-18 to Rs 250 billion from Rs 200 billion. Gopal Vittal, Bharti Airtel’s managing director for India and South Asia, stated that the additional capex would be utilised for bolstering its radio network and fibre capacity. Over the past one year, Airtel has raised almost Rs 120 billion by successively selling stake in its tower arm, Bharti Infratel. This freed-up capital has been partly used to pare debt and partly to enhance 4G coverage. The Bharti Group also sold stake in its DTH (direct to home) arm for around Rs 22.58 billion, and most of the funds were used by Airtel to fend off competition. Reportedly, ma­ny more such stake sales have been planned for 2018-19. Singtel, the largest shareholder in Airtel, also invested Rs 26.49 billion in Airtel’s parent firm. Most recently, the Airtel board approved a proposal to raise about Rs 165 billion by way of debt, including a fresh issue of $1 billion in overseas bonds, to help refinance loans and meet spectrum obligations.

Meanwhile, Idea Cellular too has been raising funds to invest in network augmentation. The company’s promoters have already infused funds worth Rs 32.5 billion in Idea, as the company reaches the final leg of its merger with Vodafone. Idea also raised Rs 35 billion through a qualified institutional placement in February 2018.

As per industry estimates, 2018-19 will see significant operator investments in fibre backhaul and site upgradation on the network side, and in VoLTE and 5G on the technology side. The Vodafone-Idea merged entity is expected to invest about Rs 600 billion over the next three years, to ramp up its infrastructure. Similarly, Bha­rat Sanchar Nigam Limited plans to in­vest Rs 60 billion over the next two years to improve its network.

Looking into the future

Given the emerging trends, it appears that the worst may be over for the Indian telecom industry. This is also reflected in the revised outlook for the sector by various rating agencies. Fitch, for instance, has revised India’s telecom sector outlook from negative in 2017 to stable in 2018. According to Fitch, industry consolidation has strengthened the competitive position of the top telecom operators, even as smaller operators exit the sector. Similarly, India Ratings and Research has revised its outlook for the telecom services sector to negative-to-stable for 2018-19 from negative in 2017-18 as it expects competition to ease in the wake of industry consolidation.

However, strong government support will be crucial. The recent relief measures approved by the union cabinet are piecemeal and will bring in only some immediate respite. Instead, what the beleaguered industry needs is a more comprehensive solution to its problems, one that will not only bail operators out of their financial mess but also ensure long-term sustainability. All hopes are now pinned on the new National Telecom Policy, slated to be launched in April 2018, to outline the future growth roadmap for the industry.

Operators are also positive on the long-term ARPU trends, given the proliferation of bundled plans, SIM consolidation and digital service provisioning. The emerging consolidated entities will be much stronger financially and operationally. Further, opportunities in new technology areas such as IoT, artificial intelligence and 5G will open up new avenues of grow­th for the sector.

With the industry undertaking a cour­se correction and major overhaul, it is ho­ped that it regains its growth momentum and returns to profitability.

Akanksha Mahajan Marwah