The entry of Reliance Jio has been a boon for consumers and a nightmare for players in this industry who are looking for permutation and combination to remain relevant
Over the years, the telecom industry has emerged as one of the integral sectors of the Indian economy. Today, it contributes about seven per cent to the country’s gross domestic product (GDP) and provides employment to around four million people. The sector is also cited as a growth driver where State policies and new technology have played a major role in its development. After the entry of many private operators in the market during the last decade — on an average 12 to 13 in each circle — competition was fuelled and tariff was drastically reduced, resulting in a phenomenal expansion of mobile phone subscribers. It is also one of the fastest growing sectors in the world and the second largest in terms of mobile phone subscribers and Internet users after China. India’s mobile phone subscribers reached 1,206 million with a density of 92 per cent and Internet users of 446 million as of March 31, 2018.
However, the telecom sector has been showing disturbing signs in recent years with losses in revenue, a decline in the number of subscribers, job cuts and closure, which had never been the scenario before. The sector’s annual gross revenue declined by nine per cent from Rs 2.8 trillion in 2016-17 to Rs 2.5 trillion in 2017-18. The adjusted gross revenue of telecom services dropped by 12.5 per cent from Rs 356.9 billion during the January-March quarter of 2018 and from Rs 408.3 billion during the same period a year ago. There were on an average 10-12 mobile service operators operational per circle in 2016, which reduced from four to five in 2018.
The Jio phenomenon: It is being deliberated that the Government’s decision to allow entry of Reliance Jio (RJio) in mid-2016 into the telecom market has disrupted the Indian telecom market. RJio initially provided free services for the first two quarters and then it started offering services at a lower price to create a customer base, which led to a cut-throat competition in the market. Other telecom operators were virtually forced to reduce their tariffs and it also led to several mergers and spectrum trading among other operators. The move exerted pressure on the operating metrics of operators, wherein voice and data revenue, subscribers’ addition and realisations slipped.
This can be seen from the maximum subscribers’ addition list. While RJio topped with 186.56 million subscribers, Bharti Airtel had 85.67 million; Vodafone 59.77 million; Idea Cellular 39.84 million; and BSNL 21.08 million in the quarter ended March 2018, while other operators such as RCom, Telenor, Tata and Aircel lost their subscribers significantly during the same period.
On the other hand, except RJio, all other operators posted losses in their adjusted gross revenue (in billion INR) continuously from Q4FY16 to Q4FY18, as per the latest data on a similar trend that continued in Q1FY19. RJio jumped from the bottom place during Q4FY16 to the second place during Q4FY18 in terms of adjusted gross revenue share. Revenue share of RJio was 24 per cent during Q4FY18, which was only four per cent lower than revenue share market top operators —Bharti Airtel.
In addition, the operators had a huge debt of around Rs 4.8 trillion by the end of March 2018, and limited capital for investment in infrastructure and expansion. Hence, today, survival rate among the operators has started with consolidation and acquisition. Bharti Airtel has acquired the telecom services of Tata, Telenor, and Videocon, while Vodafone has started the merger process with Idea and Reliance Communication. This also has a huge implication on the job market with around 40,000 people having already lost their jobs and more job cuts expected in the near future. RCom alone reduced their employee strength by 93 per cent, which now stands at 3,400 from 52,000 at its peak.
Intensified competition: In order to understand the current level of competition in the telecom market, the concentration index, known as the Herfindahl-Hirschman Index (HHI), has been calculated, where HH between 1,000 and 1,800 means competitive market (high number of operators competing with each other), and HH value above 1,800 means oligopoly, duopolyor monopoly market (one or more dominant operators in the market). The results show that HHI increases by almost 1,000 points before (1,543) and after the entry of RJio (2,490) will impact the future telecom market with an oligopolistic structure and larger and relatively stronger players. If we consider the merged operators (Bharti, Tata, Telenor) and (Vodafone, Idea) as a single operator, the HHI further increases up to 2,718, which shows the presence of only dominant players in the telecom market.
Future growth: At present, where most of the telecom operators are struggling to deal with declining revenues and rising debt, the department of telecommunication released the draft of the National Telecom Policy (NTP) 2018, that envisages an investment of $100 billion and four million jobs by 2022. This clearly reveals the policy dilemma and how the Government is looking for huge investment and job creation from limited competition, bleeding balance sheets, with massive job destruction at present. In addition, the present consolidation will leave only two-three national players in the market, which is not a good sign for the future growth of the telecom sector. They may use their monopoly or make cartels to influence policy and other decisions for their profit only. Consequently, the Government’s role in providing healthy competition in the industry is necessary to bring in new investment, jobs and growth in the sector.
( Pravin K Singh is a senior consultant and Balwant S Mehta is a Fellow with Institute for Human Development, New Delhi )