- The launch of Reliance Jio Infocomm – which is equipped with strong infrastructure and the financial backing of India’s richest man – is likely to herald a new phase for communication services in the country.
- Faster and more affordable data networks could provide access to an as yet untapped market of users in smaller towns and villages, presenting growth opportunities for a wide range of sectors such as e-commerce and telecom tower operators.
- However, regulatory challenges remain, as do concerns over a price war and worsening levels of debt due to possible aggressive bidding in spectrum auctions.
With the entry to the market of Jio, the Indian telecoms sector appears set for a new phase, characterised by cheap data and mobile phone services, and intense competition among telecom companies (telcos) to reach new users in non-urban areas. Jio, which was established in 2007 and launched its services in September 2016, has spent the past few years creating the infrastructure that has allowed it to rollout telecoms services and a 4G network nationwide. Financial support from industrialist Mukesh Ambani – who has invested USD 20 bn in the venture – has allowed Jio to sell data at a steep discount from market prices and offer voice calls for free, as it seeks to gain market share from the top three players: Bharti Airtel, Vodafone, and Idea Cellular. Jio has also launched its own brand of cheaper smartphones in a bid to reach a wider audience with its data services.
Jio’s arrival could bring considerable benefits in delivering data-led communications in a country that has long struggled to improve the quality of its telecoms network and where – despite intense competition to attract new customers – mobile phone services remain unaffordable for the majority of the population. Jio, with its cheap data services and handsets, as well as strong network – it has the capability to reach 18,000 towns and about 200,000 villages, and expects to cover 90 percent of the country by March 2017 – is well placed to take advantage of the largely untapped non-urban market.
Competition among telcos to expand their networks could add millions of new internet users, with estimates suggesting that internet penetration rates in India could exceed 50 percent within the next two years from about 26 percent currently. This scenario along with the faster and better quality of data services in turn presents growth opportunities for a range of sectors, including retail and consumer goods as well as small- and medium-sized enterprises.
E-commerce, in particular, could get a significant boost from high-speed connectivity. Some estimates suggest that the market could be worth as much as USD 120 bn by 2020, with nearly two-thirds of the growth coming from second- and third-tier cities. Start-ups, especially those in the digital space, also stand to gain from improved access to data.
Telecom tower companies are also set to benefit from increased investment in 4G networks, both by Jio and established telcos like Vodafone. Although most telecom operators in India tend to own their own towers through captive tower subsidiaries or joint ventures, recent consolidation in the sector and the need to lower debts have seen many telcos sell their towers, reducing competition for independent tower operators such as GTL Infrastructure.
The arrival of a new player, however, has also highlighted the difficulties faced by entrants to India’s telecom sector in breaking the stronghold of dominant players. Jio has accused the Cellular Operators Association of India (COAI) of bias towards the dominant players, which it claims control 68 percent of the votes in the industry body, giving them substantial control over decision-making. While the voting share is proportional to the market shares of the telcos, the set-up of the COAI has called into question whether representation is adequate for newer telcos in what is intended to be an independent organisation.
Moreover, steep reductions in tariffs by telcos seeking to match or beat Jio’s offerings have raised concerns of a price war, with the top three telcos cutting their data prices by as much as 60 percent in the run-up to Jio’s launch. Telcos in India have already been competing fiercely over voice calls and in securing bandwidth, which have contributed to high levels of debt.
Ambitious bidding for certain bandwidths in the Indian government’s biggest ever auction for airwaves that began on 1 October – in which 2350 MHz of spectrum in seven bands valued at USD 84 bn is up for sale – could exacerbate debt levels at these firms. In particular, demand for certain spectrums could be high, as telcos like Vodafone and Idea operate in fewer than ten of India’s 22 telecoms services areas, and will need to expand their coverage in order to compete with Jio and retain and grow market share.
Co-ordinated action by established players to deter newcomers also presents challenges. There are concerns that the incumbent telcos are deliberately blocking calls from Jio’s network to theirs, resulting in a situation where thousands of calls by Jio users to other networks fail every day. Allegations of telcos not meeting legal obligations under their licence agreements to facilitate such calls have prompted a probe by the Telecom Regulatory Authority of India (TRAI), which concluded that the rate of call failure was as high as 84 percent compared to the permitted rate of less than 0.5 percent.
The Indian telecoms sector appears set for a period of flux in the near term. While cheaper, faster, and more accessible data will benefit individual customers and small businesses, the manner in which telcos manage the impact on their revenues will be key. For instance, Jio’s move to offer free voice calls presents a challenge for other operators that still derive a sizeable portion of their revenues – 70 percent in the case of Airtel – from this service.
The level of risk-taking in the spectrum auction will also need to be monitored. Ahead of the auction, Vodafone Group Plc said it had invested USD 7.2 bn in its India unit, raising concerns that the firm will seek not just to plug the gaps in its 3G and 4G network in the country, but also bid for the premium 700 MHz band, which is being auctioned for the first time and is priced steeply at USD 1.7 bn per MHz. So far, all telcos have only focused on the 1800 and 2300 MHz bands, which also support 4G services and are far less expensive, with overall bids in the first three days of the spectrum sale reaching USD 9 bn. The auction does not have a fixed end date and a move by telcos to compete for pricier bands could increase debt levels and exacerbate the impact of price cuts.
Further regulatory scrutiny over telcos’ breach of obligations could also lead to legal issues as the TRAI takes steps to mitigate the impact on customers who are facing poor quality of services due to the dispute among telcos. TRAI Chairman RS Sharma has already threatened to take legal action against the “unacceptable” level of call failures, and the regulator has issued show-cause notices to errant telcos. It may be months before the issue is resolved, and any legal action raises the prospect of penalties, adding to the financial problems of the sector.