Let me start this article by asking you a simple question. Would you switch your network provider if you are getting the same data plan at a cheaper price? Or get the same data plan for free.
Well, most of us already did the same, when Reliance Jio made a blockbuster entry in the market with the free internet. In lieu of free internet, Jio added huge traction of customers under its hood.
Before getting to our topic, let us first understand a simple but very powerful characteristic of a good business – Pricing power
You can understand this by looking at your own buying habits. For instance, Would you stop drinking Coca Cola if it increases its price from Rs 20 to Rs 22? The simple answer is “No”. Normally, in an ideal world, a rational person would not like to mess up with their taste buds. Or would an Apple fan stop buying iPhones if they are priced at Rs 1 Lacs? Then again, you would find people buying iPhones standing in long queues. Now, what’s common among Coke, or iPhone? Well, they all tend to share a common trait which happens to be a unique product representing a cult brand name. Buying such products has become a habit or sometimes even a status symbol for many people. People know that these products are expensive but still, they are ready to buy them at a premium price. It happens because they get so used to the comfort or taste of such products that they do not want to change it. Well, that is known as the pricing power of the company.
But, how much of a price increase is good?
An increase equivalent to inflation is good. But can any company increase its product prices beyond the inflation rate or more than its competitors?
There is too much risk involved in this case. The customer may shift to different brands which will directly affect the sales.
There are few industries like Hotels, Airline or Telecom, where companies cannot exercise much of the pricing power. Even the top companies in these industries do not dare to hike their prices. Suppose you intend to plan a vacation and in that process, you stop by a 5-star hotel delivering you a premium quality room at Rs 5,000. But upon searching a little bit more you find another hotel that provides you with a premium quality room for Rs 4,500. To save Rs 500, you are more likely to go with the latter.
Today we will be talking about the Telecom sector, which is facing stiff competition. With a price rise by one operator, customers switch to another operator very easily. The same thing
happened in 2016 when Reliance Jio came with a free data plan. This disrupted the entire telecom industry and hampered the sales of other telecom players. Various small players were forced to exit the industry due to low or zero sales.
So this was the chart of subscribers’ market share in September 2016. Just look at the market share of Reliance Jio, which is just 1.5% of the total subscribers in the market.
Post 6 years in April 2022, let us look at the market share of Jio now:
Clearly, it holds the maximum market share of wireless subscribers as of April 2022. But before diving any deeper, let us try to analyze the costs associated with running a telecom company.
Expenses related to running a telecom company:
It all starts with bidding in spectrum auctions. So what is a spectrum?
In scientific terms, it refers to the range of electromagnetic waves. Sounds technical right? So in layman terms, it refers to the set of frequencies that are used to transmit sound and data across the country to our phones. Ideally, every telecom operator has been assigned a certain portion of the spectrum to use in India. The telecom spectrum starts from 800 Mhz and goes up to 2300 Mhz. The few commonly used bands for cellular communication are 800Mhz, 900Mhz, 1800Mhz, 2100Mhz and 2300Mhz. The telecom companies need to upgrade their spectrum in order to increase the frequencies of their transmission. With increased frequencies, telecom companies can provide better network coverage with reduced latency.
But the game does not stop over here. This bidding is done in various circles as well.
Well, circle refers to the areas under which the geography of the country is divided into as per the telecom sector. The government does this to manage the spectrum effectively across the country. As a result of which, India is divided in 22 circles. A telecom company would have to bid for the spectrum licenses in all these circles to offer uninterrupted services across the country. If not, it would have to connect with another company to offer the services in areas where it lacks spectrum, leading to roaming charges. Or it would lead to users changing their bands in order to avail appropriate signals from that telecom company. So for instance Airtel holds 900MHz spectrum in Delhi, Mumbai, Andhra Pradesh, and Karnataka but earlier had none in Gujarat and Maharashtra. In those circles, it needed to switch users to a different band to offer its services.
Today, Reliance Jio, Vodafone, Idea, and Airtel all have a spectrum across almost all circles.
Now, let’s get back to the auction where companies place a bid to use a certain set of the spectrum and in specific circles. This is so expensive that the companies have to take a huge debt in order to place their bids. The challenge does not stop over here. The company would now need to install the antennas. Yes, the big towers you see are installed by the same telecom companies. The land on which the towers are installed is generally taken on lease. But surprise… surprise.. there are different tower operator companies that do this job as well. The tower operators bear the capital expenditure and operating expenditure of installing the tower, while the network operators just need to install their antennas on them. Other expenses include the labour cost, maintenance cost, entry fee (companies providing national and international long-distance services are required to pay a flat entry fee of Rs 25 million each), license fees (Required to pay an annual license fee of 6% of their annual revenue to the Government of India).
Reliance Jio has the best 4G availability across the country as a result of which Jio attracts a large number of users.
This in itself shows the challenges a new telecom company would have to face if it wishes to enter the industry. Companies with no cash to burn cannot even imagine surviving in the telecom industry. This shows that the threat of new entrants in the industry is almost nil and the industry rivalry is too high.
The revenue of the telecom companies depends on the plans bought by the users. So, the revenue drivers for the telecom companies are the addition of new users and the up-gradation of data plans by them. The telecom companies cannot dream of hiking their data plans all of a sudden since this would reduce their user base which would result in decline in revenue for the company. As discussed before, this very fact depicts that the telecom companies do not have any pricing power. Now let’s look at why other telecom operator companies failed?
The CDMA vs GSM war:
In GSM, Voice and data can be transmitted simultaneously while in CDMA this is not the case. So in short, a person won’t be able to surf the internet while talking over the phone. GSM is a plug and play kind of system, where you just insert a new SIM and start using the network services for making the calls or surfing the net. The phone number is linked to the SIM card, so when switching devices, all you have to do is pop the SIM card into a new phone and you are good to go. But in CDMA, If you wanted to upgrade to another phone, you would have to get in touch with the network provider, to deactivate the old device and activate the new one.
Initially, many Indian Telecom companies were focused on CDMA but later they had to make a switch to GSM witnessing a growing competition. Reliance Communication and TATA owned DOCOMO were two such entities that came with a late entry in the GSM market. This helped Airtel gauge better traction in the market to increase its subscribers since it focused on GSM from its early days.
let us understand how GSM is better than CDMA.
Handset Issue:
Anil Ambani backed Reliance Communications made a stellar entry in the telecom space offering cheap mobile sets bundled with low tariffs. Both Reliance and Tata-owned Tata Indicom offered Motorola C131 as the partnering device for CDMA technology.
But, the final blow came when the leading mobile phone manufacturers Nokia and Sony Ericsson stopped making CDMA phones. The CDMA handset market was now led by ZTE, LG, Samsung and Huawei. The problem with these devices was that they had life and no consumer would like to carry a dead phone in their pocket most of the time. Hey! and did I tell you that the CDMA device manufacturer had to pay a royalty fee to Qualcomm, a company that held the patent for CDMA technology. Due to this a CDMA phone came at an expensive price than a GSM device.
Internet:
In late 2000, the internet penetration in India was very poor and expensive. Many people could only surf the internet for the first time using GSM enabled EDGE/GPRS devices. GSM provided a data bundle pack (Rs 251 for 2 GB) and thus was popular among people. Unlike Broadband it could be accessed from anywhere and did not require additional setup like a computer or modem. Tata Indicom was the first CDMA player to come up with such data plans in India. Once again, CDMA lost this battle due to limited handsets with data support and operators’ lack of interest to be in this ring.
Interestingly, the CDMA players who were never interested in capturing the data industry on mobile made their skewed entry into this world via USB dongle. So, the internet also became one of the major issues for handset users.
Now let’s talk about the major factor that eroded CDMA from its roots in India. Tada! Let’s introduce Mobile Number Portability in the telecom space.
Now, what is Mobile Number Portability?
Imagine yourself to be using a particular SIM for a certain period of time. After using it for a decade, you find that there is another network operator that provides you better internet services and free calls for a very cheap price. Now, since you’ve been using the SIM for a very long time and all your friends, relatives, colleagues, acquaintances have the same number to contact you. Think of a consequence, where they dialed up your number and found out some Ramesh from another state is talking over the call instead of you.
Well, mobile number portability was one such concept that was launched in 2011 by the Indian government to cope up with this problem. MNP gave the user an option to retain the existing number while giving him an option to change the subscriber.
With the growing demand for better internet, people preferred switching to GSM, leaving behind CDMA. Better handsets and the same SIM for mobile and data cards hiked up GSM operators’ growth. Also CDMA players could not offer video calls on their current network. Thus, MNP and 3G had a negative effect on the CDMA’s growth.
The demand for MNP grew so much that there were over 117 million requests by the end of March 2014. This demand increased to 154 million by the end of March 2015. But it turned out to be a horrific moment for most of the telecom operators.
With the introduction of MNP, many telecom operators had faced a declining ROCE. Resulting in a a race to provide better services, which comes at a cost. A telecom company had to do a large capital expenditure in order to sustain its growth. Increasing CAPEX , low customer stickiness and absence of pricing power were the main factors which have drastically reduced the company’s profitability.
Due to this late entry into the market, many telecom players sailed with a huge debt on their deck.
Well now, let’s look at the butterfly effect of Reliance Jio when it entered the market.
Effect of Reliance Jio on other Telecoms:
In 2016, with the commercial operation of Jio, small players exited the market initially. Videocon sold their spectrum to Airtel while Systema sold their spectrum to Reliance Communications.
In 2017, Telenor India was acquired by Bharti Airtel while in 2019, Tata TeleServices, Tata DOCOMO and Tata Teleservices Maharashtra Limited were merged into Bharti Airtel. Aircel along with its two units Aircel cellular and Dishnet wireless filed for bankruptcy in March 2018 due to huge competition and high level of debt. On 31 August 2018, Vodafone merged with idea and under this deal, Vodafone held 45.1% stake in combined entity while Aditya Birla held 26% shares
Reliance communication had to shut down its 2G and 3G services including all voice services and only offer 4G services from 29 December 2017 as a result of debt and failed merger with Aircel. In 2019, the company filed for bankruptcy as it was unable to sell assets to pay off its debt. It had an estimated debt of Rs 57,383 Crores vs assets worth Rs 18,000 Crores.
By 2019, Reliance Jio, Airtel and Vodafone-Idea remained the key players in this sector.
How did Reliance Jio do it?
Jio entered the market giving data as a freeway for a year. Now, getting a high speed internet for no cost was like getting a bucket full of water in the middle of the desert. And Indians love free things. As a result of which, people switched their network operators and started using Jio. As a result of which, Jio resulted in the phenomenal growth of 122% in its subscribers in the month of October (can mention year) after giving free data in September.
Reasons for an intense competition in Telecom:
So, we have seen that the telecom sector is highly capital intensive and often these companies are debt laden which results in low net profits. It is a fast changing industry where a certain technology becomes obsolete, once a new rollout happens. For instance, just after a few months of 3G spectrum bidding, the bidding for 4G spectrum had already started. And even a slight decline in the users can result in the downfall of a telecom company. The competition does not end here. The companies were reporting losses even though they were generating a certain revenue. No, operating expenses and interest expenses were not the major contributors to losses. Well, let’s see what it was:
What is AGR?
The government enforced a revenue-sharing model to bring the telecom players in profit. Well, who knew that this would become a neck’s noose for telecom players. The Adjusted Gross Revenue (AGR) calculation is what the telecom players and the government have had a disagreement over since 2005.
According to the telecom players, the AGR should include the revenue from telecom operations only while as per the Department of Telecommunications (DOT) it should include non-telecom income such as the sale of assets, interest on deposits, rents, etc.
On 24 October 2019, the Supreme Court ruled in Favor of DOT, thereby putting a tremendous pressure on telecom companies. The top courts ordered the telecom companies to pay Rs 92,000 Crores to the Government within the next three months.
While Vodafone reported a loss of Rs 50,921 crore for the September quarter of 2019, the highest loss reported ever for any Indian company, Bharti Airtel posted a loss of Rs 23,044 crore for the quarter as the company had to set aside Rs 28,450 crore towards AGR dues.
Conclusion:-
Telecom is a fast-changing industry and there is a lot of capital expenditure required in running a telecom company. Tata DOCOMO failed because it did not switch to the GSM technology when other players did. The Mobile Number Portability, Government regulations and Rising costs of Spectrum are amongst some of the parameters that acts as a barrier for the telecom industry and this restricts a new buyer from entering this industry
The main reason for failure for the Tata Docomo is their late shift from the falling CDMA technology. In addition to that, the Average Revenue Per User is so low in India that no foreign company wishes to enter and compete in India.