If there’s one thing that almost all of us have become familiar with by now, it is the war of words that has been going on between Airtel and Jio for a while now. Earlier it was on the issue of Point of Interconnections or POIs, it then went on to become a dispute on the issue of Speed test ads and the latest war of words is about how Jio is adversely affecting the health of the entire telecom industry.
Airtel and various other telecom operators now allege Jio’s free offers are wrecking havoc on the entire telecom industry. They claim that Jio’s free offers might put more pressure on an industry that is already dealing with a debt crisis, thereby leading to potential loan defaults. And some of the loan defaults are already occurring – Rcom has asked for a seven-month waiver from having to service loan interests and has been granted the same by various banks.
Ironically, however, Airtel is not one of those facing a challenge from Jio. This might sound weird considering that Airtel is the largest telecom operator in India and its recent statements, but the fact is that directly or indirectly Airtel has more to gain than lose from Jio’s entry over the long term.
Towers and cables: the subsidiary effect
Airtel is not a pure play mobile telecom operator. The company has various other subsidiaries that have been doing pretty well thanks to Jio’s entry. Firstly, let’s talk about towers. Jio, being a Greenfield operator, has not built towers from the ground up and has rather had to lease them. Now Jio has leased towers from a wide variety of companies ranging from Viom Networks to Indus but the biggest beneficiary of all of this has been – Airtel.
Airtel has its own tower arm in the form of Bharti Infratel and is the largest shareholder in Indus with a 42 percent stake. Indus is India’s largest tower company. With Jio entering the telecom market, a lot of towers on Bharti Infratel and Indus were leased by Jio for installing its 4G BTS. It is not just Jio, other operators such Vodafone and Idea also leased Infratel and/or Indus BTS for installing their 4G BTS. The result has been phenomenal Revenue as well profitability growth for both Bharti Infratel as well as Indus.
Bharti Infratel, being a publicly traded company, discloses its financial results every quarter and the good health of the company is visible from these. The net revenue for Bharti Infratel on a standalone basis increased 13 percent year-on-year (Y-o-Y). Meanwhile, net revenue for Bharti Infratel and Indus combined increased 9 percent Y-o-Y. Earnings before interest, tax, depreciation, and amortization (EBITDA) increased 15 percent for Bharti Infratel Y-o-Y while the same increased 2 percent Y-o-Y for Bharti Airtel and Indus combined. Airtel’s tower operations are having one of their best times, financially speaking.
It does not stop at towers alone. Considering that most of the data accessed by Indians are stored in servers located in foreign countries, most telecom operators also need to either build their own submarine cables or lease them from others. Jio is the process of working with a consortium that is building an underground submarine cable, but until then, Jio has to lease capacity of submarine cables owned by others. Airtel once again benefits here as it owns submarine cables that connect India with various other countries. Airtel’s submarine cables come under Airtel Business which according to the latest quarterly financial results has posted a 9 percent Y-o-Y growth in terms of revenues and 17 percent Y-o-Y growth in terms of EBITDA.
As can be seen, Airtel’s tower and other infra businesses such as submarine cables have noticed a healthy growth both in terms of revenue as well as EBITDA because of Jio’s entry into the telecom segment. While it would be incorrect to say that all the growth in revenue and EBITDA in these businesses is because of Jio, one can reasonably be sure that Jio accounts for a significant amount of it.
Fewer competitors in the field…
Ever since Jio entered telecom, a number of weak operators have closed shop and left. This started with Loop Mobile closing its Mumbai operations. MTS then sold itself to Rcom. Aircel is also in the process of merging with Rcom. Videocon and Telenor India’s operations have been bought by Airtel. The biggest impact was Idea and Vodafone’s merger.
All this will slowly but surely reduce the number of operators in India and thereby go on to reduce competitive intensity. This benefits Airtel in many ways. Firstly, Airtel now has more pricing power on a pan-India basis. It has been a well-known fact that weak operators like Telenor and Aircel have forced Airtel to keep its prices low in certain circles. For example, Aircel has had a historical stronghold in Tamil Nadu, and hence the prices of data packs Airtel has in Tamil Nadu have been lower than elsewhere in India. Similarly, Airtel has had to keep prices a little lower in circles like UP (East) where Telenor has had a stronghold. With Telenor having been bought by Airtel and Aircel merging with Rcom, the pricing power returns to Airtel.
Secondly, it helps Airtel to become the underdog once again. Since Airtel has been the largest telecom operator in India on the basis of Revenue Market share, nimble operators like Idea have been able to claw into Airtel’s revenue market share in certain circles like Madhya Pradesh. If the proposed Vodafone and Idea merger goes through, Airtel will become the underdog in the telecom market once again as its revenue market share would be lower than Idea and Vodafone combined.
Vodafone and Idea combined would have a revenue market share of 40-45 per cent on a pan-India basis and in some circles like Kerala or Maharashtra where their revenue market share exceeds 50 percent, they would have little choice but to shed the revenue market share to other players and who better to capitalize on it than Airtel?
And a bigger, cheaper spectrum pie for everyone!
Another benefit of telecom operators closing their operations or merging with others is that this is going to help Airtel in terms of spectrum in the long run. Already by virtue of acquiring Telenor and Videocon, Airtel now has 5-7 MHz of liberalized 1800 MHz spectrum in a number of key circles which can be used for deploying LTE or augmenting the existing LTE networks. Secondly, Airtel also managed to close deals with Tikona and Aircel for 2300 MHz bands, which helped it in becoming a pan-India holder of 2300 MHz spectrum just like Jio.
Aircel and Tikona would not have sold their 2300 MHz spectrum to Airtel had it not been for Jio. Aircel was already merging with Rcom and knew that it did not have the financial strength to roll out LTE networks on the 2300 MHz spectrum and hence ended up selling them to Airtel at a price of Rs 3500 crores for eight circles. Aircel paid a cumulative of Rs 3438.01 crores for the 2300 MHz spectrum it had acquired in 2010 and ended up selling it to Airtel for just Rs 61.99 crores more. In the case of Tikona, the company had paid Rs 1,058.20 crores for 2300 MHz spectrum in 2010, and Airtel acquired it at Rs 1600 crores.
But the biggest benefit that Airtel gets from operators leaving or merging with each other is the reduced bidding intensity during auctions. During the 2010 spectrum auction for 2100 MHz band, Airtel was bidding with six strong operators namely Reliance, Aircel, Tata, Idea, and Vodafone. Needless to say, the auction ended up being super expensive, and Airtel was not even able to acquire 2100 MHz spectrum on a pan-India basis.
However, in the current scenario, Airtel has only two strong bidders to contend with – Jio and Vodafone-Idea. When the bidding intensity reduces from six strong bidders to just two, prices in future auctions would also reduce accordingly. Apart from lower prices, there would also be more spectrum for everyone.
Big subscriber base, yes, but where’s the revenue, Jio?
I have already mentioned in the past how I feel that Jio’s Prime subscriber numbers might be too good to be true. If Jio’s claim of 72 million Prime subscribers were to be true, it would mean that 90 percent of Jio’s active subscriber base has paid for its Prime service.
Even if I were to give Jio the benefit of doubt and assume that 90 percent of Jio’s active subscriber base paid for Prime services, the revenue still does not reflect the same. If TRAI’s Jan – March 2017 financial report is to be taken into consideration, then Jio’s pan-India UASL revenues are just 1/3rd of Vodafone’s UASL revenues from Mumbai alone. I have searched extensively to find out Jio’s financial performance between January and March 2017, but RIL has not given out any nitty-gritty details regarding Jio.
Yet another noteworthy fact that, in my opinion, casts doubt over Jio’s Prime numbers is its subscriber addition in April. From April 1 onwards, Jio stopped offering SIMs for free. Anyone who wants a SIM now needs to recharge with the Jio Dhan Dhana Dhan offer. So the subscriber addition of Jio in April has been that of paid subscribers and paid subscribers alone, no freeloaders. Going by TRAI’s subscription report for April, Jio has managed to add just 3.87 million subscribers in April.
If Jio had managed to convert 90 percent of its active subscribers into paid ones by the end of March, then its subscriber addition rate should have also ideally maintained the same 90 percent rate in April. What I mean to say is that before April, Jio was adding 20 million subscribers roughly every month. If Jio managed to convert 90 percent of those free subscribers into paid then applying the same logic, Jio’s additions in April should have been 18 million, i.e., 90 percent of the 20 million free additions per month in the months before. However, instead of 18 million, Jio just added 3.87 million subscribers in April.
All of which makes me reasonably sure that Jio’s subscriber additions have not necessarily converted into meaningful revenue market share gains. This is crucial because at the end of the day, what really matters for a telecom company is the revenue market share. Having a subscriber base of 100 million but not being able to earn any money out of those subscribers do not help anyone. In fact, ever since Jio has entered into the telecom field, Airtel has been able to expand its revenue market share at the expense of other weak operators like Aircel and Rcom.
Short term whines, long term wins!
Airtel and other telecom operators are going to keep crying foul about Jio’s entry into the telecom segment but the fact is that over the long-term, Airtel has more to gain from Jio’s entry. Even investors seem to believe the same. When Airtel released the latest financial results, the stock actually jumped 9 percent despite fall in revenues and profitability because Airtel had managed to stabilize its loss-making African operations. Airtel, as of now, owns close to 35 percent of revenue market share in the telecom segment. Even if Jio is successful and Vodafone-Idea also ends up being successful, the revenue market share split would ideally be 30 percent each for Airtel, Vodafone-Idea and Jio with 10 percent for others. Sure there might be a 5 percent reduction but the 30 percent revenue market share would be in a market that’s far bigger than the one now.
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