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Airtel, Telenor deal to see telecom tariffs rising

Analysts see consolidation moves in the sector to eventually drive up telecom services rates

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The latest consolidation move in the telecom sector of the largest mobile operator Bharti Airtel announcing its decision on Thursday to acquire smaller rival Telenor (India) Communications Private Limited at an undisclosed price will tackle, to some extent, the issue of unviable mobile rates by removing the "bottom-most player (read Telenor)".

Analysts said that was the biggest advantage of Bharti Airtel's plans to buy out the Norwegian telecom company's Indian operations.

"There is fairly great value in taking out the bottom-most player (Telenor) in the market because in an industry like ours (India) which has such large base of prepaid users and is so price-sensitive, the player with lowest price always sets the market price. It allows Airtel to safeguard its voice traffic," said one of the analysts, who spoke on condition of anonymity.

According to him, Telenor's 43.4 megahertz (MHz) spectrum in the 1800 MHz band would also help Airtel to expand its fourth generation (4G) footprint in the seven circles - Andhra Pradesh, Bihar, Maharashtra, Gujarat, UP (East), UP (West) and Assam – that former is present in.

Today, Airtel is the market leader in terms of revenue with a 33% share while Telenor's share is slightly more than 2.5%. The newest kid on the block Reliance Jio Infocomm Ltd, which launched its promotional offer of free data and voice services for six months in September last year, has already sped ahead of Telenor in terms number of subscribers. On Tuesday, billionaire Ambani announced his telecom company had crossed 100-million-user mark.

G Krishan Kumar, Bengaluru-based telecom expert, however said the "flip" side of Airtel-Telenor deal was the quality of subscribers of the Fornebu-headquartered telecom MNC as its average revenue per user (Arpu) was amongst the lowest in the industry at around Rs 90 per subscriber per month compared to Airtel's over Rs 180 per subscriber per month.

"While Airtel adds around 20% (over 40 million of Telenor's users) more subscribers to its user-base (269 million) in one shot, it is taking subscribers with lower Arpu. We will also have to look at how many of Telenor's users are active. Also, gains to Airtel from the acquisition would also depend on the break-up of pre-paid and post-paid users of the Telenor," he said.

It is also not known what price Telenor had paid to acquire its spectrum and how much Airtel will be paying it.

Krishna Kumar said Arpu from Telenor users would improve once they were brought under Airtel's brand.

The telecom sector has seen a spate of mergers and acquisitions (M&As) after Mukesh Ambani's Rel Jio launched its data and voice services on 4G-long term evolution (LTE) network. It has been a challenger by offering free domestic voice and roaming services and rock-bottom data tariff.

Last two years have seen many M&As being announced by Vodafone, Reliance Communication, Idea Cellular, Aircel, Videocon Telecom, Sistema and others as each one tries to achieve scale to become competitive in the market.

Hemant Joshi. Technology, media and telecom leader at Deloitte India, expects 3-4 blocks or players to emerge after the completion consolidation. He said Airtel-Telenor merger deal will accelerate consolidation in the sector.

"The consolidation, which started two years back, is accelerating, and I think in a few quarters it will settle down with three to four dominant blocks and players. The smaller ones will align with bigger ones as it is very difficult for smaller players to sustain themselves in the current market because it will require a lot of financial muscle and scale to do so," he said.

Over long term, Joshi believes intense competition and aggressive pricing will stabilise and give way to a "new normal", which would not return to what was there in the past but to a new pricing structures and levels.

"Industry's profitability or financial stability will depend on what happens in the market. That will lead to finding a new normal, which will not be a race to the bottom," said the Deloitte telecom expert.

He said the tariff bonanza being currently enjoyed by consumers will end once telcos start chasing quality.

According to him, another factor that could compel telecom service providers to correct their pricing was the staggering Rs 4.5-lakh crore collective debt of the industry players.

"If that (huge debt) has be serviced, the industry has to make some reasonable money. If the industry is not able to make this money then it cannot attract more capital. One also needs to remember that ours is a private sector-led model, it's not a model like China where government puts in capital. So, the money has to come from capital market, private equity and debt. Therefore, unless this sector is attractive, where is the money going to come from? And, if the money doesn't come, the quality of service will deteriorate sooner than later and consumer would be the loser in the long run," he said.

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