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Will Reliance Jio's entry to hurt profits of incumbent telcos?

Friday, 2 May 2014 - 7:20am IST | Place: New Delhi | Agency: dna

After the superlative earnings performance by Idea Cellular and Bharti Airtel amid increasing data consumption and addition of value customers, analysts are apprehensive whether the renewed optimism in the sector is going to stay for long, given the Reliance Jio's impending entry into the telecom market by the year end.

While Bharti Airtel reported an increase of 89% in net profit for the quarter ending March 31, Idea Cellular clocked 91% jump in its earnings.

On the other hand, Mukesh Ambani's Reliance Jio has accelerated efforts to roll out its 4G services across the country. It has finalised key vendor and supplier partnerships and is making rapid progress in building critical infrastructure needed to launch the services.

Even though there has been partial consolidation in the 14-player industry following the exit of some players such as Elisalat and STel and reduced foot prints by Loop Mobile, Reliance foray is expected to create ripples in the improving sector.

"Telecom operators have been increasing tariffs to an extent that once Reliance Jio comes up they are able to pull back the prices depending on the competition that will be created," said a sector analyst requesting anonymity.

"However whether Reliance Jio's entry would affect the market by dragging it back to the tariff war days would largely depend on how they enter into the market. Voice war is a thing of the past, it is all going to be about data," he added.

Infotel was the only player to bag pan-India licence when the Broadband Wireless Access (BWA) spectrum auction that facilitates 4G services took place in 2010. Its competitors Bharti Airtel bagged spectrum in four circles, Aircel in eight, Qualcomm in four, Tikona in five while Augure in one.

While Reliance Industries bought Infotel post the auctions, Bharti Airtel bought 100% stake in Qualcomm spectrum in 2013.

Thereafter, in the recently held auctions of 1800 MHz spectrum many companies such as Idea Cellular and Vodafone participated and are now in the fray to launch their 4G services as the spectrum that was put on offer was technology neutral.

While Idea has said it will launch 4G services in eight of its key revenue markets where it acquired fresh spectrum without specifying any details, Vodafone too has acquired enough spectrum to roll out 4G services.

Talking about Reliance Jio's aggressive market strategics affecting the business of the incumbents, Jaideep Ghosh of KPMG said, "Airtel and Idea are established players with millions of users. It is difficult for another player to just enter and impact the market instantly. Everyone aspires to make money and thus unreasonable tariff wars should not be seen."

"Currently what we are seeing is the result of something that happened during the last two three quarters back. Today the ARPUs have increased as the number of competitors have declined and freebies and discounts have been cut down drastically. Many operators have reduced there footprints as well while some of them have exited the market altogether. So the market has witnessed a much-needed consolidation as well," he added.

According to a Goldman Sachs analysis, unlike Idea Cellular which showed a 3% quarter on quarter decline in revenue per minute (RPM), Bharti showed flat RPM, suggesting Idea's quarter on quarter decline was largely due to its more aggressive tariff increase in previous quarters and higher proportion of low RPM growth in the fourth quarter. From an overall industry perspective, we believe telcos remain focused on raising tariffs.

The entire 4G ecosystem has not yet developed in terms of devices, said Hemant Joshi, Partner at research firm Deloitte. "3G itself has not taken off the way it should have. There is lot of potential for 3G services which is slowly getting tapped. 4G ecosystem has not yet developed in terms of devices, deployment of towers. So there are a whole range of issues. 4G maturity will take time." he said putting aside apprehensions that Reliance Jio's aggressive plans will shake the industry.

Speaking on the possibility of staunch competition by Reliance Jio by the year end, Gopal Vittal, Managing Director and CEO (India and South Asia), Bharti Airtel said, "At the end of the day what are we trying to do? We have to have competitive growth and profitable growth... so as the competitors strategy evolves we will look at it and respond."

Another leading player spoke on the condition of anonymity that data tariff is already low and the competition is no lesser. "The incumbents are fighting within themselves for a larger share of the pie. It is not that easy for a new operator to add value customers by just giving discounts and freebies. They (Reliance Jio) will get customers initially, but will that help them in the long terms? Never! They too need to have quality customers therefore instead of getting unnecessarily aggressive they are expected to be calculative."

"They are launching on a very new technology that has not even evolved. If they will make a mistake, we will learn from it," he added.

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