Indian telecom industry: The game of thrones 

One late October morning in New Delhi, the head honchos of India’s top three private telecom companies walked in together for a premier mobile technology conference. The bonhomie between them—Reliance Jio’s Mukesh Ambani, Bharti Airtel’s Sunil Bharti Mittal, and Vodafone Idea’s Kumar Mangalam Birla—was hard to miss. Ambani put his arm around Mittal as they went up to the dais for the opening session of the India Mobile Congress to join Birla. Later, Ambani was unusually chatty as Birla listened intently.

But beneath the cheeriness lies an intense business rivalry. The three telecom giants are fighting a brutal battle for the top spot in the ₹1.5 lakh crore Indian telecom market, where the competition has been so fierce that several once-successful companies have either been forced to shut shop or been bought out altogether. And at the heart of all this lies a bruising price war unleashed by Reliance Jio which shook the industry to its core by offering free calls and dirt-cheap data when it entered the market in September 2016. “We want to offer the best services at the cheapest prices and make it affordable to every Indian,” Ambani said in his speech at the mobile congress.

Jio’s impact was almost electric. Thanks to its rock-bottom rates,suddenly, everybody from office attendants and security guards to school and college students was streaming Bollywood films and cricket matches without a care about the cost. Merely two years after its launch, it has signed up 252 million subscribers as it pounds ahead with its plan to corner half the revenue market share by 2021. That sounds like an ambitious target considering it only has around 25% of the country’s total 1,166 million mobile phone users at the moment and long-time market leader Airtel has clung to the second spot with 329 million subscribers. But Jio has the financial muscle and, more crucially, the staying power to help it nudge its way up.

The industry got a taste of it soon after Ambani launched Jio, his second telecom venture,two years ago. Several players like Telenor and Tata Tele services decided to sell off their businesses, while others like Anil Ambani-led Reliance Communications sank under a mountain of debt. In two years, the number of players in the industry shrank from nine to just four, including state-owned Bharat Sanchar Nigam Ltd (BSNL). The carnage wrought by the fight for market share led the then No. 2 player,

Vodafone India, to post losses of $4 billion and eventually merge with the No. 3 player, Idea Cellular, to create a new entity Vodafone Idea, the biggest player in the business today. After the shake-out, the three main players—Ambani, Mittal, and Birla—together control sector assets worth over 5 lakh crore and are expected to sink ₹50,000 crore each year to expand their businesses. “You can say that the silver lining in all this is the painful but quick consolidation which has left the market with fewer players like in more mature markets.Now capital and resources can be deployed more efficiently by the sector unlike when there were a dozen players,” says Cellular Opera-tors Association of India (COAI) director general Rajan Mathews. A fierce advocate of the established players, Mathews was sued by Reliance this year for defamation as the COAI issued press statements questioning the legality of Jio’s entry into the business.

Nobody expects the shake-out to end the tumult in the industry.As the battle rages on, the market dynamics of the three players are also constantly changing. Jio’s adjusted gross revenue (AGR) from licensed services edged past Airtel’s in June, making it the second largest player by revenue, according to Telecom Regulatory Authority of India (TRAI) data. In the next quarter ended September, Jio became the biggest in terms of AGR, going past Vodafone Idea too. Also, Reliance Jio posted its biggest spike in customer acquisition and a hefty profit, while Airtel posted its biggest ever quarterly loss in its domestic operations. Vodafone Idea has been rapidly losing subscribers and its losses are also spiraling fast (see table). With the rapidly changing industry, Anil Ambani, who ended up selling his business to his brother, remarked that Indian telecom was likely to end in a monopoly, given Jio’s onslaught. “Last year at our AGM, I had commented on the headwinds facing the mobile sector. Had predicted that the sector was rapidly moving towards a situation of an oligopoly or even a monopoly,” he said in September.

Jio might be behind both Vodafone Idea and Airtel in terms of number of subscribers, but Mukesh Ambani is not the kind to play second fiddle to anyone. Under him, Reliance has built the biggest oil refinery in the world—and having pumped in over $30 billion to build state-of-the-art telecom infrastructure and a pan-India optic fibre network, it is unlikely he will settle for anything less than the top position in telecom too. Of course, pricing will still be key to Jio’s growth plans. In the first phase, Ambani drew consumers by offering Jio as an additional service to their existing provider as it promised free voice calls and cheap data services. Initially, rivals lost few customers because of brand loyalty, but gradually both Vodafone Idea and Airtel users gave in to Jio’s cheaper rates, forcing them to slash prices to compete.

Analysts expect Vodafone Idea and its chairman Birla will be increasingly in Ambani’s crosshairs. Jio has already gone past Airtel in revenues and it needs just another 77 million subscribers to overtake Airtel as India’s No. 2 player by subscribers. However, the gap with Vodafone Idea is still huge: It needs another 170 million to pip VodafoneIdea’s 422 million subscribers. And Vodafone Idea will be no pushover.If Ambani had dreamt about bringing in cheap digital services to Indian customers, the Birlas were among the earliest conglomerates to identify the opportunity in telecom. Even before mobile telephony became the order, Aditya Birla, Kumar Mangalam’s father, tied up with AT&T in the 1990s to usher in telephony in the private sector. Birla AT&T later launched its services in Pune and tied up with the Tatas to launch mobile services. Subsequently, the Tatas were forced to sell their stake in the joint venture and the Birlas renamed their telecom venture Idea Cellular. In doing so, the Birlas burnt their bridges with the Tata group after an acrimonious court battle.

Despite being a late entrant into the national cellular business, Idea quickly rose to become No. 4 by smartly targeting rural customers, who until then were neglect-ed by other firms. It also stayed away from expensive 3G auctions in metro areas and cherry-picked airwaves in a few circles where it was already the market leader. This way, it did not spend capital but enhanced customer offerings, making it the most profitable among the existing players for a brief period. Birla still remains bullish: “The real digital India is about mobile broadband, taking it to a billion Indians across the diverse socio-economic and demographic set of consumers. The telecom industry is working at a breakneck speed to build a ubiquitously available high speed broadband network on a 4G platform.”

Similarly, Vodafone made a grand entry into India in 2007 by buying out Hong Kong-based Hutchison’s 67% stake in then Hutchison Essar for $11 billion. Later, Vodafone pumped in another$5 billion to buy a further stake from Essar and eventually acquired the entire firm. For Vodafone, India was an important market and it held on to its India mission despite several regulatory hiccups, including being slapped with a $2.3 billion retrospective tax on its deal with Hutch is on. Vodafone is India’s biggest foreign direct investor which has invested over ₹2.5 lakh crore over the years.

You certainly need a huge war chest to take on Ambani and Jio. Though both Idea and Vodafone were strong companies, they underestimated Jio’s entry. In 2014, Vodafone India was readying for an IPO but the test launch of Jio in 2015 suddenly upset the plans of all existing players. They were suddenly faced with additional capital expenditure to upgrade their networks to the latest 4G technology, which Jio was offering customers. They also had to buy spectrum at a high price at a cut-throat auction when the 20-year licences expired, starting 2014.

Until 2015, Idea’s then CEO, Himanshu Kapania, didn’t think it necessary to upgrade to 4G as he thought rural customers who could barely afford 3G didn’t need a further upgrade. Vodafone kept its 3G charges high for top-end customers, giving Jio a lot of room to disrupt the market. Ambani tested Jio services in December 2015 for free and continued without any charges until September 2016 even as the industry protested that its practices resulted in unfair competition. Then Vodafone global CEO, Vittorio Colao, had said it was impossible to fight competition which gives away services free as he wrote off $5 billion on account of losses in India. “Jio’s new cheap plans target rural customers and this can further lead to a decline in Vodafone Idea customers as the erstwhile Idea had the biggest rural footprint,”says Vivekanand Subbaraman, equity research firm Ambit Capital’s telecom analyst.

Who is likely to win the battle for India’s telecom market? An impromptu poll of many telecom company executives attending the three-day mobile congress suggests Ambani will most likely be the eventual winner. The executives, several from foreign telecom operators and equipment vendors, voted for Ambani as they have never before seen the kind of disruption Jio has brought to a market as large and complex as India in under two years. “Jio is already doing trials for 5G deployment in its Navi Mumbai headquarters and if they prepone its commercial launch, it will be much ahead of its Indian competitors,”says a senior Samsung executive, who did not want to be identified.

The Vodafone Idea combine is banking on its operational synergies to not just survive but also hold on to its leadership in the domestic market. To start with, the combine expects $10 billion in savings over the next few years as it rationalises telecom infrastructure like cellular towers and manpower. The combine will also gain from laying a unified optic fibre infrastructure across the country, which is expected to run into billions of dollars. In advanced markets like the U.S. and Japan, 80-90% of mobile telephony towers are interlinked through an optic fibre backbone. A strand of fibre can carry heaps of data compared to spectrum or airwaves, and linking mobile towers with fibre speeds up data transmission. Vodafone Idea plans to invest an additional ₹25,000 crore, and Birla (Idea) will bring in nearly $1 billion equivalent on his part. A Vodafone Idea executive, who did not want to be named, says it is unlikely Vodafone will bring any additional money into the joint venture; rather, it would leave it to the management to raise funds. The company was expected to issue shares worth ₹25,000 crore to raise capital, and the chances of Vodafone subscribing to its shares remain minimal. In any case, the joint venture agreement allows Birla to raise his stake to equal Vodafone’s if he so chooses.

“Due to strong uptake of data use due to price wars, there is enormous demand and, therefore, need for further capital investment,”says Marten Pieters, former Vodafone India chief executive. Pieters, who helmed Vodafone India for six years till 2015—the longest serving CEO of any Indian mobile telephony company—came back briefly last year to consult on its merger.

With the government pushing for high-speed, data-intensive 5G technology at the mobile congress, it will soon be mandatory for telecom companies to ensure fibre backhaul to offer good quality services. The prospect of additional capital expenditure even has Airtel’s Mittal worried. Mittal’s plea: “The government and regulators should consider creating a fibre network as a national asset and charge usage fee instead of each player spending to create his own network.”

But it is the complexity of integration and expansion of Vodafone Idea that Ambani will likely exploit to gain further market share. For starters, in mobile telephony,telecom towers cannot be too close as they would simultaneously detect the same phone, resulting in call drops. Since tower premises are hired on long-term contracts, it is expected that merely rationalising them will take 18-24 months for the Vodafone Idea combine. And until the towers and network are rationalised, the company cannot brand its service Vodafone Idea and treat customers of each network the same. The integration has also led to increased call drops and poor quality of service, pushing long-standing postpaid Vodafone customers to shift to Jio. Vodafone has set up a separate cell to address call drops, especially for corporate customers and new monthly subscription plans that compete with Jio. But until the networks are integrated, the company will need to brand the two services separately, incurring additional costs. In the past couple of months, Vodafone Idea has identified 60,000 towers which will eventually be rationalised. Vodafone Idea CEO Balesh Sharma said they were ahead of targets in integrating the networks while announcing the first ever quarterly results of the combined entity.

The biggest threat, analysts feel, could be Jio’s attack on millions of Idea customers in rural- and semi-urban areas where it had established deep coverage. Since these markets were largely voice markets and putting up telecom towers here is easier than in urban areas, Idea built a strong franchise in them while Airtel and Vodafone concentrated on urban clusters. But Jio is storming the rural market by not just replicating a similar network but also bringing in cheap feature phones that can use data services for entertainment. It recently slashed the price of its entry level phone, which allows users to watch video, to`501. Customers need to pay only `49 a month for unlimited voice calling and 1GB of data usage for 28 days. A Jio official, who did not want to be named, says a large chunk of the last quarter’s growth in subscribers came from this segment. “For several Indians,the phone will be their first camera and television screen,” Ambani said at the mobile congress.

There are other niggling issues. In September,the government increased the import duty on 4G equipment, a move that will affect VodafoneIdea the most as it has the biggest ongoing upgrade to 4G among the three players. Airtel will also be affected but Jio will escape the additional tariff because Jio’s network is built exclusively on Samsung’s equipment and imports from South Korea are currently exempt under a special trade agreement. Taxation is another contentious point for the telecom sector. Both Mittal and Vivek Badrinath, Vodafone Plc’s chief executive for Africa, Middle East & Asia-Pacific, and Vodafone Idea board member, agreed that the local taxation on telecom companies stymied growth and investment in the sector. Says Badrinath: “A new order to balance revenue and taxation is needed as telecom is the highest taxed sector.”

A senior executive earlier associated with Idea Cellular says that if the two joint venture partners synergise their operations, they can tide over the current crisis. Vodafone has the expertise in handling the latest technology in developed markets, while Idea can pare operation costs to the bone in a cutthroat market like India. “The world over telecom is just an infrastructure play eventually just like Big Oil is in exploration and retailing. If Vodafone Idea keeps its head down and weathers this storm,it will have a decent business going in mobile telephony and broadband,” says the executive.

Of course, for big market share gains, Jio needs to target the No.1 player, Vodafone Idea,but both companies also need to watch their backs against Airtel. Mittal, unlike Ambani or Birla, has no legacy business to fall back on and he is Indian telecom’s original entrepreneur who started by manufacturing fax machines and telephones, before entering into a string of alliances to play the mobile battle. Until recently, Airtel was India’s clear market leader and its valuation touched ₹2 lakh crore in October 2017 after nearly a decade, as it showed initial signs of increasing revenues despite Jio’s onslaught.Since then, its valuation has fallen 40% and it has propelled subscriber growth by acquiring Tata Teleservices and Telenor.

Jio might be closing in on Airtel, but Mittal may still have a card or two to play in a bid to hold on to his No. 2 spot in terms of subscribers.Until recently, one of Mittal’s largest investments, Airtel’s Africa business, was draining cash by making losses. But, in recent quarters the business has turned profitable. Mittal has the option of selling the business if the valuations are right to bring the cash home. He has already deployed the latest Massive MIMO technology with multiple antennas to use spectrum more efficiently in locations where he wants to offer his best services. According to broadband speed test specialist Ookla, Airtel had better Internet speeds than Jio in the first six months of 2018.“Though Airtel has added subscribers inorganically, they are better placed competitively than Vodafone Idea against Jio,” says Ambit’s Subbaraman. Pieters admits it is difficult to predict where it will all go. Subbaraman, in a February 2018 report titled A More Impactful Roll, said Jio was one of the most disruptive telecom launches globally. Analysts don’t expect Jio to make even 8% returns on capital during its 20-year licence term, while others from Morgan Stanley and HSBC have questioned Jio’s accounting norms that have helped it post a profit despite a huge upfront investment. Says an analyst from a foreign brokerage house: “Technically their accounting may be correct but whether shareholders will get returns in the near future is suspect.”

Even as the race to capture telecom customers gathers pace, Ambani has opened other fronts he thinks will draw customers to his network. Riding on the success of Jio TV, one of the several bundled free apps that come along with his service, he is investing in building video content, a big driver for data consumption across the world. He has invested in content companies like Eros International and Balaji Telefilms, and bought out music streaming service Saavn, apart from running his media empire Network18.

In October, Ambani invested ₹5,230 crore for controlling stakes in cable television companies Hathway and Den Networks, which will allow Jio access to 25 million homes across the country to start with.Earlier this year, Ambani announced another mega project, Jio Giga Fiber, which promises to bring optic fibre connections directly to homes to boost data consumption. Currently, distributors like Hathway and local cable operators pocket up to 80% of customer subscription charges, while the content maker gets the rest. With GigaFiber, Reliance hopes to replace the distributors and earn distribution fees, which per user is higher than the current telecom revenue per user.

To that extent, Ambani is not just thinking of telecom. His close associates say that even when he launched his first telecom venture, Reliance Infocomm, in 2003, his dream was to make available every conceivable service in a connected box at home. In a way, Ambani seems to be reliving that dream as he wants to bring education, entertainment,communication, and healthcare through his fibre to individual homes at the cheapest price.

To his telecom competitors, all this may seem fanciful as they’re still struggling to cope with the price war he has started. Between Mittal and Birla, the former has been quicker on his feet to compete by offering new services,slashing prices or expanding networks. Birla,on the other hand, has deployed his capital cautiously and has in the past cut off businesses that didn’t make money. He has a low tolerance for losses—he wound up his retail and infotech businesses as he couldn’t either scale them up or make enough returns. His viscose filament yarn or carbon black businesses are not huge like Reliance’s polyester business but they are consistently cash-generating. But Birla’s partner, Vodafone, the only surviving foreign telecom player among a dozen who began operations in India, has seen its investment gutted over the last decade.It’ll now want to recoup its value. Even as they duke it out, at the end of the day, the man who holds the key to the telecom industry’s future is Mukesh Ambani. “I believe it all depends on Mr Ambani [and] when he will be satisfied with a certain market share. Until that moment, I see the ongoing winter in the telecom landscape [continuing],” says Pieters.

(This story was originally published in the December 2018 issue of the magazine.)