Disruption is a dish best served cold

After becoming the only company to acquire pan-India 4G spectrum in 2010, people expected Reliance to disrupt Indian telecom in 2011. Then 2012. 2013. 2014. 2015.

It never happened. Instead, Reliance kept making expensive assumptions and mistakes, even as its launch get kept getting postponed.

Its biggest mistake was assuming that it could build a pan-India 4G mobile network on the 2300 Mhz spectrum it had acquired in 2010. It took it a few years to realize neither was the spectrum good enough for that (the higher the frequency of spectrum, the poorer its propagation properties, ceteris paribus) nor was there a global ecosystem of devices and equipment to make prices affordable.

But Jio was a bet on Reliance’s future, hence “too big to fail”. Lower frequency spectrum was acquired, post-haste.

But Reliance chairman Mukesh Ambani remained steadfast on one point – even with lower frequency spectrum, his network would be all LTE (4G), and not GSM (3G or 2G).

What was the plan?

“Mukesh Ambani’s final objective was always VoLTE (voice over LTE) and not GSM. He was clear from the beginning Jio would disrupt using a particular technology,” says a senior telecom veteran from one of the telecom equipment giants.

Jio’s all-4G network was meant to be a disadvantage while covering large swathes of rural India. Because firstly, Jio’s higher frequency spectrum would require more towers to cover the same area as incumbent’s lower frequency one. More importantly, because rural markets were thought to be voice, and not data led, an all-4G network made even lesser sense.

Jio plugged the first gap by acquiring tons of additional lower frequency spectrum in subsequent auctions (they are the only operator running 4G networks on 800 Mhz spectrum).

And as for the second gap, well it turned out to be an advantage.

Because the capacity and efficiency of 4G technology is much more than that of 3G or 2G ones, Jio could – once its network was up – carry much more voice traffic even in rural areas as compared to incumbents whose networks are already quite filled up.

“Jio has changed the battlefield for operators. They can afford to make voice calls free since it requires only a fraction of a 4G network. But the others can’t, without choking their existing GSM networks,” says the executive quoted earlier.

A senior industry insider says that the volume of voice traffic has actually gone up by 15% or more for all leading incumbents. He added that this hasn’t happened consistently and at this scale in well over 5 years.

“Everyone was prepared for the growth of data, but the growth of voice (calling) is the shocker,” he says.

And then there were 3

Once upon a time, not so long ago, India had over 15 telecom operators. Of those, only 10 are left today.

But that is still 6, perhaps even 7 players too many.

“We’re heading for a trajectory of 3 strong players. In our forecasting and valuation models, we roughly assume that Jio, Bharti and Vodafone-plus-Idea all end up roughly with the same share,” says Lane.

In this Bernstein model, Jio grows its customer market share to around 30% by growing the most. Bharti Airtel mostly defends its share and grows a bit, while the Idea-Vodafone combine loses combined market share. Reliance Communications and Aircel, which are themselves merging, are “treated as one with Jio, whether in virtual, wholesale or combined form,” says Lane.

State-owned BSNL and MTNL will continue to totter around, because no government will dare shut down, rationalize or sell entities that employ over 200,000 people. Their customer numbers may be around 5-6%, but neither will be a major player.

In this new landscape, Bharti’s challenge will be to ring fence and hold on to their higher value subscribers. How? “By making their relationship stronger and stronger using family plans, DTH (satellite TV), landline phones, enterprise etc.,” says Kunal Bajaj, CEO, ETIPL, a telecom services startup and former telecom analyst.

Under CEO Gopal Vittal, Bharti has spent most of the last few years preparing itself for the bruising battle with Jio. It bulked up its EBITDA (pre-tax profit) margins by nearly 10% between 2013 and 2016, reaching the 40% levels. No mean task.

“Indian telecom is now a game of survival. The ones that survive will be the ones financially and operationally structured to last out this war. It will be like Stalin, who won World War 2 against Germany by building Russia to take on and absorb enormous punishment,” says a former senior executive with one of Jio’s leading incumbent competitors.

 

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