Reliance Jio tariff plans from April: Why Airtel, Vodafone, Idea should worry

As a rule of thumb, India’s telecom operators usually watch the behaviour of about 20 percent customers, who generate 80 percent revenues. These “high-value” customers are obviously a pampered lot and their loyalty is keenly fought for. Even now, when the industry is going through a massive churn with the arrival of a new player in an already over-crowded market, it is these premium customers who will determine the fate of incumbent biggies. Will they jump ship and align with Reliance Jio Infocomm? Or will they retain old loyalties and continue to patronise the incumbent telecom operators like Bharti Airtel, Vodafone India and Idea Cellular?

It is obvious that after Tuesday’s announcement by Reliance Jio Chairman Mukesh Ambani that there will be a charge for the company's services from April, there is some relief within the industry. Freebies since Jio’s launch last year were driving down industry revenues and profitability. It is also equally certain that between now and April, the incumbent telcos will have to come out with competing tariff offers, even if this means their profitability takes further hit. Industry watchers aver that much before April, data tariffs will nosedive as competitors begin offering lower rates to keep up with Jio.

But, this could be a short-term phenomenon because of the bigger shift that is already underway in the industry. India’s telecom industry, second largest in the world behind China, has already begun talks of a massive consolidation. From over half a dozen major players, it is possible that in the next few months, only a handful of large players will emerge. This is the scenario industry watchers are referring to when they say that though data tariffs will plunge in the near term because of Jio’s offers, they will begin to rise as consolidation gets underway and the actual number of telecom operators decline.

In his address, Ambani announced tariff plans from 1 April. While asserting that voice calls will remain free for life, he said the existing 100 million customer base besides those who come on board by 31 March can use Jio services for another year at a nominal charge of Rs 303 per month. This is what pleased some analysts, who pointed out that this price is higher than the average industry ARPU and therefore won’t be dilutive of earnings of other telcos.

Sachin Salgaonkar of BoA Merrill Lynch said in a note to clients on Tuesday, “If RJio starts charging Rs 303 per month then we consider it to be positive for the industry as the offers may not be dilutive for Bharti/Idea as their average ARPU (average revenue per user) is below Rs 200. This may lead to some traffic moving back from RJio to top telcos. We are not overly worried on RJio's ability to offer 20 percent discount on existing tariffs as top telcos may have many offers which they do not even publicize and may offer customer-made packages to many.”

But analysts at Motilal Oswal believe that RJio’s offer is good enough for it to retain existing customers. “Bharti and Idea reported voice + data ARPU of Rs 298 and Rs 225, respectively, for Q3FY17. We believe RJIO’s Rs 303 tariff offering unlimited voice and 1GB per day data provides meaningful value for subscribers versus Bharti’s average 419 minute voice and 0.97GB per month data and Idea’s 385 min voice and 0.70GB per month data. The unlimited offer should drive significant retention of existing consumers.”

These analysts also said the high data usage habit of existing RJio customers will be another subscriber retention driver.

And Deutsche Bank Market Research pointed out that restoration of a paid-for model by RJio “albeit at a lower price point than pre-RJio’s market entry” is a help for all operators. These analysts further said that this though “is unlikely to impact Q4 sector results as free RJio service remains in place until quarter end. Vodafone said that the Indian service revenue growth slowed from 5.4 percent in Q2 to -1.9 percent in Q3 (the slowdown was partly as a result of de-monetisation, as well as competitive trends).”

So though the industry is relieved at RJio beginning commercial launch from April, its monetary woes are unlikely to abate even in the ongoing quarter. Remember, Vodafone Plc, the British parent, has had to write down close to $5.5 billion for the India operations recently. It has been talking of a listing on Indian bourses with little success and has never been profitable here. In the December quarter of FY17, market leader Bharti suffered due to increased competitive intensity. Third quarter net profit slumped 55 percent from a year earlier as its voice and data businesses felt the full impact of RJio’s free services. Revenue fell 3 percent as data and voice rates fell and more subscribers left the operator. Idea also reported a significant dent in its earnings thanks to RJIo’s arrival, reporting its first quarterly loss since getting listed. Its net loss was Rs 384 crore versus net profit of Rs 660 crore in the year-ago period. Revenue declined 3.7% to Rs 8,661 crore.

For the incumbent players, the next few months will likely be as tough as the last six. Things will begin to change only if the mega merger, between Vodafone India and Idea, fructifies. In this case, the resultant entity will likely have to largest subscriber and revenue market share, ahead of Bharti. Then, another possible mega alliance between Reliance Communications, MTS, Aircel and Tata Teleservices – though still being speculated about – could also alter the shape of India’s telecom industry in the future. But for now, incumbent telcos have little choice except to follow RJio’s lead on tariffs.

(Disclosure: Reliance Jio is owned by Reliance Industries, who also owns Network18, the publisher of Firstpost)