Telcos overreacting to Reliance Jio entry in spectrum auction

The possible entry of Reliance Jio Infocomm into the voice telephony market has elicited extreme reactions from the equity markets as well as from telecom industry players in the last two days. Even the usually unflappable equity analysts are divided over whether other telecom companies will have to bear the brunt of Reliance Jio’s deep-pocket, market disruptive tendencies. At the very least, Reliance Jio could make bidding for the scarce 900 mhz spectrum - the most efficient spectrum of all that will be on auction in February - so competitive that incumbents are unable to augment their kitty in key circles. Aggressive bidding could disrupt the apple cart of incumbent telcos even in the low-interest 1800 mhz spectrum band during the auctions.

The market may be right in anticipating the worst but it would be quite premature to give up the February auctions to Reliance Jio at this stage. Indeed, Reliance may behave a bit more sensibly than this worst case scenario which has prompted share prices of top telecom companies to tumble yesterday.

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[caption id=“attachment_1055687” align=“alignleft” width=“380”]  RIL Chairman Mukesh Ambani. RIL owns Reliance Jio Infocomm. AFP[/caption]

Here’s why:

1) Reliance may be after 1800, not 900 mhz spectrum:

Karan Mittal and Sneha Agarwal of ICICI Direct said in a note to clients that instead of concentrating on the scarce 900 mhz spectrum band, Reliance may instead be keener on the 1800 mhz spectrum band. Their logic is simple: Reliance already has permission to offer voice and could be looking for 1800 mhz spectrum to offer voice since it can use the 4G spectrum it already holds for offering high speed data coverage. The two analysts have said therefore that the fears of 900 mhz prices going skywards are misplaced.

2) There is enough 900 mhz spectrum: The same two analysts also say that there is 10 mhz of 900 mhz spectrum anyway available for bids in most circles during the auction. Another reason why fears of Reliance Jio pushing up prices could be misplaced

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3) 900 mhz will be re-acquired by incumbents: Four analysts of Goldman Sachs have pointed out the 900 MHz reserve price is too high to justify the business case for a new telco. “We believe incumbents that currently own this spectrum (like Bharti) will reacquire this spectrum at the reserve (or slightly higher) price,” they said. If this happens, where is the cause for other telcos including Bharti to worry about prices rising on aggression shown by Reliance Jio?

Only Credit Suisse has cried wolf at Reliance Jio’s entry. Reliance, by the way, has not officially even acknowledged that it has put in an application to bid for the upcoming auctions, with its officials merely confirming this off the record.

Sunil Tirumalai and Chunky Shah of Credit Suisse have warned that Reliance Jio’s entry is against current market expectations. “Unlike the low-priced voice strategy ofother recent challengers, with an 1800+2300 voice+data strategy Reliance could target the top end of incumbents’ customer base without having to resort to steep price discounts.” So this is a segment which incumbents could lose out on, if Reliance Jio decides to get aggressive.

Reliance Jio is the only telco which holds 4G spectrum pan India and has no telecom presence as of now despite having the spectrum.

So as we said earlier, it is premature to quake in anticipation of Reliance Jio’s entry and even foolish. The telecom market has improved significantly for incumbents in the last one year. Tariffs have risen, spectrum base price is reduced significantly, norms for mergers and acquisition will soon be liberalised so incumbents are already witnessing a reversal of fortunes. There is no reason why they cannot bid sensibly and still make profitable business case for themselves after the February auctions. Reliance Jio or no Reliance Jio.