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Any New Idea, Sirji?

The assault by Reliance Jio has left Idea Cellular particularly vulnerable as it talks merger with Vodafone

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The ominous threat was looming as early as 2015 when it became clear that Mukesh Ambani, in a year or so, would launch an audacious bid to capture a large chunk of the Indian telecom market. Even then, Idea Cellular was fairly confident of weathering the coming storm. And why not? It was solidly entrenched as the number three player with close to 200 million subscribers. The number two player Vodafone was marginally ahead, though market leader Airtel with almost 270 million subscribers was top of the heap. Idea was consistently profitable, having delivered a net profit in every quarter since it was listed on the bourses. Debt, while high, was under control, and the operations generated enough cash profits to take care of capex requirements. Equally important, Idea had acquired a hard to win reputation of a powerful and durable brand.

And then the Indian telecom market was hit by the Reliance Jio tsunami in September, 2016 with Ambani luring consumers with seemingly unbelievable offers of free talk as well as free data. A bitter and vociferous war of words and lobbying broke out between the aggressive newcomer and existing players such as Airtel, Idea and Vodafone. Both registered formal complaints with the regulator Telecom Regulatory Authority of India (Trai), and letters were sent even to the office of the Prime Minister. In typical Indian fashion, the dispute meandered and Trai eventually delivered a verdict that appeared to go in favour of Reliance Jio. But serious questions were raised over this, and the matter seems to be now with the appellate authority TDSAT. Whatever the outcome of this imbroglio, Reliance Jio is a reality and fait accompli for everyone concerned.

The company has extended its initial three month “free” offer by another three months to end March, 2017. What’s more, it claims to have galloped to a subscriber base of 100 million in just a few months; the fastest ever in the world. Veteran analysts recall how the Ambanis had used similarly aggressive and predatory strategies when they launched mobile operations in 2003. There were a lot of legal disputes, but eventually, Reliance was allowed to continue operations after a hefty fine. The most potent weapon that Mukesh Ambani has in this war is cash. Reliance Industries sits on cash reserves in excess of Rs 1,50,000 crore. The promotor of Idea, Kumar Mangalam Birla is no spring chicken when it comes to strategic warfare. But despite running an immensely successful conglomerate, Birla cannot conjure up that kind of cash.

The impact on existing telecom players has been immediate and devastating. The number three player Idea seems to have been hit particularly hard. For the quarter ended 31 December, it reported a consolidated net loss of Rs 385.6 crore compared to a consolidated net profit of Rs 655.6 crore a year ago, and Rs 90 crore in the previous quarter. Revenue fell 3.79 per cent to Rs 8,662.7 crore, as as data and voice rates fell and its subscriber base shrank. “The Indian mobile industry witnessed an unprecedented disruption in the quarter of October to December 2016, primarily due to free voice and mobile data promotions by the new entrant,” the company said in a statement, after it lost more than 5 million subscribers in the quarter. Equally devastating has been the impact on revenues. Forced to cut prices, the company witnessed a double-digit drop in average revenue per user. Idea’s average revenue per user (ARPU) for voice and data combined plunged 9.24 per cent to Rs 157 against Rs 173 in the previous quarter. However minutes of usage (MoU) rose 4.61 per cent. Voice and data ARPUs fell by 6.5 per cent and 14.61per cent, respectively, quarter on quarter.

What does a number three player do when the writing on the wall is crystal clear? Well, the time tested formula is to go for consolidation. So it came as no surprise when both Idea and Vodafone announced some time back that they were in serious talks to either merge their entities wholesale or work in some kind of consolidated operations. If that happens, the combined entity will become the largest telecom company in India by a distance with close to 400 million subscribers. There is little doubt that a combined entity of that size would be no pushover even for an overly aggressive and predatory Reliance. In any case, analysts are already wondering if Reliance can sustain the momentum over a longer period. Many surveys have shown that the data speed of Jio is not better than that of others in the 4G spectrum. It has raced to 100 million subscribers by offering unsustainable freebies. The real challenge will be in fiscal 2017-18 when the freebies are gone and Jio will have to compete on even terms with others.

But even then, it will be a cause of regret for Birla. Despite being a very late entrant, he and his team had built Idea both as a formidable company as well as brand. A merger with Vodafone will hurt because ten years of hard work would have gone in vain, even if not down the drain.

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