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BW Businessworld

Top Gun Wars

For telcos, market leadership is worth haemorrhaging because of the disproportionate benefits

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The price war for data subscribers has hurt the bottom lines of mobile telephony service providers, yet none of them is likely to pull a punch. If anything, competition will only intensify given that market leadership is all-crucial to the business.

It offers many advantages once the dust settles, as is borne out by profitability trends across the world. The leader typically commands a premium with higher average revenue per user (ARPU), a larger share of premium subscribers, and relatively lower churn.

Given this, CRISIL Research believes price war in the Rs 1.5 lakh crore wireless telecom market will continue in this fiscal, too, leaving bruised bottom lines.

Sharp price cuts and free services offered by Reliance Jio (RJio) for almost 6 months - accounting for over 55 per cent of total wireless data consumption - resulted in flat adjusted (excluding inter connect charges and service tax) gross revenue growth for telecoms . While overall data traffic has grown 5 times in the past one year, a 60 per cent fall in 4G data prices since launch of RJio in September 2016 and free data usage has resulted in muted 2 per cent growth in adjusted gross revenue last fiscal (fiscal 2017).

With RJio pricing its services under the Prime scheme from April 2017, the sectors adjusted gross revenue (AGR) is expected to grow 12-14 per cent in fiscal 2018. For incumbents, AGR growth is expected to vary between 0 per cent and 5 per cent given they are caught in a fierce fight to protect subscribers.

Today, 4G data costs as low as 1 paisa per MB in high-end plans and 7.5 paise at the lower end for Jio Prime members. And the per-GB price for 4G is lower than 3G, though telcos are offsetting this by offering more the higher GB plans in 4G to protect their overall ARPU.

The profitability picture appears grimmer. Last fiscal, two of the top three telcos are estimated to have racked up net losses due to the price war and higher network costs. That trend should continue in this fiscal (fiscal 2018) as well, with aggregate EBITDA margin of the industry (ex-Jio) expected to drop another 50-100 basis points (bps). That's over and above ~600 bps drop to ~29 per cent estimated for last fiscal.

So, what is forcing telcos into this bruising battle?

Two words: market leadership. This is borne out by the financials and business dynamics of leading global peers in key high data consuming markets. Verizon, the largest wireless telecom player in the US, boasts of a sustained high market share and best-in-class network coverage in a price-competitive and mature market. Its strong cash flows have enabled investments in network quality, which, in turn, resulted in the lowest postpaid churn of less than 1 per cent. Consequently, Verizon enjoys much higher profitability (3-year average EBITDA margin of 37 per cent) and returns (3-year average of 15 per cent) compared with peers.

Another example is Telkomsel of Indonesia, which is jointly owned by the government and Singapore-based SingTel. The company has among the highest EBIDTA margins and returns anywhere, given its wide network, and a 75-80 per cent market share in non-Java (rural) areas. It also has twice the number of subscribers than its closest competitor, ensuring significant pricing advantage that also reflects in its financial profile. Ditto South Korea's SK Telekom and Australia's Telstra.

A similar pattern is evident in the long-tailed margins of domestic telcos. Market leader Bharti Airtel's (India operations) profitability is better than that of its peers. For instance, both Bharti and Vodafone get 55-60 per cent of revenue and 40-45 per cent of subscribers from metros and Circle A, but Bharti has EBIDTA margins that are over 500 bps north of Vodafone's, which is partly due to superior ARPUs (8 per cent higher in the December 2016 quarter than the next 2).

So three things are key to market leadership: significant amount of premium subscribers, higher share of sticky post-paid subscribers, and lower churn.

Bharti enjoys the lowest churn, and its share of postpaid subscribers and average data used per user are well above the next three players.

Reason why the current three-way battle for market leadership between Bharti, Vodafone+Idea and RJio will extend the price wars.

A consequence of this would be that 4G penetration, as per CRISIL Research calculation, would top 70 per cent in the next five years, both in terms of subscriber base and data usage.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Tags assigned to this article:
leadership telecos rjio telecom

Hetal Gandhi

Hetal is the Director for CRISIL Research. She has spent over a decade at CRISIL. Her experience is spread from consumption linked sectors like autos, auto components and consumer durables to technology-linked verticals like telecom, IT services and ITEs

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