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5 August 2019

As Jio overtakes Airtel, lower spectrum costs are critical for India’s MNOs

With Reliance Jio now the second largest mobile operator in India by subscriber numbers, market leader Vodafone Idea, and deposed former leader Bharti Airtel, are under more pressure than ever to reduce costs and launch new services that can steal customers back from the disruptive and low cost Jio.

This puts them in a dilemma about 5G spectrum. They have repeated their threats to boycott the upcoming 5G spectrum auction if the regulator, TRAI, does not reduce the high reserve prices. Paying large sums for airwaves so soon after investing in 4G, and engaging in consolidation and price wars in response to Jio’s entry to the market, would intensify the MNOs’ already daunting financial challenges.

But if they do not get 5G spectrum, they will be limited in the new services they can offer, especially higher value enterprise applications, nor will they be able to take advantage of the improved cost efficiency of 5G radios and virtualized cores. And if Jio, with its deep-pocketed parent Reliance Industries behind it, does buy the spectrum, the other two MNOs could find themselves outmanoevered.

If the MNOs are to deliver what the government wants, in terms of 5G services and coverage, to support its national broadband plan, TRAI needs to break its usual habit of putting high reserve prices on spectrum to please the Treasury, which has limited MNOs’ ability to invest heavily in good quality networks.

But it has said it hopes to raise INR9.83 trillion ($84bn) from the auction of 3.5 GHz and millimeter wave licences, which could mean reserve prices as high as $7.2bn per 100 MHz.

“It doesn’t make sense for us to buy at these levels, when the ecosystem won’t be developing for the next two to three years,” a Bharti Airtel official told India’s Economic Times.

Gopal Vittal, CEO of Bharti Airtel, used the recent ET Telecom 5G conference in Delhi to call on TRAI to accelerate spectrum allocation but to reduce fees significantly. Each MNO will need at least 1,000 MHz of spectrum if they are to deliver what the government has set out for Digital India, he said.

He told LightReading at the conference: “Indian operators need 1,000MHz of spectrum each, in order to do 5G properly. There is a lot of work to be done freeing up mmWave spectrum in the high bands. Even when you talk about spectrum in the mid-band, the 3.5 GHz spectrum, every operator is going to need 75-100 MHz of spectrum, otherwise you will see a 5G icon displayed on your phone, but in reality you will just be getting a 4G experience.”

He told attendees at the event: “This must not be about revenue maximization. This is about building a strong digital footprint for the country. The cost of the spectrum needs to come down.”

He also echoed comments by Reliance Jio (see separate item) that one of the biggest challenges in India would be backhaul because fiber is not ubiquitous, and microwave backhaul will require yet more spectrum. He said: “You need microwave spectrum to deal with the backhaul of the very large quantities of traffic that are going to be involved with 5G. For that, there is microwave spectrum sitting with the government in the E-Band. This needs to be allocated. It is criminal that it is just sitting there, unallocated. This is degrading the quality of the experience that the industry is able to deliver.”

He also called on the government to legislate to reduce other costs which make the mobile business case so hard to sustain, even for the remaining three MNOs which have survived the aggressive consolidation of the past few years. These costs include high annual spectrum usage charges, high taxes, as well as “the litigation that the industry is subjected to, and the USO [universal service obligation] fund that is just sitting with the government unused. These are all constraining the industry.”

He claimed that, in 4G, Indian operators have spent INR34 in capex for every INR100 in revenues, whereas for most MNOs capex intensity would be closer to 16% or 17%. On top of that INR34, he said INR31 goes to the Treasury in taxes. “This is a broken situation and we need to fix this,” he said, especially as Indian operators have some of the lowest ARPUs in the world, despite the introduction of higher performance 4G services. In 2015, Vittal said the industry average ARPU was about INR400, which had risen somewhat as a result of consolidation, which lowered competition, and 3G/4G services. But now it is down at INR105 as a result of price wars, and the more recent consolidation have been a panic reaction to Jio’s disruption rather than a positive move to make MNOs more sustainable.

He concluded, in the interview: “Current conditions are unsustainable. If ARPU is just increased from around $1.50 to around $3.00, which is not a huge increase in terms of consumer cost, that would totally change the game for us.”

Vodafone Idea is also considering staying out of the auction, and the pressure on its finances will be intensified following a poor first quarter performance. The company’s share value fell by 25% on the news that it lost 14.1m subscribers in its fiscal first quarter, though it said most of the defectors were low value customers and it added 4.1m LTE subscribers. Its total base is now 84.8m subscribers.

The MNO is heavily focused on improving the quality of its networks with 4G expansion and densification, in order to attract higher value customers including businesses, distancing itself from the price wars with Jio for lower budget consumers.

“As we continue to integrate our networks, our customers’ data experience is significantly improving in most services areas and we now lead the league tables on data download speeds in Delhi, West Bengal and Chennai. We remain focused on expanding our 4G coverage to over one billion Indians as well as expanding our data capacities by adding more sites on TDD and deploying Massive MIMO,” said Balesh Sharma, CEO of Vodafone Idea.

By contrast, Reliance Jio recorded a solid fiscal Q1 as its mobile subscriber base increased by over 50% year-on-year.

It reported net profit up 45.6% year-on-year to INR8.4bn ($122m), with operating revenue up 44% to INR138bn. It added 116m subscribers over the year to end with 331m, or 31% share, as of the end of June.

However, the fact that it has to use price wars to build share so aggressively shows in its ARPU figures, though not yet in its profitability, thanks to its very capex-light build-out model and stripped-down operating costs. ARPU fell 9.3% year-on-year to INR122, which is still above the country’s average of INR105. Average data consumption per user rose 7.5% to 11.4GB per month.

Jio does not want to stay in the low end of the customer base entirely. It is also targeting higher value consumers and enterprises as it extends its fiber network and starts to offer multiplay bundles. Company chairman Mukesh Ambani said Jio had started connecting enterprises with its GigaFiber service and this will soon be rolled out to cover 50m households too.

But executives said that, for now, Jio will continue to prioritize increasing market share over profitability. “We have been telling you from the beginning, the priority for us today is customers,” Jio’s head of strategy, Anshuman Thakur, told India’s Business Today newspaper.

The telco is also moving some cost off its balance sheet by agreeing a deal with a consortium led by Brookfield Asset Management, which will invest INR252bn to take a 51% in its tower unit, Reliance Jio Infratel. Subject to approvals, a second phase of the deal will see the consortium repay INR120bn to Jio and “certain existing financial liabilities of Reliance Jio Infratel”, to take full control of the tower arm.