India is the third largest mobile market in the world, and one of the fastest growing. But it is threatening to implode, with disastrous consequences for consumer and business services and the government’s 5G ambitions.
Will the webscalers, sensing an opportunity to shape a key market, save the day? Facebook has taken a big stake in Reliance Jio, Microsoft is reportedly mulling a similar move, and Google is reported to be investing in Vodafone Idea. This could bring much-needed new financing into the market, and the cloud giants would no doubt waste no time in showing show how telecoms can be provided in an entirely new way, if cloud platforms take the lead in the service model, not just in the technical underpinnings of 5G.
After a wave of consolidation and price wars, partly sparked by the disruptive entry of Reliance Jio, there are three 4G operators left standing – Vodafone Idea, Bharti Airtel and Jio itself. But the established pair are struggling under the weight of high spectrum fees; the huge cost of covering India’s vast territory and investing in long-overdue network upgrades; and recently imposed retrospective fines linked to adjusted gross revenue (AGR) dues. Combine all that with low ARPUs and galloping usage levels, and the impact of the global pandemic, and the prospect is dire.
Airtel and Vodafone had threatened to boycott 5G auctions if they were not postponed and/or reserve prices lowered (they are now delayed until 2021, although further 4G spectrum will still be sold). And Vodafone has said it is prepared to exit the market completely if the operators are not given a break in terms of lower spectrum fees, tax concessions and waiver of some of the Supreme Court fines.
There is certainly high potential for India’s industries and society to be transformed with the help of high quality, affordable mobile broadband. But those goals are completely at odds with the market structure for providing the 4G, future 5G, and converged services. If the three main operators cannot afford to invest in delivering those goals, India will slide back into the situation it was in during 3G – delivering networks that were later and of lower quality than in other major economies, because of a regulatory regime that failed to address the challenges of delivering mobile broadband profitably in a market with rockbottom ARPUs.
The situation improved for a while. A first wave of consolidation reduced over-competition, and the growth of the middle class, and of business demand, drove ARPUs up as some users prioritized quality of service over very low fees. But Jio entered with a super-low cost 4G proposition and sparked another wave of mergers and exits, and another price war. Yet the government has failed to address the misalignment between its high 5G ambitions and its regulatory policy, which consistently sets very high reserve prices for spectrum; allocates small bandwidths; and refuses to reduce complexity and red tape in regulatory areas like roaming and sharing.
If the traditional telecoms model is unworkable in India, it may be time for the webscalers to show how it could be done. A month ago, Facebook spent INR 435.7bn ($5.7bn) on a 9.9% stake in Jio Platforms, the subsidiary of Reliance Industries (RIL) that controls Jio (Jio has also improved its financial position, and given RIL hope of wiping out its debt, with a series of four smaller investments from equity and venture capital firms – KKR, General Atlantic, Vista Equity Partners and Silver Lake).
Now, it could attract further financing from Microsoft. Local sources report that Microsoft is negotiating a deal to spend $2bn for a 2.5% stake in Jio Platforms. Of course, the company will be aiming to tap into the “dramatic transformation that Jio has spurred in the country”, as Facebook put it, pointing out that “in less than four years, Jio has brought more than 388m people online, fueling the creation of innovative new enterprises and connecting people in new ways”. RIL is said to be preparing an IPO for Jio Platforms, outside India.
Microsoft will not want to be left out of such a huge user base, and like Facebook, it would presumably want to use its stake in Jio to influence its strategies for 4G, 5G and FTTx expansion, and for the digital services which the Indian operator is building on top of that infrastructure, including content, money, smart home and small business services. The huge base of small and medium enterprises in India are a particular focus of the Facebook alliance, and will also be in Microsoft’s sights as potential adopters of its Azure cloud and edge offerings.
Microsoft already has a relationship with Reliance – last summer, Azure signed a 10-year partnership with Jio’s parent firm RIL which will see Jio building data centers, hosted on Azure’s cloud, across India. So Microsoft’s interest in a stake in Jio Platforms, if that materializes, will not just be about keeping up with Facebook, or even pushing its services to a huge and growing user base. This is about leveraging the fact that 5G will be a cloud platform, to reshape a key market into the same structures and commercial approaches as the rest of the cloud industry. And that means turning telecoms networks into vital but relatively dumb pipes, and ensuring the key engines for monetizing 5G – such as network slicing engines or cloud-based enterprise core networks – are firmly in the hands of the webscalers, not the telcos.
In the case of Jio, which has its own ambitions to be a full digital service provider, there will be plenty of space to innovate in new content and applications, as well as providing the infrastructure. In time, it would make sense for those two activities to be separated, creating a situation in which RIL subsidiaries invest in and monetize physical infrastructure – mobile and fiber networks, cloud data centers and so on – as well as applications. But in between those two layers will sit Azure and Facebook with their cloud-native platforms, their orchestrators and AI engines and huge user bases.
They will be aiming to concentrate as much power and profit as possible in their own layer, and in doing so, may reveal India as a template for other markets – one in which they have the opportunity to reshape the industry rapidly, because of the operators’ woes, but certainly not a unique case.
Google eyes stake in Vodafone, and IBM is supporting Airtel:
Google is creeping up behind Azure and AWS in terms of providing cloud alliances for telcos, and so getting a valuable foothold in the 5G value chain. Until this year, it was the also-ran among the big three non-Chinese webscalers, but it has made significant progress in 2020, with several strategic alliances, including the breakthrough deal with Telecom Italia (see separate item).
Now the firm is said to be interested in taking a stake of about 5% in Vodafone Idea, the market leader in India. Despite its leadership, Vodafone Group has become frustrated by the high costs of operating in India, and threatened to bail out of the country, so an investment from Google would be welcome to help reduce the telco’s debt, pay its huge fines and put it in a stronger position to invest in 5G.
Google was reported to have been chasing a deal with Jio, but was pipped to the post by Facebook. But securing an influential role in Vodafone Idea would also give it access to a significant user base for its consumer and cloud services, as well as enabling it to shape the telco’s 5G policies – its choice of cloud partner for 5G enterprise and edge services, for instance. Although Vodafone has been losing subscribers, mainly to Jio, it still has a base of 300m.
And Bharti Airtel will be chasing investments and foreign money too. Recently, its parent group announced a $1bn stake sale – about 2.75% – to help alleviate its debt.
Back in January, Airtel itself raised $3bn through the sale of shares and convertible bonds, though these funds were only enough to pay off its fines.
And Airtel has announced its own telco cloud strategy, recently choosing IBM and its Red Hat subsidiary to build the platform to support the core. Key KPIs for the new platform will be reduced time to market for new services; better customer service; and launch of low latency services. Another key goal is to reduce capex and opex even as data usage mushrooms, and so be on a more equal playing field with Reliance Jio.
The partnership between Airtel and IBM builds on a relationship that dates back to 2004, when they signed a major managed services agreement. IBM/Red Hat also has a similar cloud deal with Vodafone Idea, which is similarly designed to simplify network operations, cut costs and speed up service launch.
India offers many attractions for webscale investors:
Microsoft and Google will be looking for benefits beyond access to a large user base, facilitated by telco channels (that would not require an investment, and will be limited by India’s strict net neutrality rules, which put paid to Facebook’s previous attempt to gain ground in the market with its Facebook Basics initiative).
There are other potential benefits, some short term, but many relating to the longer term goal to redefine what a telecoms network is – not just by running it in the cloud, but by using that new platform to shake up the user experience, the service models and, of course, the companies which have the pivotal roles in the value chain.
Some likely objectives for the webscalers, in India and elsewhere where telcos need their cash, include:
- Improved ability to control the user experience if they have a ‘tame’ network – web companies investing in operators to reduce their debt, in return for a say in how their networks are planned and optimized, is likely to be a common pattern in future. The template is China Unicom’s investment arrangement with a group of companies including Alibaba and Tencent.
- Getting closer to operators which are driving open network architectures. If the telecoms infrastructure market can become more like that of the cloud, with commoditized hardware and open software, costs can go down, stimulating expansion of mobile broadband availability for all; and the whole supply chain will be more susceptible to the influence of the cloud giants. Facebook is pushing the new architecture most directly, through the Telecom Infra Project (TIP), but Google and Microsoft are also active in open network, containerization and shared spectrum projects. Vodafone Idea is an important early deployer of O-RAN architectures.
- Telcos provide a strong channel for services and apps, but if they are to become digital service providers, they will also gain valuable expertise from webscale alliances. Facebook and Jio have announced the co-development of a multi-purpose application, similar to WeChat, which supports so many aspects of daily life in China, from messaging to ride hailing to shopping and banking.
- The opportunity to access India’s 60m small and medium enterprises as well as its “120m farmers, 30m small merchants and millions of small and medium enterprises in the informal sector”, as Facebook said. They can be targeted with payments, business applications and cloud services, while helping the US giants to fend off rivals like Tencent of China.