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12 December 2019

India’s MNOs finally drive up ARPU, but fines and spectrum will negate the gains

The Indian operators have raised prices, and after years of price wars and consolidation, the huge market may finally start to behave more like others, with three major MNOs able to make sustainable margins, and a rising degree of convergence. However, government policy remains a barrier to ending many years of dysfunction and over-competition. High spectrum prices still threaten to derail the 5G business case, and operators are also facing huge fines, imposed by Supreme Court a few weeks ago – charges which could drive Vodafone Idea out of the market altogether.

The number of MNOs has fallen from about 15 a decade ago to three national players (Vodafone Idea, Reliance Jio and Bharti Airtel) plus the ailing state-owned duo, BSNL and MTNL. This consolidation should allow the operators to start to charge prices that are a little closer to the norm for similar markets to India – for years, excessive competition has driven ARPUs to the lowest in the world, making it hard for any operator to make sufficient profit to invest in high quality networks and services.

Even a wave of acquisitions did not immediately solve the problem as the new entrant, Reliance Jio, made its initial disruptive mark by offering free or very low cost services, undercutting its rivals in order to seize market share, and sparking a new wave of price wars as Bharti and Vodafone responded.

But now, Jio has started charging for mobile calls and for fiber – two services which have been free, even as it has introduced rising charges for some mobile data tariffs. Across all its mobile services, it introduced price hikes of up to 40%, though it insisted that customers would get 300% more in benefits and performance.

Meanwhile, Bharti Airtel and Vodafone Idea also announced prepaid price increases – the former set out a long list of different changes in a table, but the latter has not yet provided any detail beyond saying it was introducing new prepaid plans.

Vodafone Idea’s position as the leading MNO by subscriber numbers is under threat from Jio’s continuing growth in market share, which will be further helped by its launch of fixed-line fiber services and of multiplay bundles. Jio was the only Indian operator to report significant fixed-line customer adds in September, as it targets a place in the wireline top five.

Its fiber growth may slow slightly now its free promotional offers are over current Jio Fiber users will have to choose their tariff plan. The telco will move about 500,000 users, which have been on the free trial tariff, to paid services over the coming month. Its fiber prices will be similar to those of Bharti, at INR3,999 ($56) a month for a 1Gbps service. This highlights the importance of fiber, which can command such high fees compared to mobile, which even following the new price hikes will still have base level ARPUs of only just over $1 a month. Jio will also offer a premium service, called Titanium, for INR8,499, though it has some more modest options too – the entry level package costs INR699 (less than US$10), while Bharti’s costs INR799, both offering speeds up to 100Mbps.

But while the blended ARPUs may rise, the MNOs are facing another wave of investment, this time in 5G. Some local reports suggest they may delay roll-out by as much as five years, if proposed reserve prices for spectrum remain high, and as they grapple with the huge fines plus high competition. A report in The Economic Times of India quoted Rajan S Mathews, director general of the Cellular Operators Association of India (COAI), saying: “We will push out 5G for at least five years. That’s the operator perspective. Pricing originally started off as a problem for the industry. With INR4.92bn ($68m) for 1 MHz, most operators said it was not a viable proposition given the debt and international prices.”

Such a delay would hit hard at the government’s digital and 5G-enabled socio-economic plans, but the operators are becoming more and more hardline in calling on the Department of Telecom to give them concessions in return for supporting the national goal of 5G deployment from 2020.

But last week, telecoms minister Ravi Shankar Pradad said there were no plans to reduce the 5G spectrum prices recommended by regulator TRAI, despite pointing to the large amounts of spectrum that have gone unsold in previous auctions, as operators struggled with the combination of high reserve prices and low ARPUs.

TRAI has set the price for spectrum in the 3.3-3.6 GHz band at INR98.4bn or $1.4bn for the smallest available block of spectrum.

Bharti’s CEO, Gopal Vittal, told a conference this year: “The cost of doing business here has to come down. The spectrum usage charges, the taxes, the litigation that the industry is subjected to, the USO fund that is just sitting with the government unused, are all constraining the industry. If you look at the investment that we are making for 4G, for every 100 rupees that we earn, we spend 34 rupees on capex. For most other companies in this industry, that figure would be closer to 16 or 17 rupees. An additional 31 rupees goes to the government for tax. This is a broken situation and we need to fix this.”

Between them, India’s MNOs owe $13bn following a recent Supreme Court ruling over the way they calculated their adjusted gross revenues, with Bharti Airtel and Vodafone Idea shouldering the biggest burden. Bharti intends to raise $1bn via bonds and debentures, and a further $2bn through qualified institutional placement, to help meet the bill. Both the operators, and Reliance Jio, have called on the government to provide relief packages and to allow them to spread the payments over a long period, but so far there have been no concessions and the current payment deadline is mid-January 2020.

Vodafone Idea’s chairman, Kumar Mangalam Birla, says the company will cease to exist unless it receives assistance from the Indian government in paying its bill for about $7.4bn in outstanding dues and fines. “If we are not getting anything then I think it is the end of the story for Vodafone Idea,” he said at a recent summit.

Vodafone’s grop CEO, Nick Read, has also indicated that his group will pull out of India altogether if matters do not improve, and particularly if Vodafone Idea is not offered a substantial relief package after the fines. “I’m very clear about what the requirements are for us to be a sustainable business going forward,” he said last month. “What you need to think about is that this is a joint venture in India and the remedy package is critical for the sustainability of the business going forward. We are not going to put more equity into it from the Group. Our view is: India it’s time for you to decide whether you really do want a vibrant and competitive marketplace. If you are not a going concern, then you are moving into a liquidation type scenario. You can’t get any clearer than that.”