India’s Tata and Bharti explore mega-deal but Reliance RJio falters

Reliance Jio had a troubled start to its life as India’s newest mobile operator, with repeated delays to its LTE-only service introduction and legal challenges to its free data launch offers. However, once it did turn on its services, it had a dramatic impact on an already overcrowded market, setting in train a series of mergers and acquisitions, and price cutting by the other major 4G providers.

However, RJio’s own challenges are not yet behind it. Having gone live in some regions in September, the company – part of the huge Reliance Industries (RIL) group – gained market share of 9.5% by April, according to regulator TRAI, even though it had missed its own hugely ambitious target of signing up 100m subscribers by the end of 2016. Its success was largely down to its offer of free voice for life and free data for the first six months, and once its started charging for services, the pace of subscriber growth predictably slowed.

It had 72m customers at the end of January, and had picked up 18m during that month. In February, net adds were down to 10m and they fell again in March, to 5.9m, and April, to 3.9m. And of even greater concern, in April, only 400,000 active subscribers joined, according to a report by Goldman Sachs and ICICI Securities, compared to 16m in September and October of 2016. That indicates that many people bought RJio SIM cards to take advantage of the free offers but did not continue using them afterwards (most Indian consumers have multiple SIM cards).

Another report, from local research agency Velocity MR and cited by LightReading, says that only 18% of RJio’s subscribers use that service as their primary one, and after the new operator launched, the number of requests to port mobile numbers to a new MNO remained the same as it had been before the launch.

Of course, slowdown is to be expected at the end of a very attractive launch offer, but it has come quickly, at a time when RJio has been increasing its capex investment in its network, because if it is going to charge data fees – even though these remain among the lowest in the 4G market – it needs to improve its quality of experience.

In January, it revealed plans to spend a further $4.4bn on expanding and upgrading its network, bringing its network spending to almost $30bn. The additional funds are likely to be spent on improving basic quality of service, especially data speeds. Despite the newness of its network, TRAI’s data from November 2016 shows that RJio delivered one of the slowest 4G connection speeds in the country.

However, Jio is not just relying on price cutting. It does have leeway to undercut its rivals because it has put in place a series of agreements which have helped reduce its cost base and improve its coverage and capacity – tower sharing, roaming, fiber deals and so on. It has also been able to tap into a more modern, cost-effective generation of technology because it has no legacy networks and took its time to get its supply chain in place. It is shaping up to be a notable adopter of urban small cells and WiFi in an early example of densification, for instance.

More importantly, though, it shows signs of innovating on the service model. It has invested heavily in fiber – it has 300,000 route miles installed as backbone, more than any other MNO in India, and is extending its reach deep into the home with last mile fiber, small cells and WiFi homespots. Now it intends to add a direct-to-home (DTH) TV service to its bundles, based on satellite and Jio Fiber Broadband, and paving the way for quad play services in a market with notoriously low fixed broadband penetration.

RJio is offering an Android TV set-top, manufactured by Samindo Electronics for Kaon Media, with 4K recording, WiFi, Bluetooth and Google Cast – expected to be priced at between INR180 ($2.80) and INR200($3.10) a month, with the first three months free. Competing DTH offerings from the likes of Videocon d2h and DishTV cost around INR300 ($4.65) a month, so Jio’s DTH launch could cause similar disruption to that of the mobile data offers and of Jio Play, which has 300 TV channels bundled with basic data charges – a move that had rivals cutting their data prices by as much as 80%.

Jio could also use its hybrid OTT satellite service to push its suite of apps, including Jio Play, Jio Chat, Jio News and Jio Moneyetc – apps which can currently only be exclusively accessed over Jio’s 4G network. It may also do well to partner with Netflix or another more popular, and cheaper, local SVoD player such as YuppTV or Hotstar.

Such moves indicate that RJio’s current setbacks should not breed complacency among the older MNOs. So far, they have responded to the danger with their own price cuts, and with accelerated network expansion to boost their QoS differentiation and reach more people. Bharti Airtel said in April that it had deployed 180,000 mobile sites in the past two years, equivalent to the total number it rolled out in the previous 20 years.

The other response has been to huddle together for warmth with a string of M&A deals, from the small – Bharti buying Tikona for its 4G spectrum; to the midsized – Bharti agreeing to buy Telenor India for no cash, but taking on its outstanding spectrum and tower lease commitments; to the huge, such as Vodafone’s $23bn merger plan with Idea Cellular, to create the largest Indian MNO; or Reliance Communications’ deal with Aircel. In addition, the country’s two largest TV operators, Videocon d2h and DishTV, are merging to form a DTH superpower with 27.6m homes and over 40% market share.

Last month, a report by CCS Insight predicted that India would become a four-MNO market in the coming few years, down from 11 MNOs before RJio launched. Indeed, as far back as March 2016, Bharti Airtel’s chairman, Sunil Mittal, forecast that a further price war was in store with launch of RJio, and that this could halve the number of mobile broadband operators to five. He predicted that the survivors would be the current top three – Bharti itself, Vodafone and Idea Cellular – plus Reliance Jio and state-owned BSNL.

The next major deal on the horizon would help Airtel to stay in that charmed circle, as it is reportedly between two conglomerates, Tata Group and Bharti Enterprises, which are said to be talking about merging their telecoms assets. That would unite Airtel – India’s largest MNO until the Vodafone-Idea transaction closes – with three Tata units, Sky, Teleservices and Communications.

Tata Group has been looking for a way out of telecoms for some time, to help reduce its INR300bn ($4.63bn) debt mountain and escape the relentless price wars worsened by RJio. Tata was once in talks with Vodafone, but now the UK-headquartered firm is tying up with Aircel, Tata is looking to form a company with Airtel, maintaining a minority stake.

The deal would keep Airtel in striking distance of the Vodafone-Aircel subscriber numbers. The new number one MNO would have almost 400m customers, compared to Airtel’s current 280m, but Tata would bring it a further 48m, as well as some 800 MHz spectrum to help with efficient LTE expansion into new areas. It could also become the leading player in DTH TV, despite the Videocon/Dish plans, since Tata has 23% market share and Airtel has 21%.

Finally, Tata Communications would increase Airtel’s position in the enterprise, which is increasingly important, the more consumer ARPUs fall to the ground again after a brief revival on the back of 3G and 4G data launches.

“From structuring and approval perspectives, the easiest transaction would be for Tata Teleservices to be subsumed by Bharti Airtel,” said CCS Insight in its report, as it examined the various routes for consolidation in India. “Our view is that the main alternative is a tie-up with BSNL, but other combinations exist, such as a merger with the Reliance Communications-Aircel business.”

BSNL, one of the two state-owned telcos, has been tipped for years to merge with the other one, MTNL, which operates in the two largest markets, Delhi and Mumbai. However, the two firms bring a hefty burden of debt, poor network performance and bureaucracy to any private sector suitor.

Not that a Tata-Bharti deal is straightforward. The Indian government still owns a 26% stake in Tata Communications and Tata Sky, the TV arm, has external investors such as Rupert Murdoch’s 21st Century Fox. Tata holds a minority stake in American Tower’s Indian arm, a competitor of Bharti Infratel. Tata Teleservices has a listed arm in the Mumbai circle which would need to be delisted, and has also reportedly been in talks with RCOM, which could bring that company into the merger.

If this deal happens, it will probably force other players to seek new partners in order to achieve the scale to stay in the race. CCS Insight believes the two Reliances – Rjio and RCom – are likely to combine, reuniting a company which split apart acrimoniously almost two decades ago. The two companies already share a significant amount of infrastructure and have complementary spectrum and RAN footprints.

That would reduce the Indian market to three huge players plus the state-owned duo, a few small regional operators (mainly 2G), and some MVNOs (only recently allowed in this market). Bharti-Tata, Vodafone-Idea, and Reliance-Aircel-RJio would dominate a market which has been massively fragmented until now. This looks like an almost inevitable result of many years of price wars, under-investment in network quality, and inappropriate spectrum fees.

RJio was the catalyst, not the cause, with its disruptive entry, but it will have significant challenges to maintain its independence, or its innovation, if its major rivals all enter into marriages. Already, the investment needed to keep its network competitive is outrunning its revenue potential, and the capex:revenue ratio would only worsen in a consolidated market. It seems likely that RJio will become part of a trio of massive incumbents, which will make the Indian mobile and multiplay market more viable for its operators, but less competitive and exciting for its customers.