Despite mobile operators’ often hyped-up promises for new 5G models, any disruption in the industry in 2017 was driven by non-traditional players, particularly cable providers such as Iliad of France and new entrants such as India’s Reliance Jio. Both these companies, and others like them, have been chipping away at the mobile market for some years now, but 2017 was the year when their impact on their respective countries was clear to see in terms of the shift in market share and service models.
As incumbent rivals started to respond, this year, both are looking to expand on what they have achieved so far, RJio scaling up by acquiring the telecoms assets of Reliance Communications (RCOM), Iliad by making further acquisitions in new countries, the latest being Ireland.
RJio is to pay a reported INR240bn ($3.75bn) for the telecoms infrastructure assets of RCOM, its former sister company, apparently beating market leader Bharti Airtel to the deal. The purchase will include all RCOM’s spectrum, including coveted airwaves in the 850 MHz band; its 43,000 towers; and its nationwide fiber, plus some other assets, subject to approval from regulators and lenders. If approved, it should close in a phased manner between now and March.
This will greatly reduce RCOM’s debt mountain of about $7bn, which had pushed its share price to record lows and spurred creditors such as Chin Development Bank to initiate insolvency proceedings because of missed payments. RCOM had previously looked to scale up itself in order to boost revenues and market share and improve its finances through growth. However, although it acquired former CDMA player SSTL, its far larger purchase of Aircel was blocked and towards the end of last year, it turned its thoughts to cutting debt directly through divestment.
In November, RCOM was reported by the Economic Times to be planning to shut down major parts of its wireless business, citing a speech by Gurdeep Singh, executive director of Reliance Telecom and CEO of the mobile arm, saying RCOM had reached the stage “where we need to call it a day on our wireless business”. Though the RJio deal only applies to infrastructure (which could still be leased back – the two Reliances already have wide-ranging cooperation in sites and fiber), many local observers still expect the company to scale back its mobile activities, particularly the ageing 2G business and low-ARPU services and customers.
Singh indicated that RCOM would focus only on higher margin 4G and enterprise services since “irrational pricing by all industry participants have destroyed profitability of traditional 2G/3G mobile business”.
For RJio, the deal will add significant scale to its physical network, helping it to expand coverage and capacity. That will help it address quality of service issues with parts of its 4G network – although it has signed up new subscribers at a record rate, helped by introductory offers of free voice and data, it was also rate the worst performer in terms of 4G network quality by regulator TRAI last autumn.
It has disrupted the Indian market significantly since it went live in late 2016, with its low cost tariffs, which are enabled in turn by its ultra-low cost base. Like other new entrants to competitive markets, like Iliad’s Free Mobile in France or Comcast in the US, it has various means of keeping its costs very low. These include:
- It has no legacy networks and users to support
- It has a significant installed base of broadband and WiFi, which help it to offload traffic from the more costly cellular network while also tempting users with bundled pricing
- It has built a new ecosystem around itself, working with open source platforms like Telecom Infra Project (TIP) and pushing vendors to adopt open, affordable designs for products like small cells.
But a low cost model depends on scale to continue to improve the economies while growing the user base and being able to support new, high quality services – Rjio labels itself a digital provider rather than a telco, and is developing an apps platform that extends to the smart home, the connected car, enterprise services such as enhanced voice, and a very small footprint and affordable smart TV box. But many of these require greater coverage and capacity than RJio has built out so far, so it needs to boost its network while starting to drive profitability, before its parent company, Reliance Industries, grows weary of the continually rising capex bill (RIL increased its investment in its telecoms arm last summer via a rights issue, raising questions about the spiralling costs of its mobile adventure).
Now, with the RCOM deal, RJio gains 43,000 towers, 122.4 MHz of spectrum in four bands (850 MHz, 900 MHz, 1.8 GHz and 2.1 GHz) and about 178,000 kilometers of optic fiber. The towers will mainly serve to reduce its operating costs, since it was already a tenant on almost 30,000 of them, and will not save on those rental fees.
The spectrum will complement RJio’s own, which is mainly in 2.3 GHz (the unit was founded around the acquisition of Infocomm, the only company to secure national holdings in the 2.3 GHz BWA band when it was auctioned in 2010. Getting more sub-1 GHz airwaves will be important for improving in-building penetration for enterprise and home services, and for reducing the cost of covering suburban and rural areas.
The fiber assets may be more important still, since RJio is clearly intending to boost revenues and market share by offering quad play services and a host of fixed/mobile applications. This will distinguish it from mobile-only rivals, which are increasingly caught up in a price war, partly a result of India’s long history of low ARPUs and excessive competition, partly sparked by RJio’s low cost plans. These wars should abate now that operators are starting to consolidate (helped by some relaxation of regulatory barriers to telco M&A), but as in other regions of the world, consumer-facing operators increasingly need to control fixed, mobile and video services in order to maintain growth and profit.
With RCOM’s fiber to boost its own 300,000 kilometers, RJio will become a significant challenger to Bharti Airtel in the FTTH and quad play spaces. RJio is already testing its Jio Fiber offering in several cities but will now be able to address a far larger percentage of the population as well as having improved inter-city fiber links and denser capacity to backhaul small and large 4G cells as well as WiFi access points. Once the deal closes, RJio will own far more fiber than Airtel, which has about 250,000km.
Armed with far more comprehensive fiber and spectrum assets, and with a deep-pocketed parent which is still prepared to foot the substantial bill for becoming a leading MNO, RJio is set to be a strong top three player in India just as it is poised for another leap in mobile data usage, powered by the expansion of 4G, digital services and quad play networks.
The market has needed consolidation for years and the impossibility of supporting up to 14 operators per circle (telecoms market region) was accentuated by RJio’s arrival. Now there will be three privately owned players of real note plus the state-controlled BSNL and MTNL (the latter operates only in Delhi and Mumbai, the former everywhere else). The future of those state telcos remains uncertain, but the rapid change in the private sector may encourage the government to pursue long-reported plans to merge them together, privatize them or take other steps to improve their competitiveness and financial performance.
Meanwhile, Vodafone is buying Idea Cellular, a deal which will allow it to overtake Airtel and become the largest player by subscribers; Airtel itself is acquiring Tata Teleservices, the latest in a string of purchases of smaller MNOs (following Augere, Aircel Dishnet, Videocon, Tikona and Telenor India). Aircel will be the only remaining national second tier player, though it is rumored to be in talks with Airtel about network and infrastructure sharing, or even a merger. Its parent, Maxis of Malaysia, is said to be loath to abandon the unit after investing $7bn in it over the past decade, despite the failure of the RCOM proposal.
And though Idea Cellular will soon belong to Vodafone, it said last week that it plans to raise $1.1bn in equity, to strengthen its balance sheet ahead of the merger. About $425m of that will be made through a preferential allotment to the Aditya Birla Group, which will increase its stake in Idea from 42% to 47% as a result, and could boost it further in the coming weeks. Idea has not specified how it will raise the remaining funds.
Once the merger completes later in the year, Vodafone will own about 47.5% of the newly formed entity, while the Aditya Birla Group will own 26%. The Competition Commission of India has already approved the merger.
The bare facts of the market consolidation make Airtel look like the timid player, but its defence against RJio has been the strongest in the country. It has played the newcomer at its own game, chasing market share and rapid network expansion even at the expense of short term profits. Indeed, Airtel’s chairman Sunil Mittal indicated the pain RJio has inflicted on its rivals when he estimated, last fall, that the new entrant forced the established MNOs to write off investments worth between $40bn and $50bn, because it was able to offer free or heavily discounted introductory prices for so long. In an interview with Economic Times, Mittal said that if a company in the US or Europe pursued the same strategy as Jio, regulators would intervene to stop “predatory pricing”.
Airtel, however, was more proactive than the other big MNOs in biting the bullet and matching RJio’s special offers – it even emulated RJio’s low cost 4G handset, the JioPhone, by launching a similar device, designed in conjunction with Karbonn and other Indian phonemakers.
At the same time, it expanded its 4G footprint and capacity through build-out and acquisition. In its last fiscal year (to April 1 2017), it says it deployed 72,663 base stations, and will install about the same number in this fiscal year. That has helped it boost its market share by revenues to 36.5% at the end of September (41.5% including the share controlled by Tata), while the Vodafone-Idea combination, on current showing, would take about 43%. Airtel says it will spend about $2.5bn in capex this year, mainly on fiber and 4G, and $310m in digitizing its customer experience and services.
All this consolidation should enable the surviving MNOs to survive, and to return to profitability and revenue growth as price wars subside and differentiation shifts to new services. That may also put them in a better position to invest in additional spectrum, new technologies like advanced MIMO (Airtel is working with SK Telecom of South Korea on this), and of course 5G.
TRAI has just opened a public consultation into a four-year plan which aims to attract $100bn of investment into the communication sector to achieve the elusive goal of universal broadband in India, and lay the framework for the country to be a leading player in the fourth industrial revolution and in 5G. This is part of the broader National Telecom Policy, on which the government has promised a major update in 2018.
The regulator’s draft document, the basis of the consultation process, is wide-ranging, with topics including rural connectivity (wired and wireless), “world class cities”, quality assurance measures, business process guidelines, and new rules to stimulate investment in infrastructure and technology for 5G and Internet of Things (IoT) networks. The consultation runs until January 19.
The grand plan is to start deploying 5G by 2020, and make India a “frontrunner” in the fourth industrial revolution by 2022. But there is often a wide gap between government ambitions and rhetoric, and the commercial pressures of the operators. The MNOs, battered by price wars and mergers, laden with debt, and still seeking return on their 3G and 4G investments, have been pressurizing TRAI to delay 5G spectrum auctions until they are in a better position to invest.
But the DoT wants 5G not only to underpin new services from the MNOs, but to be the basis of new opportunities for Indian manufacturers and patent developers. It recently formed a panel of industry, government and academic stakeholders to develop a 5G network and device product portfolio, which would aim to secure 50% of the home market and 10% of the global market by 2025. The department has also approved a new 5G testbed at the Indian Institute of Technology (IIT) in Madras.
This has been heard before. Indian handset makers are increasingly successful in their own country and, to some extent, in lower cost sectors abroad, but successive attempts to build an Indian telecoms equipment base have failed – even when MNOs were required to buy a percentage of their kit domestically, it merely encouraged existing vendors to move more manufacturing resource into the country.
That could change in 5G, but so far there is no sign of an emerging giant which could build major market share and intellectual property arsenal, as the Chinese challengers have done over the past 15 years. As for the operators, Indian MNOs have seldom been great innovators or trailblazers, preoccupied as they are with keeping costs down in a very low-ARPU market and trying to extend services to a vast rural population. RJio is behaving differently, with a focus on digital services and with a 5G-ready all-IP network. Despite the renewed strength and scale of Airtel and Vodafone, it looks set to continue to be a catalyst for change in India.
Niel and Iliad move into their third mobile market, buying Irish incumbent
Xavier Niel, chairman of French cable and mobile operator Iliad, is to acquire a majority stake in Ireland’s national operator, Eir, potentially wreaking the same disruptive havoc there as his company has in France. Iliad, whose Free Mobile unit sparked a wave of price wars and consolidation, has since expanded into Italy and now Ireland, and further acquisitions are likely, in Europe or even beyond (Iliad did try, though it failed, to make a play for T-Mobile USA).
In Ireland, Niel’s private holding company, NJJ, is to acquire a 32.9% stake in Eir for €330m ($391m), while Iliad – in which Niel holds a 52% stake – will acquire a 31.6% stake for €320m ($379m). Eir says this equates to an enterprise value of about €3.5bn ($4.15bn), though most of that relates to its debt mountain of €2.3bn ($2.73bn).
The current owners of Eir, Anchorage Capital Group and Davidson Kempner Capital Management, will retain a 35.5% stake between them. The deal, which is subject to regulatory approvals, is expected to close in the first half of this year. The agreement is structured in such a way that Iliad could eventually become the majority stakeholder – it has the right to acquire most of NJJ’s stake in 2024.
Iliad is to launch services in Italy within a few months, having won spectrum there as a result of the merger of the number three and four MNOs, 3 Italia and Wind (a condition of clearance of that deal was divestment of spectrum and infrastructure to support a new entrant and avoid reducing the number of mobile players from four to three – so often a deal breaker for EU competition authorities).
The established Italian operators – TIM, Vodafone and 3 – have been announcing new tariffs and other incentives to keep customers loyal when Iliad kicks off its services. The Irish competitors – Vodafone and 3 are the main ones here too – may feel obliged to do the same.
In reality, both these countries are a very different proposition for Iliad than France was when it launched its services in 2012. In France, it had a broadband customer base with extensive home broadband and WiFi hotspots and homespots to leverage, in order to reduce cellular network costs by keeping data elsewhere, and to support low cost multiplay bundles.
In Italy, it is a genuine new entrant, with no established brand, customer base or infrastructure to sweeten its cost base. And Ireland is different again – it will have both fixed and mobile networks, and an existing subscriber base, but it will inherit an incumbent which is, despite that, only the third MNO among three national players (with just over 1m users and under 20% share).
Eir has only just been getting back on its financial feet after filing for bankruptcy protection (‘examinership’ in Ireland). It has been restructuring but still has significant debt, and while it is the market leader in fixed broadband, with 900,000 customers, its TV-over-broadband service has only 74,000 customers to date. In its most recent financial year, Eir reported revenues of €1.32bn ($1.56bn) and adjusted EBITDA of €520m ($616m).
However, buying a going concern relatively cheaply, harnessing its infrastructure assets far more effectively, and then stealing share from larger players with aggressive bundling offers – that is what Niel’s companies do best. Ireland may not be a large market, but it offers significant opportunity for market share growth and for rural and IoT expansion.