Reliance Jio’s official entry into the Indian telecoms market today will be credit negative for the incumbents – especially smaller telcos – and should hasten industry consolidation, predicted Fitch Ratings.
Rising competition will lead to continued downward pressure on data tariffs at a time when capital expenditure will have to increase to support rising data consumption as lower-cost 4G handsets become available.
Fitch estimates that Jio’s blended tariff rates are 20-25 per cent lower than those of its rivals. Jio’s data charges are much lower and it does not charge at all for voice calls or text messages. In addition, all of Jio’s services will be free until the end of the year to kick-start its customer acquisition strategy. Until December 2017, its free offerings will also include 300 live TV stations and on-demand movies and music, along with proprietary chat, electronic payment capability and a range of other applications.
The incumbents, Fitch said, are likely to respond by lowering their tariffs to retain customers. It expects the industry blended tariff to fall by 10-15 per cent in the next year. The recent rise in data ARPU will soon start to reverse and cannibalisation by data services will continue to reduce voice ARPU.
Jio’s tariff plans may gradually push the market towards “data-only plans”. Such a shift could be particularly disruptive, given that most operators still generate the bulk of their revenue and profit from voice and text messages. The top-four telcos’ average operating EBITDA margin is likely to narrow by at least 2-2.5 points (it was 35 per cent last year) in the next year.
Steep curve for Jio
Nitin Soni, a Fitch director, said Jio is likely to be loss making at the EBITDA level for the first two years as it will face large initial costs, while its subscriber growth will be constrained by low 4G handset penetration. Less than 5 per cent of Indian consumers have 4G handsets. But that is changing quickly, as more than 70 per cent of new handsets sold are 4G.
He said in the first year Jio is unlikely to win more than 20-30 million subscribers or a 3-4 per cent revenue market share.
Soni said the country’s telecoms market should continue to consolidate and expects five to six operators to emerge from the shakeout. The market currently has more than 10 mobile players. “Unprofitable telcos, such as Telenor and Tata, could exit, given that their businesses will struggle to compete and they are now able to monetise their most valuable assets – their underutilised spectrum.”