Why Reliance Jio’s cost advantage may not last longer

Reliance Jio and impact on MNPElara Securities said Reliance Jio’s cost advantage may not last longer. Reliance Jio has invested more than $20 billion to build its nationwide 4G network.

While running a pure 4G network will result in lower operating cost than a mix of 2G, 3G and 4G, the cost advantage to Reliance Jio may be minor with the new rollout strategy being adopted by incumbents like Vodafone that are choosing to deploy 4G LTE by installing new single radio access network (SRAN).

Vodafone has already used the SingleRAN deployment strategy for rolling out 4G LTE in Europe and has found this providing lower total cost of ownership. Reliance Jio’s cost advantage may not last for long and its lead in fiber-optic rollout could also be under threat.

India’s experience with last-mile, fiber-optic deployment suggests a lifespan of 5-7 years due to frequent fiber cuts vs 20-25 in developed countries.

Reliance Jio’s initial fiber rollout areas will soon need to be replaced, given that the rollout started over 2010-12.
India telecom operator revenueGoldman Sachs Global Investment Research said revenue for top telecom operators has been under pressure, seeing a double digit decline last two quarters.

Telecom leaders perform despite Jio

Top telecom operators in different circles have fared well in terms of subscriber additions or revenue market share despite the entry of Reliance Jio Infocomm, says Elara Securities.

Drop in subscriber market share (SMS) was as high as 111bp for Bharti Airtel, the telecom leader in Delhi circle during the initial month after Reliance Jio’s entry with a free service period. Bharti Airtel achieved 10bp improvement MoM in its Delhi SMS in March 2017.

Revenue market share for the leaders (excluding Aircel) has improved in the range of 356bp for Airtel to 320bp for Idea Cellular and 239bp for Vodafone.

Telecom operators’ revenue has declined 24 percent as average revenue per user (ARPU) fell sharply in the range of 19.8-21.1 percent due to free promotional period by Reliance Jio.

ARPU can improve over FY19-20 for the telecom operator leaders such as Bharti Airtel, Vodafone and Idea Cellular as they benefit from both elasticity in data usage and consolidation of subscriber identification module (SIM) by their users resulting in higher wallet share from their customers, said Ravi Menon of Elara Securities.

Reliance Jio’s entry has created incentives for adoption of broadband with wireless broadband user addition picking up post September 2016 when Reliance Jio launched operations commercially in India.

In the six months prior to Reliance Jio’s entry, Bharti Airtel, Vodafone and Idea Cellular together were adding only 4.2 million broadband subscribers per month. They collectively lost 10.9 million broadband subscribers in November 2016 as Reliance Jio’s free offer lured customers away.

Bharti Airtel, Vodafone and Idea added 8.5 million subscribers in March 2017 due to anticipation about the end of free services from Reliance Jio.

In April 2017, despite Reliance Jio extending a new three-month subscription package of INR 309 for 84 days of 1GB of broadband data per day, Bharti Airtel and Vodafone together still managed to add 5.16 million broadband subscribers.

From the time of launch of Reliance Jio, mobile broadband (3G+4G) subscriber base has increased by 15.4 percent for Bharti Airtel and 12.5 percent for Vodafone. While BSNL has managed to hold on to its broadband subscriber base, Idea Cellular’s broadband subscriber base has eroded 19.8 percent from its recent peak of 30.72 million in September 2016.

Idea Cellular’s worst loss in subscriber market share (SMS) from September 2016 to May 2017 was in Kerala where it has lost 234bp of SMS. The company has also lost revenue market share (as per TRAI report for Q4FY17) of 364bp in Kerala — contrary to the experience for Airtel and Vodafone in circles where they are number 1.

“Our channel checks reveal network dark spots over many parts of the country are the primary reason why most users are still reluctant to make Reliance Jio their only service provider. Visitor location register (VLR) data also suggests Reliance Jio’s service is not being preferred as the main service provider by a large segment of its subscriber base,” Elara Securities said.

Reliance Jio’s VLR data has shown a downward trend from October 2016-April 2017, suggesting a large number of its customers which tried the service in the initial free period from launch have discontinued using its services.

Jio’s current customer base could erode further if tariffs do not continue to be significantly more attractive than that of Bharti Airtel and Vodafone, or Reliance Jio improves its network coverage to match that of Bharti and Vodafone.

BSNL’s VLR decline has been sharp since Reliance Jio’s launch. Even in its best circles it has seen VLR drop in the range of 5.7-26.8 percent. BSNL has seen one of the worst VLR declines in Kerala (fell 18.8 percent) where it was number 2 with an SMS of 23.7 percent in August 2016.