The recent tariff order issued by the Telecom Regulatory Authority of India has triggered a fresh round of war of words between Mukesh Ambani-led Reliance Jio and the other major service providers — Airtel, Vodafone and Idea, with the latter group alleging the sectoral regulator had distorted “the competitive landscape in favour of one operator … with deep pockets and monopolistic designs.”
While stating that “over the past 12-18 months, regulation after regulation put out by TRAI has ended up in distorting the competitive landscape in favour of one operator, while putting all other operators at a serious disadvantage,” COAI refrained from directly naming Reliance Jio as the beneficiary.
Even as the top three providers threatened to legally challenge the recent order, the regulator dismissed their allegation as “baseless”. The regulator further said that Cellular Operators Association of India (COAI), the operators’ body which counts all four operators as members, had “got into the habit of making such allegations and are free to move court.”
‘Defamation suit threat’
On Friday, Reliance Jio joined the bandwagon warning it would pursue defamation proceedings against the COAI, while demanding a public apology and clarification in 48 hours for “callous and defamatory statements”. Reliance Jio further added that it reserves “its right to initiate criminal and civil defamation proceedings, including for damages, against both COAI and incumbent dominant operators (IDOs), jointly and or severally.”
The bone of contention this time is the new tariff order by the regulator which the latter said was aimed at ensuring transparency, non-discrimination and non-predation in tariffs that operators offer consumers. TRAI said under the new norms, there was no need to impose restrictions on the number of promotional offers that an operator can provide to its subscribers, while also amending the definition of ‘significant market power’ and predatory pricing.
The amended order modifies the definition of SMP to exclude parameters like traffic volume and switching capacity. “As a result, the operator who, by its own admission is the world’s largest data network, may be free to offer any sort of predatory tariffs, while older operators are now subject to regulation and cannot compete without falling foul of a new definition of what constitutes predatory pricing,” Rajan Mathews, director general of COAI said.
In a report, Credit Suisse said restricting market share definition to mobile revenue and subscriber share implied Reliance Jio would have reasonable flexibility on pricing till it crosses 30% share at the circle level, and that it expected the operator to hit this limit in a few quarters.
While stating it was not clear if the other operators (who are large in many circles) will be allowed to match Jio if the latter does price offerings below cost in future, the agency said, “Overall, we see these new rules as incrementally negative for the incumbent telcos,” Credit Suisse said.
Interestingly, the new regulations were expected to put an end to the controversy that started after Reliance Jio entered the industry with a ‘welcome offer’ giving free voice and data to its subscribers for three months. It later extended the free offer till March 31, 2017, naming it ‘Happy New Year’ offer.
Bharti Airtel, Vodafone and Idea had alleged that Reliance Jio’s offer was in violation of norms that limited promotional offers to 90 days. However, TRAI, in January 2017, said that Reliance Jio’s two plans were distinct from each other and did not flout regulatory norms.
Bharti Airtel and Idea Cellular then moved the TDSAT against TRAI. While TDSAT said the two plans of Reliance Jio did not violate any rules, it added the company did not adhere to the 7-day limit for reporting a new offer to TRAI.
COAI said the recent tariff order will exacerbate the financial crisis that the telecom industry in India was currently facing.
Terming the situation in the telecom industry as “dire”, Hemant Joshi, partner, Deloitte India, said, “The industry is definitely reeling under financial stress. This was also acknowledged by The Economic Survey.”
‘Lower revenues’
The 2017-18 survey said the telecom sector was going through a period of stress with “growing losses, debt pile, price war, reduced revenue and irrational spectrum costs,” adding that “low-cost data services by a new entrant” have disrupted the market and revenues of incumbent players had fallen.
Mr. Joshi said the government needed to step in and nurture the sector. “If telcos are bleeding, they will need to raise money for future investments in infrastructure and technology, from the market either through debt or equity. But who will invest in the sector if it is not viable? The government needs to... make sure that competitive pricing is not a race to the bottom.”
The telecom industry till now is estimated to have invested ₹9.2 lakh crore and is reeling under a debt burden of close to ₹5 lakh crore.
“When Reliance Jio came in, the revenue stream of the telcos started slipping because of months of Jio’s free service. How do you compete against free?,” Mr. Mathews said, adding that this triggered he exit of smaller players as well as a spat of mergers in the industry. “2016 was the death knell for players who were at the margin, leading to a situation where you have just three private players left – Jio, Vodafone-Idea and Airtel.
The consolidation in the sector gained pace post the entry of Reliance Jio, amid telcos seeing sharp fall in revenues, profitability and free cash flows. Bharti Airtel took over the wireless business of Tata Teleservices, having earlier bought Telenor India and Tikona Digital. Reliance Communications exited its wireless business, while selling most of its wireless assets to Jio. Meanwhile, Vodafone India and Idea Cellular announced a merger, which, when completed, will create the largest telco in India.
India Ratings in a report last year forecast a decline of 6% in the revenues of the telecom sector to ₹2.4 lakh crore in FY2018. “Competition has impacted the revenue generation and profitability of all players in H2 FY2017, post the Reliance Jio launch.” ICRA said it estimated “FY18 revenue and EBITDA to decline by 6% and 28% respectively.”
The reduction in the mobile termination charge by TRAI had resulted in a loss of more than ₹15,000 crore a year for the older players, the COAI said. Mr. Mathews added, “There is no relief in sight in terms of tariff wars.”
“It is the regulator’s duty to ensure orderly growth of the industry… In the case of the tariff order: the regulator has redefined the criteria of SMP. That is the gate, if you come in only then you have predatory pricing…
“This mainly allows one operator to maybe take the pricing further down and the majority operator will face a problem at a limit in terms of how they can respond. What will that do… that will continue to exacerbate the revenue stream of the incumbents,” Mr. Mathews said.
‘Destroyed financials’
He added the “governance structure of the regulator needs to be looked at seriously… TRAI is legally bound to ensure orderly growth of the telecom sector and... a level-playing field for all participants.” COAI has further alleged that the ‘continued favouring’ of Reliance Jio by the regulator has “destroyed the financials of an industry which was the poster child of India’s reform, with tens of thousands of jobs and tens of billions of dollars of investment at stake.”
Meanwhile, India Ratings and Research revised the outlook on the telecom services sector to ‘negative-to-stable’ for FY19 from ‘negative’ in FY18.
“While consolidation has opened avenues for structural improvements, the industry’s pricing power is yet to return… top telcos would focus on increasing their subscriber market share [rather] than revenue market share in FY19,” it said.
The agency added that the return of pricing power is hazy and would depend upon factors such as Jio’s pricing strategy and consumer reaction to tariff increases.
However, it expects industry revenue to remain stable in FY19, although revenue growth would be uneven across telcos. It said “extant telcos (excluding RJio)... would face the double whammy of declining data tariff and voice revenue.”
Consolidation had led to sufficient spectrum availability and top telcos have strengthened their business model via acquisition of spectrum at attractive prices, it said.
However, it added, FY19 may not witness active participation in spectrum auctions. Capital expenditure in telecom would be towards network augmentation, technology investments.
