“Consolidation in the India telecom
industry has accelerated over the past two years, with the top three operators gaining as much revenue market share (580bps) over FY15-1QFY18 as they did over FY10-15. This has been driven by high spectrum costs and intense pricing pressure due to the entry of Reliance Jio,” CLSA said in a report.
High spectrum fees are a key reason for consolidation in the sector. While big telecom
operators, buoyed by large balance sheets, were able to participate actively in the spectrum auctions, smaller operators were marginalised.
Over FY13-17, telecom operators spent nearly $39 billion on spectrum purchases, driven by renewals and data spectrum requirements, and nearly 90 per cent of these spends were made by Airtel, Vodafone-Idea Cellular, and Reliance Jio. As a result, their share in the spectrum market has gone up from 37 per cent in 2012 to 68 per cent in 2017 (Reliance Jio was not there in 2012).
Although the gap in the overall spectrum share of large and small operators is high, the data spectrum gap is even higher, with the top ones cornering around 85 per cent of the 3G/4G spectrum.
“This spectrum edge has been the key enabler for larger telecom operators to roll out their 3G/4G networks, leading to a significant difference in the service offerings of the top operators and smaller operators. While top operators are increasingly offering large data bundles and 3G/4G services, smaller operators are struggling to match them because of limited spectrum and lower network investment,” the report added.
It’s not only high spectrum costs but also the entry of Reliance Jio that makes things more difficult for the incumbents. The free services by Reliance Jio for the first six months, followed by discounted tariffs since April this year, triggered an unprecedented price war, resulting in sharp declines in revenue and earnings before interest, depreciation, taxation, and amortisation for both large and smaller operators. Smaller operators have been hit harder, reporting higher revenue declines since the launch of Reliance Jio.
As a result, a spate of consolidation transactions happened in the industry, and the most notable was the merger between Idea Cellular and Vodafone India, the number two and three operators in India.
After the merger, the combined entity is likely to be the largest telecom operator with a 34 per cent subscriber share and 43 per cent revenue share. Several smaller operators have either scaled down operations or exited the business completely. Bharti Airtel’s acquisition of Telenor, Tata Teleservices, Tikona and Videocon’s spectrum, and the spectrum trading-sharing arrangement between Reliance Communications (RCom) and Reliance Jio are such instances.
With the merger between RCom and Aircel falling through, the former has announced it will optimise its 2G mobile services by the end of this month, and Aircel remains under severe stress to deleverage its balance sheet.
“We expect the accelerated consolidation to transform the Indian telecom sector from an eight-player market to a largely three-player market, with the top three operators — Bharti Airtel, Idea-Vodafone and Reliance Jio — cornering over 95 per cent of revenue market share,” CLSA said.
Reliance Jio is also expected to stabilise its tariffs after gaining a market share of 20-25 per cent.