Reliance Jio’s aggressive rates to shake up industry: Experts

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Reliance Jio Infocomm kicks off its much awaited but delayed 4G services on Monday, shaking up the industry with free voice and dirt cheap data, which top rivals Bharti Airtel, Vodafone and Idea will be forced to react to, draining their finances.
Mukesh Ambani-owned Jio’s management is counting on its introductory offer of free calls and data to grab a 100 million customers rapidly.
Prashant Singhal, global telecom leader at EY, expects Jio’s aggressive pricing to impact incumbent operators’ profitability and sustainability while Hemant Joshi, partner at Deloitte, said it would change the paradigms for the telecom sector.
Pressure on voice business
Rajan Mathews, director general of GSM industry body Cellular Operators Association of India, however, put on a brave face, saying with Jio’s offer the battle lines are drawn, and incumbents Bharti Airtel, Vodafone India and Idea Cellular will doubtless match the rates to retain their mid-to high-end customers.
Jio has filed its tariff plans with Telecom Regulatory Authority of India (Trai), promising free voice calls and mobile Internet at a fifth of current market rates along with a wide range of entertainment options once the free offer closes.
Announcing Jio’s 4G launch earlier this week, Ambani had said customers must pay for only one service, either voice or data, underscoring a principle that threatens one of the main revenue streams for incumbents-they charge for both.
Jio will effectively charge for data at five paisa per MB or Rs 50 per GB.
Cut call
Small wonder, experts believe Jio’s tariff offer of unlimited voice calls bundled with multiple data buckets will compel incumbents to cut call charges for retaining mid- to high-end average revenue per user (ARPU) generating customers and securing their voice business.
Though the voice business has plateaued, it remains the mainstay for incumbent carriers, accounting for around 75 per cent of their revenues.
HSBC analyst Rajiv Sharma expects “voice tariffs at the middle-and-higher end of the market to come under serious pressure” following Jio’s offers, and sees top incumbents lowering voice pricing over the next six to nine months to retain high-end customers.
“In a worst-case scenario, this might imply Bharti’s voice ARPUs falling by as much as 50 per cent at the higher end of the subscriber base if it were to match Jio,” says Sharma. Airtel’s voice ARPU is currently at Rs 139.
Credit Suisse said incumbents will be forced to emulate Jio and offer bundled plans with unlimited voice, which could hit revenue growth. “If Jio’s tariff structure finds resonance, it will lead to bundled voice and data plans in the sector,” it said, noting that Jio’s data bundles are 35-to-50 per cent cheaper.
It expects the weaker revenue growth for No.1 Bharti Airtel and third ranked Idea to lead to 7 per cent and 10 per cent cuts in earnings before interest, tax, depreciation and amortisation and 10 per cent and 65 per cent cut in earnings per share, respectively.
Bank of America-Merrill Lynch also expects the biggest incumbent operators to respond selectively with tariff cuts to prevent their subscribers from moving to Jio.
Disruptive plans
Brokerages expect three of Jio’s price points to be potentially disruptive-Rs 149,Rs 299 and Rs 499, although most single out the Rs 149 plan as the one likely to inflict maximum damage to incumbents’ voice business.
“We see adverse impact for incumbents in the lower-tier segment as the lowestRs 149 offer will appeal to voice only consumers who will now be able to make free calls,” Bank of America Merrill Lynch said in a note.
It added that the Rs 149 offer surprised the market, which wasn’t expecting Jio to aggressively target the low end of the mobile turf.
Analysts at BNP Paribas, however, don’t immediately expect incumbents to match Jio on voice tariffs, and expect some pressure on their voice revenues.
“The need of a 4G phone should also limit the near-term impact, given that only 6-7 per cent of mobile subscribers have 4G phones in the country,” the brokerage said.
Credit Suisse believes incumbents still have time to match Jio’s offer as the latter’s tariffs kick in only on January 1, 2017. In fact, since Jio’s services are free till December, the brokerage expects the 4G entrant to unveil a new set of tariffs closer to commercial launch.
Incumbents have been trying various data-pricing strategies to retain top-end users and have already cut effective rates. As the voice business plateaus, they have turned to pricier data services for growth and ramped up 3G/4G presence.
Bharti Airtel and Vodafone India recently offered unlimited voice calls on high-value postpaid packs to retain higher revenue paying customers ahead of Jio’s launch. The two, along with Idea, have also slashed effective data prices by nearly 70 per cent on some plans.