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Upping the Game: Operators battle it out for 4G data market share
The year 2016 turned out to be a significant one for the 4G segment in India. Reliance Jio Infocomm Limited’s (RJIL) entry gave a major boost to the evolving 4G ecosystem in the country, as a result of which the service uptake has grown multifold. It also made the 4G space extremely competitive, which impacted the incumbents’ businesses operationally and financially. Going forward, the segment will continue to witness significant activity and will play a key role in improving the mobile broadband scenario in the country. Industry experts share their views on the existing 4G landscape in the country, key operator strategies to survive competition and their future outlook…
What are your views regarding the current 4G uptake in the country? What are the key growth drivers?
With Reliance Jio’s aggressive launch, 4G adoption in the country is going to increase multifold in the next one to two years. Attractive price points, an enhanced user experience, access to free content and a fall in 4G device prices are the key growth drivers for 4G adoption. The possibility of using 4G on 2G/3G phones via Wi-Fi hotspot devices is further fuelling 4G adoption in the country.
There has been a significant growth in the 4G subscriber base in India since the commercial launch of these services. The 4G subscriber base has reached 70 million and is expected to grow rapidly. Unlike 3G in the year 2010, the 4G ecosystem is fully equipped with affordable tariff, budget handsets, prime content and growing demand for data services, which are the forces behind the rapid growth of 4G adoption in India.
The entry of RJIL had an immediate impact on the long term evolution (LTE) market in India. 4G penetration increased to over 6 per cent of the total mobile subscriptions in December 2016, rising from less than 0.5 per cent a year earlier. According to Ovum’s World Cellular Information Service database, India reported 75 million net additions during 2015-16, the second highest number of LTE subscriber additions in Asia, after China with 347 million additions. Ovum expects 2017 to be a defining year for mobile broadband uptake, with operators pushing subscribers to adopt new technologies with data offers. Incumbents and the new entrant RJIL have been targeting customers early on by offering multiple benefits to buyers of 4G handsets who agree to take 4G data plans. While smartphone costs have been declining over the past few years, the year 2016 witnessed a surge in the availability of LTE and voice over LTE (VoLTE) capable phones.
Till 2015-16, operators were making limited investments in 4G as they believed 3G will be here to stay for the next few years. This is the reason why there were only less than 2 million 4G subscribers in India (1 per cent population penetration) at the end of 2015-16. Things have, however, changed drastically over the last one year and 4G penetration has grown exponentially from 1 million to 2 million active users as of March 2016 and to about 120 million by February 2016.
The main driver for this growth has been the aggressive price competition in the market which has led to a substantial fall in 4G tariffs. Data tariff per GB has fallen from Rs 220-Rs 230 per GB in the first half of 2016, to below Rs 100 per GB levels. The welcome offer by RJIL has also enabled it to gain more than 100 million LTE subscribers in less than six months, though there will be some decline in the 4G user base, once it starts charging for data starting April 2017. Another key driver has been the fall in 4G handset prices, which has led to a faster convergence of 3G and 4G handset prices. Finally, operators have also invested heavily in their 4G networks over the last year or so, leading to better coverage especially in urban areas. All these three factors combined have led to the exponential growth in the 4G market.
How have 4G roll-outs impacted service providers’ business operationally and financially? What should be their future strategies?
Telecom operators in the country are going through a tough phase. While data usage and adoption is increasing, the data revenue is not going up proportionally. Moreover, the revenue from voice services is declining at a fast pace, which is putting a lot of pressure on the operators. At the one end they need to continuously invest heavily in network upgradation, increase their 4G coverage and improve quality of service (QoS). Unfortunately, at other end, data revenue is not providing enough leg room for investing in networks. Going forward, collaboration and consolidation will be the key mantras for survival. Operators need to collaborate more, increase the sharing of networks and other assets, improve operational efficiency and try to bring down their capex and opex. They also need to keep innovating and offering new products and services with the help of the right set of partners.
Every new technology demands a large amount of capex for deployment. Apart from the high spectrum cost, the Indian telecom operators have invested a lot of money in the 4G infrastructure. Although this seems to be a financial burden for operators currently, it is likely to help increase profitability in the long run. Operators are changing their business models to adapt to the digital disruption. Apart from the core business, operators are shifting towards different services like machine-to-machine (M2M), internet of things (IoT), cloud and analytics to stay in business.
RJIL’s 4G service plans brought unprecedented disruption to the Indian mobile market. The intense competitive pressure has pushed competitors to respond with deep discounts and increased data allowances to retain subscribers. Traditionally, Indian operators have relied on voice-only offers as their main cash cows. These were complemented with the sale of separate data offers for those using mobile data services. RJIL, however, came to market with offers that bundle voice and data in the same pack, including free voice for life, in a market where voice accounted for 70 per cent of operators’ mobile revenues. Commoditising voice has led to a freefall in operator profit margins. Bharti’s earnings before interest, tax, depreciation and amortisation (EBITDA) declined by 3.3 per cent year on year in the quarter-ended December 2016, and Idea Cellular suffered the worst impact, with EBITDA declining 24.1 per cent year on year. The operator also booked its first net loss since it started operations in India, of Rs 3.8 billion in the said quarter. The cannibalisation of voice revenues by over-the-top (OTT) services and the continued discounting pressures on voice indicate that operators will soon have to bid adieu to their traditional strength in voice margins. While VoLTE can help lower the per-bit costs of voice carriage for incumbent operators, shifting the 80 per cent of subscribers who are currently on GSM networks to LTE will take a few years.
The impact of 4G roll-out and the recent price wars have impacted the financials of operators. The EBITDA margin of the incumbent operators has declined in the last quarter and we expect margins to continue to remain under pressure due to the low tariffs and promotional offers.
To support such low tariffs, operators will need to significantly reduce their cost per GB, which is only possible at a minimum revenue market share (RMS) of 20-25 per cent, with an even higher RMS making the cost per GB even more efficient. This will result in significant network capacity expansion for operators and hence sustained investments in spectrum, network and operations. The proposed merger between Vodafone India and Idea Cellular is also an outcome of these recent changes in the market, where only a few scaled-up players with the ability to make large investments can remain profitable in the long term. Also from a pricing perspective, in a 4G world, operators are expected to adopt the global best practices of hard bundling voice and data. Operators will thus charge only for data and market voice is free (cost which is inbuilt into the pack price).
What future do you foresee for 2G and 3G technologies? What is your outlook for VoLTE services in India?
Eventually, with 4G gaining traction, 2G and 3G will phase out. But it will not happen in a short period of time. India being a vast country, it will take time for operators to have good 4G coverage across the country. Hence, initially it will get phased out in metros and Tier-1 cities. In many rural areas though, 2G and 3G will continue to be used for many more years. VoLTE will also soon gain traction. Various OTT players are coming out with very light application that offers reasonable quality of service in low bandwidth. For example, Microsoft recently launched Skype Lite that was built for India, which they claim can run effectively on 2G.
Though there is a rapid shift from voice to data services in India owing to the increased adoption of smartphones, there is still a huge market for feature phones (with almost 59 per cent market share) and voice services in the rural parts of India, which will drive 2G and 3G technologies for some more years. Government is also backing digital services like payment, information and news on feature phones for rural population. 4G is still new in India and it will take some time to reach the vast geography. Operators are also doing backward integration of 4G network with 2G and 3G technologies for inter-operability with each other.
RJIL demonstrated that India can be a major market for mobile broadband services. The Indian telecom industry is changing on multiple fronts, where operators are building large LTE networks and working towards developing a suitable ecosystem for 4G led services. The government is also supporting by auctioning additional spectrum for deploying 4G. Operators are collaborating with vendors to ensure device availability and integrating digital apps to the devices. The likes of RJIL are collaborating to bring VoLTE to feature phones, which will further speed up the expected technology migration trend. Driven by these changes, Ovum expects GSM’s share of total mobile subscriptions to decline quickly to around 50 per cent by 2018 and less than 20 per cent by 2021.
From a supply side perspective, operators have already minimised their 2G and 3G investments and a majority of the new capex deployed is focused on 4G. This is visible in the 2G and 3G subscriber net adds trends, where both 2G and 3G subscriptions have declined in the last one year (although not significantly). Going forward, 2G will continue to decline but 3G might grow steadily for the next three to four years. The growth of 3G services is expected to come from rural areas with limited 4G coverage as well as from users who cannot afford a 4G device.
VoLTE is at a nascent stage in India right now and only Reliance Jio offers commercial VoLTE services. Operators including Airtel, Vodafone India and Idea Cellular are trialling VoLTE services, with an expected launch by the end of this year. Based on the experience from mature LTE markets, we expect operators in India to not differentiate between circuit-switched (CS) voice, VoIP and VoLTE as part of their plans through a seamless integration of the three technologies.
How do you see 4G ecosystem evolving in the next few years? What will be the key emerging trends?
Thanks to Reliance Jio, the 4G ecosystem is evolving very fast in India. We see the price of mobile devices falling, average subscriber data usage increasing, growing usage of applications, and increasing video content getting delivered/viewed over the internet. These trends are driving the growth of 4G adoption in India. With the increased availability of mobile bandwidth at an affordable price, the adoption of cloud and mobility is gaining steam in the country. The synergy created by reliable connectivity, cloud adoption, increased mobility application and other emerging technologies like IoT and analytics are bringing in tremendous digital transformation across industries, thereby in fundamentally changing our business as well as our personal life.
The 4G ecosystem is still at a nascent stage of development. It goes beyond 4G enabled handsets and data services to include M2M services, IoT, analytics, robotics, artificial intelligence, augmented/virtual reality and machine learning. The digitisation drive in India and government initiatives like Digital India, Smart Cities and e-governance will drive the 4G ecosystem. The rising use of digital content, video, games, customised services, localised content and e-commerce are the other emerging trends of high adoption of 4G services. Cybersecurity and privacy are major concerns with the rising use of online services.
The 4G ecosystem in India has been improving rapidly. In terms of 4G devices, affordability has been increasing at a fast pace with the mass adoption of 4G globally, which has led to a decline in 4G handset prices. As per the recent quarter data, ~80 per cent of smartphone shipments in India are 4G-enabled. Local manufacturing, besides a push from the government’s “Make in India” initiative and a vibrant ecosystem will further improve the affordability. 4G coverage has already been improving in the urban areas and with the expected availability of 700 MHz in the near future, operators could increase their rural coverage – which will lead to mass adoption of 4G.
From a data tariff perspective, tariffs have already reduced drastically over the past one year and there is not much headroom for tariffs to reduce further in the next few years. Operators are in fact offering unlimited data plans which are going to increase 4G traffic from the premium segment. Finally, lack of relevant content including Hindi and multi-lingual regional content is an issue. But with the entry of multiple OTT players, especially domestic and global OTT video players, and each investing significantly in original India-specific content, are expected to fill the content gap in the Indian market.
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