Telecom sector: Data war churns consolidation

As revenue from voice services shifts towards data, telcos are trying to tap it by acquiring spectrum to deploy high-speed mobile internet services.

Written by Pranav Mukul | New Delhi | Updated: March 29, 2017 2:24 am
Telecom sector, voice services, data calling, whatsapp calling, facebook calling, mobile internet, mobile internet service, vodafone, idea, indian express news, india news, technology news, business news Illustration: Subrata Dhar

The largest merger in the Indian telecom industry between Vodafone India and Idea Cellular comes at a time when the sector is witnessing stiff competition as far as tariffs are concerned, something which were already very low for voice services owing to intense competition among the more than 10 mobile operators in the market barely a year ago. With Vodafone and Idea announcing merger of the two companies in an all-share deal, the Indian telecom sector would be left with only six operators. Traditionally, all mobile companies in India have amended their tariffs in tandem with each other, but with the entry of Reliance Jio in September, analysts say, a new tariff regime was brought to the market where instead of having separate voice and data tariffs, the industry will have blended rates for both the services.

Most analysts and sector experts have attributed the entry of a player of Reliance Jio’s size as the reason for the spur in consolidation, in which larger players have combined synergies to obtain operational efficiencies, and smaller companies have found it better to swim out of the turbulent waters. However, the global trend of consolidation in the sector points towards the emergence of data services as one of the key reasons behind firms participating in M&A activities, which has left markets such as the US and Europe with four-to-five top players in control of the sector, and the tariffs.

Investments to acquire spectrum for deploying high-speed mobile internet services have been on a rise in India with rising spectrum costs. In the 2016 spectrum auction, the best bandwidth for 4G internet — the 700 MHz — was priced at a premium due to its propagation characteristics. However, it failed to elicit any interest from the operators due to its high cost. “Voice has been commoditised in India, and now operators are moving towards a scenario where they’ll charge only for data, and voice will be provided along with it. The Indian telecom sector is under pressure and the future expansion and growth will depend on the quantum of spectrum held and the quality of services offered,” said Rishi Tejpal, principal research analyst, Gartner.

According to data provided by the Telecom Regulatory Authority of India (Trai), the average minutes of usage came down to 319 minutes per subscriber per month in 2015-16 from a high of 446 minutes in 2006-07. Experts believe growing data usage, and the blended tariff regime are expected to hurt the revenues of telecom companies coming from voice usage — which comprises nearly 80 per cent of their topline.

Sistema became the first company to fold up in this consolidation drive, as its Indian operations merged with Anil Ambani-led Reliance Communications (RComm) that provided the exit route for the Russian company from India. The merger with Sistema also strengthened RComm’s holding of the 800 MHz spectrum, which is considered high-quality for deploying 4G services. The next one to go was Videocon Telecom folding up its operations by selling its entire spectrum portfolio to Bharti Airtel. Since then the Sunil Mittal-led company has also acquired spectrum from Aircel, which is merging itself with Reliance Communications. Airtel also announced acquisition of Telenor last month. Airtel also acquired Qualcomm’s broadband business in India, and Augere Wireless in 2013 and 2015, respectively, to strengthen its spectrum portfolio for 4G data offerings. Airtel’s buyout of Telenor, while reinforcing the company’s spectrum holding, also paved the way for Telenor to exit the Indian market.

On Thursday, Airtel also announced its acquisition of broadband company Tikona for Rs 1,600 crore, and its broadband wireless access (BWA) spectrum. “Airtel’s continued focus on strengthening its 4G capabilities across multiple spectrum bands will be complemented with the BWA spectrum acquisition from Tikona,” Airtel India CEO Gopal Vittal said on the acquisition.

In the US, four companies – AT&T, Verizon Wireless, T-Mobile US and Sprint – are said to control nearly 90 per cent of the market. The American telecom market has reached to this situation after a number of M&A deals, through which the larger players consumed smaller ones like Leap Wireless, Alltel, MetroPCS, and also exit of larger firms like Vodafone. Analysts have also attributed this to the post 2008 condition of the economy, in which combination of operations by companies in sectors other than telecommunications as well, was seen as a necessary move.

“With the focus on minimising costs to reduce impact on margins, operators will be increasingly inclined towards consolidation as a strategy to overcome challenging market conditions,” consultancy firm Capgemini had said in a 2014 report.

Interestingly, some US-based experts had also pointed out to the co-incidence that the M&A activity picked momentum post the launch of the Apple’s iPhone in June 2007.

In Europe, too, the M&A drive led to three, or in some cases four, companies to control major countries there. The consolidation began in 2007, when Orange sold its Dutch mobile operation to Deutsche Telekom, which consolidated the market in The Netherlands from four to three companies. In 2009, Orange and Deutsche Telekom merged in the UK to form Everything Everywhere (EE). Apart from these, several other deals in countries such as France, Poland, Czech Republic also resulted in a small number of dominant firms. “Apart from possible cost saving, there are other factors that are fueling consolidation among European telecoms. These include attractive valuations, availability of debt at low interest rates, and the willingness of more and more banks to underwrite huge amounts of debt to ensure that deals get through,” the Capgemini report said.

During the time of these mergers and stake sales in the telecom sector in the West, data consumption was also growing, as it is in India today, and was also indicated in some larger mobile operators like Vodafone acquiring cable companies to make use of their backbone networks, which augmented their data handling capacities.

While the merger of Vodafone’s India operations with Idea Cellular could strengthen the situation of the companies in a scenario where the entire tariff paradigm has been challenged by a new entrant, both the operators have also indicated that the deal could catalyse investments from the companies into newer technologies for data services. “The combination of the two companies’ networks and spectrum holdings, together with continued investment, will accelerate the pan-India expansion of wireless broadband services on 4G/4G+/5G technologies to build capacity, supporting the expansion of digital content and IoT (internet of things) services and delivering a world-class broadband experience to customers,” the companies said in a statement.

If India were to follow the footsteps of the West, the next wave of consolidation could be seen in form of telecom operators acquiring media companies to have control over the content offerings. This has been made evident not only by AT&T’s proposed acquisition of Time Warner, but also by content companies such as Google, Facebook, and Amazon getting into the business of providing internet access. This activity in the US provides insights for regulators here to prep themselves for such a potential consolidation drive. “Few regulators have the tools or the experience to properly oversee the smooth functioning of modern electronic communications service markets and we believe there should be a concerted effort by these agencies to catch up in 2017,” BMI Research said in an article.

“The FCC itself can be considered unfit for purpose in the broadband era, where it has singularly failed to promote or develop competition at the market or state level; in many parts of the US, choice is limited to one provider and where such providers’ own traffic/services are increasingly being sidelined by external network-agnostic service providers,” the article noted.

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