Reports of delays in the nationwide commercial launch of Reliance Jio notwithstanding, the country’s incumbent mobile companies are clearly gearing up by way of consolidation and exits.
Wednesday’s deal involving Bharti Airtel acquiring spectrum from Videocon in six circles — Gujarat, Uttar Pradesh West, Uttar Pradesh East, Bihar, Haryana and Madhya Pradesh — in the 1800 MHz band, which companies are using to deploy 4G data services, is expected to aid Airtel strengthen its spectrum portfolio and help service its subscribers better with a strong ground ahead of Reliance Jio’s launch.
The Airtel-Videocon deal was preceded by the Anil Ambani-led Reliance Communications announcing plans to acquire interests in MTS and Chennai-based Aircel. According to a stock exchange filing made by Airtel, it would pay Rs 4,428 crore to Videocon for the airwaves.
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Industry experts said that from Bharti Airtel’s point of view, the deal makes the company better placed for Reliance Jio’s launch. Once the deal consummates, Airtel will be able to provide 4G services in 19 out of 22 telecom circles as against Reliance Jio, which holds 4G spectrum in all 22 circles.
“Bharti Airtel’s plan to acquire 1800 MHz spectrum in six Indian service areas, or “circles”, from smaller telco Videocon highlights Bharti’s need to boost its 4G spectrum amid pending competition from the entry of Reliance Jio, part of Reliance Industries, in second half of 2016,” Fitch Ratings said in a report.
Incidentally, Videocon had earlier entered into an agreement with Aditya Birla group company Idea Cellular for sale of its spectrum in two circles — Uttar Pradesh West and Gujarat — at a price that was pegged as overvalued by several in the industry. The deal between Idea and Videocon was terminated on Monday, amid questions on why Videocon decided to sell its spectrum to Airtel at a price lower than what it would have received from Idea.
“Videocon presumably preferred to sell more spectrum in one deal when they sold six circles to Airtel. Spectrum prices depend on several factors including the circle profile, scarcity, reserve price that is being set in the new auction etc. The chief component of the price for the six circles would probably come from the Gujarat circle which is common to both deals that Videocon attempted, namely with Idea and with Airtel. The rest I would imagine are smaller components of the overall price,” Mahesh Uppal, Director, ComFirst India said. An analyst with a leading consultancy firm concurred with Uppal, and on condition of anonymity said that Videocon did not want to sit on any spectrum holding at a time when auctions were approaching.
“If the spectrum auction happens, which is being proposed, and all the operators bid into that, then it would become very difficult for any operator to buy Videocon’s spectrum. People would have already committed their money in the auction, so Videocon would have liked to sell their airwaves before the auction,” the analyst said.
He added that it would make sense for Videocon to sell the spectrum in one go, considering that the company was still getting a premium over the price it paid to acquire the airwaves in 2013. Even though sector analysts are of the opinion that Bharti Airtel has acquired the spectrum to gear up for Reliance Jio’s launch, many believe that the Sunil Mittal-led telecom company is already very well placed to absorb the disruption caused by Jio. “The two major issues that have been an overhang clouding the prospects of the telecom sector are the upcoming spectrum auctions and the impending Jio launch. Airtel, being the market leader, is well placed to battle the storm as it did in the hyper competitive phase of 2008-12,” brokerage firm ICICI Direct said in a research note. “This acquisition will help Airtel further strengthen its spectrum portfolio and help service its subscribers better with a strong ground ahead of Reliance Jio’s launch. Moreover, it also keeps the company better placed ahead of the biggest auctions in the telecom space,” the brokerage added in its note.
Another impending issue that has the incumbent players concerned is that Reliance Jio starting a price war to increase churn in the industry to acquire customers.
The highly competitive telecommunications industry in India, with more than 10 players, has been complaining about the abysmally low voice and data pricing regime that has been adopted for the sake of competition. Reliance Jio’s launch is expected to further fuel this fire.
Historically, telecom companies have followed a trend according to which if one of the service providers announces a cut in tariffs, others invariably follow. The same is expected when Jio launches with low tariffs to win customers.
“Price cutting must be kept in perspective. If one company cuts prices, others too can cut prices. The sector’s current revenue before Reliance Jio has entered the market is Rs 2 lakh crore per year. The incumbents would certainly want to fortify themselves to protect revenues. In 2001-2002, these players were relatively small players. Airtel was a relatively small company. But now you should expect incumbents to fight back vigorously. So I don’t think even cutting prices will be enough,” Mahesh Uppal said.
In such a scenario, while it would be only a hiccup for big players such as Airtel, Idea and Vodafone to absorb the blow of even lower tariffs, the likes of Videocon Telecom and MTS find it better to swim out of the waters that are about to be turbulent rather than continue being with what they have, or even investing more building a boat. “If the prices crash, smaller players would be hurt the most.
Bigger players like Airtel can possibly survive the crash in prices and later, slowly inch back,” Uppal said. As we advance towards Reliance Jio’s commercial launch, the incumbents are gearing up for it in one way or the another, and while some call it a coincidence, only the expectations of the company starting its services has spurred consolidation across the sector.