Jio to set in motion data, voice war among telcos: Experts

Reliance Industries' Chairman Mukesh Ambani today highlighted plans for Reliance Jio, which will officially launch on December 31. The company will have a soft launch (from September 5 till December 31) during which time data and voice services will be free. Launching the network at Reliance’s 42nd Annual General Meeting, Ambani said that all domestic voice calls will be free for a lifetime and data plans will start at Rs 50 per gigabyte a month. Experts on CNBC-TV18 unanimously agree that the official launch of Jio will start a competitive war amongst telcos over data prices. “This is destructive competition at its best,” said UR Bhat of Dalton Capital Advisors. RIL is set on very aggressive price points, said Rajan Mathews, Director-General of COAI. However, he added that: “They are not killer types of tariffs which will do away with competition.”Mathews believes that if RIL makes September 5 its official launch date, it will come under the regulatory regime. Nitin Soni of Fitch, which has a negative outlook on the sector, believes that competitors’ data will be hugely hit with margins contracting in range of 250-300 basis points. On the other hand, market expert, Ambareesh Baliga believes that the Reliance Jio offerings will not only hurt the incumbents, but it would not help Reliance Industries either for the next 3-4 quarters. The sector will surely see a lot of consolidation and merger and acquisitions and only a maximum of four players may remain. Moreover, only post 12-18 months, the sector will get re-rated. Vodafone will also have to look at pushing its IPO further, says Baliga.At present, Reliance is basically looking at maximizing its subscriber base and not ARPUs (average revenue per users) as such.(Disclaimer: RIL owns Network18, which publishes moneycontrol.com)Below is the verbatim transcript of experts:Reema: Your initial reaction, what have you made of the data tariffs offered by Jio and what does it means for incumbents now?Mathews: First of all welcome to Jio into the real life market place. It is great day for consumers as well as for the industry and the announcements, the 10 points that Mukesh Ambani laid out are very on spot and very compelling for the consumer in terms of the price points. I think they are very aggressive price points. Clearly, Ambani expects to make money out of his tariffs, so when you start at Rs 19 going up to Rs 49 going out to Rs 499, those are all price points that are not totally detrimental to the industry.So, the industry will react, will respond and it is going to be in the competitive landscape as to how company is positioned against this. However, these are not really sort of killer type tariffs that are going to do away with the competition.Latha: The Reliance's Chairman has also made a charge that Rel Jio customers' calls were blocked by the competition because they didn't provide enough interconnect. How do you react to that point?Mathews: The incumbent operators will not agree with that because I believe the whole contention of the argument was vis-a-vis is this commercial service launch or is it "in the nature of a test". I believe both the department of telecommunications (DoT) and the regulator have indicated that yes this is a grey area and they did hope to clarify this and we hope to hear from either one of them in terms of the clarity.However, if you look at the two dates by the way - by the September 5th and the December 31st in between this, you have this free offer. Our particular perspective at this point or at least the incumbents' point of view would probably be that September 5th is really the launch date of commercial service. You have got a period of 90 days where it has been offered free and so we will have to look to see how the incumbent will parse this.However, again this is a whole contention, is it commercial or is it not. If it is not commercial service the blockages perhaps will continue because of the unclarity that prevails and so this is something that we will have to wait to see vis-à-vis from the DOT or the Telecom Regulatory Authority of India (TRAI).Latha: Two questions, I assume as COAI you all will be raising this issue. Will you be taking this up with the regulator that September 5th should be considered commercial and second, how do you expect the business margins of the industry to proceed from here on? Voice has to be free, no two ways about that?Mathews: I think it is to the benefit of RIL to acknowledge the September 5th date as the date of the commercial service because then what happens is that you come under the regulatory regime and then when you ask for additional capacity then that capacity has to be responded to in a defined period of time which is 90 days.So, I think it provides clarity for all concern, it sets a level playing field and then incumbents can respond appropriately. So, staying in a twilight zone is not helpful from an industry perspective. So, I would hope that would be the way forward in terms of resolving the issue.Prashant: Just a quick point, so you are saying that if clarity doesn't come whether this is a trail period or this is a commercial launch, I heard you say that incumbents will continue to not provide interconnect? Is that what you said?Mathews: Incumbents will probably wait for that clarity to emerge because that has been the whole centre of discussion.Prashant: If there is no clarity, let us assume that it continues in the twilight zone; you are saying if it continues in the twilight what are incumbents going to do?Mathews: The incumbents will obviously, look at the status quo and RIL will have to look at its status quo and then we will revert back to what we had always asked.Prashant: Status quo means no interconnect?Mathews: I am not saying no, please be careful. Do provide interconnect today which provided capacity vis-à-vis representations from incumbents that they had provided capacity to be at least 50 to 20 million users on the Rel Jio network. So, there is interconnect that is in process, it is question of whether it is adequate to meet the projected amounts that RIL is proposing. That is again a decision that must be made in the context of commercials service not in the context of what we believe to be test period.Latha: Therefore you are admitting that there is truth to Rel Jio charge that interconnects was inadequately provided? You can admit the question that it may not have been adequate?Mathews: The question of adequacy or inadequacy really hinges on the question of whether it is in the test period or not in the test period because in a test period when you are "giving it away continuously for free the volume and the capacity is very different from what it could be in a paying commercial period". So, that is part of the contention saying that the capacity that has been asked of is at real capacity in a commercially oriented environment. That is the question that is at the hub, I think that question needs to be answered first.Reema: What stance do you think DoT is likely to take on this because the decision ultimately depends on them? Which way do you think they are likely to swing?Mathews: It is a good question; I think if you look at prior history never before has a test taken on this magnitude, this volume and this type of number of consumers and customers. Yes, in a way it is novel and so this is what the march of technology, the march of innovation and everything else requires the DoT and the TRAI to take a good hard look and say look please a make a decision soon, so that we can move forward in the interest of the consumer.Reema: Just to move on you spoke about the data prices being very aggressive. We have already seen data prices come down by over 10 percent on year-on-year basis for a while now. With these kind of data prices announced by Jio what could be the extent of data prices coming down from here on by the likes of Bharti Airtel, Vodafone and Idea Cellular?Mathews: Already you are seeing a gigabit of data services being offered with the Rs 50 and some perhaps upfront payment and incremental pricing even going below that so I think you will see the competition aligning themselves with this. However, I don't believe you will see a head-to-head type of an adversarial type of pricing. What I think you are going to be seeing is a much more clever positioning, so that the consumer - one, has real choice and two, begins to see that yes, you can have a gigabit for a price that may be Rs 10 but you enjoy it for only 24 hours or mixing and matching those types of offers that allow the consumer to really make those types of choices.So, I think those price points can be met. It will put some pressure on the competition. However, I think ultimately it is not going to be overwhelming. The whole paradigm has changed vis-à-vis fact that you are offering voice for free now. The fact that it has bundle and that you are pricing the total bundle, the fact that simplicity has been introduced that is a good thing. The fact that you can get billing that is a good thing. The quality of service is going to the proof of the pudding so that will ultimately get sorted out in terms of the dynamics of a competitive market place.Latha: My colleague Reema did a quick math and for a Rs 500 package, she is calculating that what Bharti or Vodafone would offer for Rs 735-750 the Reliance Jio package comes for Rs 500. So basically, it is a 35 percent attack at least in the basic minimum. Is that something the incumbents can take?Mathews: Clearly, the incumbents, as long as they have capacity which is clearly the same situation as far as Rel Jio is concerned, as long as you have the capacity, the networks will bear that. Please understand that in a data network, as you put more and more customers on, the quality begins to start feeling the impact of that. Also, remember that when you put voice onto an all data network, it really causes an all data network to be less efficient than a hybrid network. So, these are some of the dynamics that will go into play when you are in the actual market place. So, when you have a bundled offer, you have to see how much of that bundled data plan is going to be used for voice as opposed to pure data and streaming data and so that is ultimately going to be how this thing will play out in the market place.Prashant: Is there any estimation of the interconnect revenues that incumbents can collect?Mathews: Right now, what you begin to start seeing is on average a major incumbent operator net gets about Rs 2,500 crore to about Rs 3,000 crore, somewhere in that range for interconnect revenue. So yes, one of the issues that will have to be also determined by the TRAI is this whole issue where the voice comes embedded in an application or not, this is the whole Over-The-Top content (OTT) conundrum that they have been looking at.Kritika: Will this now completely distort revenues coming in from voice?Baliga: Absolutely. It is clearly a death knell for voice call revenues for the other companies. And like what we were discussing for the past couple of months saying that there will be disruptive pricing, like what we saw way back in 2003 and because of which I was saying for the last 12-15 months, that any upside you see in both Bharti and Idea should be utilised to exit. And that has proved really right now and today you have seen after 11 o’clock the way these stocks have fallen.Nisha: Talk about what will happen to Vodafone IPO. The entire sector is getting rerated. Bharti is down 6 percent. Idea is under pressure. Of course, Reliance stock has not really seen any surge after this announcement because they are patiently waiting. But Vodafone has been preparing for an IPO. Will it get the kind of valuations now from investors with this kind of aggressive pricing?Baliga: First of all, this is not profitable to anyone including Reliance. I would say for the next 3-4 quarters, there will be a lot of pressure as far as margins are concerned and for Vodafone, they are a bit too late. They should have come earlier or possibly, they have to wait for the next six quarters to come out with an IPO because till then, I do not think telecom sector as such will really get valuations looking at the way the margins are going to fall.Latha: First of all, will you not buy this offer? Some part of the Reliance Welcome offer and impact on competition?Diwan: Of course, just before the AGM started off, I was sharing that I do not see the announcements to have an impact on the Reliance share but the negative impacts are at least going to be felt because the EPS accretion is going to start from January 1. The revenue is going to start from the commercial launch. The key thing is two things. As Reema said, I am very glad to see that Reliance has not gone and started entry level at Rs 49 and Rs 59 and all. So, their average rate per user (ARPU) is always going to be an average of higher than Rs 149. Now even if you get about 10 crore of customers, just take a basic, you are talking about a roughly Rs 20,000 crore a year revenue only from that part. The additional stuff is much bigger. Secondly, if you see the capacity utilisation levels for an Idea, there is about 22 percent from the data side or Bharti is slightly higher. While they have capacities, they do not have clients and their migration story is now going to get wind out of the sales there. Very clearly, voice free is a big hook in India because that is what people use a phone for more than anything else. And that is going to dramatically change.Reema: What were the material statements made by Mukesh Ambani on the oil and gas business?Diwan: A lot of that got eclipsed because of the big bang announcement on the Reliance Jio in the front loaded presentation. But a couple of things that I found very interesting. One is that finally, the synthetic rubber units are getting on stream. Now given the fact that there are a lot of these companies which are ramping up production capacities on rubber applications, tyres and so many other things, synthetic rubber is a very huge forward integrated product from the basic petrochemical area and this has huge margins also because it has 3-4 more stages of value addition. Secondly, he has very clearly said that capital preservation is the approach or the strategy used for the US shale gas which means they are not going to do much about adding more money out there or probably they would start taking off money apart from the mid-stream divestments that they made. And very clearly aviation fuel also has started to look up for them which is another threshold for them getting into. So, the refinery and petchem businesses also seem to have started seeing the reflection of the huge investments that have been made. Remember, Reliance Jio was the new investment, but continuously there has been a lot of Brownfield expansion on petchem and refining that they have been doing and the cracker plants.So these few things will make Reliance’s oil and gas business much more immune to the volatility in the global markets and especially that huge supply security that he is talking about, raw material coming from the US through ships and all, that is really making sure that margins in that business.Prashant: Back of the envelope, top of your head if you are Bharti Airtel, if you are Idea Cellular and you have to compete against Jio’s offer what hit would profitability take?Soni: We said, we have a negative outlook on the sector and we thought that if the data average revenue per user (ARPU) fell by 15-20 percent at least it will translate into a margin fall of 150-200 basis points. However, this one comes out to be much lower. It looks like 25 to 30 percent on the data tariff drop, so it would mean 250-300 basis points drop on the EBITDA margins of the incumbents.Prashant: What about voice, include voice as well because voice is free is free? You cannot cut rates you have to go free now to compete?Soni: Voice, we will have to slightly deeply analyse because you will have to understand that the incumbents will also start getting lot of interconnection revenue from Jio. For Jio it is not charging for its subscribers, but it must be paying some interconnection revenue to the incumbents as long as the calls are terminating at the incumbents network. So, incumbents will get the interconnection revenue, but on the data it will be huge hit because if they were to match the prices their tariff will drop by 25-30 percent from USD 2 arpu, their margins will fell by 250-300 basis points on that basis.Prashant: What is your view on the telecom incumbents now?Shenoy: The interesting thing about the whole thing is that there is a massive disruption again. He did once last decade and obviously the incumbents are going to have to respond. Data as much as it was growing giving telcos a lot of profit in comparison with their not so active profits on SMS and voice.I think what has happened now is a disruption that will say they are going to have a much more longer returns cycle than they had earlier planned for. The incumbents are going to get impacted they are going to match these prices. Though, the prices are not substantially, is not the 10x that they are talking about. I did my rough calculations, I pay approximately Rs 150 per GB for 4G right now, I will pay Rs 50 per GB if the services corrects, so it is about one-third lower cost in that respect.There is also a tremendous focus on bringing a big competitor to the direct home network, which is something that I am looking at keenly. A large amount of Indian connections are prepaid, so I am not sure how these Rs 149 per month thing concept works out in terms of how does it work out in terms of a prepaid plan, that will actually determine some of the vagaries of acceptance as well, but overall I thinks it is a very big disruption and the incumbent needs to be scared. They need to be looking at their plans quite carefully and in probability if Reliance network is faster or more reliable, then they are going to upgrade their networks as well.Reliance actually borrows at a substantially lower cost now, so they are serious competition and at this point having saying this for a while this and the spectrum auctions is just generally negative for shareholders of all telecom companies.Prashant: What are your thoughts on the tariffs, the plan etc which has been outlined today?Tulsian: If you see the situation -- first I will touch upon the existing players. They all got butchered, the way we have seen the response to the share price. If you take a call, it cannot be more than the aggression what we have seen in the Reliance Jio plans. So yes, things are that it will be a tough time for all the existing incumbents whether you talk of Bharti Airtel or Idea or Reliance Communications.Everyone has been talking of the technical part of this interconnect and all those things, I agree that those are very much relevant but if you take the commercial call on that -- which I have stated prior to the Reliance Annual General Meeting (AGM) -- what will be the situation, has anybody penned it out? Because if you see the statement, having made by Mukesh Ambani, he has said that I compliment all the Reliance Jio employees for meeting the targets, they have exceeded that. I have set the target of Rs 10 crore, he has not spelt out the time horizon as to what has been the time limit which he has set.If he has given the compliments to the Jio employees of meeting their targets ahead of the schedule then if he would have spelt out the situation of 10 crore customers by what time they are expecting that would have given you some indications of taking a financial call on this project.You will have FY18 as the first year of commercial operation for Jio, the full year of commercial operation. If I take 12 crore as the customer, which can become the members and if I take Rs 500 as a monthly subscription -- because we have all been talking of voice free, even the voice customers will be subscribing this not for data but for voice because if you see now, two-third of the revenue of the telecom companies are coming for voice. Definitely, there will be data explosion but ultimately, the intent of Jio is to attract the voice customers also who have been offered free amongst the bundle being offered now in the form of data.So if I take a revenue of about Rs 70,000 crore also for the first full year that is FY18 whether that is achievable, whether that is practical and then you need to take the earning call. So yes, in the process what I have gathered or what I have summarised is that the tough time has started for all the existing telecom players.However, but how much will be achieved by the Reliance also in the first full year of operation, will that be adding anything to the bottomline? I won't be surprised to see Jio contributing losses to the bottomline of the company in the first year that is for FY18. So my analysis will be only revolving around the financials`, which we need to estimate for FY18 and FY19 for which still the clarity is required, study and analyse.Prashant: Skipping Reliance Industries and the value that Jio offers to the RIL shareholders aside for Bharti and Idea shareholders, who are watching this, what is your advice?Tulsian: That has all been discussed all along that the moment Jio will come in the market with the launch. Definitely the tough time has started for all these players. I don’t have my doubts that things will deteriorate further. Take an example of Idea, I am not touching more on Bharti at this stage, we have already seen the profit after tax (PAT) of the company dipping by 70 percent if I extrapolate the Q1 numbers. Q1 PAT was closer to about Rs 250 crore against Rs 3,000 crore for role of FY16. So I think the kind of erosion which we will be seeing in the margins of these companies, it will be tough time. I think that there has to be a unanimous call by the investors that as soon as they exit from the existing players, it is better for them to salvage -- whether they have bought it at a lower price or at a higher price. So definitely the dark days have started for the existing players whether you talk of Bharti Airtel or you talk of Idea or maybe even RCOM even after the amalgamation or the integration of the RCOM-Sistema or maybe the Aircel. So things are looking negative for the existing players.