India's Telecom Sector Set For Three-way Battle

The ongoing shake-up in the telecom sector has set the stage for a three-way battle between Airtel, Reliance Jio and the Vodafone-Idea combine. At stake is India’s data services market, which is estimated to be ₹95,000 crore by 2020, growing at a compounded annual rate of 21 per cent.

While Airtel consolidated its market position as the No. 1 player with the acquisition of Tata Teleservices’ mobile business, the bugles have been sounded by Vodafone and Idea, with the shareholders of the latter overwhelmingly approving the earlier-announced merger.

Prashant Singhal, Global Telecommunications Leader at EY, told “From having 9-10 mobile operators in each circle just a few years ago, the Indian telecom sector is all set for a major consolidation that would reduce the number of players to 3-4.”

Even in other markets, he added, “the industry has settled at around four operators. India has taken time to consolidate to the right number, but it is finally happening.”

To be fair, India’s telecom sector has had several rounds of consolidation earlier. Between 2001 and 2004, there were several deals that saw the exit of regional players like Koshika Telecom and Escotel and the emergence of pan-India operators.

“The difference between then and now is that the current consolidation has led to huge value destruction. It has been painful for those exiting,” said Singhal.

Jobs at stake

One of the big fallouts of the consolidation has been the impact on jobs. Most of the deals are distressed sales by loss-making companies, including Tata Tele, Telenor, Videocon and Tikona Wireless.

The failed merger between Reliance Communications and Aircel adds to the woes as there is now uncertainty over their operations, which could force them to shut operations at least partially.

According to one market estimate, as many as 30,000 jobs could be at stake from the ongoing consolidation. “ Consolidation is good, but it would have been better if it was done as a natural progression than being forced due to market disruption by one operator,” said an analyst without naming Reliance Jio as the disruptive force.

RJio launched services in September 2016 and has already cornered 130 million users and 19 per cent of the spectrum holdings.

According to analysts at Deutsche Bank Markets Research, the benefits of sectoral consolidation will far outweigh the competitive impact of Jio’s entry.

“Jio’s entry precipitated exits by the weaker players and a merger of smaller incumbents (Idea and Vodafone). Since Jio’s entry, the incumbents have seen a reduction of 30-35 per cent in EBITDA and 800-1,000 bps in margins as they have tactically matched Jio’s tariffs,” said Deutsche Bank Markets Research in a report to its clients.

Experts reckon that after the initial pain, the consolidation will augur well for the industry. GV Giri of IIFL said: “Once the initial pain points are mitigated, the surviving two or three operators will emerge stronger to capitalise on the huge potential that data services will bring. While Airtel and RJio are clearly emerging as the two dominant players, it will be interesting to see how the Idea-Vodafone merger shapes up.”

Prophetically, Sunil Mittal, Chairman of Airtel, in an interview to BusinessLine last year, had said that he sees only four operators remaining in business within 24 months. That may now happen faster than the Airtel boss had predicted.