“Everyone was taken by surprise,” says an executive with a ringside view of the bruising fight between Bharti Airtel, India’s largest telecom company, and newcomer Reliance Jio, arguably the fastest growing telco in the world. “What was perhaps supposed to happen in the next three years happened in six months.”
The Airtel-Jio slugfest could as well be the battle for supremacy in the Indian telecom sweepstakes between Sunil Bharti Mittal and Mukesh Ambani, and the executive is talking about how the Airtel camp was taken by surprise by the pace at which the Ambani-led Jio captured market share. The executive asked to stay anonymous because Airtel’s strategy to counter Jio is just playing out.
The background of the chat which the executive – among India’s earliest champions of telecoms in India – is having with FactorDaily is this: Jio is commercially launched on September 5, 2016, offering free calls and free internet services over a fully fourth-generation (4G) network. The freebies result in a massive rise in data usage, from 20 crore GB a month to 120 crore GB monthly, in India as millions sign up for Jio. At last count, Jio’s customer base was inching towards 140 million.
Clearly, the bosses at Airtel had underestimated their newest rival and erred in thinking that it would take at least three to four years for this shift to happen.
Ambani’s move led to a broadband tariff being slashed to one-tenth the price in the pre-Jio days. Airtel and other incumbent operators also mimicked Jio in offering free voice. Airtel’s profit fell drastically (72% in the quarter to March 31, 2017). Others such as Idea Cellular, controlled by the Aditya Birla Group, too, reported losses in the quarters after Jio’s launch.
What followed at Airtel’s headquarters in Gurugram and at the south Delhi office of its holding company, Bharti Enterprises were a series of meetings between Mittal, Airtel CEO Gopal Vittal and the rest of Airtel’s leadership team to counter Ambani’s every move – both on the regulatory and the consumer front.
“It is phenomenal the way Airtel has made a comeback… Airtel is the only company that has withstood Reliance’s onslaught,” said an executive with a rival incumbent telecom operator, requesting anonymity.
The Airtel stock has reflected this comeback. Shares of Airtel are at a nine-year high. Ahead of the Jio launch, the stock started shedding value to touch Rs 295 each in December after Ambani extended Jio’s free services with the New Year Offer. It is currently at Rs 473 riding a bull market (the Bombay Stock Exchange’s benchmark sensitive index is at an all-time).
Airtel declined comment for this story as the company is in its so-called silent period ahead of the announcement of its quarterly results on October 31. Airtel will likely post losses for at least two consecutive quarters – largely due to the impact of lower interconnect user charges (IUC), increased spending in the deployment of new networks, and low tariff plans.
Choosing Mittal over Ambani
With cutthroat tariff plans, Jio was vacuuming subscribers from smaller telecom operators. The writing on the wall was clear for them: sell out. Mittal had to move fast — acquire the small companies and consolidate the market to retain subscribers and, more importantly, spectrum allocated to the companies.
To be sure, Airtel had started its recent spree of acquisitions in March 2016 with Videocon Telecommunications. In April, 2016, it bought spectrum from Aircel, which gave Airtel a larger play in Tamil Nadu (including Chennai), Bihar, Jammu & Kashmir, West Bengal, Assam, North East, Orissa, and Andhra Pradesh. In February 2017, it bought Telenor and followed it in May with a buyout of broadband provider Tikona Digital Network. In May 2012, it had acquired Qualcomm’s India broadband business and in August 2015, Augere Wireless Broadband India.
Between 1999 and 2004, Airtel bought four companies to consolidate its position of leadership in the market – JT Mobile (promoted by Raj Mohan Rao and Raghu Kataria), Chennai-based SkyCell, Spice Cell (owned by Modicorp and Distacom) and Rajasthan’s Hexacom.
But the big one was last fortnight’s deal to acquire Tata Teleservices for a bargain price of Rs 2,000 crore, Airtel’s seventh acquisition in five years. As a result, India’s telecom market is closer to becoming a three-player market: Idea-Vodafone, Airtel, and Jio. State-owned BSNL and MTNL are increasingly not considered serious players in the market by analysts.
According to Credit Suisse, “…this deal boosts Bharti’s position significantly, taking it neck-to-neck with Vodafone-Idea in terms of spectrum holding, revenues, subscribers, etc. Our analysis suggests there are no significant spectrum cap breaches to be worried about (like in the Idea-Vodafone deal). The minor revenue share breaches may get addressed when Jio starts reporting revenues.”
Jio had a preliminary discussion to buy the Tata unit but the talks didn’t reach closure. When N. Chandrasekaran took over as chairperson of the Tata Sons board, selling the telecom business was one of his three top priorities along with fixing the group’s steel business in Europe and getting Tata Motors back on track.
“The seller’s (Tata Teleservices) only options were to shut operations or sell the business to Airtel,” said Kunal Vora, an analyst with French-banking group BNP Paribas. Idea and Vodafone are still in the process of a merger and Jio is a 4G-only network. The Tata Mobile franchise was not growing, it was bleeding cash, and carried a debt of Rs 31,000 crore.
Chandrasekaran met Mittal at his house in New Delhi. “The initial deal revolved around the whole of Tata’s telecom and media business, including telecom, direct-to-home (DTH), overseas cable and enterprise business,” said a third source with knowledge of the talks.
A large deal with multiple businesses had its own complexities and the best thing to do was to take one step at a time. Getting the telecom business off the hook was the best way to do that. “The acquisition of additional spectrum made an attractive business proposition. It will further strengthen our already solid portfolio and create substantial long-term value for our shareholders given the significant synergies,” Mittal hinted of future alliances in the press statement.
What was kept out was Tata Teleservices’ enterprise business (likely to be folded into Tata Communications) and its retail fixed line and broadband business that could be merged with Tata Sky.
Mittal got a sweet deal. Airtel acquired all of Tata’s spectrum and customers (Tata retains its stake in Viom, the tower business). “We estimate the proposed acquisition adds roughly 40 million subscribers and 4% revenue market share, while also giving the company access to 71.3 MHz liberalised spectrum at a discounted price… which can be deployed for 4G,” writes Navin Killa, a telecom analyst with Swiss securities house UBS in his report. He estimates Airtel gained four percentage points in revenue market share.
Analysts also feel that with the Tata Teleservices deal Mittal has consolidated Airtel’s leadership in India’s telecom market. “With this merger and the recent Telenor and Aircel transactions, Bharti Airtel may make it difficult for Jio to continue with its disruptive pricing for long, which has been our concern so far,” writes Rajiv Sharma, analyst, India telecoms, media and internet, HSBC Securities and Capital Markets.
The spectrum that Airtel got from the acquisition of Tata Teleservices will “smoothen and accelerate Airtel’s ability to migrate the present three-layer network to pure 4G without disrupting the 2G business… Bharti is clearly demonstrating that it is focussed on taking all the necessary steps to consolidate its market leadership,” Sharma said. Jio has increased user tariffs recently and Airtel will likely be the gainer.
Fortifying the network
Soon after Jio’s launch, Mittal lost a couple of battles from the regulatory side, especially when the Telecom Regulatory Authority of India allowed Jio to continue with its free pricing model. The second blow was evident when TRAI reduced IUC from 14 paise a minute to six paise – a move that benefits Reliance Jio. IUC is the money one operator gives to the other when a call lands from one network to the other.
Mittal was unhappy with Jio’s free services and he made it very evident. In January, he said at a conference, “It is unfair competition… It is a problem if anything is given for free… The revenue and the margins of the industry are impacted.”
There is little Airtel could do about a rival’s tariffs driven by deep pockets or the regulator’s IUC decisions. But, what Mittal could do is build moats around his business.
Part of that strategy is Project Leap – an ongoing initiative to strengthen the network and build for the future. Airtel is investing Rs 20,000 crore in building a VoLTE network, work for which started a little over two months ago, said a fourth source, again wanting to stay anonymous. (VoLTE is short for voice over long-term evolution, an internet protocol based standard in telecommunications.)
“Every week, roll outs are happening… Mumbai, Maharashtra, Goa, Madhya Pradesh and Chattisgarh are already done. This network is very efficient for voice as only 5-10% of the network is utilised for that,” the source said.
Airtel’s VoLTE network is similar to what Jio has. It allows voice to travel in form of data packets, increasing the utilisation of the network. “A large part of the network is free to distribute high-quality data,” the first source said. To be sure, it was already transmitting some of its traffic on IP networks but the idea is to shift to one on a higher speed.
Until Jio was commercially launched in September last year, Airtel’s leadership including Mittal thought that 3G would stay for long in India. “Until Reliance Jio got launched we never thought that we would see such a sudden shift towards 4G… Overnight the market changed,” Rahul Sharma, co-founder of phone brand Micromax, had told this reporter a few months ago.
In the next two years, Airtel hopes to shift all its 3G users to the 4G platform. A fifth source close to the company said that Airtel will shut down its 3G services in the next couple of years. “The process has already started… every base station roll out is happening with the 4G technology,” said the source.
Mittal doesn’t want to lose another battle to Ambani, especially in the wireless broadband data space. Airtel has already started deployment of what is called Massive Mimo, which is a pre-5G technology. “It is a step towards 5G… It will help Airtel deliver faster speeds and higher efficiencies than what it can on a 4G network,” said a senior executive with one of the telecom network equipment makers, insisting his or his employer’s name not be taken.
Airtel has already started rolling out Massive Mimo in Bengaluru and Kolkata. “It enhances capacity by five to seven times, and is particularly helpful in high-density zones or congested areas,” said the first source.
In a recent development, Airtel has partnered with Korean telecom company SK Telecom to build networks that improve network planning based on every customer’s device experience. This is done with the help of machine learning, big data analytics and building customised tools. When deployed, Airtel will be the only player in the country to do this. “With SK Telecom’s clear and undisputed leadership in technology, this is one partnership that will decisively change the game in India and put the country at par with the most advanced broadband nations in the world,” said Mittal in a press statement.
Bets on 2G, Airtel stores, cheap phones
Even as Airtel hopes to do away with 3G in two years, it will continue with 2G technology for a while. “The ecosystem is not yet completely ready. More than 70% of the handsets are not VoLTE ready… That is why Jio is finding it difficult to add customers despite free data,” said the fourth source.
He added that having the 2G network in place helps. To Airtel’s point, more than half of the country’s mobile phone users use the phone only to make calls. “If someone doesn’t use data why would he pay Rs 150 for data,” the source asked, in reference to Jio’s cheapest monthly data plan of Rs 153.
Airtel has tariff plans for as less as Rs 20 for an entire month for non-data users. Internal surveys of Airtel also show that an average Indian uses the mobile phone for about two to two-and-half years. That means there is some time left before millions buy a new 4G-enabled device. “Even in 2022, 20% to 30% of the network will be a 2G network,” said the source.
Mittal wants to serve the people in rural India, too, where the ARPU is as low Rs 30 or Rs 40. According to TRAI, more than half of Airtel’s user base is in rural India. Mittal cannot afford to abandon the user if he or she isn’t willing to pay Rs 150 for data.
But, what about the lead Jio has over Airtel is data consumption?
“The gap will reduce once a large number of customers start paying regularly… In the coming quarters, you will see a de-growth in data usage on the Jio network. There will be data rationalisation,” predicts the fourth source.
Airtel is also investing Rs 2,000 crore in Project Next over the next three years, the company’s digital innovation programme.
One of the key aims of Project Next is to deliver a differentiated customer experience at the Airtel Stores. Airtel has engaged Eight Inc to design the Next-Gen Airtel Stores. Eight Inc is the original designer of the Apple Store and the company worked closely with Steve Jobs for 12 years before he passed away.
Work has started on redesigning over 2,500 Airtel stores with the first two already up in Gurugram.
At the stores, which are based on the concept of share, create and experience, there is a social wall that collates customer stories and experiences from across the country and is shared on a digital screen. Then, there is the touch screen table, which allows users to discover Airtel’s services and customise packages. But the main attraction is the experience zone or the digital entertainment hubs that allow customers to explore and experience Airtel’s digital content offerings like movies, music, live TV, and games.
Airtel has something called the Wynk family of apps, across music, movies, and games, much like Saavn and Netflix. However, Airtel does not have a content and services ecosystem like Jio does, which has its fingers dug into healthcare and education as well.
Part of Project Next is also to have a robust ecosystem of devices. Recently it partnered with Indian handset manufacturer Karbonn to bring out a 4G smartphone at an effective price of Rs 1,399. The phone, without being bundled with Airtel, would cost Rs 3,499.
The phone is Airtel’s answer to the JioPhone, which Jio bills as the device that will get half a billion Indians onto the internet. The JioPhone is available at Rs 1,500, which is be fully refunded after three years.
Airtel will sell the phone for Rs 2,899 with a Rs 500-cashback in 18 months and another Rs 1,000 after 36 months – taking the total benefit to Rs 1,500. “To bring it at a cost lower than this would mean compromising with the quality of the phone,” the fourth source said, taking a dig at the JioPhone. Airtel is also talking to a dozen phone makers to bring more affordable 4G smartphones to the market. “Unlike the JioPhone, these phones will allow you to download apps and use it like any other smartphone,” said the source.
It’s only round one in the battle between Airtel and Jio yet. For now, Airtel has not just defended its turf well but has also taken advantage of the chaos to bulk itself up in preparation for what will be a war for a decade or more.
Subscribe to FactorDaily
Our daily brief keeps thousands of readers ahead of the curve. More signals, less noise.
Disclosure: FactorDaily is owned by SourceCode Media, which counts Accel Partners, Blume Ventures and Vijay Shekhar Sharma among its investors. Accel Partners is an early investor in Flipkart. Vijay Shekhar Sharma is the founder of Paytm. None of FactorDaily’s investors have any influence on its reporting about India’s technology and startup ecosystem.