India's telecom price war threatens to hold up 5G investments

OCT 25, 2021

MUMBAI -- The war of attrition brought by billionaire Mukesh Ambani's Reliance Industries to the Indian telecommunications market looks set to reach a new intensity, threatening rivals' ability to fund investments in 5G networks and other infrastructure.

"It is my promise that JioPhone Next will be among the most affordable smartphones not just in India, but globally," Ambani said in June, touting the device the group's telecom arm Reliance Jio Infocomm is developing in collaboration with Google.

JioPhone Next's launch has been delayed from September, but some expect it could be released in time for Diwali, known as the festival of lights celebrating the Hindu New Year, next month. Details on data rates and services are expected to be announced soon.

For rivals who have watched Reliance Jio drive a plunge in data prices, this adds to the worries on the horizon. Debt-laden No. 3 player Vodafone Idea has been described in some analyst reports as facing the possibility of financial collapse.

Reliance, which first made its name in textiles and later petrochemicals, disrupted the industry when it entered the mobile market in 2016 with rates far undercutting rivals. The average cost of mobile data -- which was 226.3 rupees ($3.02 in today's rates) per gigabyte in 2015 -- took a tumble soon after, dropping to just 10.9 rupees in 2020, or 5% of the earlier level, according to the Indian government.

"The entry of Reliance Jio in 2016 started an unprecedented tariff war in the Indian mobile space, which resulted in a significant reduction in mobile data tariffs by all the MNOs operating in the market including Airtel, Vodafone, etc.," said Deepa Dhingra, Senior Telecom Analyst at research firm GlobalData.

A Vodafone Idea shop in Mumbai: Once the Indian market leader, the company has retreated to third place. (Photo by Ryosuke Hanada)

In recent years Reliance has pivoted its focus from petrochemicals and energy to telecommunications, digital technology and retail. Its digital arm Jio Platforms, flush with capital from global players, including a $4.5 billion investment from Google and a $5.7 billion injection from Facebook in 2020, was able to afford competitive rates. Reliance Jio is also working with Google to develop a 5G network.

The competition has transformed India's telecom landscape. A 2018 merger of two major players created industry leader Vodafone Idea, only to be overtaken by Reliance Jio, which now commands nearly 40% of the market in terms of subscribers. Bharti Airtel trails in second place at almost 30%, followed by Vodafone Idea at 22.8%, government data shows.

Mobile connections have become an essential part of everyday life in India. A total of 64% of the country's more than 1.3 billion people had a smartphone in 2020, a jump from 44% in 2016, according to Hong Kong-based research firm Counterpoint. Boosted by COVID-19 lockdowns and travel restrictions, online services have expanded across a wide range of businesses, and mobile carriers have been fighting a financially draining contest for customers.

This is taking a visible toll on Vodafone Idea. Indian wireless carriers need to invest both in their 4G networks and in 5G, which has yet to become available. But deteriorating earnings left Vodafone Idea relatively worse off in terms of network investments, according to a Nomura report This has resulted in poor reception, especially in rural areas, which in turn is driving customers away.

Vodafone Idea was mired in liabilities of about 1.8 trillion rupees, or about $24 billion, as of the end of March -- more than 10 times its earnings before interest, taxes, depreciation and amortization.

One cause of Vodafone Idea's struggles was the levies that wireless carriers must pay: the government collects a percentage of business revenue in licensing and other fees. Carriers had contested the government's definition of such revenue, but India's highest court in 2019 ordered them to pay overdue charges plus interest.

The decision dealt a severe blow to established players Vodafone Idea and Airtel. Newcomer Reliance Jio was the only one of the three to deliver a net profit for fiscal 2020.

The cabinet in September approved a relief package that included a moratorium on such payments for four years, but this appears unlikely to solve Vodafone Idea's problems.

With more than 200 million subscribers, the collapse of Vodafone Idea would have reverberations beyond the industry. The government has denied the possibility of nationalizing the company.

Delays in telecommunications infrastructure investment in India would have an impact on companies looking to this market for business opportunities in network equipment. Among them are Japanese e-commerce company Rakuten Group, which has a research lab in Bangalore and aims to sell its low-cost model for 5G networks.

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