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Recent developments that disrupted Indian telecom space
Sushma Vishnani
New Delhi, Thursday, March 16, 2017 | 13:54 IST
Recent developments that disrupted Indian telecom space

Disruption is often used as an effective strategy by a new and powerful entrant to outcast strong incumbent competitors. Disruptions happening in the corporate world can be categorised into two types: New-market disruptions and low-end disruptions (Christensen Clayton M. 2003) New-market disruptions call for creating a novel market for the product. So the challenge for new-market disruptors is 'non-consumption'.

The personal computer business can be put in this domain as the earliest customers were new consumers and they had never used or owned the product earlier. Low-end disruptions occur in the lower end of the mainstream market. They are intended to lock horns with the incumbents, causing them to flee from the market. The retail sector has witnessed it a number of times. Big retailers such as Wal-Mart have the history of initiating such low-end disruptions, causing many branded retail stores specialising in paints, toys, kitchen utensils and other products to disappear from the market.

The exercise entails translating the potential business idea in disruptive strategies. Harvard Business School professor and disruption guru Clayton Christensen says a disruption displaces an existing market, industry or technology, and produces something new and more efficient and worthwhile. It is at once destructive and creative. But to be truly disruptive, the proposed business idea should disrupt all proven incumbents in the target market.

Here are a few examples of disruptive strategies from the corporate world. Amazon.com came up with a disruptive strategy to replace all traditional bookstores. GE Capital has disrupted a considerable share of the commercial banks' historical markets, principally through its disruptive strategies. McDonald's has proved to be a hybrid disruptor in the 'eating out' space by making available economical and hygienic food to large masses of people worldwide. In brief, a disruptive business model is a prized corporate asset.

The recent disruption caused in the Indian telecom sector by the launch of Reliance Jio on September 4, 2016, is critically analysed in this paper. The paper consists of following sections:

1.    Brief about the Indian telecom sector
2.    Major regulatory disruptions
3.    Disruption caused in 2016
4.    Financial impact of disruption caused in 2016 on major incumbents
5.    Analysis of disruption caused in 2016 using Clayton Christensen's framework of three key disruptive litmus tests
6.    Conclusion: Implications for incumbents in the industry

About Indian telecom sector

The Indian telecom sector has emerged as one of the leading potential markets in the global context and witnessed high-paced growth over the past 25 years. The telecom industry of India has experienced dramatic changes over the years. Technological innovations and regulatory changes have been the twin factors responsible for setting the stage right for the evolution in this space. The sector was liberalised in 1994 with the introduction of the National Telecommunications Policy or NTP. The Telecom Regulatory Authority of India or TRAI, an independent regulator for the Indian telecom sector, was set up in 1997 to reduce the interference of the Indian government in operational matters of telecom companies.

India is currently considered the world's second-largest telecom market (Yadav Kapil, et al. 2015). It has registered a strong compound annual growth rate (CAGR) of 19.96 per cent in its subscriber base during the last decade. The mobile segment's teledensity swelled around six times, from 14.6 per cent in FY07 to 81.38 per cent in FY16. The number of Internet subscribers in the country increased at a CAGR of 78.81 per cent, with the number reaching 342.65 million in March 2016 from 8.6 million in 2006. The sector is expected to witness an extremely high growth rate in the coming years, given the favourable regulatory support by the government and the introduction of 4G. The top five players in the sector in 2016 were Bharti Airtel, Vodafone, Idea, Reliance and Bharat Sanchar Nigam Ltd or BSNL.

Pre-liberalisation scenario
Back in 1948, there were only 80,000 telephones (landlines) in India. Growth in the sector was extremely slow till 1991, the year of liberalisation. The number of fixed-line telephones in 1991 were 5.07 million and the sector was entirely state-run.

Major regulatory disruptions
The Indian telecom sector witnessed its first major disruption during 1990s when the Indian government opened up the sector for private investments. Owing to this initiative, the sector saw major changes in the areas of ownership, services and telecom infrastructure regulations. Several joint ventures between the State and the international players followed and during this phase, the Indian telephony services observed technological disruption and mobile telephony picked up. In July 1995, the first mobile telephone service was launched in India.

In the first decade of the 21st century, the government further liberalised the entry of private and foreign investors in the sector, especially in the mobile telephony space. The impact was affordable services for a large number of Indian residents, especially the Indian middle class. During FY08, the mobile subscriber base recorded a 50 per cent jump year on year.

Disruption in 2016

Free voice calls, drop in data tariffs, sharp competition among Indian telecom companies and finally the dramatic entry of Reliance Jio caused massive disruptions in recent times. These massive disruptions have not only made 2016 a landmark year for India's telecom sector in terms of tariffs, services and technology, but have also created substantial expectations among mobile subscribers.
 
One of the major disruptions in the Indian telecom sector started with the launch of Reliance Jio on September 5, 2016. The launch announcement offered the lowest rate (worldwide) for the Internet data at Rs 50 per gigabyte (GB). Also, all its services were offered free, on promotional basis, till December 31, 2016 (which was further extended till March 31, 2017). This kind of cut-throat disruption by a new player (with huge financial muscle) is expected to bring consolidation in the industry. But we are yet to find out how far this consolidation will be in the interest of consumers.

These developments in the Indian telecom sector shook all major telecom operators. Reliance Jio has proved to be a game-changer and the company's pricing strategy has disrupted the market and forced the telecom companies to devise ways and means to survive and face stiff competition. Jio's strategy is to focus on the data business aggressively instead of the voice segment as the data segment offers high growth potential. While the voice market has already matured in India, data relating to voice and non-voice service revenues of the top three industry players (Bharti, Vodafone and Idea) reflect this trend as well. The same is featured below in Table 1. Apart from its unique pricing proposition, Jio's network is technologically more sophisticated for high-speed data business compared to other players in the market.

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The disruptive pricing strategy of Reliance Jio, at the time of the launch itself, was expected to majorly impact the financials of all the telecom companies of India. It was also expected to bring consolidation in the industry. To analyse the financial impact of this disruption on the telecom sector of the country, a study of three biggest private sector telecom companies is undertaken, namely, Bharti Airtel , Vodafone and Idea Cellular. During the fourth quarter of 2016, these companies held 74 per cent of the Indian market share. While Bharti Airtel held 31.7 per cent, Vodafone had 22.7 per cent and Idea had 20.2 per cent. Since the launch of Jio in September 2016, we have tried to analyse the impact of disruption caused in the businesses of these companies by using the financials for the December 2016 quarter.

Financial implications for major telcos
Bharti Airtel
The company's revenues (both on group basis and for India) for Q3 of FY17 registered a decline compared to the immediately preceding quarter, Q2 of FY17. Its group revenues declined by approximately 5 per cent and revenues from Indian operations declined by approximately 6 per cent. However, as compared to the corresponding quarter of the previous financial year, its revenues from India operations grew by 1.8 per cent while its group revenues declined by approximately 3 per cent.

EBITDA figures for the quarter registered growth vis-à-vis the corresponding quarter of the previous financial year, but declined compared to the previous quarter. Group EBITDA declined by 19.5 per cent and India EBITDA declined by 12 per cent compared to Q2 of FY17. EBITDA margins also showed a similar trend. EBIT for the group as a whole declined by 10.3 per cent while EBIT for India declined by 16.4 per cent compared to the corresponding quarter of the last financial year. A drastic decline in EBIT also took place compared to the previous quarter. EBIT for the group declined by 18.4 per cent and for India operations, declined by 24.3 per cent. EBIT margins also showed decline. Net profit also declined hugely compared to the previous quarter as well as the corresponding quarter of the previous financial year.

Overall, compared to the top line, the company suffered a major setback in its bottom-line performance. Huge depreciation and amortisation expenses and finance costs were the major reasons for this occurrence. Huge capex and debt during the quarter led to this. Overall, the company's profit performance declined during this quarter. The company's management felt that the major reason for this was the 'entry of a new competitor offering free voice and data'. Intense competition has led to this phenomenon. The company has stepped up its capex during the quarter to compete with the highly sophisticated network of its new competitor in the market. This has also caused a minor decline in its ROE and ROI.

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Vodafone India
This multinational also reported decline in its revenues for the quarter ended December 2016 compared to the corresponding quarter of FY2016. Group CEO Vittorio Colao mentioned in the News Release of Q3 FY17 that the group performance has declined owing to its performance in Indian markets where the sector is affected by free services from the new entrant. He also stated that the company has entered into discussions with the Aditya Birla Group about an all-share merger of Vodafone India and Idea to combat intensive competition in India.  

Vodafone Consolidated
The December 2016 quarter reported revenue (?13,687m) declined by 3.9 per cent compared to the December 2015 quarter reported revenue (?14,247m).

Vodafone India

The December 2016 quarter reported revenue (?1,452m) declined by 5.5 per cent compared to the December 2015 quarter reported revenue (?1,536m).

Idea Cellular

The company's revenues for the Q3 of FY17 registered a decline compared to the immediately preceding quarter or Q2 of FY17. Its revenues declined by approximately 7 per cent. However, compared to the corresponding quarter of the previous financial year, its revenues declined by 3.8 per cent. EBITDA figures for the quarter showed decline compared to the previous quarter as well as the corresponding quarter of the previous financial year. EBITDA declined by 23.7 per cent compared to Q2 of FY17 and by 24.4 per cent compared to Q3 of FY16. EBITDA margins also showed a waning trend. EBIT for the company showed a whopping decline of 82 per cent compared to the corresponding quarter of the last financial year. A drastic decline in EBIT also took place compared to the previous quarter. The company incurred a huge net loss during the quarter while in the previous quarters, it had reported net profits.

Overall, compared to the top line, the company suffered a major setback in its bottom-line performance. The company's profit performance declined during this quarter. The company's management said the major reason for this phenomenon was 'an unprecedented disruption in the quarter, primarily due to free voice and mobile data promotions by the new entrant in the sector'. Intense competition led to this phenomenon. The decline in profitability was caused by the decline in margins as well as increased investments. The company had to reduce its voice rates as well as mobile data rates during the quarter to retain its existing customers.

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Analysis of disruption caused in 2016 using Clayton Christensen's framework of three key disruptive litmus tests
Disruption occurs when the existing competitive setting of the industry experiences major changes due to a new technological development or business model. The incumbent may or may not effectively response to this change of the market scenario depending on whether it is tackled as an opportunity or considered a threat by the incumbent.

In the context of the Indian telecom sector, the stage for disruption was set by Reliance Jio with the introduction of 4G services in the Indian market. The company has been doing spectrum acquisitions for this purpose since 2010. It launched its services in September 2016 with an announcement of free voice calls and cheapest data services (at Rs 50/GB). This paper attempts to study how the present changes in the telecom market are expected to unfold in the coming future. Clayton Christensen, in his book The Innovator's Solution: Creating and Sustaining Successful Growth, came up with the concept of litmus tests to analyse whether a new idea or business model has disruptive potential. He provided three key disruptive litmus tests:

1.    Does a growth opportunity exist?
2.    Can it attract customers away from the core of the mainstream market?
3.    Can the incumbent respond?

This study analyses the disruptive power of Reliance Jio's strategy in the context of these three questions.

1.    The voice segment of the telecom market in India has reached the saturation stage while the data segment still offers the scope for huge growth. Taking this into consideration, Jio strategised to hit the data segment and came up with the focus of digitising India. At the end of FY15, the number of 3G/4G subscribers were estimated to be 173.7 million, which was expected to rise to 220 million by FY16. It is expected to climb to 322 million by 2020.

Keeping these numbers in view, the company plans to cover 70 per cent of the population, including the rural India. At present, Jio connectivity is available in nearly18,000 cities and 2,00,000 villages across the country. The company has the largest fibre-optic network in India, which is capable of providing fast 4G. Other players in the market are facing the investment issue as they have already put in a huge amount in laying down 2G/3G fibre networks and replacing the same with a 4G network requires huge funding. Furthermore, Jio's network is sophisticated enough to seamlessly upgrade to 5G. Jio also comprehends that Indian customers are price sensitive and accordingly launched its services with an alluring pricing strategy. Thus the strategy of Reliance Jio is to cater to the country's large rural population and not just target the affluent segment. To facilitate this, the company has also launched its 4G handsets that are reasonably priced.

2.    The financial results of the major Indian telcos for the quarter ended December 2016 reflect, as of now, that Jio has been able to cause a shift in the customer base of other telcos, bringing them to Reliance Jio. Of course, one of the major reasons cited in this regard by other competitors is the free pricing offered by Reliance Jio at its launch. However, telecom sector analysts believe that the launch of affordable data services by Jio is going to increase data adoption across segments and average data consumption will rise as well. This may have a positive impact on the telco's profitability in the long run due to substantial increase in capacity utilisation. The current focus of Jio is to bring on board as many customers as possible by its lucrative pricing strategy.

3.    To address the third litmus test, three major telcos of India--Bharti Airtel, Vodafone India and Idea Cellular--are considered as the significant incumbent firms in the industry. All three faced a major setback in terms of business performances during the quarter ended December 2016. All the companies have held responsible the 'free voice and data offers' of Reliance Jio as the major disruptive factor. Of the three companies, two (Vodafone India and Idea Cellular) have initiated merger talks to deal with the stiff competition posed by Reliance Jio. Bharti Airtel, however, feels competent enough to face this stiff competition. The company also offered free data for a year for switching to 4G network in an effort to retain its customers. A number of lucrative plans were also launched during the quarter.

The top brokerage firms of the telecom sector felt that the launch of Reliance Jio is disruptive, owing to free voice calling and cheapest data services, and this is expected to create pressure on the incumbents in many ways. If the incumbents are able to sustain the stiff competition, Reliance Jio's business plan cannot be considered disruptive. It may be a promising development for the sector, but will not be covered by the definition of disruptive business idea or plan. The future is going to prove whether the third litmus test will be affirmative or otherwise.

Conclusion: Implications for incumbents in the industry

Large-scale disruption in the Indian telecom sector indicates that the fragmented structure of the sector requires a shift to a more consolidated ecosystem. It also indicates that the industry needs to shift its focus from voice to data segment as the voice market has reached a saturation point while the data market can be tapped further and offers a huge scope for growth. Moreover, the disruption caused by the entry of Reliance Jio is expected to improve service quality as all the market players now need to invest more to improve their networks, infrastructural facilities and spectrums to compete. It is also expected to bring down the prices as a whole.

 

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