Year 2018: Indian telecom sector gears up for next phase

The year 2018, (FY 2017-18) has been another exciting year for the telecom industry in India. From operators’ perspective, finally industry seems to be geared up for the next revolution where individual consumers would be the derived beneficiaries of technology rather than the direct recipient as has been happening for decades.

To get prepared for this era of connecting people and devices, the operator ecosystem had to reboot, which is why, we saw M&As and exits, leaving behind only the operators who have the wherewithal to propel growth in capital intensive arena. This is because the Digital Era of Telecommunications, as also ratified by the NDCP 2018, needs a revisit all through the value chain and addressing one or a few segments won’t suffice. With India moving towards 5G, both backhaul as well as the access infrastructure needs a revamp, so the consumer devices. Obviously, to make this happen, there is a need to infuse billions of dollars. The NDCP 2018, envisions $100 billion investment requirement for what we know as the telecom sector today.

Emergence of Reliance Industries’ Jio, has spurred an inorganic growth as well as strategizing in the entire sector. This has led the entire value chain think ahead of times and evaluate the emerging technologies around, like that of 5G, IoT, AI as well as the ML/DL. Over the past few years, in FY 2017-18 in particular one of the major focus areas for all telcos has been to see how to acquire more competencies around the advanced IT skills. Digital Communications is actually convergence of telecom and IT.

However, this has poised the industry with lot many challenges. First and foremost is to look for the huge investments required, which become critical as the balance sheet and overall financial health is only deteriorating, especially for the incumbents. At the same, the hyper-competitive market has led to unprecedented fall in revenues and profits of the operators. This has resulted in operators becoming defensive and reactive to situations, which are changing every now and then, rather than aggressively and proactively go for the future opportunities.

Spectrum, though being attempted to make affordable, is still a resource, which the operators can’t have in abundance at the price points that work for them the best. Rather, it is going against the fundamental law of volumes or scale. As India moves up the Gs of generations of mobile communications, the volume requirement of spectrum is only increasing. This should have, if applying the law of volumes, brought down the price of a spectrum unit.

FY 2017-18 Performance

The India Telecom Services clocked a total revenue of Rs 211,336 crore for the FY 2017-18. This was 34% less than the previous financial year. The sharp decline in revenues, first one to be registered in the history of Indian telecom industry, is a no surprise as the very intense competition in the mobile space has led to equally intense price war. As a result, the post-paid plans of incumbent operators saw around 50% reduction, with unlimited voice minutes in local and NLD sectors, free SMSs and anywhere between 1-2 GB of 4G data a day.

This not only affected the mobile space but had its adverse impact on the entire telecom services including the fixed line services where consumers switched from fixed broadband to options like JioFi or simply 4G Broadband over Smartphones.

The sharp decline in the revenues was also a result of several operators in the process of exit or acquisition, registering losses impacting the overall financial health of the telecom sector. While some of the acquisitions and exits are complete, yet, others are in the process, whose subscribers where allured by remaining operators by giving them free migration plans and other benefits. This also had an impact on the earnings potential of this sector during this fiscal.

Voice

Essentially voice is free, and operators are not able to monetise the voice part anymore. However, as the structure of this survey goes, we had to arrive at estimates of voice service revenues. This was achieved by factoring MoUs as well as splitting the subscription fee, by taking averages of data charges and voice calls, details of which are available as per pre-paid plans.

The other factor that makes estimating voice revenues challenging is VoLTE. With VoLTE in the picture, everything is data, even a voice call. It is perhaps factors such as highlighted here, that V&D 100 annual survey, shall be presented in a different format to reflect the industry changes.

During the FY 2017-18, estimated 49% of the revenues of operators came in from voice services. India still has over 550 million subscribers over a 2G Featurephone. The segment though with very low ARPU, does constitute the largest, and thus still skewing the overall industry service revenues to voice.

This is for the first time, that less than 50% of the total service revenues came from voice. It is very insightful to witness that around 3 years back, voice contributed over 70% of the revenues for telcos.

Data

As they say, Data is the new oil. Unfortunately, this oil even being edible in huge volumes is not giving the proportionate revenues to the telecom operators. Reason being, the hyper competition around data services that has caused the change in the entire business models of operators.

Data revenues grew the most, contributing 33% of the total telecom services revenue. This was at 20% in the previous financial year. Though the data consumption has grown by approximately 2.5 times during the period, it has not been able to reflect the same in terms of revenues.

The growth in data revenues is something that operators should rejoice about. As all their investments in the recent years have been towards building data networks, it has finally started to payoff. Though the payoff is meagre and does in no way help them to have any substantial RoIs. This is the only segment that is expected to witness growth in coming years as well.

Value Added and Other Services

With the overflow of content, the value-added services, in the form we know them today are no longer giving substantial value to a consumer. As a result, consumers do not spend much on it. Even, services like selling Smartphones of third parties with some bundled offers it not yielding any revenue to the operators. At the same time, the channel of selling Smartphones through operators is not picking up in India despite several attempts.

However, offering security and other software services on a pay as you go model, is adding some revenue to this stream. In the financial year 2017-18, total of 18% revenue for operators came from these services including the technical consulting offered to enterprise customers. This was at 26% in the previous financial year. The DTH services are also impacted as users are moving to OTT based content consumed over a 4G data network.

Enterprise Communications

Enterprises still aren’t giving enough of business to the operators. Reason being, the offerings are primarily tweaked towards large and medium organisations while the SMBs are underserved. Unless operators plug in this gap and address the SMBs, we are not going to see a huge difference in the enterprise business for operators.

At the same time, the increasing need to connect more and more devices and growth of shared services like aggregation apps, etc., has pushed the enterprise contribution by a few percent points.

Compared to FY 2016-17, this fiscal enterprise business contributed 18% to the revenues of telecom operators. This was also due to healthy growth in VSAT segment. In the previous year, the contribution was mere 14%.

Consumer Communications

Consumer Communications is driven by high speed data services. Consumers are continuing to add data services to their portfolio and subscribe to packages that give more GBs a month to them for use. However, the pricing of the packages and plans is not leading to the increase in the revenues for this segment, hence the contribution in overall revenues.