First Principles | How Indian telcos are cracking the 5G challenge
It appears that an altogether different business model may emerge out of India even after the recent hiccups faced by the Adani Group once poised to emerge as a significant player in the enterprise telecom space.
The Indian telecom business is on the cusp of significant change that’s not immediately apparent. When we first looked at how telecom companies were battling it out to navigate the 5G space in August last year, it was clear that for all the hype, people don’t have the money to pay for it. Those who can afford 5G services are enterprise customers. But an informal conversation with a New Delhi-based policy analyst watching this space evolve, offers an interesting spin. “If you step away and look dispassionately at 5G, it’s like the Green Hydrogen business. Technically a lot can be done but there are not enough used cases.”
While his observation may be true on the ground, it also appears that an altogether different business model may emerge out of India even after the recent hiccups faced by the Adani Group once poised to emerge as a significant player in the enterprise telecom space. There’s also another paradox as Gaurav Dua, the Head of Capital Market Strategy at ShareKhan.com, points out. Unlike in the past, when people shifted rapidly from 2G to 3G, a large number of Indians still haven’t fully adopted 4G. “Getting people to migrate to 4G networks hasn’t been easy for telcos,” he says. Given this history, it is premature to assume that large numbers of people will latch on to high-speed 5G networks, and the reason is this: Higher speed comes with a price. Indians are among the most price-conscious consumers in the world.
Which is why when Reliance Jio entered the market in 2016, it disrupted the industry by offering free voice calls and ultra-cheap data plans, forcing other players to slash their prices. This resulted in a sharp decline in average revenue per user (ARPU). This is a key metric for measuring profitability. According to TRAI data, ARPU fell from roughly ₹125 in 2017 to ₹87 in 2020. This pretty much broke the industry’s back.
Such numbers were unsustainable and the three big players that include Airtel, Jio and Vodafone-Idea (VI) have since worked their ways to increase their ARPU. Vodafone has inched its way up to ₹134 while Jio has stayed flat at ₹177. Airtel has come close to breaching the ₹200 barrier at ₹194. To put it mildly, extracting this much out of Indian consumers has taken the ‘mickey’ out of telecom operators, and analysts feel conflicted about what the future may look like in terms of finances.
To remain sustainable with 4G networks, Airtel's top brass, led by Gopal Vittal, has made it clear that companies must be in a position to command an ARPU of ₹200. However, Dua suggests recent signals portend that there may be more to achieving this than meets the eye. To begin with, banking industry veteran KV Kamath has taken over as chairman of Jio Financial Services. How this business evolves will be watched keenly because it is widely believed that this entity will deliver services on the back of Reliance Jio’s telecom reach and infrastructure. Kamath’s reputation for understanding technology and finance deeply is well acknowledged globally. Then, there is the original content that Jio is creating and acquiring from across the world. In the longer run, this too will be delivered through the pipes and fibre that Reliance Jio places. Clearly, much thought and money have gone into building this infrastructure.
Airtel is attempting something similar and has started to acquire and create its own content. It has made forays into financial services as well, and most recent reports have it that the company will end this year by clocking ₹1,300 crore in revenues from its payment bank. The booster shot will happen with its investment in PayTM. If all this works out, Indian telcos may just show the world how to work with tight-fisted customers and still make money.