A Week After Tepid Telecom Auctions, Price Hikes Aim to Pull off A Rescue Act

Telecom customers have been grinning widely from ear to mouth since Jio launched services in September 2016, when it all but took away the remaining wind out of telecom sails by promising free voice calls, forever and in perpetuity.

All that remained then to squeeze revenues out of the wingless Indian telecom phoenix was data services. Here again, and quite paradoxically, Jio and Airtel all but teamed forces to outdo each other and corner one final hunting ground. Vodafone-Idea (Vi) watched quietly from the sidelines.

Eight years later, that data battle rages on, all but turning to ashes Vodafone-Idea’s remaining hopes of a turnaround in the world’s cheapest data access market.

The flipside is a curious one – the long-due price-hike will benefit Vi the most, buying it precious time to plan its future in India, regardless of whether it leads to a resurrection or the final exit from the most cut-throat telecom market in the world.

What also remains to be seen is whether this hike is a one-off move by India’s beleaguered telecom operators to get some profitability back on their books, or a precursor of a trend to come.

The odds are in favour of the trend continuing, for no one has the gumption or the financial muscle and staying power to withstand a long-drawn skirmish in an industry that has seen competitor headcount go down from 12 in its heyday to just three today.

Segments of the media have been agog and hasty in reporting ‘massive tariff hikes’ of between 10 and 25 per cent by private sector operators.

What has been left unsaid is that, in itself, the price hike will not lead to too many jitters for individual telecom subscribers, who will see their monthly spends increase by around Rs 30-50.

To put that in perspective, the very popular 84-day data plan offering 1.5 GB of usage per day, costing Rs 719, will now cost Rs 859 – an increase of Rs 140 over 84 days, or Rs 45 a month.

However, even minor increases can have a multiplier effect in India’s telecom space, which is ruled by volumes unthinkable of in most other countries and geographies.

Such is the state and tariff structure here that volumes can cause even small increases to notch up fantastic overall gains for telcos, who can burp up these monies to make some financial sense to investors, raising and pumping desperately-needed cash into their ‘5G Play’ game.

For instance, in a market of over 100 crore subscribers, a Rs 45 per month tariff hike per subscriber translates into gains of Rs 4,500 crore for telcos. Extrapolated annually, the Rs 45 becomes Rs 54,000 crore per year, and divided by three (private operators), it averages at a cool Rs 18,000 crore per year per operator.

That is the logic and reality of volumes in India, despite other vexatious realities like loan repayments, regulatory issues and state-mandated fees hit home.

We can delve more on the permutations that enter the picture with the price hike, but let’s figure out why airwave sale and price hikes have all but coincided this time.

While limited in their enthusiasm and lacking in erstwhile vigour, telcos did put in bids of Rs 11,300 crore in the auctions. What people do not comprehend is that auction bids are just the beginning of a spending jamboree for telecom companies.

For one, the Rs 11,300-crore bids by India’s three remaining telcos does not mean instant gratification for the exchequer. The spectrum is valid for 20 years and bidders have to make the payment over that same period in instalments.

Another saving grace is that financial death-traps such as Spectrum Usage Charges (SUC), Financial Bank Guarantees (FBG) and Performance Bank Guarantees (PBG) have been done away with. There is a final hurrah too – spectrum can now be returned after 10 years.

Yet, the auction found few takers this time as besides auction pay-outs, spending has to be factored in for the eventual roll-out.

Once spectrum has been acquired, bidders have to upgrade telecom equipment (to 5G in this case), widen the network footprint (set up more towers) and invest in marketing (customer acquisition costs). Individually, these three expense heads are a steep climb. Together, they can turn into the avalanche that kills the climb and the climber.

The only recourse is a tariff hike, especially with other costs standing firm and escalating year on year. Earlier, 12 telcos was a crowd and suicidal financial moves by one could be gobbled up by others to increase customer acquisition.

Now, we have a motley group of three feeding off one-another. That is why Vodafone-Idea, despite playing only a cursory role in the auctions, is not seen as the villain when it joins Jio and Airtel in increasing tariffs.

Having made significant investments on their networks, telcos have to find ways to increase the monthly average revenue per user (ARPU) to meet seething and never-ending payment obligations and outflows.

Also, India still remains the world’s cheapest telecom market, with monthly ARPUs below Rs 200. Operators have all admitted that ARPUs shy of Rs 300 per subscriber per month are a recipe for disaster.

We also have the inexorable truth that despite the volumes, India and Indians find price hikes of any nature offensive and always react heartlessly, switching operators for even a few rupees a month.

That is a reason that right before this price hike, the Government lent a hand to telcos by making portability (switching operators) tougher. It also begs mention that the state has a stake in the game, owning much of the cash-strapped Vi, whose shares have been picked up in lieu of non-payment of license and related dues.

Finally, if you look at the tariff hikes, you will see an across-the-board increase for pre-paid subscribers, while most of India’s post-paid market, especially the large-usage variety, have been spared.

That’s because an industry struggling to raise ARPUs to Rs 300 cannot run the risk of losing those paying Rs 500 or Rs 1,000 a month to other telcos through portability.

Revenues by any means is the only rule left in the deadly telecom game. This price hike was inevitable, just waiting to happen, and it finally has. What needs to be seen is who blinks first.

Will it be telcos, already facing dangling swords as dangerous as the one belonging to Damocles, or subscribers, who are known to shift allegiance for things as inane as 1GB of data or the latest Bollywood hit as a free caller tune? We shall know in just a month.