20 Dec 2019 20:01 IST

Tariff hike by telcos may ease their pain, but only a bit

Over the last few years, three major blows have pushed the telecom sector further into crisis

The telecom sector in India has been in trouble for over a decade due to regulatory challenges and onerous pay-outs in the form of various fees and charges. The pain for incumbent players was aggravated with the entry of Reliance Jio in 2016, which led to intense competition in the market and unleashed irrational price wars. With Jio offering free voice and data services, other telecom operators had to slash their tariffs to retain their customer base. For instance, data tariffs plummeted to little less than ₹10 per user per GB (gigabyte) in June this year, from about ₹270 per user per GB in 2015.

The competitive landscape led to consolidation as well. From over 10 players in the sector six years ago, there are just three operators now. With the rock-bottom prices of data and voice services already bleeding the debt-ridden telcos, the situation worsened with the recent verdict from the Supreme Court for payment of adjusted gross revenue (AGR) dues by telecom operators.

In a bid to cushion the pain, the key players — Bharti Airtel, Vodafone Idea — have, starting December, raised tariffs after four years of consistently lowering prices. While the increase may not help the bottomline significantly, it may ease the pain to an extent.

Here is a look at what pushed India’s telecom companies to call off the price wars after three to four years of unbridled competition and how the move will help these companies.

Cause for the hikes

The crisis within the telecom industry deepened in the last three-four years with three major blows.

First, the entry of Reliance Jio in September 2016. The debt-laden telcos had to face stiff competition from Reliance Jio, which was offering data and voice services at massive discounts. This took a toll on the companies that were already struggling to survive in the market. The average revenue per user (ARPU) fell from ₹124 in December 2015 to ₹81 in June this year.

While Bharti Airtel managed to remain in the game despite a falling ARPU, Vodafone and Idea took a hard hit and eventually merged to form a single entity.

Idea’s ARPU stood at ₹179 in March quarter of FY15 but it came down to ₹100 in the June quarter (Q1) of FY19 (before merger). Airtel, on the other hand, had a wider reach than Idea. The ARPU stood at ₹105 in Q1 of FY19, though it fell from ₹198 in March quarter FY15. However, the ARPU for both companies has improved since June, thanks to introduction of minimum recharge plans to wean out the non-paying customers. As of September quarter FY20, the ARPU for Bharti Airtel and Vodafone Idea stood at ₹128 and ₹107 respectively.

The second major blow for telcos had come from the spectrum auction conducted in October 2016. While the Centre resolved the issue of spectrum scarcity by releasing nearly 2354.55 MHz of airwaves for sale, operators spent a huge amount of money to buy this spectrum, adding to their debt. Bharti Airtel has a total outstanding debt of ₹1,18,106.5 crore as of September 2019 while Vodafone Idea’s debt is ₹1,01,910 crore. Both operators were unable to increase tariffs due to stiff competition. In fact, until recently, they continued to slash their rates to retain and attract new customers.

Regulatory changes

Third, the regulatory changes also had a negative impact on telecom companies. Bharti Airtel and Vodafone Idea reported record losses, of ₹22,830 crore and ₹50,923 crore respectively, for the quarter ended September 2019, after making provisions toward the Supreme Court’s ruling on the definition of adjusted gross revenue (AGR). As per the judgement, telecom service providers are to make payments towards license fees and spectrum usage fees along with interest and penalties. The amount is estimated to be around ₹1.3 lakh crore. The companies are expected to pay up this amount within three months. This is among the key factors that pushed the telcos to increase their tariffs.

Further, the telecom regulatory authority of India (TRAI) had, two years ago, cut mobile interconnection usage charges (IUC) from 14 paise a minute to 6 paise a minute. IUC is basically an arrangement under which telecom players connect their equipment, networks and services with other telecom services providers. This is a charge payable by a service provider whose subscriber originates the call, to the service provider in whose network the call terminates.

Initially, the regulator wanted to scrap the IUC from January 2020 but it led to a legal tussle between the regulator and the incumbents. Since IUC generates revenue for players, scrapping of the IUC regime could hurt operators which are already struggling with losses.

Turning to tariff hikes

While payment of AGR dues has dealt the sector a big blow, the recent announcement by the regulator to defer the zero-IUC regime till the end of 2020 offers a breather.

Also, to handle the competition, improve revenues and cushion finance costs, companies have hiked tariffs in the range of 15-41 per cent across all pre-paid mobile plans (95 per cent are under pre-paid subscription).

Between Vodafone Idea and Bharti Airtel, the latter has been ahead of the curve, focussing on fewer and better-paying customers since the beginning of this year. It registered growth in consolidated revenue of 5 per cent and 3 per cent y-o-y in the June and September quarters respectively, though it had reported record losses. Similar strategies had been undertaken by Vodafone Idea as well.

Thus, going forward, while the increase in tariff may not reduce the telcos’ debt burden, it may improve the ARPU. It could also increase data consumption among customers as the operators are offering additional benefits, such as Amazon Prime subscription, rewards and other privileges along with mobile plans.