India stares at a carrier monopoly with Reliance Jio as Airtel and Vodafone Idea face uncertain future
India has the world’s lowest call and data tariffs in the world right now, riding on the back of mega telecom operators and hyper-competition among them. But that hasn’t always been the case in the country, as a lot of it can be traced back to a few key defining moments in the telecom sector’s history. There is a good chance that the country is headed towards one more such moment, one that might turn a hyper-competitive market into a carrier monopoly with Reliance Jio at the helm.
In this article, we will revisit the rise of Reliance Jio in India, its effects in the telecom space, the AGR-Supreme Court decision and how all of this would shape the future of one of the largest telecom markets in the world. But before we take a look at the present, let us take a few steps back to see the past and get a clearer idea of how the Indian telecom sector is where it is right now.
Reliance Jio and its rise in India
When Reliance Jio entered the telecom industry in India, back in September 2016, millions of Indians rejoiced as they got access to unlimited, free and no-strings-attached 4G LTE data. Jio quite literally gave away its SIM cards and accompanying 4G data capabilities for free to any and all consumers who wanted them. So, from September 2016 all the way till mid-April 2017, customers who were willing to queue up for the free Jio SIM card could have access to free and unlimited VoLTE calls on the Jio network, free and unlimited calls across India to any other telecom operator, free and unlimited SMS, and free 4G LTE data too. The only catch was the speed throttling that came into effect after a user crossed 4GB of 4G LTE data per day, but even that is a very generous limit for a freebie. The limits were lowered in later periods, but even if you did cross the threshold, you could continue accessing the internet, albeit in a throttled state.
The freebies that Reliance Jio showered customers with shook the Indian telecom space to the core, as there was simply no way to compete against a business model that wanted to actively avoid making any money from the end-users for a prolonged period of 7 months. Jio did offer speed booster packs for when consumers crossed their limits, but as a consumer, all you had to do was wait out the day and have your generous limits refreshed at the stroke of midnight. This was in stark contrast to the monthly data plans that were offered by other telecoms back then, plans that offered 1-3GB of 4G data for the whole month and did not include voice calls and SMS. India jumped from treating 4G as a luxury to trating it as a necessity; from being miserly and very conscious about data usage to having one of the most widely available free 4G services practically overnight.
Within 6 months, Reliance Jio gained 100 Million subscribers for its network, adding an average of seven subscribers every second from its launch. This meteoric rise pushed Jio from a non-existent entity in mid-2016 to the fourth-largest telecom operator in India by Q1 2017! For comparison, the subscriber base of Verizon, USA’s largest telecom operator, stood at 144 Million at the end of Q3 2016, right around when Jio started off.
When the freebie period ended, Jio continued the massacre by offering the cheapest 4G data plans the country had ever seen at that time. For the same amount of money that a customer would have previously paid in 2016 for 1 to 3GB of 4G data for a month (and separately paid for calls and text), Reliance Jio offered the same amount of data per day, coupled with free unlimited calling and messaging! Granted, the 4G speed on Jio’s network back then was not good, but it still was a healthy compromise to make for the average Indian.
The Indian telecom sector in 2019
Jio’s dive into the market created such a huge splash that several operators simply drowned out over the months and years. Those who could afford to match Jio’s value offering attempted to do so for as long as they could. And all those who couldn’t, saw their subscriber base shrink sharply and continuously, until they couldn’t stay afloat. The industry as it currently stands is comprised of just four players: Vodafone Idea, Reliance Jio, Airtel, and BSNL/MTNL — a far cry from the 12+ operators in 2016! But recent events in the country may worsen the situation and turn the Indian telecom sector into a monopoly for Reliance Jio — and surprisingly, Jio will have no part to play in this!
As per data from the Telecom Regulatory Authority of India released in August 2019, Vodafone Idea is currently the largest telecom operator in India, with 375 Million subscribers and a 32% market share, the large subscriber base made possible mainly because Vodafone and Idea merged back in August 2018. Reliance Jio occupies the second spot, with 348 Million subscribers and a 30% market share. With 328 Million subscribers and a 28% market share, Airtel comes in third, while the state-run entity BSNL has 120 Million subscribers and the remaining 10% of the market. Combined, India’s total wireless subscriber base stands at a whopping 1.171 Billion subscribers. To retain some perspective for our global audience, USA’s total subscriber connections were estimated to be 422 Million at the end of 2018 — so India’s total base right now is around thrice that of the United States. Keep in mind, India’s population is around 1.33 Billion, so there’s still plenty of room for the country to grow.
The top three telcos are private players and are always practically neck-to-neck, with Reliance Jio clearly gaining more subscribers quarter after quarter over the past years, causing the other two to bleed profusely. BSNL is a state-run entity and not really the first, or second, or even third choice for many customers. The company has been in the news for being a cash-bleeding entity for several years now, and the government recently announced a rescue package/revival plan for the company, merging it with MTNL, another of its smaller loss-making telco. The general consensus on the move is that it is too little and too late — there is no competitiveness left in the state-run entity and the situation is merely prolonging an eventual death.
So for all practical purposes, up until October 24, 2019, the Indian telecom industry was made up of three key players: Vodafone Idea, Reliance Jio, and Airtel, and with no clear winner among themselves as each wielded about 30% of the market. At that stage, one could predict that the three would continue to bleed each other out for several more months and years, and their competition would shape the Indian 5G landscape and beyond. As a general view, the biggest short term winners were going to be the consumers, who could continue to enjoy the fruits that had been borne by the laws of economics. Eventually, either one of these telecom players might buckle, but this was a prediction thrown carelessly in the air, one that had no foreseeable date. Maybe the others would continue running ahead with losses till there is only one left standing, or maybe they would adapt their ways to band together and exploit the oligopoly that would then exist. There were far too many variables for this future, and this future wasn’t one to be taken seriously at this stage.
Until October 24, 2019.
The Supreme Court judgment — Union of India v/s Association of Unified Telecom Providers of India
On that fateful date, the Supreme Court of India passed a judgment in a long-standing dispute from 2003.
This dispute related to the definition of Adjusted Gross Revenue (AGR) as mentioned in the National Telecom Policy 1999 (NTP 1999). The NTP 1999 was introduced to provide relief to the telecom service providers 20 years ago, as they were consistently defaulting in making fixed license fee payments to the Government of India according to the previous National Telecom Policy 1994. The Government itself admitted that the fixed license fee was steep, and keeping in mind the national interest of the country, the NTP 1999 switched from a fixed license fee payable to the Government to a revenue-sharing fee. This revenue-sharing was set to 15% of AGR, which was reduced over the years to rest at 8% since 2013.
However, disputes arose on how this AGR should be calculated. The Department of Telecommunications (DoT) attempted to calculate AGR by clubbing together elements of income which did not accrue from the operations under the license; for example – dividend income, interests on short term investments etc. Members of the Association of Unified Telecom Service Providers of India (AUSPI) complained to the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) in 2003 that the definition of AGR ended up including non-core business activities. Their argument was that, after all, a telecom provider does not ordinarily engage in the business of short term lending, so if it did earn interest on this non-core business activity, does it need to pay a portion of this back to the government for operating under a telecom license?
The TDSAT held in 2006 that this non-core business income should be excluded, and only core business income (within the context of the telecom industry) should be considered when calculating the AGR, and consequently, the license fee payable. There was a lot of back and forth then between the TDSAT, the Telecom Regulatory Authority of India (TRAI), the DoT, the AUSPI, the Government of India and the Courts — I’ll skip the details on this as it involves finer legalese beyond the scope of this article. The final issue ended up in the hands of the Supreme Court of India in 2015 when the DoT approached them for final adjudication.
The Supreme Court took the view that the telecom service providers had willingly, consciously and unconditionally entered into the licensing agreements with the Government of India. Because of the existence of this valid and binding contract, the service providers cannot enjoy the benefits that are extended under the contract while rejecting the obligations that the contract imposes. The Supreme Court ruled that the contractual definition of AGR (which was broad in nature) is binding, and the interpretation that the telecoms were attempting to apply by deducting several expense heads and excluding several income heads was against the straightforward definition of AGR mentioned in the license contract. There was little reason to have been litigating since 2003 when it was all clear since the beginning. The Court also observed in paragraph 189/page 144 of the judgment:
The conduct of the licensees was highly unfair, and anyhow and somehow, they had attempted to delay the payment. It passes comprehension how they have contended that the demand has to be worked out after this Court renders the decision.
Consequently, the Court ruled against the telecom service providers and directed that the telecoms have to pay not only license fee and spectrum usage charges, but also penalties, interest, and interest on the penalty. The license agreement also provided for compounding of interest on a monthly basis, and the Court upheld the same as it was under a valid contract. The dues were in contention since 2003, and since compound interest was being charged for a period of 16 years, the amount that the telecoms suddenly had to provide for came out to be an absolutely huge number. It isn’t immediately clear if the telecoms made any part payments over the years for these dues.
The Fallout
The final result of the Supreme Court verdict was that telecom operators in India together now owed the government ₹9,20,00,00,00,000 [Rupees Ninety Two Thousand Crores]; which comes out to an obscene $12.82 Billion USD, in just unpaid license fee dues that have accrued over the years. Adding in the spectrum usage charges and the compounding interest elements takes the total tally to ₹1.3 Lakh Crore according to some estimates, which translates into $18.11 Billion USD!
This monstrous amount is to be paid by the telecom companies that had existed during those times. However, Reliance Jio’s advent into the telecom sector heavily consolidated the whole industry, and had already forced several of these telcos to shut shop and liquidate. In the end, the only players really affected by this massive liability are Airtel and Vodafone Idea.
According to filings submitted to the Court, as reported by Economic Times, Reliance Jio’s total liability is just ₹41.35 Crore ($5.7 Million USD) as it entered the market just three years ago, a figure which the Mukesh Ambani’s RIL-backed Jio should have no issues in paying. Meanwhile, Airtel’s total liability is estimated to be ₹41,507 Crore ($5.78 Billion USD), while that of Vodafone Idea is estimated to be ₹39,313 Crore ($5.48 Billion USD)!
This absolutely massive liability for Airtel and Vodafone Idea would co-exist alongside extremely tough competition from Reliance Jio, a shrinking userbase and continuously falling revenue, as well as required capital expenditure in the form of infrastructure upgrades as would be needed for India’s 5G rollout. The telecom sector was/is already saddled with debts in an atmosphere of hyper-competition, and stares at extensive capital expenditure, and now, massive fines which it should have prudently provided for, early on.
The next big kicker came in the form of time provided for repayment, as all of this was to be repaid to the government within 3 months, i.e. by January 2020!
Following the verdict, Airtel and Vodafone Idea posted their worst quarterly results ever in India, since they now had to create a provision for this repayment. The results were so bad, and the losses so huge, that Vodafone Idea quite literally had the worst quarter of all time by any company in India, while Airtel’s was third-worse. This loss is in contrast to normal operational expenses, though arguments can be made on how the telecoms should have already been creating provisions for payment of mandatory license fees and spectrum usage charges, keeping in mind prudent accounting practices. Vodafone Idea’s parent company, Vodafone, which owns a 45% share in the subsidiary, indicated that the subsidiary may be headed for liquidation, keeping in mind the context of the critical state of affairs in India’s telecom sector.
The government too is in a tight spot. Senior officials have been quoted as saying:
The government is in a fix and the problems are plenty. If we go ahead and demand the AGR dues, most will not be able to pay. If we increase the payment period, then it will increase the interest and penalties.
A stern demand by the government will end up initiating liquidating proceedings against both Airtel and Vodafone Idea, as both now have frail balance sheets in light of this massive new debt.
This essentially would leave behind Reliance Jio as the sole player in India’s telecom sector, being the only reliable provider option for India’s population of 1.33 Billion people. If such a hypothetical-yet-not-too-far-fetched-now scenario comes to exist, telephony services in the world’s second-most populous country will be controlled by one single private business, which would have swollen to about 10 times (!!!) the size of Verizon, USA’s largest telecom. Reliance Jio could thus end up in a situation where it could dictate prices in any direction by any margin, as it deems fit and reasonable. Sure, competitors could always arrive at the scene and attempt to wrestle control away from this mega-telco, but do you remember the 16 telecom operators that existed back in 2016? Jio was just getting started back then.
The way forward, when there are no free lunches
As expected, Vodafone Idea and Airtel have been requesting the government to explore relief measures. The Cellular Operators Association of India (COAI) had written to the government, seeking a total waiver of the entire sum pending for all operators. If that wasn’t possible, they requested that the principal portion be allowed to be paid over 10 years, with no payments to be made for 2 years first.
Reliance Jio stood up against such demands, rightfully so in my opinion from a strictly legal perspective, as it went on to say that “the licensees have indulged in abuse of the process of court, and deliberately delayed payment of dues on frivolous and legally untenable grounds“, and that any cuts in the liability would amount to “rewarding them in initiating vexatious proceedings to delay payment of dues“. Jio also reiterated that both Airtel and Vodafone Idea have sufficient liquidity and financial strength to overcome adverse financial conditions and meet their contractual obligations, by monetizing assets and investments, and by issuing fresh equity. Keeping in mind the prolonged financial stress in the sector, and the fact that Reliance Jio isn’t going anywhere and the financial forecast its existence brings along, who in their right mind would participate in further equity funding?
Before any relief came forth, Vodafone Idea announced that it will raise its prices from December 2019 onwards. India’s mobile data charges are the cheapest in the world, and Vodafone Idea’s ARPU (Average Revenue per User) is merely ₹107 ($1.49) per month. Increasing tariffs for calls and data will help the company continue its business, though it isn’t immediately clear how far it will help them. This announcement from Vodafone Idea then prompted Airtel to announce the same, which should help raise its ₹128 ($1.78) per month ARPU. Reliance Jio also relented on the same, which will help raise its ₹120 ($1.67) per month ARPU.
Of course, merely hiking tariffs for two months would be nowhere enough to pull out Vodafone Idea and Airtel out of this colossal pit of quicksand. But still, this raising of tariffs is the first instance of a hike in three years since Reliance Jio’s entry, and a combined effort like this indicates that the unsustainable price war is finally coming to an end.
Some more relief has just come in from the government, as it gave the telecom operators a breather by allowing them to defer payments for spectrum auction purchases by up to two years. The spectrum auction installments were due for 2020-21 and 2021-22, and these can now be deferred to be spread equally over the remaining installments. This, coupled with the tariff increase, should ease cash flow for the companies involved in the short term.
If my understanding is correct, there is still the larger issue of pending dues of ₹9,20,00,00,00,000 / ~$12,820,000,000; which is the white elephant in the room that the government’s relief has not addressed so far. According to a report from LiveMint published after the government’s deferment announcement, the government has told the Parliament that there was no proposal under consideration as of now to either waive off the penalties or the interest or extend the time limit to pay the dues, implying no immediate relief on this end.
Concluding Note
The next few days, weeks and months are going to be crucial for the Indian telecom sector, if the government does not bailout the telcos from their current precarious position. Arguments can be made on whether the government should bail them out at all. The socialist in me recognizes telecom as a structural pillar for India’s infrastructure, and a monopoly in this sector could have far-reaching consequences for India’s competitiveness, especially keeping in mind the impending rollout of 5G in this vast country. On the other hand, the capitalist in me agrees with the fact that the telecoms willingly and consciously entered into license agreements with quid pro quo, and that they should not be saved when it was their duty to have provided for an adverse verdict during more prosperous times.
There ain’t no such thing as a free lunch.
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