Reviewing industry's performance during 2017 and expectations going forward

1. How would you rate the industry’s perform-
ance during 2017? What were the highs and
the lows?
Hemant Joshi
The telecom sector went through many
important changes in 2017. The hypercom-
petitive market with 12 telecom operators
witnessed numerous mergers and acquisi-
tions (M&As), which are expected to have a
deeper impact on the sector. Apart from
consolidation, 2017 can also be referred to
as a year of data revolution in a country that
was predominantly voice-centric, with the
internet subscriber base reaching 420 mil-
lion. Further, the commercial launch of 4G
services across the country and the rising
competition helped in reducing data service
tariffs significantly. Amidst all the positives,
the debt issue (cumulative debt of Rs 4.5
trillion) in the industry and the high spec-
trum prices were major challenges.
Inderpreet Kaur
While 2017 will be viewed as one of the
most challenging years for Indian telecom
operators, it will also be marked as a year of
disruptions. The entry of a new formidable
competitor, Reliance Jio Infocomm
Limited (RJIL), disrupted the market with
rock-bottom pricing for data services and
the introduction of free lifetime voice call-
ing. The year 2017 also proved successful
for mobile broadband services, and 4G
long term evolution (LTE) finally crossed
the 10 per cent penetration mark, five years
after 4G services were launched in 2012.
The M&A announcements in the sec-
tor indicated that the industry will move to
a more sustainable structure, which will
help operators cope better with challenges.
Moreover, 2017 saw new collaborations
between service providers and local handset
vendors. In an industry first, the incum-
bents introduced low-cost voice over LTE-
enabled feature phones to migrate the large
base of existing GSM subscribers to LTE.
Operators also partnered with content
providers to offer new and exclusive con-
tent to their subscribers.
Parul Malhotra
The year 2017 was a watershed year for
the Indian telecom industry; a year marked
by disruptive changes that are set to rede-
fine the Indian telecom growth story. De-
monetisation powered the rise of digital
payments, indicated by an 80-85 per cent
increase in the value of digital transactions
in 2017-18. In 2017, there were close to
$1.5 billion worth of investments in m-
payments. Unified Payments Interface
(UPI)-supported payment platforms are
further pushing India towards a cashless
economy. With over 350 million smart-
phone users and the impetus provided by
the government, we are well on the way to
realising the Digital India dream. India
witnessed a massive upsurge in data con-
sumption, marching past China and the
US to be the leading data consumer
worldwide, averaging 1.5 billion GB per
month. In fact, it is expected that by 2023,
India’s total mobile data traffic per month
will grow eleven times to reach 14 exabyte
from 1.3 exabyte in 2017. A dramatic shift
Change and Consolidation
Analysts expect stability to return after a year of disruptions
During 2017, data consumption increased manyfold with a strategic shift from voice-oriented offerings to data-driven ones. This did not,
however, provide any financial respite to operators, who continued to report sliding revenues and profitability. Going forward, their key pri-
ority will be to devise new revenue models to stay competitive. Moreover, the policy landscape is expected to evolve significantly as the
National Telecom Policy, 2018 gets finalised. Industry analysts comment on the sector’s performance, key challenges and future outlook...
forum
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ANNIVERSARY
Hemant Joshi
TMT Leader,
Deloitte India
Inderpreet Kaur
Analyst,
Ovum
Parul Malhotra
Associate Director,
Telecommunications,
EY
Nitin Soni
Director, Asia-Pacific
Corporate Ratings,
Fitch Ratings

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from the bits to the bytes model, increased
data allowance on floor plans and free dig-
ital content with new subscriptions were
pro-demand, pro-consumer strategies.
Nitin Soni
The industry was characterised by intense
competition in 2017 led by Reliance Jio.
The industry’s revenue and EBITDA
declined for the first time in years, mainly
due to the free voice, text and data offer-
ings started by Reliance Jio during
September 2016-March 2017. The incum-
bents struggled to compete against the
aggressive pricing behaviour of Reliance
Jio and had to cut their tariffs to retain
subscribers, which affected their financial
performance in 2017.
On the positive side, this intense com-
petition resulted in the consolidation of
the industry from 10-12 players to three
telecom companies now, excluding gov-
ernment-owned telcos. We believe that
the industry structure has now corrected,
which will gradually provide pricing po-
wer to the incumbents once Reliance Jio’s
pricing behaviour stabilises.
How has the policy and regulatory landscape
changed over the past one year?
Hemant Joshi
There have been many policy and regula-
tory developments in the past year to keep
the sector competitive. Interconnection
usage charges and quality of service (QoS)
for basic and cellular services remained the
highlights in 2017. Further, amendments
to the spectrum trading guidelines, recom-
mendations on ease of doing business, net
neutrality and internet telephony are soon
likely to see final regulations. Moreover,
the sector is expected to see more regulato-
ry changes under the upcoming National
Telecom Policy, 2018 (NTP, 2018).
Inderpreet Kaur
The regulator and the government have
been considering new policy initiatives to
ease the financial burden on operators.
Policymakers held discussions on reducing
spectrum usage charges, extension of the
deferred payment period for spectrum, re-
ducing the universal service obligation
levy on operators, and revising the goods
and services tax rate for telecom services.
Policymakers have also been reviewing
spectrum caps to further ease sector con-
solidation. The regulator has also recom-
mended changing the current limit that
allows operators to hold up to 50 per cent
of the total available spectrum within a
band in a zone. The Telecom Regulatory
Authority of India (TRAI) also favoured
increasing the limit for overall holdings
across all bands to 35 per cent from the
current 25 per cent. For the sub-1 GHz
bands (including 700 MHz, 800 MHz, 900
MHz), TRAI suggested a combined spec-
trum holding limit of 50 per cent.
Nitin Soni
The telecom industry benefited from a
benign and favourable regulatory environ-
ment in 2017. The Department of Tele-
communications’ decision to allow opera-
tors to pay spectrum liabilities over 16 yea-
rs, rather than 10 years, is a positive devel-
opment. The longer time frame allowed
for the payment of spectrum liability will
provide a cushion to telcos’ declining cash
flows. The regulator’s decision to relax
spectrum caps will further add to the con-
solidation. The increase in spectrum limits
will provide a relief to Vodafone-Idea
Cellular and Reliance Jio as they earlier
had the problem of returning some excess
spectrum in some circles to the govern-
ment following their spectrum acquisi-
tions. However, TRAI’s decision to reduce
interconnection charges by 57 per cent on
voice as well as the recent deduction of
international interconnection charges
proved to be negative for the incumbents
and positive for Reliance Jio. However, the
asymmetry of traffic between Jio and the
incumbents will gradually narrow as Jio
gains more subscribers.
How has consolidation changed the dynam-
ics of the telecom sector? What impact has
it had on stakeholders in the industry?
Hemant Joshi
The sector is witnessing major M&A activ-
ity and is expected to consolidate into a
market with three to four major players.
Consolidation has helped some major oper-
ators gain market share and increase their
spectrum holdings in a short span of time.
Further, consolidation will eliminate weak-
er and uninterested players and only serious
players who want to stay in the business for
the long term will remain. From an end-
user perspective, consolidation has helped
in reducing tariffs as well as improving ser-
vice quality. However, the QoS needs to be
aligned with global standards.
Inderpreet Kaur
Owing to consolidation, bigger changes
are expected in the tower space. Telcos are
disposing of non-strategic assets amid a
changing industry. In March 2017, Bharti
Airtel sold a 10.3 per cent stake in Bharti
Infratel to raise Rs 62 billion ($958 mil-
lion) to pare debt and combat competition
from RJIL. More recently, Bharti disposed
of an additional 3.65 per cent stake in the
tower business for about Rs 25.7 billion
($397.5 million) to build its core business,
mobile services. As the industry prepares
itself for consolidation, most operators
have started separating their core and non-
core businesses. For Vodafone and Idea,
the decision to sell off their respective to-
wer business shares is the first step towar-
ds deleveraging their balance sheets before
the two entities begin their merger. Like
Bharti and Reliance Communications, the
decision to dispose of their tower assets
will help Vodafone and Idea raise addi-
tional funds for expanding their mobile
broadband networks and improving their
“The sector is witnessing major
M&A activity and is expected to
consolidate into a market with
three to four major players.”
Hemant Joshi
“While 2017 will be viewed as
a challenging year for opera-
tors, it will also be marked as
a year of disruptions.”
Inderpreet Kaur

3. forum
QoS for consumers.
Parul Malhotra
Operator consolidation in the sector was
preordained; however, the pace at which
things unfolded is fairly interesting. The
upside of consolidation is price discipline,
market share gain for the incumbents, a
focus on customer and network experi-
ence, and a path to recovery in the latter
part of 2018/early 2019. Operators are
transitioning to digital service providers
through content partnerships and alli-
ances with handset makers. Equipment
vendors have been under pressure with
the decline in telco spending on networks.
A revaluation of contracts is expected as
telcos look to unlock merger synergies.
However, the onward thrust on deploy-
ment of networks is set to drive long-term
growth for the players. The shift towards
data is causing operators to drive asset
sales. The exit of marginal wireless opera-
tors is impacting peripheral tower players
and forcing them to relook at their own
business models. There is likely to be the
emergence of three to four dominant
pure-play infrastructure players. All this
will pave the way for a robust infrastruc-
ture market as the cornerstone of the sec-
tor’s digital endeavours.
Nitin Soni
Industry consolidation has corrected the
industry structure to three large telcos – Jio,
Bharti Airtel and Vodafone-Idea - with bet-
ter balance sheets and the possibility of a
gradual improvement in pricing power.
Spectrum assets have also consolidated am-
ong these operators, supporting network
expansion and decongestion of 4G net-
works. Smaller and weaker telcos exited the
industry following aggressive competition
from Reliance Jio in 2017. We expect that
consolidation will improve the internet
experience and the ability to invest in 5G
networks, and provide pricing stability to
telcos in the medium to long terms. Most
Asia-Pacific telco markets do not have more
than three to four large telcos.
What are the key challenges facing opera-
tors? What should be the key operator strate-
gies/focus areas in the coming year?
Hemant Joshi
The Digital India initiative to bring every-
one into the digital ecosystem has provided
numerous opportunities to operators. Fur-
ther, the ease of doing business has impro-
ved in the past few years. However, opera-
tors still face many operational challenges:
• Reduced revenues: Operator revenues
are falling due to declining tariffs and
diminishing demand for voice services.
Operators are providing bundled ser-
vices to sustain profitability.
• High capex requirements: Capex requ-
irements are high due to the growing
demand for new technologies, infra-
structure development for better QoS,
high-priced spectrum, etc.
• High taxation: The cumulative tax of
around 33 per cent for Indian operators,
compared to those in markets like Chi-
na (22 per cent), the European Union
(20 per cent) and the US (17 per cent),
puts additional pressure on their bal-
ance sheets.
• OTT: Over-the-top (OTT) services are
gaining popularity and are using opera-
tors’ channels to provide voice and mes-
saging services without any revenue
sharing options. However, operators are
constantly improving their business
models to withstand the disruption
brought in by OTT services and new
entrants. Some major telcos are expect-
ed to start high-speed broadband ser-
vices via fibre-to-the-premises, which
could be a game changer in the telecom
market. Further, the key performance
indicators of telcos are shifting from
QoS to quality of experience.
Inderpreet Kaur
In the short term, telcos will try to gain
subscribers from operators exiting the
market to maintain their lead in subscriber
market share. This means industry will
continue to struggle to establish any pric-
ing discipline in the short to mid-term.
However, offering quality services to sub-
scribers amid the ongoing consolidation
will remain a challenge. Maintaining good
service quality with the increasing data lo-
ad will require operators to improve capa-
city on access and backhaul networks and,
therefore, demand higher capital commit-
ments. Subscriber churn will be a bigger
concern in the new age of data services as
subscribers will not be tied to phone num-
bers as they were in the case of traditional
voice services. Operators will have to em-
phasise on user experience to retain sub-
scribers on their data networks.
Parul Malhotra
Debt, estimated at Rs 4.6 trillion, contin-
ues to be a major deterrent to the indus-
try’s sustainability. Capital intensity is like-
ly to remain elevated from a capacity and
coverage standpoint. The return on capital
employed (RoCE) profile for most opera-
tors is below the cost of capital. The finan-
cial state of the sector is under distress.
We could call 2017 a foundation year
that will pave the way for onward growth.
To emerge from the grim situation, opera-
tors will have to take a strategic call on their
wireless businesses and deleverage non-
core assets to repair their balance sheets. A
focus on innovative business models and an
enhanced customer experience will be cen-
tral to operators’ strategies. Building a dig-
ital portfolio through strategic partnerships
will witness increased play. Handset-telco
bundling is likely to be on the rise.
Nitin Soni
The key challenges faced by the industry
are declining blended tariffs with limited
pricing power, a high subscriber churn
rate and “no growth” capex. Industry rev-
enue and EBITDA declined in 2017 on
88 tele.net | January 2018
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ANNIVERSARY
“2017 was a year marked by
disruptive changes that are set
to redefine the Indian telecom
growth story.”
Parul Malhotra
“The revival of pricing power,
led by a change in pricing be-
haviour by Reliance Jio, will be
a key driver for telcos in 2018.”
Nitin Soni

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ANNIVERSARY
lower tariffs, despite significant growth in
data usage, as blended tariffs declined sig-
nificantly. Free cash flow generation
declined for most incumbents as higher
data usage required larger capex invest-
ments to decongest networks. Therefore,
a large part of the capex proved to be “no
growth” capex as telcos invested a signifi-
cant part of their capex to just maintain
their EBITDA.
The revival of pricing power, led by a
change in pricing behaviour by Reliance
Jio, will be a key driver for telcos in 2018.
Pricing discipline and a focus on prof-
itability need to be a priority for the sector
in order to provide sustainable industry
growth. Telcos will need to continuously
invest more to expand their 4G networks
in Tier II and III cities and rural areas to
expand the coverage and capacity of their
data networks.
What are your expectations from 2018? What
will be the key trends driving the growth of
the telecom sector during the year?
Hemant Joshi
During 2018, the NTP, 2018 is expected
to address various regulatory issues faced
by the sector, such as simplification of
telecom taxes, licence reforms, ease of
doing business and right of way. The new
policy will also focus on granting internet
access to every citizen, which will help the
government’s Digital India initiative.
The major trends in the sector are
likely to be:
• Consolidation: Consolidation in the sec-
tor as well as in allied sectors will con-
tinue in 2018. Players with a strong fi-
nancial background are expected to
dominate while weaker players could
merge with others as an exit strategy.
The new policy on spectrum caps could
help in consolidation.
• New business models: Telcos will move
to innovative business models to counter
declining revenues. Converged services
with voice telephony, wired and wireless
broadband, and television services along
with relevant content will help in im-
proving revenues and profitability.
• 5G and emerging technologies: The ris-
ing demand for data and innovative ser-
vices will see more investment in 5G
research and development in the coun-
try. Emerging technologies such as inter-
net of things (IoT), machine-to-machine
communications, artificial intelligence
(AI), drones and robots will create more
demand in the market.
• Spectrum auction: The government is
expected to hold another spectrum auc-
tion to make the ecosystem ready for
upcoming technologies. The highly effi-
cient 700 MHz band spectrum, which
remained unsold in the last auction, is
expected to be in focus.
Inderpreet Kaur
The short-term approach of competing on
price alone will not be an effective strate-
gy, and operators will need to more than
just sell subscribers access, which means
telcos will have to evolve from the dumb
pipe route. Digital services and solutions
will become the top priority for telcos. In-
cumbents are already taking steps toward
becoming digital service providers. Market
leader Bharti Airtel has announced multi-
ple initiatives to build a set of digital ser-
vices for its future customers. Under
Project Next, Bharti has allocated Rs 20
billion ($310 million) to improve the cus-
tomer experience by digitising 2,500 retail
stores and developing a suite of digital ser-
vices over the next three years. Bharti’s
recent partnership with Amdocs to focus
on machine learning and AI technologies
is aimed at transforming the customer
experience across multiple touch points.
Further, previously known price leaders
will have to think about establishing a
good cost structure model that is sustain-
able. To grow in the game, operators will
have to add rich content offerings to the
strategy framework. Operator strategies
will have to move beyond just focusing on
traffic numbers and will have to look at
designing a broader approach that will
encourage loyalty and a shift towards post-
paid subscriptions.
Parul Malhotra
After weathering the year gone by, this
year is likely to ring in stability for the sec-
tor. Pricing power is expected to return to
operators. Revenue and profitability are
expected to hit the growth trajectory in
the backdrop of data consumption and
innovative asset-light business models.
Feature-rich phones will continue to be
displaced by smartphones. Whatever can
be connected will be connected – IoT will
be on the rise. Alliances and partnership
will be high on operators’ agendas. The
sector, which is the spine of the govern-
ment’s Digital India vision, is looking for-
ward to a promising NTP, 2018.
Nitin Soni
We revised the outlook of the telecom sec-
tor to stable in 2018 from negative in 2017
as we expect competition to ease with th-
ree large telcos emerging out of the indus-
try shakeout. Their combined revenue
market share will increase to around 90
per cent in 2018 (2017: 80 per cent).
We believe that Reliance Jio will grad-
ually change its pricing approach to mon-
etise its large investment ($31 billion-$34
billion) from hunting for a larger sub-
scriber base. We expect that mid-2018
could be an inflexion point for the indus-
try, when Reliance Jio could gradually
start increasing tariffs. The incumbents
would definitely welcome such tariff
increases and it will help their financial
performance for 2018-19.
Data usage growth will continue in
2018. Data usage per subscriber per mon-
th increased five-fold for market leader
Bharti Airtel to 5 GB in the quarter end-
ing December 2017. A small growth in
industry blended tariffs from a low base
along with growing data usage will be a
positive, leading to revenue and EBITDA
growth for the industry. In addition, grow-
ing data usage will increasingly cannibalise
voice and text usage, leading to a decline in
traditionally profitable services.
In terms of spectrum auctions, we do
not expect any major auctions to take place
in 2018. The government plans to auction
the 700 MHz spectrum, which may find
limited participants given that 700 MHz is
expensive and the ecosystem has not yet
fully developed. However, the regulator
may take additional positive steps for the
industry in the form of lower spectrum
usage charges and low revenue sharing
with the government. ▲