Airtel manages to hold on in the face of Jio's onslaught

Airtel manages to hold on in the face of Jio's onslaught

It is important for incumbents to focus on implementing the right subscriber-retention strategies instead of matching Jio’s price points.

Rishi Tejpal    30 Jul 2018y Images

The first-term exams are over and results are out. 

Airtel and Jio announced their first-quarter results for FY19 last week. Broadly, trends seen in the previous quarter continue. Minor improvements in Airtel’s metrics offer a ray of hope, as any positive in these tough times is worth a mention.

The dynamics of the Indian telecom industry have drastically changed over the past two years. So, it has become irrelevant to compare the telcos’ year-on-year (y-o-y) performance. What is more appropriate is monitoring quarter-on-quarter (q-o-q) metrics.

Hence, while there are discussions about how Airtel’s revenues and profits fell drastically compared with the same quarter last year, it would be prudent to analyse how the quarterly metrics have evolved.

Industry stabilisation still a far cry
The market consolidation triggered by Jio in September 2016 has reduced the Indian telecom market to a 3+1 (three private and one public-sector player) structure. In such a scenario, market stabilisation typically happens when the three top players have nearly equal market share. While Airtel is already there, and the Vodafone-Idea combine is well above this threshold, newcomer Jio still needs nearly 190 million subscribers to reach there.

But the incumbents need to closely monitor their churn and focus on retention initiatives to maintain market share.In a market where one player is going all-out to acquire subscribers and the rest are struggling to retain market share, monitoring churn becomes critically important. While Airtel’s churn is showing a declining trend, the gap is still huge when compared with Jio. In the first quarter of FY19, Airtel churned nearly seven times more subscribers as against Jio. Thus, it becomes even more important for Airtel to focus on implementing the right retention strategies instead of matching Jio's price points.

What does that mean for the industry?
The short answer is, more price wars.

The disruption triggered by Jio is expected to continue till it reaches a subscriber market share equal to the other two leading players. Though there is no regulatory obligation for it to stop there, industry expectation is that an equal market share among the three players will be the point when the market can start seeing some correction in average revenue per user (ARPU).

Gopal Vittal, Airtel India’s CEO, expressed similar views during its Q1 FY19 earnings call. “India is rapidly moving towards more or less a three-player equal-sized market. Pricing should start lifting soon,” Vittal said.

Given Jio’s rate of subscriber acquisition over the past few quarters, it is likely to take another six-eight quarters before it evens scores with the incumbents.

In addition to its aggressive marketing strategy and competitive pricing, Jio is now targeting the mass segment of customers who are not digitally connected — the feature-phone users. With JioPhone, it is targeting this segment with attractive device prices and bundled-service plans. Jio recently announced it has more than 25 million JioPhone subscribers and targets more than 100 million in the shortest possible time. It is also gunning for the more premium post-paid users with an attractive post-paid plan, which has half the minimum tariff offered by incumbents.

While these subscribers might not be high-ARPU subscribers, the substantial scale makes this segment quite attractive. This will not only help Jio increase its subscriber market share, but also boost its data consumption by onboarding many first-time Internet users.

Airtel on the other hand seems to be passive towards this segment of users. Its view is that the feature-phone market is limited and the smartphone market is expected to grow faster.

During its earning’s call, Vittal said, “The new feature phone (JioPhone) is largely taking some share away from existing feature-phone users and less a downgrade from smartphones. For us the single-biggest priority is to get the right quality of customers. Our focus is really to ring-fence and hold on to our high-ARPU customers and getting on to the primary SIM slot of customers.”

Only time will tell whose strategy is right, but it seems Jio has a well-planned subscriber-acquisition strategy.

What do the first-quarter results say?
Compared with the previous quarter, Airtel did show some improvement on consolidated profit after tax (PAT) and marginal improvement in revenue in the mobile-business segment in India.

Meanwhile, Jio continued to climb up both on revenue and net profitability.

Airtel’s India operations continued to remain under pressure. It managed to increase its consolidated net profit by 17.4% to INR97.3 crore, compared with INR 82.9 crore in the previous quarter. This is close to Jio’s 19.9% increase in net profit, up from INR510 crore to INR612 crore during the same period.

On a y-o-y basis, Airtel’s net profit fell 73.5%. But as we noted before, what is more important in these times is how you fare at the q-o-q level. So, the improvement in this quarter is a positive for Airtel.

While on a consolidated basis, Airtel’s Africa operations supported its numbers, the situation at home is still a cause for worry.

Data traffic, ARPU move in opposite direction
Data traffic continues to increase across networks. A comparison of the quarterly data traffic of Airtel and Jio indicates a huge gap.

On average, quarterly data traffic on Jio’s network is more than three times that on Airtel’s networks, thanks majorly to Jio's large digital-content spread.

Even the monthly data usage per subscriber on Jio’s network is higher compared with Airtel’s network (10.6 GB on Jio against 7.68 GB on Airtel).Over the past one year, quarterly data traffic on Airtel’s network has grown 201%, while its ARPU has declined by nearly 32%. This contradictory trend is expected to continue given exponential increase in data usage and aggressive price wars.

Increasing data traffic puts more load on the networks and necessitates a lot of capex to meet the capacity requirements. Maintaining those capex levels in a market with continuously declining ARPU becomes unsustainable. This has been one of the key reasons for smaller players exiting the market.

How long can telcos bear the heat of constantly declining ARPUs and exponentially increasing capex?
There is no quantifiable answer in terms of timelines, but the industry’s expectation is that the situation should stabilise in the near future.

“We are in an unsustainable level of pricing today. The pricing should start lifting in the next perhaps six months. But again, this is a function of competitive dynamics,” Vittal said during the earnings call.

Analysts from institutional research houses, however, have a somewhat conservative view on this.

According to Motilal Oswal analysts, as the flux is getting settled and the current ARPU is unsustainable, ARPU accretion should set in over the next few quarters.

Roadmap: retention will be key

§  The war for subscriber market share will continue. Incumbents need to focus on implementing customer-retention strategies to protect their turf.

§  Building a robust content strategy will be vital.

§  Instead of matching the competitor’s pricing, the effort should be to optimise the underlying cost structure for arriving at competitive price points. The idea ought to be to offer more value for the price customers pay instead of bringing down the prices.

§  Leverage data analytics, artificial intelligence, and machine learning for customer micro-segmentation. Based on these micro-segments, implement segment-specific retention strategies.

§  Focus on a strategy of ‘whom to reach’, ‘when to reach’, and ‘why reach’ to offer contextual experience to customers.

The bottom line
While Airtel’s perseverance in the face of Jio is seen in the current-quarter and previous-quarter results, it still needs to make some radical changes to catalyse that push. Some minor improvements this quarter are encouraging signs, but they won’t be enough. Right from leadership to network evolution to digital-services plan, everything needs a strategic overhaul.