Overview of Telecommunication Sector in India

What is it?
According to Investopedia: “The telecommunication sector is made up of companies that make communication possible on a global scale, whether it is through the phone or the Internet, through airwaves or cables, through wires or wireless.”
The industry is divided into following subcategories:

1. Infrastructure
2. Equipment
3. Mobile Virtual Network Operators (MNVO)
4. White Space Spectrum
5. 5G
6. Telephone Service Providers
7. Broadband

Amid the above industries a term which needs some explanation is the white space spectrum. As per the present system, what various television network do is leave space in between various frequencies. Just like there is space between frequency of FM channels. This space is known as the White Space Spectrum. This spectrum in case of television network is similar to those used by 4G networks and can be used for widespread broadband internet.

Market Scenario:
According to Maximize Market Research Pvt Ltd, Global telecommunication industry was valued at US$2.4 Trillion in 2019. In India the size of the telecom industry is approximately USD 8.45 Billion as per report released by TRAI. A few facts about the telecom industry in India:
It is the second largest industry in terms of subscribers with a total of 1,195.24 Million Subscribers as on 30th September 2019. This figure grew by 0.73% in comparison to the previous quarters. Teledensity i.e. no of telecom connection per 100 individuals stood at 90.52 nationwide, at 160.63 for Urban and 57.79 for rural. The high density in Urban landscape shows the recent trend of having multiple connections by a single user.

As we can see from the above graph that almost 89% of the market share is owned by Private players and PSU enjoys only 11% share that too diminishing YOY. The fig stands at mere 7.88% if we talk about Revenue Market Share.

Private Player shebang:

In terms of RMS, the market leader is Jio with a share of 32%, followed by Airtel at 30 and Voda-Idea at 28% market share if we look at Q1 of FY20. Jio as we can see led the sector by being the largest Telco player in terms of revenue. The penetrating pricing done by Jio proved to be very fruitful for them and disrupted the whole sector.

But the question that troubled the industry stewards was how Jio was profitable despite such low pricing. Was it so efficient operationally that it could undercut other competitors by hefty margins?

The answer lied in the very basic fundamental analysis in Financial Accounting that was the common size statement analysis of all these players.

The above fig compares the various line expense items of Income Statement for the Year ended 2019, for all the three players. As we can see from the above and from the below table as well that Jio was charging very low depreciation in comparison to other players. Another insight was the lower financing cost for Jio and very high Network Operating expense for Voda Idea.

Coming back to the main argument of charging very low depreciation. A US based agency called Bernstein found that if Jio used the straight-line depreciation method as used by other players instead of the present “Units Produced Method” amid other normalization such as brokerage. They will be at a loss of nearly, 15,000 Crore. This embezzlement shows company intention to state that it is profitable to fool others and not attract anti-competitive agency due to predatory pricing.

Further, using the above financials and a simple click of Goal Seek button, we found out the increase in revenue that would be needed for the other two players to be operationally profitable. The percentage increase stood at 49.695% for Voda-Idea and 4.49% for Airtel. But the industry decided to increase the price by nearly 40%. Assuming perfectly inelastic demand, we could say that the situation is win-win for Airtel but for Voda-Idea they need to increase their operational efficiency to remain relevant.

Now adding in factors like the Fine Imposed by Department of Telecom and the price sensitivity of the Indian landscape the picture seems to be grave for Voda-Idea. Keep in mind, we have not yet taken into consideration the non-operating expenses. But there might still be a little scope, maybe the consumer has become so used to being online that they are willing to spend almost twice to keep on consuming data. If past is any thing to bank upon, when minimum recharge commitment was introduced there was a dip in the number of subscribers.

White Space Spectrum: An opportunity for Rural Connectivity
According to a study by IIT Bombay, in India 12 out of 15 i.e. nearly 80% of the channels are available as Television White Space. A lot of players such as Microsoft, Google BHEL and prestigious institutes such as IIT Delhi, Hyderabad & Bangalore, were conducting research in this field. But government in the year 2017 rejected Microsoft’s license and subsequently banned players entering this field. The main advantage of having a white space spectrum based broadband connection is its low cost, low infrastructure requirement in comparison to let’s say optic fibre while providing the same level of service.

Trends in Telecom Industry

1. OTT i.e. Over-the-top services such as video streaming is one of the disruptors targeting the telecom industry. All the major players such as Jio and Airtel with an exception of Vodafone have entered this domain. Airtel has Xtream Box and Jio has Jio TV. All the other DTH service provider have also launched apps of their own to provide OTT services to the customer base.
2. 5G: 5G technology is the next generation wireless communication which are based out on technology known by the name Millimetre waves. These are the waves which have very high frequency from upwards 30 Ghz to 300 Ghz. As we increase the frequency our wavelength decreases. As the wavelength decreases the ability of a wave to pass through an object decreases. For example: A ray of light cannot pass a solid object whereas radio frequency can go through the walls. So, with an increased speed and efficiency (i.e. the frequency) there is a need to be in the line of sight for having a stable 5G connection. This implies a need to have small 5G network emitters all around a city to have a stable connection while one is traveling. This process can be extremely expensive and time taking. If we talk about in Indian context, it is very a little farfetched to be implemented in say next year or so. What’s the whole fiasco that we here about 5G is using LTE tech i.e. the core of 4G for 5G. Which although a little better is not what actually 5G is and is not capable to provide the benefit that the core 5G tech will give.
   
3. Security & IOT: As the whole system gets more interconnected and everything comes on the grid especially after the advent of IOT devices. A famous example which is often quoted to show how vulnerable we are is that of Casino. A London based casino was hacked via a thermometer IOT device used to maintain the fish tank in the casino. The hacker was able to get the whole database of the casino with the help of that small IOT device.

Conclusion

Telecommunication Industry is going through a lot the consolidation, the whole spectrum sales fiasco and the 100-pound gorilla in the room Jio slowly disrupting the whole industry. A lot is yet to come, we have entered a decade where hopefully India will be able to witness the true sense of what 5G is and get a glimpse of connected world we call future.

References: TRAI, Crisil, BCG Insights, Invest India, Airtel Annual Report, Jio Annual Report and Voda-Idea Annual Report, Government of Singapore.