The telecom industry in India was in a pretty tight spot due to various challenges led by the Adjusted Gross Revenue (AGR) contention. AGR is a fee-sharing mechanism between the Government and the telecom providers who shifted to ‘revenue-sharing fee’ model in 1999, from the ‘fixed license fee’ model. Telecom providers are supposed to share a percentage of their AGR with the Government. While the government says that AGR includes all revenues from both telecom as well as non-telecom services, the operators contend that it should include only the revenue from core services. While the legal proceedings continue, India’s telecom industry continued facing other challenges such as one of the lowest ARPUs in the world and intense competition.
However, COVID-19 has given the industry a boost, changing the market dynamics and due to the increased interests of global investors. In his report, The New Normal for Telecom Providers in Southeast Asia, Ecosystm Principal Advisor, Shamir Amanullah talks about how the telecom sector has fast evolved as the backbone of business and social interactions as the adoption of applications such as video conferencing and collaborative tools surge. Streaming services such as Netflix have become the go-to source for entertainment, putting the telecom sector in the spotlight today.
India’s monthly active internet user base is estimated to touch 639 million by the end of December, thanks to the COVID-19-induced measures that have forced people to stay indoors. Currently estimated at 574 million, the number of monthly active internet users has grown 24% over that of 2019, indicating an overall penetration of 41% last year. Further, It is estimated that India will have more than 907 million internet users by 2023, accounting for nearly 64% of the population. There are also around 71 million children aged 5-11 years, who go online using devices of family members exhibiting high future digital adoption in the Gen Z.
India’s rural areas are driving the country’s digital revolution, with a 45% growth in internet penetration in 2019 as compared to 11% in urban India. Rural India has an estimated 264 million internet users and is expected to reach 304 million in 2020. Local language content and video drive the internet boom in rural India, with a 250% rise in penetration in the last four years. Mobile is the device of choice for 100% of active users to browse the internet.
Global Interest in the Indian Market
Reliance Jio
Jio Platforms, a subsidiary of Reliance Industries (India’s most valued firm) has raised an estimate of USD 20.2 billion in the past four months from 13 investors by selling about 33% stake in the firm. To put this into context, India’s entire start-up ecosystem raised USD 14.5 billion last year! Besides Google and Facebook, the list of investors includes Qualcomm Investment Ventures, Intel Capital, KKR, TPG, General Atlantic, Silver Lake, L Catterton, Vista Equity Partners, the Abu Dhabi Investment Authority and Saudi Arabia’s Public Investment Fund.
Google’s new investment gives Jio Platforms an equity valuation of USD 58 billion. The investment today from Google is one of the rare instances when it has joined its global rival Facebook in backing a firm. Google and Reliance Jio Platforms will work on a customised version of the Android operating system to develop low-cost, entry-level smartphones to serve the next hundreds of millions of users, according to Mukesh Ambani, Chairman and MD of Reliance Industries. These phones will support Google Play and future wireless standard 5G, he said.
Jio is increasing its focus on the development of areas such as digital services, education, healthcare and entertainment that can support economic growth and social inclusion at a critical time for the economy. At the Reliance Annual General meet, it was announced that Jio has developed a complete 5G solution from scratch that will enable us the launch of a world-class 5G service in India. Jio also revealed that the company is developing Jio TV Plus, Jio Glass, and more.
With an estimated 387 million subscribers as on 31st March 2020 making them the largest in the country, Jio Platforms provides telecom, broadband, and digital content services. Leveraging advanced technologies like Big Data Analytics, AI, IoT, Augmented and Mixed Reality, and Blockchain, this platform is focused on providing affordable internet connectivity with the content to match.
Bharti Airtel
Bharti Telecom, the promoter of Bharti Airtel, has sold a 2.75% stake in the telecom operator for an estimated USD 1.15 billion in May 2020 to a healthy mix of investors – long-only and hedge fund – across Asia, Europe and the US. The promoter entity will use the proceeds of the stake sale to pare debt and become a “debt-free company”.
It was reported that Amazon is in early-stage talks to buy a stake worth USD 2 billion in Bharti Airtel. This translates to a 5% stake based on the current market valuation of the telecom operator. There have also been conversations about the possibility of an agreement on a commercial transaction where Airtel would offer Amazon’s products at cheaper rates. However, Bharti Airtel has clarified that it works with digital and OTT platforms from time-to-time but has no other activity to report.
Airtel has also shared plans to integrate technology and telecom to build a digital platform to take on Jio’s ambitions of evolving into a tech and consumer company. To scale up its digital platforms business, Airtel has been betting on four pillars: data, distribution, payments, and network.
Bharti Airtel also announced it has partnered with Verizon to launch the BlueJeans video-conferencing service in India to serve business customers in the world’s second-largest internet market. They have an estimated 328 million subscribers as on 31st March 2020 making them the 2nd largest in the country.
The Third Player
Vodafone Idea Limited
Vodafone has an estimated 319 million subscribers as on 31st March 2020 making them the 3rd largest telecom provider in the country. There was unvalidated news that Google had shown interest in Vodafone but that does not seem relevant now given their investment in Jio.
The AGR case remains a significant factor for the telecom sector, particularly for Vodafone given their precarious financial position.
However, in recent times, their ARPU is expected to increase by over 40% from USD 1.23 to USD 1.88, through increased pricing. The stock market is responding positively to Vodafone with the stock almost doubling in the last 1 month
