To state the obvious, market power is good for suppliers and bad for consumers while competition is good for consumers and bad for suppliers.
We are about to see an example of that in the Indian mobile market as Reliance Jio enters the market and causes mobile data plan prices to fall by perhaps 15 percent to 20 percent, according to analysts at Fitch Ratings.
“We expect blended monthly ARPU to fall by five to six percent to around Rs 160 (2015: Rs 170) due to a decline in data tariffs, which will more than offset the rise in data usage,” Fitch Ratings said.
That will be good for Indian consumers who want access to the Internet, but a tougher challenges for Internet service suppliers.
On the other hand, one might argue, connecting up to a billion additional Indians will require such challenges, as disposable income is an issue for many of those potential new customers.
Rarely, if ever, is high adoption of Internet access service paired with high prices. Generally speaking, adoption is highest as retail price drops below three percent of household income, or less than one percent of per capita disposable income, one might argue.
The point is that retail prices necessarily will have to drop, or household incomes rise, to bring retail prices down to the two percent of household income level that generally is associated with high adoption rates.
That will not be welcome by ISPs, but likely is part of the process of making the cost of Internet access something most Indians can, and will, pay for. The point is that all costs in the delivery ecosystem ultimately are paid by consumers.
And if consumers cannot spend very much, all the other parts of the delivery chain will face constraints where it comes to their own prices.
Fitch expects industry revenue to grow by low single digits compared to the 2015 level of nine percent growth, driven solely by data services. That might be a significant prediction. Up to this point, voice revenues have driven perhaps 80 percent of mobile service provider revenues.
A shift to mobile data as the “sole” driver of growth would indeed be significant.
Mobile data will rise to around 25 percent to 27 percent of total revenue in 2016, compared to the 2015 level of 18 percent to 20 percent, on a doubling of data traffic volume.
But the biggest four mobile service providers will experience a drop in earnings before interest, taxes, depreciation and amortization (EBITDA).
EBITDA will narrow by 0.1 to 0.2 percent in 2016, partly a result of higher marketing spend and lower mobile data prices.
On the other hand, 2016 industry capex/revenue could rise to 19 percent to 20 percent, up from the 2015 level of 18 percent, in part because of investments to improve call drop performance.
Fitch Ratings said weaker unprofitable mobile operators including Videocon, Aircel and Tata could exit the industry as they make operating losses and lack key spectrum assets and financial flexibility to invest in data networks and five to six operators emerge from the industry shake-out.
“The top-four–Bharti Airtel, Vodafone India, Idea Cellular and Reliance Communications–are likely to raise revenue market share to 80 percent,” said Fitch Ratings.
Fitch Ratings also lowered telecom sector outlook to “negative” from “stable” for 2016.
The agency expects the 2016 credit profiles of the top-four Indian telcos to come under pressure amid tougher competition, larger capex requirements and debt funded mergers or acquisitions.
