In Business Model, Internet Access, Mobile, News, Spectrum

It would be hard to underestimate the importance of Reliance Jio’s entry into the Indian mobile market. Aside from instantly moving Reliance Jio from a positive to a negative balance sheet, Jio seems to be the catalyst for a restructuring of the Indian mobile market, shrinking the total number of providers and rearranging market share for the surviving firms.

Also, the new competition will lead to higher capital spending, higher marketing costs, more pressure to add spectrum, a potential reduction in profit levels and certainly a loss of customer base for all other leading service providers.

The resulting higher costs and lower revenue will put some stress on mobile service provider business models. Reliance Jio, for its part, is betting its entire business, and will be highly motivated to succeed, ensuring a fierce competitive assault.

The $14 billion foray into mobile services already is reshaping the rest of the business as well, triggering capital investment boosts, mobile data price cuts, spectrum sales and acquisitions, and a few market exits by smaller players, ultimately.

Bharti Airtel, the biggest telecom firm in India, launched its high-speed 4G services way ahead of R-Jio to take the first-mover advantage, offering 4G at the cost of 3G service.

Of course, those investments mean more balance sheet pressure for Airtel and the other main competitors, all of which must expect to bleed millions of customers, in addition to spending more on their networks, and likely being forced to spend more on marketing as well.

At least one analyst believes the other leading Indian mobile firms could lose 45 million accounts to Reliance Jio, over a two-year period.

“A significant step-up in capex clearly reflects fear of disruption by R-Jio and it would keep the balance sheet stretched. Moreover, as competition is going to accelerate post R-Jio, we believe RoE’s (return on equity) on incremental capex would remain under pressure, hence, delaying payback on investments,” said Emkay Global Financial Services.

“Even as Idea (Idea Cellular) management has maintained it does not expect FY17/18E wireless network capex levels to be materially higher than FY16E guided levels of Rs.60-65 billion (Rs.6,000-6,500 crore), increase in Bharti’s capex spends may force a recalibration of Idea’s capex plans, in our view,” said Kotak Research.



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