Airtel’s 2G rate hike: It’s less about money and more about signalling

For the 2G voice customer, telecom tariffs have suddenly jumped by nearly two-thirds. Earlier this week, Bharti Airtel finally bit the bullet on tariffs and discontinued the basic ₹49 recharge plan, which was being used by nearly 55 million subscribers across the country.

Now, for a minimum recharge, these subscribers will have to spend ₹79. By taking this bold step for nearly 17% of its total consumer base, Bharti has set a trend which competitors Vodafone Idea and Reliance Jio Infocomm (RJio) will find hard to ignore.

In fact, the revenue implications for Bharti are not really very significant since the hike will lead to what telecom industry calls ‘subscriber churn’ — subscribers will stop using the telco through multiple SIMs or drop off the connectivity map.

Taking on Reliance Jio

So, the move does not have vast immediate revenue implications; its significance lies in what it signals — that revenues need to be grown. Bharti, along with Vodafone Idea, has been vocal about the need to raise the average revenue per user (ARPU) for several quarters now, but both the companies were unable to implement hikes due to RJio’s competitive ferocity.

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Earlier in the week, Bharti first raised tariffs for its 4G post-paid customers and continued to experiment with the hike for 2G customers in select circles before announcing it for all.

Analysts at Kotak Institutional Equities noted that Bharti’s lead on tariff hike shows the telco has confidence in its customer traction, particularly for segments like corporate post-paid and entry-level prepaid.

“We do not see an incremental threat from RJio in these segments; it had rolled out aggressive post-paid plans in September 2020 and longer-tenure plans for JioPhone customers in February 2021. Bharti has been gaining post-paid subscribers consistently over the last few quarters and it has perhaps not lost much ground at the lower-end prepaid segment as well, with a good proportion of that base gradually upgrading to 4G services anyway,” they said.

Future tariff moves

In the post-paid segment, Bharti has raised monthly entry-level tariff for corporate plans from ₹199/₹249 earlier to ₹299. The total post-paid segment (corporate + retail) contributes 5% of Bharti’s mobile subscriber base but accounts for nearly 12% of mobile revenues. And, while the new prepaid plan brings Bharti in line with the RJio smartphone plan, more importantly, it sets the tone for further tariff moves.

Analysts widely expect Vodafone Idea to follow suit and, together with Bharti, it is possible that more future tariff hikes will happen. While announcing the hike, Bharti said new plans offer up to four times more outgoing minutes of usage along with double the data.

Analysts at Citi Research said: “Assuming a 55 million pan-India subscriber base (17% of total subscribers), we estimate this segment contributes 5% to Bharti’s overall mobile revenues. A 60% hike could therefore correspond to a 3% revenue uplift, though this could be partially offset by higher subscriber churn as this segment is naturally far more price-sensitive, which could potentially bring down the benefit to 1.5-2.5%.”

Dues and duopoly

Bharti’s tariff hikes come after months of struggle to ward off the competitive intensity of RJio’s rock-bottom data tariffs (voice services are free) and also in the backdrop of the recent Supreme Court judgment. The SC dismissed the plea of telecom companies to recalculate the AGR (adjusted gross revenue) dues, putting the spotlight back on the very survival of the weakest telco, Vodafone Idea.

This case stems from the formula used by the Department of Telecom (DoT) to charge licence fee from telcos, which calls for a fixed percentage of AGR. Telcos had moved the apex court challenging the DoT’s version of what constitutes AGR retrospectively.

As per the latest information provided by the DoT, Vodafone owes nearly ₹50,400 crore and Bharti nearly ₹26,000 crore in past dues even after payment of the first tranche by both. RJio has already paid ₹195 crore and has no more outstanding.

While Bharti’s balance-sheet is strong enough to bear the AGR shock, Vodafone Idea’s survival remains in question, thus raising concerns of a duopoly. One analyst has now suggested that Vodafone Idea’s losses be nationalised through a government takeover of the telco. How feasible or even desirable this may be, remains to be seen. But suffice it to say that the nearly ₹1.8 lakh-crore net debt on Vodafone Idea’s books does narrow the chances of the company’s survival.

“Any relief in AGR dues would have abated VI’s debt woes and facilitated a much-needed fund-raising. In the absence of Vodafone Idea’s capital raising and tariff hike, we see the market moving towards a duopoly,” analysts at brokerage Edelweiss said.

In such a scenario, the bold tariff moves by Bharti would provide Vodafone Idea the platform to also raise tariffs and thus improve its ARPU.

Market share

As has been happening in recent months, RJio continues to gain subscribers while Vodafone Idea continues to lose them. Per TRAI data for May this year, Bharti and Vodafone Idea together lost nearly 90 lakh subscribers over April. In the same month, RJio gained over 35 lakh subscribers compared to April, further cementing its market leadership position.

So, RJio now has over 36% or more than a third of the total subscribers, followed by Bharti at just below 30% and Vodafone Idea at just about 24% with state-owned BSNL at just under 10%.

It is interesting to see that even in April, RJio had gained a large chunk of subscribers at nearly 47 lakh while Airtel had added a minuscule five lakh and Vodafone Idea continued its losing streak at about 18 lakh. The loss in subscribers or the minimal gain for Bharti could be attributed to the local lockdowns in the wake of second wave of COVID in April and May as also the decline in income levels of subscribers, forcing them to postpone recharges. The continued subscriber acquisition by RJio shows that competitive aggression has only intensified.

In the 12-month period ended May 31, 2021, both Bharti and RJio gained 2% incremental share of subscribers at the cost of Vodafone Idea’s share. In May 2021, Vodafone Idea’s share declined from a little over 27% to just under 24%. This decline in Vodafone Idea’s share has happened despite the overall market adding nearly 3.3 crore subscribers during the year.