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High prices limit Idea’s 4G growth; Reliance Jio launch could add more pressure

After several quarters of spectacular growth in its wireless data business, Idea Cellular seems to have hit a wall in the January-March quarter, with data growth falling to a disappointing 1.5% from 15-17% seen recently.

In comparison, Bharti Airtel reported a data volume growth of 9.6% during the same three months, indicating that much of the problem remains with the operator rather than the market. Idea did not explain why data growth fell off a cliff during the fourth quarter of its financial year.

DISAPPOINTING 4G USAGE

One of the reasons may be the disappointing take up of Idea’s 4G service compared to that of Airtel.

4G LTE is supposed to lower the price and increase the consumption due to its high efficiency.

However, surprisingly, Idea’s 4G customers are using even less data than its 3G customers.

According to the company, by the end of March, Idea had 6.8 lakh (0.68 mln) 4G data customers, who together used 1.44 bln MBs during the three months. That gives you an average 4G data consumption of just 704 MB per user per month.

For the same three months, Idea’s 23 mln 3G data users consumed 56.2 bln MBs, giving an average consumption of 818 MB per user per month.

These numbers are far below what a 4G network can support.

For example, Reliance Jio, which will soon start its operations, is targeting an average data consumption of 10 GB per month per user.

Part of the reason for the lower quantum could be that many of these users came on the 4G network during the middle of the quarter, unlike 3G users who have been on the network for all 90 days of the quarter and could therefore consume more.

HIGH 4G DATA PRICES

However, another reason would be Idea Cellular’s attempt to focus and maintain per-MB data prices when users move from 2G to 3G and 3G to 4G instead of looking at increasing revenue per user by encouraging him to consume more by lowering the per-MB price.

This is how operators looked at the price vs volume question in the 2G data era, when it made sense to focus on a per-MB  price as the network had very limited capacity and there was no point in trying to drive consumption beyond a point.

However, in the 4G era, companies continue to focus on per MB pricing, missing the opportunity to convert a Rs 100-per-month data user into a Rs 400-per-month user by lowering data prices.

In its press release, the company rather proudly says: “After 6 quarters of steep fall in Voice and Mobile Data Realised Rate, Idea — by clamping down on promotional offers in the fourth quarter for new & existing customers — is pleased to share.. mobile data realised rate (price) improved from 22.3 paise per MB to 22.9 paise quarter on quarter, an increase of 2.9%.”

In other words, despite a single 4G tower being able to deliver 100 times the quantity of data that a 2G tower can deliver and 4-10 times that of 3G, Idea is seeking to charge the same price per MB for consumers using all these technologies.

Company’s CEO Himanshu Kapania said it was ‘testing the waters’ with a price increase to see how the consumers would respond and that the quarter can be seen as a ‘one off’.

“We are not losing sleep over that,” he said.

Kapania was asked why Idea was not cutting its 4G data prices aggressively before the launch of Reliance Jio and creating for itself a strong defensive position in the market.

In reply,  Kapania said cutting prices was not the only way to increase data consumption. He said he has a team that focuses on converting non-data users into data users and that the company nudges such subscribers into consuming data by giving small trial packs.

In addition, he said, consumers have to open their minds to spending on data. While many consumers are happy to spend Rs 150-200 per month on voice, they are more reticent when it comes to spending on data, he said.

“A big drop (in prices) alone is not going to be the driver to attract consumers. These consumers will have to expand their outlook on telecom spending (they) have to start spending on mobile Internet.”

Despite operating profits improving noticeably, Idea’s stock ended the day down 6% due to lackluster results.

coverage-4g

BIG 4G INVESTMENT

Nevertheless, Idea continues to make big investments into the new technology, and has almost caught up with Bharti Airtel in terms of the geographic extent of its 4G network.

Part of the reason behind the investment spree could be that the company feels that without an aggressive 4G roll out, its total data consumption on the network could start declining.

As of the end of March, Idea Cellular had extended its 4G network to 1,327 towns and 2,619 villages. This is comparable to the coverage of the biggest commercial 4G network in India, that of Bharti Airtel.

By the end of March, the Aditya Birla Company had almost caught  up with Bharti Airtel in terms of the total number of 4G towers. Since then, it has probably surpassed the market leader (see the green line in the chart below vs the yellow line. The chart has been made on the assumption that Airtel added about 13,500 3G towers during the quarter.)airtel-idea-4g-3g-number-towers

However, we should add that despite having a comparable, or even higher geographic 4G coverage compared to Bharti Airtel, Idea Cellular is unlikely to have even 50% of the capacity of Airtel’s 4G network due to the small quantity of spectrum used by it.new-tower

While Airtel uses 10+20 MHz  of spectrum in most circles for 4G, Idea uses only 10 MHz, which gives the Airtel network about three times the capacity that Idea’s 4G network will have for the same number of towers.

However, capacity constraints are likely to be a problem only later on when 4G usage becomes widespread, though such worries could limit Idea’s ability to respond to cut-throat 4G offerings from Bharti Airtel and Reliance Jio in the future.

As part of its fervent efforts to remain in contention in the data age, Idea is also investing heavily into fiber optic networks.

It created an extra 10,000 route kilometers of fiber network during the three months — the highest ever addition during any quarter in the company’s history. With this, the company has 1.15 lakh km of fiber.

This comes in the wake of news that Reliance Jio has already crossed the 2.7 lakh km mark and will have 3 lakh km of fiber by March next year.

Bharti Airtel, however, did not seem to be overly worried on the fiber front and added only another 5,000 km to take the total to 2.1 lakh route km.

Idea also saw brisk addition of 4G devices to its network.

In fact, nearly all of the new high-speed data devices added to Idea’s network during the three months supported 4G. With this, the number of subscribers who possessed 4G phones increased from 3.5% at the end of December to 6.2% at the end of March.

4G PRICE CUTS COMING?

Idea’s lack of data growth is likely to lead the operator to cut the prices of its 4G data offerings.

In the Jan-March period, the company was charging 22.9 paise per MB, or about Rs 230 per GB for data, compared to 22.3 paise in the previous three months.

This increase in price was probably what led to the poor growth in data usage during the period.

In contrast, Bharti Airtel, which saw a 10% jump in data usage during the same period, cut its data prices at the same time. Bharti Airtel’s average data price fell 4% during the quarter to about 230 per GB from about Rs 239 per GB in the previous three months.

Both these companies are expected to be forced to cut their prices to at least about Rs 100 per GB after the launch of Reliance Jio’s 4G services in the coming weeks.

The Mukesh Ambani-led company is expected to charge only around Rs 50 per GB on average — or about one-fifth of what Idea and Airtel charge.

Meanwhile, Jio’s network partner and a low-cost data provider Reliance Communications has started upgrading its CDMA data users to 4G, though it has not revealed its new 4G data tariff plans. However, RCom is expected to offer between 30-40 GB for Rs 1,000, which comes to Rs 25 to 33 per GB for high volume users.
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