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Reliance Industries: The
second coming
RIL: Secures pan-India spectrum for LTE
In June 2010, RIL secured 2x20Mhz unpaired spectrum in the 2.3Ghz band at Rs120bn.
It has announced its intention to rollout LTE (FDD version). At this juncture, RIL has not
made any announcements about its key equipment vendors or its strategy to source
towers for the network rollout. We expect a service launch over the next 18 months.
Our assumptions for RIL’s telecom foray:
RIL would also need to provide voice services to build a viable business.
LTE is both a boon (for data) and bane (for voice) – standards for provisioning
voice over LTE have not crystallised.
Headroom for disruptive pricing, especially on voice, is limited. However, we
believe RIL would be impacted by data tariffs. RIL would be better placed than
the incumbents to offer higher data speeds, which it is likely to leverage to
drive down data pricing.
RIL could acquire/merge with another player to gain access to GSM spectrum.
The proposed M&A guidelines are favourable for such an outcome
We expect RIL to target and enter both voice and data markets
We believe it would be difficult to build a viable business only focussed on the data
market. Assuming the Indian data market scales up to 20% of the total telecom
revenues by FY16E, an optimistic estimate of the market size would be around Rs350-
400bn. Assuming RIL corners a 20% marketshare (an optimistic estimate), its top line
would be around Rs75-80bn. As a comparison, Idea’s current top line is around
Rs200bn. Given that RIL plans to invest around $5bn in telecom, a $1.6bn top line is
likely to fall short of its ambitions.
RIL’s ability to disrupt pricing, especially voice, would be limited
Our discussions with clients indicate that there is an expectation that RIL will focus on
data and offer cheap (or free) voice calls on VoIP technology as a loss leader strategy to
build a subscriber base. In addition, this would significantly impact the voice revenues
of the incumbents.
While RIL can offer on-net calls at any rate, off-net calls will need to be priced at a
minimum of the termination charge. As for VoIP calls, we note that they are not
'costless’. Hence we would surprised if RIL elects to provide free voice calls and use it
as a loss leader strategy for an extended period.
Incumbents’ strategies and tactics have evolved since RIL’s last foray
During its first foray into telecom (as RCOM in 2003), RIL entered the market with
disruptive voice pricing, which quickly helped build operating scale and volume of
minutes. Ironically, incumbents such as Bharti recognised the value of this 'minutes
factory' approach rather than their ARPU-based business model and re-jigged their
operating strategy and business processes.
We believe RIL's ability to succeed with a similar approach this time is limited due to
two factors: a) the headroom to cut prices is low as incumbents have significant scale
and low-cost structure and b) incumbents have demonstrated a willingness to sacrifice
margins to remain competitive on tariffs. In summary, we believe that RIL's entry could
trigger a round of competitive tariff cuts, but these are unlikely to be sustained in the
long run.
LTE – challenges abound
Deutsche Bank analyst Brian Modoff highlighted in a recent note (Signals to Noise –
LTE challenges, 2 October 2011) the key challenges confronting carriers building out a
LTE network. This includes: a) support for voice and legacy services and b) band
support in handset radios.
He notes that carriers are still struggling to find a way to support basis services
such as voice and SMS. Voice Over LTE (VoLTE) has emerged as a preferred
solution, but there are no clear-cut standards for designing VoLTE systems.
Band support: The proliferation of bands proposed for LTE is a major challenge.
Brian believes that there are around 44 different bands for LTE around the
world, which is too broad a range to be addressed in a single chip. He sees
radios in cell phones as major technical challenge for LTE. Put simply, RIL is
likely to be hamstrung with a poor device ecosystem, and it would be a
challenge to build a low-cost LTE ‘phone’.
Nevertheless, on a long-term basis RIL is well placed on its technology choice
Unlike the last time around when RIL was on a CDMA platform that had a truncated
upgrade path, its current choice of LTE is the next upgrade for WCDMA (i.e. 3G)
technologies being used by its key competitors. As the telecom market in India evolves
to an increasing share of data, RIL would be better placed than competitors on the
technology front.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Industries: The
second coming
RIL: Secures pan-India spectrum for LTE
In June 2010, RIL secured 2x20Mhz unpaired spectrum in the 2.3Ghz band at Rs120bn.
It has announced its intention to rollout LTE (FDD version). At this juncture, RIL has not
made any announcements about its key equipment vendors or its strategy to source
towers for the network rollout. We expect a service launch over the next 18 months.
Our assumptions for RIL’s telecom foray:
RIL would also need to provide voice services to build a viable business.
LTE is both a boon (for data) and bane (for voice) – standards for provisioning
voice over LTE have not crystallised.
Headroom for disruptive pricing, especially on voice, is limited. However, we
believe RIL would be impacted by data tariffs. RIL would be better placed than
the incumbents to offer higher data speeds, which it is likely to leverage to
drive down data pricing.
RIL could acquire/merge with another player to gain access to GSM spectrum.
The proposed M&A guidelines are favourable for such an outcome
We expect RIL to target and enter both voice and data markets
We believe it would be difficult to build a viable business only focussed on the data
market. Assuming the Indian data market scales up to 20% of the total telecom
revenues by FY16E, an optimistic estimate of the market size would be around Rs350-
400bn. Assuming RIL corners a 20% marketshare (an optimistic estimate), its top line
would be around Rs75-80bn. As a comparison, Idea’s current top line is around
Rs200bn. Given that RIL plans to invest around $5bn in telecom, a $1.6bn top line is
likely to fall short of its ambitions.
RIL’s ability to disrupt pricing, especially voice, would be limited
Our discussions with clients indicate that there is an expectation that RIL will focus on
data and offer cheap (or free) voice calls on VoIP technology as a loss leader strategy to
build a subscriber base. In addition, this would significantly impact the voice revenues
of the incumbents.
While RIL can offer on-net calls at any rate, off-net calls will need to be priced at a
minimum of the termination charge. As for VoIP calls, we note that they are not
'costless’. Hence we would surprised if RIL elects to provide free voice calls and use it
as a loss leader strategy for an extended period.
Incumbents’ strategies and tactics have evolved since RIL’s last foray
During its first foray into telecom (as RCOM in 2003), RIL entered the market with
disruptive voice pricing, which quickly helped build operating scale and volume of
minutes. Ironically, incumbents such as Bharti recognised the value of this 'minutes
factory' approach rather than their ARPU-based business model and re-jigged their
operating strategy and business processes.
We believe RIL's ability to succeed with a similar approach this time is limited due to
two factors: a) the headroom to cut prices is low as incumbents have significant scale
and low-cost structure and b) incumbents have demonstrated a willingness to sacrifice
margins to remain competitive on tariffs. In summary, we believe that RIL's entry could
trigger a round of competitive tariff cuts, but these are unlikely to be sustained in the
long run.
LTE – challenges abound
Deutsche Bank analyst Brian Modoff highlighted in a recent note (Signals to Noise –
LTE challenges, 2 October 2011) the key challenges confronting carriers building out a
LTE network. This includes: a) support for voice and legacy services and b) band
support in handset radios.
He notes that carriers are still struggling to find a way to support basis services
such as voice and SMS. Voice Over LTE (VoLTE) has emerged as a preferred
solution, but there are no clear-cut standards for designing VoLTE systems.
Band support: The proliferation of bands proposed for LTE is a major challenge.
Brian believes that there are around 44 different bands for LTE around the
world, which is too broad a range to be addressed in a single chip. He sees
radios in cell phones as major technical challenge for LTE. Put simply, RIL is
likely to be hamstrung with a poor device ecosystem, and it would be a
challenge to build a low-cost LTE ‘phone’.
Nevertheless, on a long-term basis RIL is well placed on its technology choice
Unlike the last time around when RIL was on a CDMA platform that had a truncated
upgrade path, its current choice of LTE is the next upgrade for WCDMA (i.e. 3G)
technologies being used by its key competitors. As the telecom market in India evolves
to an increasing share of data, RIL would be better placed than competitors on the
technology front.
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