Sometimes it is hard for people to agree when you make a crazy sounding prediction, no matter how strong the facts backing you.
During a 3 hour film on TV, I must have seen Airtel 4G challenge ad some 25 times. Then I looked at my Airtel phone – No Internet coverage!
— Rajat Sharma (@SanaSecurities) October 19, 2015
Telecom Stocks could correct by up to 80%.
The nature of technology is such that a minor up-gradation can often make redundant even the most well established businesses. From video/ audio cassettes, to CDs, to USBs, and finally to music apps, all off these were multi million dollar industries which rose and fell in just a little over a decade. Back in the year 2000, who would have thought that MTNL will loose its economic moat as a market leader in the telecom industry?
What’s the problem with Telecom Stocks
[I] Voice Calling Business is Over With internet becoming increasingly accessible, telecom business is undergoing a sea change. So far, telecom companies get a majority of their revenue from voice calling. Take the example of Bharti Airtel – the largest telecom operator in India with a 22.7% market share in the wireless market. Out of its total income from operation, 17.6% comes from data usage.**
** The revenue figure for data usage is based on Bharti Airtel’s annual report for FY 2015
I have not found any study with projections on how fast everyone will shift to whatsapp calling, which is free!! Here is my own guess, based on absolutely no in-depth research, just common sense – 12 – 24 months. Whatsapp calls are free world over and they are crystal clear, with no call drops.
And just in case – be sure that nobody will ever start charging for whatsapp calls. Just in case they do, many others are planning to come up with a very similar app (FOR FREE!).
The writing is on the wall – either find a way to get more revenue from data usage or be beaten out.
[II] Threat of New Entrants in Data Services
If new entrants can provide faster internet, the party for telecom companies could end pretty soon. Based on very credible knowledge I have reason to believe that a complete revamp of how we surf the internet is likely world-over. (This has nothing to do with Arvind Kejriwal’s free internet plans).
[III] Increasing Free Access
Even without the threat of new entrants, the business model itself faces a problem. Most places of work and recreation now provide free WIFI access which is unlikely to change. If telecom companies start charging higher for data, there is a very real possibility that data usage itself could fall significantly. To take an example – on an average day, I spend about 8 hours in office and 10-12 hours at home. Both my office and home have high speed internet by MTNL (I mean… as high as MTNL gets). Out of the balance 4-6 hours, I am either out driving or meeting a client/ friend for a meal (mostly at places with high speed WiFi access). In short, other than when I am driving, I really don’t use my mobile’s data service. Actually, I think even if I did not have data on my phone, I will be fine.
What Could Work for Existing Telecom Companies
[I] Existing Setup
An established business/ industry has a big advantage when it comes to diversifying or expanding into related lines. Not only do they have the requisite infrastructure, they also employ a large population of people. They are taxpayers and create wealth for the nation.
For these reasons they are in a better bargaining position with the government and with any potential competition to not only secure the first mover advantage but often to change the entire landscape to suit their existing setup. In a majority cases, a change in technology is spearheaded by existing players.
[II] Diversifying into New Lines of Business
With 100% market share (for industry as a whole), it is easier to start offering value added services like DTH television. Not only that, it is often easier to do things which under normal circumstances would have been frowned upon, if not declared illegal.
For example – charging differently to different clients, helping some websites to open faster than others for a higher fee from such websites. There is a reason why net neutrality is such a big issue. If Amazons and Flipkarts of the world start paying telecom companies to help load their pages faster than those of a newbie, they sure will be able to sell far more products at the expense of smaller businesses. This will help them create an industry wide monopoly for each other.
Financial performance and Revenue Breakup – (Listed) Telecom Stocks in India
Telemedia: voice and data communications based on ﬁxed line and broadband.
Digital TV: IncludeS digital broadcasting services provided under the Direct-to-home platform.
Airtel Business: End-to-end telecom solutions provided to Indian and global corporations by serving as a single point of contact for all telecommunication needs across data and voice (domestic as well as international long distance), network integration and managed services.
Tower: IncludeS setting up, operating and maintaining wireless communication towers in India.
Data – data/ broadband services.
Value Added Service – revenue from SMS and voice based value added services.
Non Voice – Includes data/ broadband services, tower infrastructure, handsets, optic fiber cables, direct to home services, internet data center, marketing, infrastructure services etc.
Data includes corporate data transmission services data centers, virtual private network, roaming services, television and other network and managed services
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