You must have read in the news about the plight of the Vodafone-Idea company. None of us could have ever thought, the companies which were so successful in their fields, would have to face such miserable days. If I had asked you 4 to 5 years back, which mobile telecom operator you use. Your answer could have varied between Airtel, Aircel, Vodafone, Docomo, Idea, Reliance, BSNL, Videocon, and even more. But if ask you the same question today. You would not have any answer other than Airtel, VI, or Jio. The Telecom sector now has a trioka system operating in it. (or Rule of 3). Don’t be very surprised if there is a duopoly in the near future as lenders of VI are considering taking the company to insolvency firms to get back their dues. So why this happened? Why is an industry that used to be so dynamic and competitive, is left only with two major players, and every other company is wiped out? We will find out in this article.
Fall of Telecom Companies – Role of Jio
In 2016, Reliance Industries limited made an ambitious announcement. They were ready to enter the telecom sector and promised to provide lucrative offers to everyone. Unlimited internet, Unlimited messaging, Unlimited voice calls. And all this at the cost of nothing. When Jio was launched, crores of Indians came to get the sim of Jio. Who knew, that this new player in the telecom industry will change the fate of all the existing players. Existing companies were not aware that their future was not left for years now and they were going to end soon. As soon as people started shifting to Jio, it became even difficult for then market leader Airtel to compete with Jio. Companies that had less than 10% share simply could not survive and they simply had to exit.
This is known as a predatory pricing marketing strategy. Basically, if you have huge cash to burn, then burn it to such an extent, keep your cost low, and once the competitors are out of business, you start making your profit. Customers who were now habituated to free internet and free calling, cannot agree to less than that. Therefore, if other companies had to stay in business, they have to agree to the demands of customers. Companies like Airtel and Idea, which once used to charge Rs 200 for 1 GB of data for 1 month of internet, now had to start taking losses to compete with the Jio.
Crisis in Telecom Sector
But wait, if you think Jio was the sole reason for the plight of all the telecom companies. Then, you are wrong. In fact, the major reason for today’s crisis is not Jio but policymakers, the government. Government demands huge regulatory fees from the telecom companies, for their operation and spectrum usage. Government charges up to 15% of the Adjusted Gross Revenue(AGR) as regulatory fees. While, in no major economy, it’s more than 3%. In fact, the majority of the dues of VI are AGR dues that are owed to the government.
So this is the overall scenario of VI. There were already huge costs, telecom companies had to bear by paying regulatory fees to the government. By the entry of Jio, they further had to cut down their price. Since they lost their customers to Jio, which now has the largest market share, they also lost their revenue to pay dues and finding it difficult to honor the debt commitments. Their fate is now left at the mercy of the government. They can only survive if the government decides to bail out the company. As per estimates, VI needs a minimum of Rs 70,000 crores to survive further.