The low-cost data revolution started by Reliance Industries through its subsidiary Reliance Jio Infocomm saw a surge in data consumption on mobiles. This saw a jump in data usage by Indians and significant smartphone adoption across demographics. During the pandemic, with people working from home and some even using mobiles as hotspots, data consumption spiked for all mobile service providers, including Bharti Airtel and Vodafone Idea.

But once mobile operators hiked tariffs, with some like Vodafone Idea even doubling their minimum recharge for prepaid subscribers to Rs 99 for around 28 days, there was some fall in data consumption.

The stated objective for this pricing action was to boost average revenue per user or ARPU. Tariff hikes started in FY21 in Q3, and there was a recent tariff hike in Q3FY22. This led to a rise in ARPU, but the spike seemed to have levelled off by Q2FY22. Then came another tariff hike in Q3FY22. This helped most telcos to post higher sequential rise in ARPUs in Q3FY22. Only Jio’s data average data consumption rose sequentially in Q3FY22.

Tariff hikes lead to a rise in Jio’s active subscriber ratio

It was obvious to telecom companies that a rise in tariffs will lead to a consolidation of subscribers in the industry. None of the three large players were immune to this. Airtel was one of least affected by this tariff hike in terms of loss of subscribers. Airtel’s active subscribers have remained at 97%-98% over the 12 months ended December 2021. While Vodafone Idea, or Vi, steadily lost subscribers as tariffs rose, its active subscribers also fell nearly 407 basis points to 86.42% at the end of December 2021.

Reliance Jio on the other hand saw a 7.45 percentage point rise in active subscribers over the same 12 month period ended December 2021 to 87.64%. This helped boost its ARPU even though it still has nearly 51.4 million subscribers that are inactive on its network.  It’s worth pointing out that Vodafone Idea had around 36 million inactive subscribers on its network, while Airtel had only 7.01 million inactive subscribers at the end of December 2021. This means Bharti Airtel is able to sweat its network infrastructure to the fullest, which is why its ARPUs rose by Rs 10 in Q3FY22 to Rs 163.

The fall in Vi’s margins and rise in Jio’s margins over this period are a direct result of this shift in active consumers for Vi and Jio. Vi’s margins at the end of Q3FY22 were down to 39.3%. In the face of this, the commentary by management of all three major private telcos points to utilising existing and future network expansions to leverage the consumer’s need for newer digital services.

Into this comes Vi’s decision to opt for conversion of debt with a net present value of nearly Rs 16,000 crore for its AGR and other regulatory liabilities, which gives them a four year moratorium on these payments. The company says it will use the cash it saves when the government accepts the proposal for conversion of the dues into equity shares allotted to Special Undertaking of Unit Trust of India. The four-year moratorium is expected to free up around Rs 60,000 crore cash outflow from Vi’s coffers in the future.

This allows Vi to focus on 17 of its key circles out of the 22. These are the circles that Vi’s management says contribute most to its revenues. The telecom reforms that the Centre unveiled will release nearly Rs 17,000 crore worth of funds for Vi to redeploy the non-fund based bank guarantee that is released into funded limits. The company hopes to use these funds to expand its 4G network.

On the other hand, Bharti Airtel and Reliance Jio have no trouble getting funds to expand their 4G networks. So much so that both Airtel and Jio have prepaid some regulatory debt, and are still holding steady on investing more to expand their network coverage.

Some of this capital expenditure, or capex, will go into expanding 4G connectivity and expanding use cases for 5G even as the spectrum auction for 5G services is imminent. Airtel also raised $1 billion from Google, out of which $300 million is earmarked towards future engagements. Airtel also wants in on a similar plan by Jio and Google to build an Android phone for the Indian market that will help expand 4G coverage in India.

Jio is now generating enough margins for the company to be sustained on its own cash flows, but we will have to wait and see how the impending 5G spectrum auctions pan out.

Here is where Vi’s predicament is laid bare. The company has hardly any money left for expanding network coverage beyond its priority circles. The promoters of Vodafone Idea, Vodafone and Aditya Birla Group, agreed to invest a total of Rs 4,500 crore into the company to help it pay off its past dues to Indus Towers.

The company’s original plan to raise nearly Rs 25,000 crore was not successful, with many investors waiting for the government’s telecom reforms in September 2021 to help clarify the viability of Vodafone Idea. Now, the company will seek shareholder approval this month to raise Rs 10,000 crore, apart from the preferential share issue to the promoters for Rs 4,500 crore.

Despite new tariff hikes coming soon, it doesn’t look likely that ARPUs for mobile services will hit the Rs 200 level it was at nearly five years ago. For companies like Vodafone Idea, raising funds is the only way to survive. But the company’s chances of survival are right now hard to predict, sandwiched as it is between two aggressive competitors.