RJio Rivals May Have to Subsidize Devices

India's three biggest mobile operators -- Bharti Airtel, Vodafone India and Idea Cellular -- may be forced into bundling devices with service plans following the launch of a low-cost 4G handset by nemesis Reliance Jio earlier this month. (See RJio Disrupts Again With Low-Cost 4G Phone.)

That would represent a radical break with the current practice. With most customers on prepaid deals and spending very little each month, India's operators have traditionally shied away from subsidizing devices, although they have made exceptions in some cases, such as with Apple's iPhone.

The launch of the JioPhone, though, has put further pressure on operators that were already reeling from the impact of RJio's aggressive pricing moves. The new device, Reliance Jio has promised, will effectively cost a consumer nothing. Subscribers must simply pay an initial deposit of 1,500 Indian rupees ($23.30) and spend at least INR153 ($2.30) on their service plan every 28 days. For that, a customer gets unlimited voice, text-messaging and data services. And after a three-year period, a customer can claim back the INR1,500 on returning the device.

RJio has already acquired 125 million subscribers since launching services last September (giving it a market share of about 10%). The 4G phone launch is likely to give it a further boost in lower-income segments of the market, where consumers have previously been unable to afford the costlier devices needed to make use of 4G services. If incumbents fail to respond with similarly enticing offers, their low-end customers could jump ship.

"The top three incumbents are at high risk from 4G feature phone disruption given they account for 60% of all 2G data users," said CLSA, a brokerage firm, in a recent research note.

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The incumbent telcos have already suffered mightily from RJio's arrival. But the new entrant's latest move risks triggering an exodus of 2G subscribers from their networks. RJio's target appears to be many of the customers currently spending more than $2 per month on service plans. Those subscribers account for as much as 30% of the 500 million feature phones in the country, with the other 70% of customers spending as little as INR50 ($0.78) per month, according to estimates.

Moreover, if RJio can guarantee a satisfactory experience on its network, customers that have previously used it as a "secondary" SIM provider, refusing to cut ties with incumbent operators, might start to think about using RJio only. That really would pile misery onto the incumbents.

These are grim times for India's biggest telcos. While fighting a tariff war on one front, they are being forced to spend heavily on network upgrades and modernization on another. Now they have to consider subsidizing devices as well.

— Gagandeep Kaur, contributing editor, special to Light Reading

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