Telecom service providers are always under pressure to improve their services if they must remain relevant in the market. The article shows that currently, Jio maintains a lower jio network cost per tower, however, Bharti Airtel’s improvement is progressive and is gradually bridging the gap.
This article describes how two of the major players of the Indian telecom sector, specifically Jio and Airtel allocate network costs, define RoU depreciation and finally question whether it is beneficial or detrimental to the industry.
Understanding Jio Network Costs
Most of the expenses incurred in developing the network are shouldered by telecom service providers hence reducing the revenue of a business. These include expenses such as constructing and maintaining towers, rent as well as energy costs. In recent years, both Reliance Jio and Bharti Airtel have tried to cut down the network expenses to deliver higher operating margins and sustain the market leadership.
In its first year of operations, Jio was able to keep its consolidated jio network cost per tower including RoU depreciation and lease finance cost significantly below Airtel. Four years back they were 35% cheaper than Jio competing against them.
Still, it is projected to decline to 7% by the financial year ending March 2025 commonly referred to as FY24. From this trend, it is evident that while the services are currently better compared to Airtel, AI is still striving to level up its pricing with that of AI.
What is Right of Use (RoU) Depreciation?
Jio has reduced its jio network cost by cutting its RoU (Right of Use) depreciation. RoU depreciation is another financial factor used in estimating jio network cost. This policy enables companies to identify the expense of using leased assets throughout the lease agreement. RoU depreciation means a decrease in the value of these assets over time; thus, changing the jio network cost.
Thus, RoU depreciation has now become a significant line item for both Jio and Airtel. However, Jio has continued to operate a low-cost model, while Airtel has achieved a steeper decline in total jio network cost. This shows that Airtel has considered efficiency and cost control in its operations as the difference in cost between the two reduces.
Airtel’s Cost-Cutting Measures
Airtel has also aimed to reduce its per-tower cost in terms of its network. Data obtained from IIFL Securities indicate that per-location cost in the financial year ending in March 2024 was 3% YoY lower than the previous year, where per-location cost was 8% YoY lower.
Similarly, the corresponding cost for Jio was reduced by 1% per annum The significant reduction in Airtel’s costs led to the company having the lowest reported costs per gigabyte among global operators. This change demonstrates that measures taken by the management to enhance the operational efficiency of Airtel are yielding positive results.
Airtel has been able to achieve one of its goals which is the reduction of costs in certain areas of its operations especially in the energy department. Per tower energy cost has reduced significantly for Airtel down by 12% in FY24 and for Jio by 10%.
Therefore, the gap in energy cost for Jio and Airtel has now narrowed down to 4% from 34%. This is another proof of the steps employed by Airtel to diminish energy consumption and enhance its effectiveness.
The Role of 5G Expansion
The establishment of 5G standards is the new test for telcos’ cost structures. However, Jio has offered the cheapest or been more proactive in deploying its 5G network, with a slight of it. They have guided to roll out 1.8 lakh unique 5G locations by the end of FY24, whereas Airtel stated it is going to have 1. 04 lakh. Setting high goals to lay and lease infrastructure, especially for 5G, Jio has provided higher internet speeds and lower traffic.
Jio uses around 30% of its 5G network, while Airtel only utilizes around 15%. The availability of 5G networks also allows Reliance Jio to manage traffic on its 4G network, which reduces network congestion costs. 5G can also have a reduced cost in the future due to the economies of scale which can cause more saturation in the market.
Implications for Jio and Airtel
This jio network cost advantage is slowly decreasing over Airtel but still plays some role in Jio’s entire scheme of things. Hence, it is helpful as due to lower costs, they can set lower prices to have more customers and higher profitability.
However, the fact remains that the cost gap is now approaching parity, thus establishing that the cost leadership strategy that has been implemented by Airtel is yielding positive results and the competition is stiffening.
Selling and Distribution Expenses
Jio is also one of the firms that have used cost escalation in selling and distributing its products. Distribution costs of Jio’s sales and distribution expenses were up 37% y-o-y in FY24 mainly on account of payments regarding mobile number portability.
This increase also depicts the issue of customer loyalty once the market expands as there are numerous competitors. Since both Jio and Airtel are in the same market and competing, careful management of these expenses will be important in achieving a positive net profit.
Energy Costs
Operating expenses are also categorized under jio network costs whereas Jio as well as Airtel have incorporated cost optimization measures for energy costs also. Jio has reduced the energy cost/tower by 10% by the end of FY24 and Airtel by 12%. This emphasis on energy efficiency stems from the desire to contain operating expenses and the network’s impact on the environment.
This has led to the narrowing down of the overall jio network cost differential where Airtel has been able to cut down on energy costs better than Jio. The following reductions have been achieved by implementing technologies in energy efficiency and improving network practices: This puts Airtel in a better position of efficiency and cost control.
Impact of Tower Count
This influenced the realization of the total cost of the network depending on the many towers a telco has. Jio had 328,750 towers on average than Airtel with a 296,620 balance in FY24. Although having a greater number of towers assists in offering broader service to customers and aids 5G development, it has been a network burden to Jio.
This clearly indicates that Airtel has managed both the number and jio network costs better than two and also the fact that it has slightly fewer numbers of towers proposes strategic management of the operation. Similarly, Airtel can better challenge Jio even though the latter has more towers, for the overall cost per tower is less for Airtel.
Jio and Airtel: Increased Competitors
The rivalry between Jio and Airtel seems to intensify further in this telecommunication sector for the Indian market. Thus, Airtel has the lowest operating, profit, and cash margin among incumbents though it has intensely competed, and recently, has been closing the gap with Jio more through cost control and efficiency measures than through revenue growth.
Cost Control:
Both Jio and Airtel are deploying 5G networks and attempting to cover as many people with high-speed internet as possible. Managing jio network costs has emerged as a valuable consideration in this process. Jio has succeeded in its low-cost model, and now it also has to manage the sales, distribution, and operating expenses associated with 5G networks. Airtel also needs to manage its energy and operating expenses to cut down its expenditures.
Innovation and Efficiency:
Strategic management is imperative when it comes to competition and survival in the telecommunication industry. Based on this analysis, both Jio and Airtel have rolled out 5G services and have embarked on cost-cutting measures. However, with the growth of competition, they will strive to look for other ways of cutting expenditures and improving the functions of the networks.
Conclusion
Jio also has a comparatively low jio network cost per tower to Airtel but the pace at which the gap has been closing has been gradually slowing down because of the intensifying competition in the Indian telecom space.
Airtel has managed to narrow down the cost difference with Jio by slashing energy efficiency and operating jio network costs. Both of the companies are involved in the establishment of 5G networks and are investing in new technologies. Managing the expenses on the network is likely to be central to sustaining profit and market leadership.
In the case of customers, this could mean enhanced services and possibly lower prices in other service segments. Jio and Airtel will both continue to look for operational efficiencies which will in turn enhance the telecom sector in India while offering competing customer value propositions.
As a result of the competition situation in jio network costs, Airtel has pursued the Jio, of course, it is known that the struggle continues. The telecom sector remains one of the most competitive; thus these two industries will have to persist in the endeavour to minimize jio network costs. To read more about the jio trends related to the context of the current article, you can find on everything Jio. Also, read this detailed article on communications today
