Once touted as the sunrise sector that led innovation and job creation, the telecom sector is today facing a crisis like no other. The fate of companies that brought wireless connectivity to a billion people now hangs on the hope of reduced government levies.
The telecom sector needs to stay relevant, competitive and sustained. This is not a choice that anybody has, not even the government. We have to make sure this industry sustains and thrives, in an oligopoly structure which will be beneficial in the long-run for economy and for customers whose lives depend on the digital ecosystem.
The least anyone deeply associated with the telecom industry can admit is we have not been in a good shape for some time now, In a country that continues to trail on physical infrastructure, telecom’s global competitiveness over the last two decades made a significant contribution to India’s virtual and digital infrastructure. Given that the world today competes on both physical as well as virtual infrastructure, our nation has to protect and strengthen what we have built, to stay contemporary and competitive. Letting an oligopoly melt-down to a monopoly is not a choice either.
We need to look at the genesis of the trouble. Telecom is a regulated industry globally. In all parts of the world, regulators and licensors have played push and pull while extracting as much out of the industry as feasible. However, most jurisdictions have not compromised on the sustainability of the sector despite experimenting with different industry structures and regulations. Future technologies and use cases for 5G will leave little room for complacency. High-speed, low-latency, and high-concentration of internet-of-things devices would mean there is no room for dark spots in the areas 5G is deployed.
The problem begins to arise when you become reactive rather than proactive on how the industry is transforming and how consumer behaviour is changing.
The 1999 New Telecom Policy
Twenty years ago, the sector was in an era where India had a fixed-charge, per customer per month, before the New Telecom Policy, 1999, was unveiled. That was the first bailout package that India’s telecom sector got. Without it, the industry would have probably collapsed at that very juncture.
The big flaw in the approach was that everyone thought that India’s large geographic spread and population would offer room for multiple telecommunications service providers. We got into a market structure that was touted to be ‘perfect competition’, with more than 10 players competing in almost every part of the country. This was based on a premise that consumers would be spoilt for choice and . The facts that got overlooked were the advent of high-speed wireless internet, faster technological upgrades and higher capex needs with shorter periods to amortise them.
Most in the industry knew that it was not sustainable to have 10 players in any market. However, global examples were overlooked due to the belief that India’s large and young population would translate into volumes that will generate profitable sustenance.
From 2G To 3G
The new players who got their licenses and spectrum rolled out services at very low prices, which did not support a viable business model. To number-savvy Indian users, the price arbitrage encouraged individual users to have multiple SIMs. As a result, the average revenue per user dropped. The industry was also migrating to 3G at that time, and most service providers were not capitalised enough to transform from 2G to 3G. The rest is history. There was a collapse and the industry consolidated into a more sustainable oligopoly, after enormous -destruction and series of bankruptcies.
While these structural changes were happening, there was a major transformation happening toward data, from voice. Along with this came a larger ecosystem of devices, security, storage, content, digital services, all eyeing a greater share of the telecom pie.
In a country which has very limited wired and fibre connections to homes and SMEs, the need for wireless spectrum was underestimated. While wireless was the survival kit for telecom in India, spectrum was now priced very high.
Nowhere in the world had anybody seen such spectrum prices.
Spectrum Gets Costly
In countries where spectrum prices are market-discovered through auctions, all the administrative and other charges including revenue share are brought down significantly to make sure that it’s not a double-whammy for the industry. That’s not happened in India. Initially, not only was the reserve price for spectrum pegged very high, but the quantum of spectrum was quasi-rationed for auctions. This led to crazy bidding and over-leveraged balance sheets among the surviving operators.
After that, if you have to pay almost 30 percent of your revenue to the government in some form or the other, how do you ensure any reasonable return on capital employed?
Revenue Flight To Others In The Chain
The transformation from voice to data has also changed the revenue-share equation for a majority of the telecom service providers, versus other players in the chain globally.
In the voice regime, telecom operators kept almost all of the revenue to themselves. As the sector moved to 2G and 3G data, that revenue share reduced. Now there were smartphones as well as content and application providers who came in and began to move the telecom industry’s cheese.
With 4G and 5G, the telecom operators are competing for revenue with a range of different ecosystems; like content and digital services, cloud and storage, internet-of-things devices, and security. Between them, these ecosystems take away a very large part of the revenues that earlier went to the telecom access providers. So, the money that the telcos are left with is relatively small. This has led to a mismatch with the investments required to stay relevant.
This equation is sent into further imbalance by customer expectations and behaviour. A dominant portion of the mobile data consumed today is video. Even as the demand for video content is going up, the video quality is getting richer too.
The shift from standard definition to high definition, from 4K to 8K, is an exponential jump in terms of the data consumed for the same video. But the customer is not willing to pay commensurately and that suppresses the business case further.
Incumbents Misread The Early Signs
The incumbent operators were the first to receive 4G licences. As the 4G ecosystem was still evolving, a ‘nomadic’ access solution was the first 4G offering in some cities. No incumbent was yet thinking to bet big on 4G back then. The competition also did not fully anticipate the impact Reliance Jio’s 4G entry would have. The incumbents misread the feasibility and timeline of the device ecosystem readiness, VoLTE readiness, 4G content and application play, the ability of Samsung to roll out an all-pervasive 4G infrastructure, etc.
The incumbents also did not see that voice can be perceived to be an application that could be free and that bucket plans would be the new pricing format.
This disrupted their existing business models. Reliance Jio did not enter the market overnight, it took a couple of years. It is unfortunate that in the midst of this disruption, the incumbents lost their first-mover advantage and thought leadership to the challenger. The incumbents had deployed multiple technologies while Jio was a pure-4G play. There was no room for the older players to hold on to their higher pricing and ARPUs, given their weaker data play at that time.
Also Read: Why Indian Telecom Is Where It Is Right Now
The Price Mismatch
Having witnessed the access play in many parts of the world, I see that providing sustained customer experience at an ARPU of $1.5 per month is a tough task even for the challenger. Now that there is some pricing equilibrium in the Indian telecom market, between what are three almost equally-sized operators, there should be an upward price reset for the good of the industry and its customers.
Some aspirations will have to change. At the end of the day, everybody believes that one-third is their rightful share in the market.
One of them may need to say, I will only serve 20-25 percent of the market and I don’t want 30 percent market share as sustainability is more important. If nobody agrees to relent and all of them want to compete, then the aggression may not wane.
Indian telecom regulators have pursued a forbearance policy on pricing, which in my mind is the right approach and must continue. I am not a proponent of setting any floor-price and would rather focus on customer experience which encourages the operators to invest behind augmenting that. That an output-based focus should take care of low pricing.
Also Read: Telcos Signal Easing Of Price War With New, Costlier Prepaid Plans
How Do BSNL And MTNL Fit In?
India needs three viable telecom service providers, to ensure agility, choice, contemporary technology, and world-class customer experience. India should not be allowed to slip back to a duopoly or monopoly structure. However, if the government does not intervene in the current circumstances, then, maybe we are looking at a two-player market, if not a monopoly.
While the government has expressed its intent to revive BSNL and MTNL, that, in my opinion, might just turn out to be a misadventure. State-owned players are not the preference of a very large share of the audience. From an experience and brand perspective, most people—and millennials in particular—don’t relate to these brands. Additionally, on data and 4G these two have to play a catch-up game. As a result, competitive pricing may become an inevitable option for BSNL and MTNL in an attempt to garner some market share, with the caveat of them being able to roll out a competitive 4G network in a short period.
Most will agree that the industry may not have the appetite to get into another price-war once again at this juncture.
I don’t wish to crystal-ball-gaze, but there is nothing logical or mathematical that suggests even a small chance of success for BSNL and MTNL. They would be better-placed cutting their losses and avoiding the syndrome of putting good money after bad.
The Policy Changes Needed
Spectrum, which is the most important raw material for telecom, has to be viewed as a national resource that leads to national productivity and competitiveness. Seen this way, we can’t milk the telecom cow to death on spectrum prices and government levies. Without a doubt, there is room to reduce the reserve price of spectrum drastically. This should encourage the telecom service providers to bid for more harmonised spectrum, especially the sub-1,000 MHz bands for better indoor penetration and experience.
As our spectrum prices are market-discovered, the rates for all other government levies like revenue share, universal service obligation, spectrum usage charge, the GST rate, all need a downward revision.
The government has built up a large sum in USO funds, perhaps to the tune of Rs 50,000 crore or so which is under-utilised. A moratorium on the 5 percent collection for USO for the next two-three years will help the industry to fund their recovery a bit.
Without intruding on the Supreme Court order on the definition of adjusted gross revenue, the spectrum fee moratorium announced by the government is applicable from April 1, 2020. The two incumbents, clubbed together, have to pay Rs 9,000 crore by March 31, 2020, to the best of my understanding. This is a huge payout considering their current financials. While the government cannot make changes to the Supreme Court order, can it waive its rights, if any, assigned to it by the court’s order?
The government needs to treat this industry like an infrastructure industry, where permissions on the right of way, infrastructure for coverage and capacity, etc. are given expeditiously. We can’t afford to fall behind the rest of the world.
More Disruption?
Given the Indian telecom industry’s financial woes, the transformation to 5G seems delayed at a commercial level. We may accept that delay, given the fact that use-cases for 5G are still evolving and its viability is still being debated even by the early-movers. That said, we can’t afford to fall behind on 5G experimentation and use-case development. It may be prudent for the licensors to allocate 5G spectrum to all service providers for the next two years to develop their 5G gameplan as the sector may not have the muscle to go wrong on 5G. Remember 5G is a 100 MHz spectrum bet per operator, unlike previous technologies.
Telecom service providers lost some of their relevance as the use of mobile devices shifted from customer’s ears during the 1990s to their eyes in the 2000s.
Also Read: Government Within Its Rights To Hold Spectrum Auction, But Older Telecom Firms Unlikely To Bid: COAI
SMS and voice were the two main revenue streams for the operators, which they latched onto for far too long without innovation. The OTT world emerged due to this complacency.
While the regulators and government are expected to do their bit the telcos have to figure out how to partake in the creation of the OTT world and the larger ecosystem, so that they can also make money out of it. If telcos’ revenue model is that you get a percentage of revenue from content and digital services providers, they will keep investing but get very small returns. Now, some operators are taking those punts on content, digital services. etc. However, they need a healthy balance sheet to do this.
Ensure The Customer Is Happy
Ultimately, the winners will emerge from offering the right consumer experience. Low pricing only leads to an average, or below-average, consumer experience. Telecom will need a lot of investment. We will have to convince investors, lenders, and the larger ecosystem that we cannot allow this industry to go down.
‘Make in India for Telecom’, gains more credibility and momentum with a healthy domestic telecom industry and any government gets that point.
With fingers crossed, I wish for the survival of the Indian telecom oligopoly for the sake of the Indian consumer. The telecom industry did create great infrastructure despite many odds and needs to survive for the sake of India’s global competitiveness.
Sanjay Kapoor is a telecom industry expert and entrepreneur. He is the erstwhile CEO of Bharti Airtel India and South Asia and chairman of Micromax.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.
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