Two years ago, I wrote a column on BloombergQuint, titled ‘25 Years On, Indian Mobile Telephony Finds Itself At A Crossroads’. The article started with the following words – “The telecom sector in particular, and the information and communications technology (ICT) sector in general, have in many ways transformed India, its economy, and people’s lives.”
Telecom and ICT, apart from connecting and transforming lives of over a billion Indians, continue and could to be a growth engine for the economy – in terms of billions of dollars of investment, millions of jobs created and revenues to the government accounting 6.5 percent of GDP.
The telecom sector currently claims to be in crisis and is repeating the same mistakes it has made earlier and is heavily investing in a communication and public relations campaign aimed at a ‘bailout’ by the government.
In my view, the current competitive pressures on the two incumbents, Bharti Airtel Ltd. and Vodafone Idea Ltd., in itself don’t represent a crisis.
The only inconvenience right now is the Supreme Court order ruling in favour of the government on revenue share, and the resultant dues to be paid by telecom companies.
What the government can do in that specific issue of the Supreme Court order, is to take a slightly more patient view of recovering the money, instead of demanding it immediately. I would be very supportive of such a decision.
If that’s done, there is absolutely no reason why the industry deserves any more favours or a ‘bailout package’ as has been referred to in the media - requesting relaxation on spectrum payments, airwave usage charges and rural connectivity obligations.
Understanding The Stress
None of the other payments are new obligations. There are just two new factors that are prompting the two incumbent telecom companies to cry Mayday.
First, the entry of a new disruptive player in Reliance Jio, and second, the Supreme Court judgment.
If this issue of a new liability of unpaid revenue share is taken out of the equation, there is nothing that particularly justifies any intervention by the government in the telecom sector.
I have said this before and will say this again...
The perils and risks of being in the tech space is this, that new technologies, new disrupters are the new normal. Incumbent legacy companies across the technology space have to work and invest on that basis. No government or policy or argument can protect your business model/revenues/ in this space.
I believe, therefore, that the two private telecom companies find themselves in crisis today, akin to the same situation that the government monopoly BSNL found itself a decade and a half ago, of being rudely and brutally being shaken up from the cozy duopoly by a hard-charging new entrant in Reliance Jio.
The two telcos have clearly made many poor decisions (in hindsight) along the way that has made them vulnerable. They made poor technology judgments in timing their move to the internet and IP core networks, over-investing in legacy non-IP networks, overbidding for spectrum, poor customer service that made it easy for a new operator to churn away users, and using more debt to ensure promoter equity isn’t diluted.
On that last point - Idea and Airtel held on to high levels of promoter ownership, and at various points didn't dilute but increased debt. In an effort to maintain control and ownership - they took on more debt than what was realistically possible to service.
This approach is primarily driven by a mentality in corporate India to hold on to high levels of ownership. This meant that they did not bring in adequate equity capital at the required time. When debt was easy to come by in the late 2000s, there came to be a belief that debt was cheaper than equity. This was not unique to telecom, it is what happened in happened in steel, highways and other sectors, all of which have now landed up being insolvency cases under the Insolvency and Bankruptcy Code.
Why should telecom be treated differently?
No Permanent Winners
In the wireless technology space today, there is no permanent winner or loser.
It is a proven fact all around the world, that in technology, there will always be a new entrant with disruptive technology, pricing and product innovation that existing incumbents will find hard to win against, unless they innovate, upgrade, change their way of working.
Both Airtel and Vodafone Idea are, in a sense, caught on the back foot, because for long they invested heavily in a conventional cellular network, and only started changing to an IP-based network after Reliance Jio disrupted the market.
To a large extent, Airtel and Vodafone changed too slowly, saddled with legacy investment in non-IP networks. The weight of their existing spectrum which is co-related to debt is weighing them down, and making them less nimble.
That, unfortunately, cannot be reason enough for a “bailout” using public money.
In technology, people make decisions and investments today that may be completely irrelevant 10 months from now.
The money that you have sunk in, the indebtedness that you have taken on, may turn out to be something that is a burden on you. That is just the nature of the technology space. Look at the recent writedowns by Softbank in WeWork, the loss of market cap in Uber, etc. as shareholders mark up losses as a result of assumptions gone wrong.
25 years on, telcos need to rethink their basic untenable belief that whatever investment they make, will have to get a return, and if they don’t get a return, then they will just seek a bailout.
Because in today’s world and more particularly in today’s New India, you make an investment, and it’s a bet you’re taking. Currently, there is nothing in the law, nothing in public policy that prevents somebody from taking a bad business decision.
For example, in the next five years, if someone comes up with something new in terms of technology and services, Reliance Industries Ltd. can’t come to the government and say that “I have invested $10 billion in Jio, so protect me”.
Imminent Collapse?
The clearest evidence of how the two legacy operators have made missteps in their business is proved by how rapidly they have lost customers to a new entrant.
These are not issues that are at all to do with regulations or government policy and itself don’t represent a crisis that requires public policy intervention.
To repeat a point I made earlier - yes, the recent Supreme Court order creates significant liabilities. But there can be no case for their total waiver. This would create a moral hazard issue, inconsistent with this government’s policy. Though, as I stated up front, subject to legal issues being clear, the government can perhaps look at a longer-term repayment plan.
Predictably, there are attempts to up the ante and pressure the government to intervene with wild statements of imminent collapse, job loss, etc. The Vodafone chief executive officer has recently said its Indian venture is at the risk of collapse.
I don’t think anybody is going to collapse.
It is not a new strategy for private sector companies, whether in telecom or any other sector, to keep talking about imminent collapse as a strategy to pressure those that shape public policy.
Leave that to the side for the moment and try to clinically analyse the fact that the industry today is at a place where there are only three operators of any substance. About 6-7 years ago there were 6-8 players, and at that time, the same two large telcos were arguing that there was too much competition and that it will kill the industry.
The government and policymakers will look at this with cold facts. Airtel has a market capitalisation of $26 billion today. Vodafone Idea is also significantly d and there is no financial evidence that points to anything contrary. Both these companies are backed by significant strategic names—SingTel and Vodafone respectively—that are big boys in telecom that must fully understand the missteps made in previous years.
Regulatory Playing Field
There is one point that I have consistently maintained in telecom, back from when I left the sector in 2006. That is, that the telecom companies have not really done their bit in improving the regulatory environment in India. It’s been 25-26 years since the first Indian telecom company was given a licence. I was among the first in 1995.
Telcos, instead of being mature and responsible stakeholders in developing a strong, credible regulatory framework, continue to try and ‘manage’ policy through public relations and politics.
Why should the sustained functioning of a sector become a political issue every time, with administratively driven discussions on bailout packages?
Rules-based governance should be the norm rather than this ad hoc approach. That is the responsibility of these telecom companies, who have not done their bit in creating such a regime.
That’s why we are still struggling with basic regulatory issues.
Even today, basic disputes of inter-connect, competition, new entrants are still being adjudicated in the public domain and the media instead of being done through a regulator and a regulatory process that is transparent and accountable.
I think one of the biggest disservices that the Indian telecom companies have done to the sector, is that they have not played a part in helping evolve a strong, robust, regulatory framework. That would have solved any disputes that required adjudication between government and the telecom companies, or between telecom companies themselves, or consumers and telecom companies.
Even today, on basic issues of quality of service, it is the government that has to intervene.
This is a glaring gap for an industry that is worth billions of dollars, that they continue to shortcut things and oppose the creation of a world-class regulatory framework of laws and rules.
Telcos’ conduct on issues like net neutrality, call-drops are all evidence to this over the years. Some of their recent requests like minimum pricing slabs are bizarre and just foolish – knowing fully that in a free-market model, governments cannot intervene to regulate minimum pricing just because one or two companies find it difficult to compete.
The Way Out
I’m frankly disappointed that these big multi-billion telecom companies are seeking a bailout from Indian taxpayers. Not only is it disappointing but it is also not tenable.
Telcos are not unlike any other sector or company. Many sectors have had to deal with high indebtedness as a result of reckless lending and borrowing in the 2010-2014 timeframe. The culture of opaque bailouts and restructuring of debt have been replaced by the Insolvency and Bankruptcy Code.
Telcos seeking debt bailout forget that under the IBC, even if they default on their debt, the law prescribes an insolvency resolution process with creditors taking over and administering the business before selling it as a going concern to new shareholders.
They have significant market capitalisation and deep-pocketed strategic investors under whose watch their business decisions were taken. They must rebuild their balance sheet, rebuild their business plans and models and compete hard with current and future competitors.
Rajeev Chandrasekhar is a Rajya Sabha Member of Parliament for the BJP; the founder of BPL Mobile; and a technology entrepreneur.
The views expressed here are those of the author and do not necessarily represent the views of Bloomberg Quint or its editorial team.
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