Indian Telecom: At Crossroads, Fork, Or Dead-End?
The telecom sector once again finds itself at a new crossroads. Vodafone Idea Ltd. is on the brink. BSNL-MTNL, despite governments’ strenuous and substantial support to them, are hardly effective competitors. Resultantly, the sector stands at the edge of a duopoly. There is much breast-beating about the dangers of India lapsing into a duopoly. The government has publicly stated that it is in favour of three players remaining, excluding the central public sector undertakings. Notwithstanding that, it is far from clear that there is any feasible path that can sidestep the remorseless slide into a duopoly.
Kumar Mangalam Birla has clearly conveyed to the government what potential investors in VIL want. First, reassessment of AGR dues, which after the Supreme Court judgment delivered post his June letter to the Union Cabinet Secretary, is effectively ruled out. Dues of Rs 60,960 crore are now cast in stone. Second, a moratorium on spectrum payments. This would be difficult for the government to agree to, both because the terms were set upfront before the spectrum auctions and because they can’t be changed for just one player, however compelling the circumstances. The third is equally problematic, which is to fix a floor rate for services above the cost of providing them, ostensibly to avoid unfair competition by way of resort to predatory pricing. The difficulty here requires a longer explanation. It necessitates a dive into the recent history of the telecom sector as well as a contemporary lens with which to view its current travails.
How We Got Here
The National Telecom Policy 1994 introduced mobile telephony in the country through two private operators in each of 22 circles. The auction resulted in unviable bids, winners curse, and a slide into a high-cost structure and dysfunctionality. Outgoing calls cost Rs 32 a minute. NTP 1999 was a politically audacious step in response to pressure from operators and international financial institutions. It accepted a substantial revenue loss but rescued the sector by introducing two more players including BSNL-MTNL and switching to the revenue share model where risks were shared by the government.
The Unified Access Services License, introduced in 2003-04, enabled operators to offer landline, mobile, and a range of other services through a single license at an administered price with bundled spectrum. A slow addition of new players and expansion of coverage followed. The momentum gradually built up. By 2008, there were 300 million subscribers. The sudden induction of 122 new licensees in 2008 saw the number of providers in each circle balloon to 12-16. The controversial nature of that induction apart, many of the new players seemed to have entered only to grab customers at any cost, increase their valuations and then sell out to the highest bidder.
The new subscribers were from the middle and lower economic strata. Low prices and innovative strategies like calling-party pays, allowed them to join the mobile revolution and made India the fastest-growing market, barring none, not even China. This was great for digital inclusion, but not so great for the viability of the business. The 2012 Supreme Court order cancelling all 122 licenses in one fell swoop in the wake of the Comptroller and Auditor General report and a welter of allegations of impropriety in their issuance was another watershed moment.
Fresh spectrum auctions were held thereafter in 2012-13. The remaining licensees had to bid for spectrum since the 2008 allotments were struck down. Further financial stress resulted. The competitive climate and the affordability of new subscribers left little room to raise prices. OTT players offering VOIP chipped away at revenues from lucrative voice and SMS services, adding more stress.
The entry of Reliance Jio Infocomm in 2015 marked another seismic shift for the sector. By offering 4G VOLTE services from inception, Jio was better positioned to combat the challenging conditions and OTT players. Upfront adoption of new technologies and having no legacy network to worry about did offer Jio a significant competitive advantage at the cost of an inability to take on 2G and 3G customers. On the other hand, incumbent players had to plan for a phased migration—from 2G and 3G infrastructure, services, and customer—to 4G and 5G over a time span of several years. As recently as 2020, smartphone penetration in India was just 42%. But most importantly, the cost of providing services was very different for a new entrant adopting new technologies from the outset.
Legacy Business Model Amid Disruption
In the digital world, disruption is the norm as evidenced by the growth of Uber, Airbnb, e-commerce, digital payments, etc. Such digital marauders often grow by eating the lunches of other businesses. The investments required are relatively small compared to the businesses they disrupt. Consequently, many digital platforms swiftly attain incredible valuations. Customers get valuable services, often free of cost (though there is a data play here). On the other hand, the telecom sector is investment-heavy. It involves large sunk costs like spectrum payments, optical fibre, electronic equipment, etc.
Given its physical nature, change in the telecom sector is a slow process, even though the technology is evolving rapidly.
On the other hand, new digital technologies are emerging, and innovative solutions are being deployed at great speed. But digital solutions and platforms ride on telecom infrastructure. While the digital revolution stands on both these legs, the two legs are fundamentally different in their attributes, resulting in further stress for telcos.
The bottom line of all this is that there is no easy way to fix a floor price for the cost of telecom services. The cost varies from one player to another. Besides, fixing a floor price might result in users being deprived of the gains of continuing digital disruption. These issues are best left to market forces and the interplay between technology choices and business strategies.
Resultantly, the third ask of potential investors of VIL is a hard one and not advisable.
No Easy Options
What happens if VIL ceases operations abruptly? 270 million customers would be left high and dry. Many of them are 2G and 3G users. Jio cannot serve them and Airtel cannot accommodate such a gigantic influx overnight. Banks that have substantial exposure to VIL are deeply concerned. VIL’s total debt is estimated at Rs 1.8 lakh crore of which Rs 23,000 crore is bank debt, enough to jolt the banking sector if it goes belly up. The government is worried about disruption in services to so many people and a sharp drop in sector revenues when only two players survive.
So where does all this leave VIL? What are the options for its promoters, lenders, and the government? Given all the factors involved, one possible approach could be to separate the continuance of operations from the financial resolution. The latter involves investment and financial engineering. There are some reports of lenders proffering a debt-equity swap. But even as those attempts roll on, a way needs to be found to continue services. If this can be done without bleeding cash by working out some standstill arrangement for debt and dues by banks and the government respectively, it could buy time to work out financial, organisational, and management options.
It will not be easy.
R Chandrashekhar is a former Union Telecom Secretary and past President of NASSCOM.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.