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Monday, July 25, 2011

Telecom Industry in India: More players may lead to higher tariffs?

Telecom industry has been instrumental in revolutionizing the lives of common Indians. The mobile phone and now the internet has been in focus of late at almost every level be it policy, corporate, consumer etc. But the industry is going through turbulent times. The 2G scam, the steeply priced 3G spectrum, tax claims… the list is endless. It doesn’t make for a good reading as telecommunication will go a long way in determining our future growth rate as we are in the information age. 

Let’s have a look at some of the problems plaguing the industry. Let me divide the problem into two parts based on the technology involved; 2G and 3G

2G: If you look at problems in this space, the 2G scam comes to your mind straightaway. Undoubtedly it’s a blot on the Indian face. And its findings will certainly leave many embarrassed but let’s not waste our time over these facts related to the scam. Instead, let’s concentrate on the other major issues related to 2G. The one that comes to the mind is “too much competition or should I say too many players”. While FCFS basis used to allocate spectrum helped keep the cost down hence low tariffs but it allowed too many players to enter the fray. 
This has resulted in players with large subscriber base having too little spectrum while many with little or no subscriber base are sitting on precious resources.  The industry despite taking care of network effect doesn’t seem to be achieving the economies of scale (remember it’s a capital intensive industry) thus forcing lots of customers in very little spectrum. As a result India is struggling to improve the quality of coverage despite achieving decent breadth of coverage at 800mn subscribers. This could lead to future tariff hikes by major players as low tariffs become unsustainable (As I write this, Airtel has already made the announcement) . 

Also it paints a grim picture for the industry thus the players might struggle to attract capital for their expansion thereby creating problems in last-mile penetration. This negatively affects the inclusive growth agenda as any sector be it financial, health, education etc. is banking on telecommunication to reach out to one and all. It’s not a surprise that China with just 3 players is doing much better on cost as well as quality front vis-à-vis India which has more than 10 players with half of them having a few hundred subscribers. Chinese telecom industry with a HHI of 0.40 w.r.t 0.16 for India only drives home the point (for 2004). So for now, the way forward would be auctioning of the unused spectrum. 

3G: There was always a question mark over profitability after more than 67,000 crores were paid by telecom service firms in the 3G spectrum auction. So, who was to be blamed, the telecom firms who overpaid or the auction process that was touted as the most efficient price discovery mechanism? May be the government did not put many blocks on offer thus creating artificial scarcity and so the prices went up. But it’s not easy to pin down a scientific price to spectrum. As Marten Pieters, MD of Vodafone Essar recounts his experience when in the beginning of the last decade, 3G spectrum and other spectrum auctions in Europe fetched very high prices. But a big spectrum auction in Germany in 2010 saw them getting four times as much spectrum at half the price. The other problem is the readiness e.g. only 3% of the 141mn Vodafone subscribers have a 3G enabled handset (Please don’t mistake them as 3G users yet). So the existing scenario entails that the companies are still some distance away from breaking even. 


An industry that saw such exponential growth in the recent past and is so vital for the growth story of India, could find itself in a spot of bother because of inadequate policy support, unsustainable business models and “too much competition”. So the million dollar question is, “How much is too much?” May be, consolidation could be the way forward. M&A advisors, watch out!

3 comments:

  1. These are some of the comments of the readers on different forums:

    Kashyap Rupak says:
    Just want to add few points:
    1. Tariff hike by Airtel is not fully contributed to spectrum issue.Its due to hardware/support contract price hike by Huawei mainly(70% equipment in Bharti network are from this vendor).

    2.quality of coverage should be attributed to the technology being used along with 2G/3G/LTE. In most of the countries including China,operators are using FEMTO cell for boosting the service coverage, but India still operators are exploring the possibility for the same

    Sandeep Singh says:
    I can say yes. There are high chances. With so many players in arena and no sign of consolidation, most of the companies are living on edge. The existing scene in telecom is unsustainable ( going by company profitability and past international experiences). Therefore, there are likelihood of such situation.

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  2. very useful information thank you for sharing it.

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