Crisis for Indian Telecom Companies

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TOPIC: General Studies 2

• Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

The government is considering smoother exit for telecom providers at a broader policy level as part of revised mergers and acquisition roles. The ministry of telecommunications has said that the solution for aiding this sector would have to be done on policy level to keep sector alive. At present, telecom industry’s debt to the banking sector is estimated at Rs 4 lakh crore.

Operation around world

There is no country in the world that has so many telecom operators where in circle in India, there is half a dozen telecom operators and typically the industry all over the world is that there are three players where two will have 40% of market share and other will have 20%. This is a natural sequence where the weak get swallowed by strong. If the weaker operators are not able to sustain by themselves, then mergers and acquisitions should be allowed. It should be allowed as business case.

A booming industry seems to be in doldrums-

The cost of inputs was made expensive vis-a vis spectrum and the cost of operations were high.

There was continuing to extract the revenue upfront in terms of revenue charges and then continuing revenue share model. This was usually one or other but now it is both. The new entrant took top players off.

Telecos asking for stimulus-

The situation has not developed because of entry of new competitor only. It has been for over a long period of time. Most of the companies are highly debted as they had to first pay for spectrum which was a business decision at one point of time.

The companies have invested in infrastructure. They have not invested in network. They have not upgraded the technology so the new entrant with new technology has wiped them out. So there are industry woes.

Here the government should:

1. Initiate spectrum fee waiver or adjustment
2. Deal with the debt. The merger between reliance and aircel didn’t work because banks did not agree to the merger. This is because the merged entity would result in a larger write-off which will wipe out Rs. 25000 crore from the banks’ balance sheet.
3. Ask the companies to divest their related investment including any property/real estate/ infrastructure before going in for debt restructuring. These companies have to agree to swap debt for equity which they are shying away from.

Challenges of telecom sector

Revolutionary change in technology

Entrance of new operator has changed the game. Moving away from voice to data which can greatly expand the economies of scope. The data can provide with infotainment, entertainment, education. Data and broadband revolution will help enormous revenues increase. However, the broadband infrastructure has to be build more speedily and has to be sustained.

The eternal mistakes

Fault of business operator decisions, fault of government policy and fault of banks for recklessly lending has led to increase in telecom operators’ vulnerability.

In 1998-99 when NDA government bailed out telecom operators and fault of telecom operators, there were astronomical voice prices in 1995. This sector was too critical to be allowed to fail and was thus bailed out. Later it led to absolute boom in the sector.

Fall in average revenue per user.

But that is to be made up by offering new services like infotainment. Money will be received from content, educational policies, telemedicine to help the consumers. Investing more in services than infrastructure will lead to key increase in revenues as well as fair competition.

Increased expenditure

The telecom service providers pay as much as 30% of their revenues in taxes and levies for spectrum and operating licences. Of this, around half was the tax component. Under the Goods and Service Tax regime (GST), this has gone up to 18%, making the services more expensive at a time when it should have been reduced. Essential services have either got a nil GST rate or the lowest slab of 5%.

Overhang of the debt

No country can borrow from any bank in India or foreign. They are not considered debt-worthy companies.

What is government bailing out- a wrong business decision or its wrong decision?

Government determined technology till 2014. When it gave spectrum, it said it must comply with GSMA standards. Then in 2014, it came up with re-bidding for the spectrum which led to astronomical prices. The supply was constrained, the people were bidding back for the existing spectrum. Then SC said there should be auction. Hence leading to fierce completion in limited supply. This decision was taken because the government saw that it was losing revenues. Spectrum was earlier taken for free, now needs to be bid for as it is a natural resource in that sense.

Key takeaway

The government cannot trigger consolidation of the sector. It can ease the process of mergers and acquisition. This is procedural issue. It will not change dynamics of the sector. The two bad telecom operators will not give one better telecom operator. The profitability will come when debt is restructured.

For last seven years, telecom operators were in demand fulfilment mode. Most of these companies did not have a sales department, but a distribution department. They were distributing the sim cards and not selling services. To sell services, there is need to build services. Voice is commoditised. It was there for last 7 years but no one prepared for it. No new infrastructure and no new towers. Nowhere in the world, have the telecos owned infrastructure.  They are owned by third parties into real estate business.

After 4G and 5G, voice will become virtually free and money can be earned from VAS. They’ll have to deal with content providers, VAS providers, businesses who use their subscriber base, advertising.

The monetisation of subscriber base for all these kinds of services not thought of before. Hence, now the focus of industry to invest in upgrading networks constantly.

Connecting the dots:

• ‘Communication is critical to national security.’ In light of this statement, critically analyse the importance telecom sector in India.