Indian Telecom Sector: Past, Present and the Road Ahead….
The news of Mr. Kumar Mangalam Birla stepping down from the Board of Vodafone Idea has led to extensive debates around the future of the Telecom sector in India, more particularly the Vodafone Idea Group.
The Telecom sector has a chequered but interesting history. Right from the 1850s when the first telegraph line was installed till the 2000s when private companies were allowed to compete in the sector, the digital revolution in the last decade, and the current so-called Oligopoly market of Telecom players, the industry has evolved dramatically.
Currently, the telecom sector has four players, practically speaking three players: Bharti Airtel, Vodafone Idea, Reliance Jio, and BSNL. Two broad aspects need to be analyzed with regards to the Telecom sector. The first being operational and legal challenges faced by the Telecom companies in general and the second is the changes due to the entry of the big daddy ‘Reliance Jio.’
Speaking of the first aspect, telecom companies function under the spectrum licenses auctioned periodically by the Department of Telecommunications. Spectrum is a range of electromagnetic radio frequencies used for the transmission of voice, data, and images. Mobile telecom operators send and receive frequencies to enable communication between two phones. The issue here is that this spectrum is also used for defense services and railways. With the exponential demand for mobile phones other telecom devices, the Government has to balance the allocations between these sectors to maximize social benefits. The unimaginable hike in demand leads to aggressive bidding for the spectrum auctions by the telecom companies thereby leading to skyrocketing of the bid prices.
The spectrum license process is not free from controversies. Arguably, the first thing we recollect after listening to the word spectrum is the 2G scam, wherein allocations of licenses were concluded at distorted prices on a first come first basis instead of an auction process. This led to the Supreme Court canceling the Telecom licenses for a dozen of companies. Further, the CAG Report on this issue suggests that these irregularities in the license procedures were in place right from 2003. Apart from a setback to the telecom companies due to the cancellation of licenses, massive political crossfire and CBI investigations were also witnessed by the industry.
The second challenge was of the Adjusted Gross Revenue or the ‘AGR dues.’ These dues are to be paid by telecom companies in addition to the spectrum license fees. There was a new scheme of revenue-sharing model bought in replacing the erstwhile fixed fee system for AGR. There were some arithmetical errors in the levy of these AGR dues. Airtel, Vodafone Idea and Tata cellular had a long battle on this issue which recently was decided against these companies. Now, these 3 companies have to pay these dues in 10 years in a phased manner.
In this regard, Supreme Court stated that the business of Telecom companies have substantially improved since the rollout of the new scheme and hence they should be ready to pay the dues. It is surprising to see that commercial success is viewed as one of the grounds or justifications to make companies pay dues with Interest and penalty!!
More particularly for Vodafone Idea these dues have raised significant cash flow problems to an extent of having a revisit to the going concern assumption of Vodafone Idea. These dues were in addition to the retrospective taxation dispute. Luckily the legacy issues of Vodafone have finally been put to rest by the latest amendments bought in by the Finance Ministry.
The second aspect is the entry of Reliance Jio. Reliance being cash-rich company dramatically slashed the tariff and made a heroic entry in the telecom sector. After Jio, there is only one key to survive in the market: Pricing Structure. Now whether this price war is fair or it’s just the Karma of the existing telecom companies turning against them because of selling data at an apparently exorbitant rate is a topic for some other day. The companies which used to offer 1 GB data per month are now providing the same data daily! The Indian Courts have decided that Jio pricing structure is not predatory within the meaning of Competition law by smartly carving out an exception to the term predatory pricing. This move rattled the telecom sector for sure but indirectly contributed to India being recognized as a destination for cheapest data. Realizing that there is no other way to stand tall, Airtel and Vodafone too had to follow the suit and reduce their prices.
Mr. Birla has also offered to sell off his stake to the Government underlining the fact that having minimum 3 players in the Telecom market to ensure fair competition is the need of the hour. Monopolistic trends in the ever-growing and crucial sector of Telecom is not a good sign.
Some analysis on the way ahead:
- The telecom sector is booming at a staggering rate year on year. An excellent document on this industry by the Competition Commission of India (CCI) states that the annual growth rate in telecom and internet subscribers is 33% and a few months have seen as high as 20 million new subscriber additions. The Covid onslaught has reiterated the importance of digital media and telecom. The sector contribution to GDP has increased by 6 times during the Covid period. The concentration of such an emerging and powerful market in a market with virtually no competition is not optimal. As we are all set to welcome 5G technology as well, a decent competitor enhances customers choice and promotes a healthy market growth.
- An interesting aspect is whether Government should really consider a buyout of the share of Mr. Birla and pump in money in Vodafone Idea. The Government is running BSNL currently but in reality the position of BSNL is no where close to the other players. Considering how the BSNL is functioning, it is difficult to say that Government is willing to bridge the gap of a competitor in the market.
- A relief package for the Telecom sector which was a much-awaited step is on its way. Rather than buyout or bail out the Government needs to bring some rational measures so that ailing Companies like Vodafone Idea figure out some idea to help themselves. The call for help by Mr. Birla is not hinting towards acquisition but revival or an operation reset. Policy- making in terms of taxation policies or AGR dues has not been that conducive to enable foreign investors to invest some money.
- The CCI Report highlights another important and to some extent an obvious trend in the telecom revenue generation pattern. The cash cow is not calls but it’s data. Data is so invaluable that calls are now given as a free gift with data. These days are the days of synergy and companies have become aware that most of the times 2+2 is more than 4. This can be seen through collaborations of telecom companies with the newcomer OTT platforms. Initially, telecom companies offered resistance and protested that OTT should have separate regulations. But later on they realised that OTT doesn’t replace Telecom but in fact depends on them. So we could see partnerships like Jio- Facebook, Airtel- Hotstar, Airtel- Amazon prime, Reliance buying Hathway and Viacom entertainment or Colours network, Airtel- Netflix partnership and so on. So Vodafone Idea needs a rethink to capitalize this market as well.
- The ripple effect of ill performing telecom corporates will be evident on Banks and other lenders and also on employment.
Only time will reveal if Vodafone Idea can withstand the current trends in Telecom. The AGR verdict might be criticized as unfair but still the judicial discipline of the Apex Court needs to be respected. We may hope that the upcoming relief package for Telecom sector brings in rationalization in terms of a moratorium for spectrum payments and overall measures to help the sector boost itself rather than directly bailing out a private company.
