Addressing the Telecom Sector Crisis

What is the issue?

Top telecom companies such as the Bharti Airtel and Vodafone Idea recently reported historic losses. Click here to know more.
In this backdrop, here is a look at Indian telecom sector’s growth and the current crisis it faces.

How was the telecom sector in the 90s?

In the early 1990s, India had merely 7 million telephones with a waiting time of 7 to 8 years to get a connection.
It was because the cost of installing a landline telephone was too high.
The required average revenue per user (ARPU) was Rs. 1,250 per month.
This was certainly too high for most Indians at that time.
[ARPU is defined as the total revenue divided by the number of subscribers.]

How did the sector evolve thereafter?

Indian telecom grew at a slow pace through government budgets and subsidies.
It is in this context that wireless telephony was introduced.
This brought down the capital cost, made telephones affordable, was easier to install and brought in private investments.
The results have been certainly dramatic, with telecommunications sector growing at a rapid pace.
It moved ahead with the virtuous cycle of growing demand and increasing competition.
This pushed down prices to levels not seen anywhere else in the world.

What is the current crisis?

The telecom sector is now under severe pressure, reflected in the top telecos’ loss making trend.
Notably, the troubles of present are rooted in the fast-paced growth of the past.
The regulations that increased tele-density in the past, consequently pushed down ARPUs.
This drove businesses to work with a single mind focus on consumer acquisition, as the base of users increased rapidly.

How were such crisis handled in the past?

The first telecom auctions for private players were in 1995.
The financial bids were unbelievably high; some international consultants proposed large licence fees without understanding Indian affordability.
Over the period, the winners realised that the bids were economically unsustainable.
Several legal ploys were used to stop the payment against bids, cases multiplied, and the telecom dream was shattered.
It was advised in 1999 that the only way out was to cancel the licence fees due to the government and introduce the “revenue share” model.
[This involves the distribution of the total amount of income generated by the sale of goods or services between the stakeholders or contributors.
This is different from profit share model wherein only the profit is shared i.e. the revenue left over after costs have been removed.]
The then PM Atal Bihari Vajpayee took the bold step and licensees were offered an option to switch to revenue-share instead of upfront licence fees.

What was the result of the move?

The installation cost of wireless telephony was less than one-fourth of a landline telephone.
Low ARPU was no longer a big concern.
By around 2003, India had around 300 million telephone lines and the urban market was saturating.
Airtel, Vodafone, and Idea (GSM trio), with their GSM mobile-licence, were the leaders.
Rural markets required lower tariff, but the GSM trio were happy with the urban market and resisted reduction in tariffs.
The market grew at a slow pace since then.

How was this corrected?

It was in around 2007 that the then government saw this imbroglio and found ways to give new GSM licences using primarily revenue-share.
These newcomers, primarily Reliance Communications (RCOM) and Tata Teleservices, dropped tariffs and introduced per-second billing.
Others had to follow. The market thus grew quickly to 900 million lines.
Resultantly, the operators were making decent money, even with lower tariffs.
Till then, India was using only 2G telephony. Data and Internet was at very low speed.
3G telephony was just being introduced and operators were bargaining for more 3G spectrum in 900 MHz and 1800 MHz bands.
The government was periodically conducting auctions since 2010, fetching large spectrum bids.

How did the old vs new players come about?

Around 2013, the Government made available some spectrum in the 2300-2500 MHz band.
This was not considered suitable for 3G telephony then.
4G was in its infancy and there was some concern about technology standards and technology readiness.
A new company, Reliance Jio, betted on it and won the whole spectrum pan-India through a partner company.
It got it at a relatively lower price as there was little interest from established operators.
Jio had to wait for years to get the technology ready and launched the 4G service late in 2016 and caught the imagination of users.
It made voice calls almost free and offered good quality video on smart handsets at very low tariffs.
Others did follow this but paid higher amounts for spectrum in later auctions.
Jio has been gaining market share since then.
The older operators have been on the defensive, facing serious erosion in market share and profitability.
RCOM and Tata Teleservices have been wiped out.
Vodafone and Idea merged to just about survive.
Airtel, the strongest operator 2 years back, continues to lose market share and profitability.

What is the recent SC verdict, and the challenge therein?

The revenue-sharing agreement that companies like Airtel, Idea, Vodafone and others signed in 2001 has come to affect them.
The Supreme Court ruled in October 2019 that these companies are liable to pay revenue share not just on telecom revenue but all revenues of the company.
These include sales proceeds on handsets, renting of their towers, infrastructure sharing, and even on dividend incomes from any investment.
Furthermore, they have to pay huge late-fees and penalties, totaling Rs. 1.3 lakh crore.
The court has rightly interpreted the written agreement of 2001.
However, the amounts are enormous that when paid, is likely to bankrupt these players.
Further, except that it says so in a contract, it makes little sense to pay revenue share to the government on unrelated businesses.
The industry is already saddled with debt of Rs. 7 lakh crore.
Once again, India is faced with the prospect of a telecom monopoly or duopoly.

What lies ahead for the government?

The government could offer the telecom operators payment of principal in installments and waive off interest and penalties.
It is critical for the nation to have multiple players compete in telecom services.
Besides, the role digital connectivity plays in society should be recognised.
If India is to reap the benefit of being fully digital, government’s taxes and earnings from telecom should be limited.
Today, in addition to corporate taxes, the government’s telecom revenue includes GST, spectrum auction, revenue share as licence fees, amounting to about 30% of customer bill.
The money could be better spent by operators to improve today’s average service-quality.
This would help telecom reach the remotest parts of the country and the service needs to continue to be affordable.
The government should thus not look at the telecom sector primarily as a revenue-earner but as a key service provider towards ensuring connectivity.

Source: The Hindu