The End Game in Telecom

Telecom sector has a penchant for the spectacular. Telecom has witnessed an amazing run in the last 15 years when tele-density has increased 15-fold from a mere 6% to 88%. It has witnessed squashing of 120+ licenses by the Supreme court and inglorious exit of several operators due to business failure including big brands like Tata and RCOM.And yet again 2 operators in a now narrow field of 3, are on the brink of financial collapse. We are excluding in this count the public sector player that is just lamely carrying on.It is a fine mess and we will take stock of who or what contributed to this. After that we turn our attention to how the end game could play out if some of those who contributed to it were to make amends or not make amends

Mistake-1: (Period 1994 to 2000) Market potential grossly over-estimated. Operators bid for unviable annual spectrum charge
Responsibility: Private operators and Government)
Telecom started as a duopoly with a fixed annual pay-out towards license/spectrum.  After the first few years, in many circles the revenue was possibly lower than the annual license fee. This experiment failed and the government had to intervene with a new percentage revenue share. In exchange,the government opened up the license to public sector and invited one more operator in each sector.

Mistake -2 (Period 2001 to 2003) License for basic plus wireless in local loop converted as full blown mobile (roaming) license by Reliance and Tata Teleservices
Responsibility: Reliance and Tata Teleservice.

It was then the turn of Reliance (and Tata Teleservices) to create a new crisis by offering roaming under a basic+ limited mobility license. This crisis was defused by converting the basic license into a mobile license by paying the auction price that was discovered when the fourth operator was invited.
Unwittingly the market now had 6 operators in each circle and the incumbents survived only because of interoperability constraints (due to CDMA technology) faced by the new operators.
The increase in competitive intensity implied that tariff was under check.

Mistake-3 (Period 2003 onwards) Additional spectrum without any upfront payment
Responsibility: DoT and Regulator
DoT and regulator doled out additional spectrum to operators based on self (operator) reported number of subscribers.  Revenue linked Spectrum usage charges applied for the incremental spectrum but this was without any upfront payment.

Mistake- 4 (Period -2008 to 2012) Fragmentation of spectrum by opening up 6 to 7 more new licenses
Responsibility: Government and Regulator
New licenses were issued to as many as 6 players in most circles and this created triple jeopardy

  1. Available spectrum was fragmented leading to high investment in creating towers and quality for ALL operators
  2. Telecom is capital intensive with investments required in the early stage and returns are contingent on reaching critical mass. Financially strained operation
  3. New operators coming in at different points in time has been the biggest bane of the telecom sector.  New operators realise that telecom market is not made for slow /measured entry due to high set-up costs and due to community of interest. New Telecom Operators create huge capacity along with coverage. The marginal cost to acquire/serve a customer is very low. This creates appetite and zeal to reach critical customer mass in the shortest time possible.  This suicidal approach was in full bloom when 4 of the 6 operators entered the market with a bang.

This created a huge drag on the incumbent operators’ ability to price and they were forced to defend their customer market share.

Mistake-6 Period: 2013 Cancellation of licenses
Responsibility: Supreme Court
Supreme Court got into the act questioning the philosophy of selling spectrum in 2007-08 at auction prices discovered in 2001. This sensational judgment overlooked the fact that value of spectrum is also a function of available residual market and is contingent on lead time to roll out network, build brand/service etc. It also overlooked that the quality of spectrum issued in 2007-08 was different from what was issued in 2001-02.The issuance of new licenses to 6 to 7 new operators when there were 6 players already was wrong not because of applying the licence fee discovered 7 years back but because it led to complete fragmentation of spectrum, duplication of resources, creation of unsustainable competition and militated against an intelligent way of developing the market. If the policy maker and regulator did not understand telecom business, I guess we cannot expect the Supreme Court to get it either.The irony was the new operators had by that time recognised that the market was very tough, and they had to scrap the bottom by targeting low ARPU prepaid customers. The incumbents had a huge lead in market development and had the advantage of operating long-distance services and 3G services.
Cancellation of licenses meant quick death for the some of the new operators and a few others limped along without any clear sense of purpose. They continued to create some drag for the incumbents

Mistake-6 Year: 2013 Migration of BWA (Broadband) licence to Unified license (Voice+ data)
Responsibility: Reliance and DoT/ Regulator
Reliance Jio acquired the company that bid for 4G data service license — at a significantly lower price as compared to 3G voice+ data service only to convert it at a later date by paying pan India auction price discovered in 2001-02 after the supreme court had held that 2001-02 auction price cannot be valid in 2008 ( see mistake-5)

Mistake-7 Period 2014 onwards. Renewal of spectrum at a very high reserve price
Responsibility: Regulator and DoT and Government
Spoiler: Reliance

The cancellation of licenses caused financial harm to those impacted but there was more collateral damage.  It created a new thought process on auctioning precious resources such as spectrum. Regulator went on over drive and pegged very high base prices for spectrum that came up for renewal. The operators were caught in a bind to bid for and retain their spectrum for business continuity. Unfortunately, they were also ambushed by Reliance who participated in the bid to drive prices further up.Regulator and DoT were by now on an overdrive to correct what is highlighted as mistake-3 and forced the operators to pay the newly discovered price for all spectrum held in excess of what was deemed to be eligible spectrum along with license or surrender the spectrum.  This created ripple effect even for those operators who had balance license period

Mistake-8 Year: 2016 Predatory pricing and disruptive entry by Reliance Jio
Responsibility: Reliance, Government and Regulator (for aiding and abetting)

The penultimate round in this game was shockingly easily won by Reliance Jio with its disruptive bundled value proposition on top of high speed 4G data and high capacity IP network in 2016. This was no ordinary disruption. The first impact was a precipitous drop in revenue. Voice which accounted for 70% of revenue became free packaged in unlimited quantity as a bundle with large parcel of data for a monthly ARPU of Rs.150 approx. Revenue from STD calling and roaming evaporated in this new bundled proposition. Second, the collapse in tariff triggered usage explosion particularly in data by 30x to 40x necessitating investment in network capacity.Third, the incumbent players who had envisaged a gradual migration to 4G from 3G had to scramble to make investments in 4G electronics to match Jio on data speed and LTE access.Fourth, the quiet and inglorious exit of players like RCOM, Tata Teleservices, Aircel and Uninor did nothing to bolster the revenues of the incumbents. If anything, it created a deeper crisis in the rental earnings from towers and the incumbents lost more than the gain
It led to further consolidation as Vodafone and Idea merged but, in the period, leading up to the merger they possibly lost some market share to sink to the third position instead of becoming a strong number one.Reliance may have pulled out an unimaginable victory, but it has come at great financial cost/sacrifice to them as well.Reliance was supported by the regulator and competition commission in not calling out and arresting what was possibly the most blatant case of predatory pricing.Incumbents were not prepared to take on the 4G onslaught and looked foolish catching up with Reliance, after enjoying a head start of many years.

Mistake-9   Year 2019. Telecom operators lose AGR case in Supreme court
Responsibility: Operators and Regulator/ DoT

In the shrinking revenue market incumbent operators were literally fighting a battle where “it cannot get any worse” was the only hope.And then it got worse in the cruellest manner possible on account of the Supreme Court ruling on AGR definition — creating a huge financial liability.On hindsight it can argued that the operators could have contained the risk by paying the amount and fighting, even if it slightly weakened their case.The dragging of the case over a long period implied that the liability has now ballooned 3x times due to penalty and interest.With the spectrum value being redefined thru 3G auction and renewal it is debatable if the revenue share retains sanctity in the first place.In this long period of 25 years, the regulator, DoT, government and the operators have also crafted some great policies and taken bold decisions and of course have also committed several other not so major mistakes.But the achievements pale when placed alongside the egregious mistakes, some of which have been recounted in this narrative.It is also true that some wisdom is after the event and some mistakes got exacerbated due to circumstances. But it is probably right to say that a sector that contributes so crucially to business and personal productivity has been mismanaged and those responsible are not even putting up their hands to claim it.We have a long list of victims and few victors.

Where do we go from here?

In the last 25 days after the SC ruling the operators have experienced a range of emotions from despair to new hope of some bailout package by the Government.Their first expectation is waiver of penalty and interest (or waiver apply lower interest). The government is likely to make this gesture, partially or in full and also allow time for payment of the charges.The second expectation in terms of reduced revenue share, spectrum usage charge and GST are also likely to be met with Reliance joining in the chorus for this demand.It is possible the relief on the first part is low while the relief on the second part is significant to manage perception. Reliance will gain the most from this arrangement.The end game it appears may not signal defeat and death but a slow revival and some time and space for the injured to heal.  The game is played on Reliance terms and they have for now reached satiety in terms of revenue market share and coming on top of the heap. The timing for Reliance to increase the prices cannot happen at a better time and they can now work on sharp improvement of realisation and gradual improvement of revenue market share.All operators have finally come together to announce price increase and we could witness iterative price increase and the launch of 5G at some premium.Airtel and Voda-idea will come together to probably create a shared 5G network and in the current scheme of things though unlikely we should not be surprised if Reliance also joins the common 5G network platform.After what they have gone thru in the last 3 years the incumbent operators have reconciled to playing second fiddle to Reliance and for now surviving and nursing themselves back to health.Telecom is a key business enabler and is at the very core of new age business.Regulator and Government need to show imagination to promote and accelerate 5G by keeping the upfront spectrum price low even while slashing the revenue share.The regulator should also explore methods to equalise the license period for all the players, create a stable regulatory regime, define min-max for tariff and otherwise stay away from taking sides or creating controls

Surya Mahadevan
Prof. Surya Mahadevan has 30 years of work experience in FMCG and Telecom sectors. He played leadership roles managing large brands such as Tata, Reliance, Aircel, Loop, Maltova, Viva and Amul.

He has worked across Sales, Marketing, Retail and Customer Service functional areas and in his last assignment before joining TAPMI, he was responsible for Mumbai Circle Telecom operations as Chief Operating Officer at Loop Mobile.