The Actors:
Bharti Airtel, Vodafone Idea, Reliance Jio, Government of India and the Indian citizens
Background:
The Indian telecommunications setup was, prior to 1994, a nationalized one. The only players in the field were MTNL (serving Delhi and Mumbai) and VSNL (for international calls) due to the low demand for telephones, then considered more as a status symbol. Financial crisis, increasing demand of telephones and the introduction of cellphones around 1994 led the government to liberalize (BSNL was setup as a result) and privatize the sector. As a result of privatization, the country was divided into 18 circles for cellular services and two private companies were allowed to participate in the open tender process for each circle. This meant that the setup was now a duopoly by design.
The private companies who had won the bid to provide cellular service in a particular circle were required to pay a fixed fee to the government to obtain a license for operation for 15 years. However, due to unrealistic projections of revenue and less than anticipated user and usage numbers, the companies found the agreed to license fee high. After much prodding from the companies, the then Indian government agreed to waive the license fee and instead setup a revenue sharing model with the companies. This was a huge policy shift and one which was beneficial as the profits of companies kept increasing, while also allowing the government a slice of it.
The next (disastrous) policy shift occurred in 2008, the year of the 2G spectrum scam. The government awarded licenses to companies on a first-come, first-serve basis at throwaway prices decided in another auction held seven years ago leading to enormous competition among the companies. Subsequently though, the Supreme Court cancelled all of the 122 allocated licenses in 2008 citing flawed procedure and mandated that the spectrum should be auctioned.
In 2012, the government changed the rules again. It increased the prices of the spectrums ten-fold. Now, the companies had to pay a sort of license fee as well as share their revenue with the government as agreed to in 1994. This coupled with the fines that the Supreme Court had imposed on companies for their part in the 2G scam left many companies with no funds to operate and led to consolidation in the telecom industry. Bharti Airtel, Vodafone and Idea emerged as the major players.
So many policy shifts and rule changes over only two decades ensured that investments in the sector dried up due to low trust, especially considering that most of the companies were JVs between local organizations and established international corporations.
The Current Scenario:
The current scenario of the industry is one that is dictated by the entry of Reliance Jio in 2016. In consistency with Mukesh Ambani’s strategy, he entered the market offering free services to the customers in a bid to monopolize as much of the market as he could. He could afford doing this because because he had cash reserves while the other existing companies were already saddled with debt taken on to buy the expensive spectrum and due to low returns over the years. Companies like Aircel and Reliance Communications (owned by Anil Ambani) went bankrupt trying to compete with Jio, while several others sold their businesses to either Vodafone or Airtel. Much recently, it also forced Idea and Vodafone to merge. It also didn’t help that Jio entered directly offering 4G VoLTE, the latest technology while the others had to slowly upgrade to it.
Various regulatory decisions have also somewhat controversially favoured Jio. Primarily, Jio’s predatory pricing was not deemed anti-competitive by TRAI. Jio was also allowed to use the 4G spectrum that had been assigned for data for voice services as well. The decision to reduce the IUC (Interconnect Usage Charge: the charge that operators levy on each other during inter-operator calls) from 14p/min to 6p/min also benefitted Jio, then with the lower share of subscribers.
The recent Supreme Court ruling concerning the calculation of AGR (Adjusted Gross Revenue) is sure to make another major dent in the profits of the legacy companies. The dispute was centered on how to define AGR ( the revenue that companies pay the government as part of the revenue sharing model). The companies define AGR as revenue from their core services while the government also wanted to include revenue from interest, investment and asset sales. The Supreme Court agreed with the government and directed the companies to clear their dues (including penalties and interest) which is an estimated combined total of $13 billion, of which only a fraction is owed by Jio by January 2020.
Upon requests of a bailout package from the government by the embattled companies, the government has deferred currently owed spectrum payments till March 2022 but it is yet to be seen how much of a relief it proves to be, especially since all operators have increased their prices for services in a bid to stay afloat. (Jio is doing it for fun)
The Future:
The present state of the Indian telecom industry is dire. It can be said that each and every stakeholder is at fault for the situation the industry finds itself in. Everyone was greedy; the government took exorbitant fees from the companies while the operators did not care much about the consumers. However, right now to bail out the industry, the government needs to step up and enact reforms, the primary being doing away with either the revenue share or the license fees. The two year moratorium for spectrum fees may not be enough with Vodafone Idea’s debt already being $14 billion and Airtel’s being over $15 billion. This along with the AGR dues may well sink both these companies.
That is something the government cannot afford to do, politically and economically. The opposition has already hit out at it alleging a nexus with the Ambanis and doing nothing to prevent a Jio monopoly will only strengthen these allegations. With BSNL and MTNL having debts to the tune of Rs. 40,000 crore, they will not be able to compete with Jio at present and a unchecked Jio may well be hell for the consumers.
In that context, it is a welcome move that the government plans to modernize BSNL and MTNL by merging them and giving them a Rs. 69,000 crore package. However, history shows that nationalized institutions never do well and it may just happen that a better idea would have been to privatize BSNL and MTNL and give the revival money as a bailout package to Airtel and VodaIdea.
As far as Vodafone-Idea is concerned, Kumar Mangalam Birla has warned that they may have to shut shop. However, a cash infusion from parent company Vodafone may save them. The incentive for them in doing so is tapping the users in the rural areas. Airtel is not in as bad a state as Vodafone-Idea and is expected to just tide over the crisis especially after hiking tariffs.
The worst affected by the crisis will most definitely be the consumers. As already seen, the operators have increased the tariffs. What was free a few years back, is already back on road to become expensive. And once it becomes expensive, it stays expensive. It should be noted here that Jio’s increase in price is part of the strategy with which it (and in general RIL) does business. So, a monopoly headed by Jio will most surely mean high prices, even higher than pre-2016.
Another way the consumers will be affected is investment for 5G. Already, the trust in the sector is low and investments have dried up. The sector was lucky that Jio arrived when it did because it led to a 4G rollout in India very quickly (even earlier than in parts of the US). But the same cannot be said for 5G. It is harder to upgrade than to build from scratch, and with two of the three domestic players in debt, foreign investment is needed. However, foreign investors will be wary of the fact that they can’t appeal against the frivolous and whimsical policies of the government to international arbitration anymore, since the Indian government unilaterally canceled the investment treaties that made that possible.
What do you think is the next right step forward for the telecom industry? Share it in the comments below!
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