The Mess Called the Indian Telecom Sector

How it all started

Post 2000, there was a large influx of a lot many players in the telecom sector. The liberal policies of the then ABV government made way for both national as well as international operators like Reliance Infocomm (not to be confused with Reliance Jio!), Airtel, Vodafone, Tata Indicom, Idea and the likes to enter the market. This was mainly because of reduction in licensing fees and an increase in the percentage of shares an international firm is allowed to have in an operator operating in India to 74%. Till then, the market was dominated by a government entity, DTS, which was later renamed as Bharat Sanchar Nigam Limited (BSNL). The government also divested its shares in VSNL, which along with MTNL, were carved out of C-DOT (setup by Rajiv Gandhi with the help of Sam Pitroda in the 1980s). Tata later bought 25% of VSNL’s shares.

India has predominantly followed the GSM mobile system, with CDMA also being present, but in the minority. It was in 2004 when the number of mobile phone connections crossed the number of fixed-line (wired) connections, and the sector hasn’t looked back since. The mobile phone market has a coverage of about 1.183 billion presently, which would mean that it has increased by more than 200 times in the last ~18 years.

Internet, on the other hand, took some time to really hit its stride, since its launch in 1995 by VSNL. India had dial-up connection, with maximum speeds of 56 KBps, till 2004. After that, broadband was introduced, which had speeds of upto 256 KBps. Despite this development, the growth that took place in the number of subscriptions was below industry estimates. In 2010, 3G services were launched in India, which hugely accelerated the popularity and accessibility of internet in India. Another significant milestone was the introduction of 4G services in the country.

From 10,000 dial-up users in 1995 to 450 million fixed and mobile users combined in FY2019 (according to Internet and Mobile Association of India), India has come a long way in terms of internet services offered and is currently second to China in terms of the number of internet users.

The Growth in Numbers

The Telecom Inc’s story in India has been that of tremendous growth and success. It grew from about 760 million in 2010 to about 1.14 billion in 2016. Post 2016, though, there has been a slight stagnation in the growth rates, and is currently at about 1.18 billion users.

Tele-Density has shot up to 92.84% (in FY2018) from a modest 18.3% in FY2007. The rural tele-density has increased to ~59% (as of October 2018) from ~43% in March 2016 while the rural wireless teledensity has increased to 58.48% (as of October 2018) from 50.08% in March 2016. Total broadband subscriptions in the country increased at a CAGR of 60.03% during FY07–18 to reach 412.60 million while the subscriptions, as of November 2018, stood at 511.90 million. These show the rate at which MVAS, the mobile telephony and internet services have penetrated the Indian market (both urban and rural).

Total wireless data usage in India grew 131.12 % YoY to 12,549,891 TB between July-September 2018, thereby making India the largest consumer of mobile data in the world. It is also mention-worthy that the FDI inflows into the telecom sector during April 2000 – September 2018 totalled to US$ 32.34 billion. During this period, FDI into the sector accounted for a share of nearly 8.12 per cent of total FDI inflows into the country! The contribution of the telecom sector to India’s GDP is about 6.5% (as reported in 2017) and is expected to rise to 8.2% in 2021.

Disruption Leads to Innovation

Let’s go back to September 2016. 12 large operators providing primarily voice and text services with much less focus on mobile data. Mobile Internet consumers were used to high costs and long buffering times due to slow speeds. Average 3G data consumption in 2015-16 was put at 753 MB/month. There were a dozen large operators fighting it out to capture the market share and consolidate their user base. Things were rosy for operators. But there was a storm coming.

Mukesh Ambani has always been a very shrewd investor, and has had a penchant for disrupting and investing ahead of the market curve.

Telecom was always part of his vision and he disrupted the industry back in the early 2000s by entering the market with free incoming calls. Remember the market was very nascent and the user penetration for mobile phone connections very low. But then the Ambanis split and the telecom business went to Anil Ambani, with a condition that the two groups could not directly compete, meaning Mukesh had to put his plans on a pause.

Cut to 2016, with the cool off period for the non-compete condition waived off, Mukesh Ambani disrupts the industry with a bang, rolling out full-fledged 4G services with Reliance Jio Infocomm and changing the way consumers communicated and paid for the communication. While the ensuing bloodbath in the industry saw the number of large operators fall down to four from a dozen in a span of months, after many were forced to shut shop or merge, the consumers were smiling. They now had access to Mobile Internet connections on pricing plans solely based on amount of data consumed, with voice and text services being complementary.

Not only that, the data prices were drastically reduced to one of the cheapest in the world.

Where one would pay a couple of hundreds for a single GB of data consumption, now Jio offered the same GB of data everyday for three months for the same price. This started a price war in the industry which left such a big red mark on the balance sheets of the barely surviving incumbents that they are still reeling under the effects.

The timing of this disruption proved to be very critical as this was the same time when a whole range of digital services were finally starting to go big starting to market their products much better. Data was just being called the new oil and the industry was starting to look at it as the key to the fourth industrial revolution. It boosted internet penetration and the much-improved connectivity and availability of cheap data provided the impetus that India’s startups and other large and small corporations needed to create and build upon a digital ecosystem of services.

The effect however would not have been as quick and explosive with respect to time if Jio had not offered its services for free for a period of 6 months. That really got people hooked to digital services being available 24 x 7 even when not at home or in the range of a fixed internet connection.

Where Things Stand Now

From more than a dozen large operators in what can very conveniently be called the pre-Jio era to just three large operators now, including Jio that is, consumers have a lot less options to choose from. Big foreign names like Telenor, Sistema and Docomo exited the market, and domestic players like Reliance (ADAG), Aircel and Tata were forced to shut shop. Vodafone and Idea were forced to merge to survive, Bharti Airtel being the only one able to survive on its own, and surprisingly, even after acquiring Tata to get a jump in subscriber base. Jio, backed by its cash-rich parent has taken a huge debt and forced its competition to go under larger piles of debt. Such is the shape of the industry, that the current cabinet has agreed in-principle to merge the state-run MTNL and BSNL which have been under severe distress for long now.

While Jio and Airtel reported a net debt in excess of $15 billion in June 2019, the figure stands at $14 billion for Vodafone-Idea. Vodafone-Idea is said to be in talks with its creditors to restructure the debt. Airtel is also enjoying a marginal increase in its stock price on account of reports saying that it is trying to cut debt by utilizing money from IPO of its Africa unit. Jio too is tinkering with its ownership structure and clearing up its debt pile by transferring all of its liabilities to its parent RIL.

All three are said to be working on cleaning up balance sheets as the market looks to move towards some stability in light of Jio finally increasing the price of its services on account of Interconnection Usage Charge (IUC). IUC is the cost that one mobile operator pays to another for carrying through/ terminating a call. It works as a clearing-house, as the costs involved are aggregated and a settlement is arrived at. IUC is said to be a huge cost to all operators but has been an advantage to the incumbents ever since Jio started offering free voice and consumers abused the service by using missed calls from other operators. In a display of bad blood in the industry, Jio even accused its competition of trying to abuse IUC to increase their own revenue by shortening the ringing time to 20 secs instead of the current industry standard of 30 secs. This matter was even reported to the Telecom Regulatory Authority of India (TRAI).The incumbents do not want IUC to be scrapped as this would further increase the asymmetry of traffic, while Jio, who entered the market with the revolutionary 4G/IP technology, argue that as long as the incumbents don’t convert all of their network to 4G, asymmetry will remain.

As if this was not enough to push the sector in gloom, the government, riding high on the back of a recent Supreme Court Judgement regarding Adjusted Gross Revenue, that directs operators to club revenue generated from streams other than the direct consumer services, leaves the industry to pay a combined Rs. 1.3 lakh Cr in taxes, penalties and interest (Rs. 92,000 Cr for only Annual Licensing Fee and Rs. 41,000 Cr for Spectrum Usage Charge, both calculated on the basis of AGR). Airtel and VodafoneIdea are the worst hit, with them facing demands of 39,000 crore and 41,000 crore, respectively. The demands could even go up to 58,000 crore for VodafoneIdea and 43,000 crore for Bharti Airtel, if interest, compound interest and penalties are to be taken into account.

While operators other than Jio have asked the government for relief package to help avoid collapse and bankruptcy leading to a monopoly situation in the market, Jio has assured the government that its competition does not face any imminent collapse and the industry is well enough to pay their dues. The government has set up a panel to discuss this through and to get to an amicable solution, as they are well aware of the huge debt the telecom sector is in currently, and it would definitely be difficult for the operators, especially the incumbents to pay up in such a short period of time. One possible solution that the panel has considered, is for the operators to repay this amount over the next 20 years, with the dues being calculated using NPV method.

The government has also been thinking about setting a floor price for plans, to curb a potential incidence of a predatory pricing situation. This could, however, prove to be counterproductive, especially for the customers. This might also lead to the operators getting complacent and not adopting technology and innovation, as easily as they would have otherwise.

The Way Forward

The only way to grow and survive in this ever changing world is through innovation. The telecom sector is no different. The firms would need to realign their business strategies and redesign their existing structures to gain the much needed competitive edge.

The following are a few future trends that we thought about highlighting:

1. The 5G Revolution: This, undoubtedly, is the next big thing in telecom. Its adoption would lead to an even faster internet, and would definitely have a huge impact on next generation technology, including Big Data, IoT, AI/ML, Blockchain.

2. Adoption of AI: Artificial Intelligence is slated to play a major role especially in Predictive Analytics of networks and traffic, customer churn, etc. We should also see chatbots and speech and voice bots for efficient customer service.

3. IoT: Telecom companies will definitely be the major drivers of implementation of the Internet of Things, by providing infrastructure and connectivity and the ability to handle huge amount of data.

4. Cloud Services: Telecom companies would also help in integrating the cloud offerings and creating the next generation data centres, thereby reducing latency, improving availability, and along with the adoption of 5G, massively improving speeds.

5. Security: This is a very critical factor that the telecom companies have to focus on. They should think about new ways to ramp up network security, which would consequently lead to data privacy and prevention of data breaches.

6. Diversification: We should see many more tie-ups of telecom companies with content based platforms. They could also think about creating their own content; this could actually help them expand their user base.

Telecom companies are expected to act as the backbone of the ‘Digital India’ initiative, playing a pivotal role in the digital transformation across several industries. Thus to attain success in other sectors, we would need the telecom sector to always be at the forefront of technological advancement. For this, they would need to spend a lot on innovation and R&D. However, with huge AGR dues, the telecom companies are definitely in a big fix, with an impending danger of job cuts and ‘cost-cutting’. This is something we can ill afford and a resolution must be arrived at as soon as possible.