All hope is not lost yet for the telecom sector
Indian telecom companies have decided to raise tariffs after a particularly challenging phase of flux that saw disruptive technological change, intense competition, and bitter disputes over policy compliance. A glaring sign of the funk that much of this sector finds itself in was the eye-popping losses posted by Bharti Airtel and Vodafone Idea for the last quarter, with little clarity on how they will pay their accumulated dues to the Union exchequer—yes, the large sums arrived at by a widened definition of the “revenues” that telecom operators must share with the government.
The concerted price response by Airtel and Vodafone Idea may be a bid to stay afloat, but it is also the kind of market behaviour that regulators are wont to frown upon. Late on Tuesday, Reliance Jio also said it will raise tariffs. In a field of just three major players, the former two are arrayed on the wrong side of technology; Jio uses superior systems to offer calls and data at throwaway rates. Varying network technologies seem to have caused cost differentials that are likely to result in industry consolidation, and the government, as an assurer of market efficiency, will have to step in at some point. It’s clear that survival in telecom requires every operator to adapt to disruptive technology and policy settings without losing consumer orientation. It’s not easy.
So what are the lessons from the latest telecom crisis? First, the government must price spectrum sensibly. It needs to lower its reliance on the sale of radio frequencies to plug its fiscal gaps. These receipts filter through the industry to the consumer; if they don’t, they balloon as losses somewhere along the value chain, and investors get lumped with the tab. Second, don’t put a price on a permit. A licence comes with a set of obligations; a holder must provide services of acceptable quality to telecom subscribers, for example. Licence fees, however, provide no signals that could adjust demand and supply. That’s the job of airwaves, the main resource that operators depend on, and this can be done well so long as they are priced correctly through auctions. Finally, don’t thwart technology. Telecom companies are always keen on the efficiencies of modern advancements, and policymakers need to be alive to factors holding back their adoption.
The policy environment is vital as India begins preparations for adopting fifth generation (5G) cellular technology that can carry data at a tenth of the cost that current 4G networks do. Ericsson, a telecom equipment maker that has tested the technology in the country, estimates the business potential of 5G-enabled digitalization in India by 2026 at $27 billion, as the country adds every fourth new subscriber in the world. A government committee sees a $1 trillion economic impact of 5G by 2035 once stuff like Internet of Things, Artificial Intelligence and augmented reality gets going. Gigabit-speed networks that give rise to various new ways to use the internet could significantly alter the nature of telecom regulation; 5G architecture is radically different from existing networks, and would call for considerable investment by cellular operators as they go about setting up their grids. Airtel and Vodafone Idea have indicated that the price floor set by the government for 5G spectrum is beyond their reach. If they are forced to sell assets or take on fresh debt to pay the sums demanded by the government, their ability to join the upcoming auctions could diminish further. That would leave India’s telecom market in worse shape.