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Why are telecom firms in the doldrums?

LiveMint logoLiveMint 11-06-2017 V. Sridhar

Mounting losses have returned to haunt the Indian telecom industry once again. The last time this was witnessed was in 1999 when a number of licensees under the National Telecom Policy, 1994 were finding it difficult to pay the licence fee. The government at that time offered a bailout package in the form of migrating the licensed operators from a fixed licence fee to a revenue-sharing scheme under the New Telecom Policy, 1999. Now, with most operators declaring losses, fall in revenue and Ebitda (earnings before interest, taxes, depreciation and amortization), and with just one operator alone accumulating debt of more than Rs40,000 crore, it is a tough time for the industry. This is a sad state of affairs when the whole country is steaming ahead with the digital revolution. With the government stressing on Digital India, enterprises embracing digital transformation and consumers becoming digital-savvy, why is telecom—the backbone of the digital revolution in the country—in the doldrums?

First, are telecom companies (telcos) themselves to be blamed? While they complained earlier about higher spectrum prices and inadequate spectrum, today they bicker about predatory pricing and inadequate interconnections. The industry is consolidated with five-six competitors in each service area with healthy but not too much competition. The spectrum holding per operator has almost doubled, providing enough capacity to meet burgeoning demand. Regulations have enabled sharing and trading of active and passive infrastructure, paving the way for cost reductions.

However, due to this infighting, telcos have conveniently forgotten about customers. Connectivity is very poor with simple voice calls getting disconnected; poor to no coverage in certain areas and inside buildings; one-time passwords being received after time-out; data speeds at pitiably low levels; and consumer complaints conveniently ignored. According to a report by OpenSignal, download speeds in India have dropped more than one megabit per second (Mbps) in the last six months as data traffic has increased. India is ranked 74th and is listed below Pakistan and Sri Lanka in terms of speed. While the global average 4G download speed is 16.2 Mbps, it is 5.1 Mbps in India.

Instead of undercutting prices amongst themselves, telcos will be better off if they can offer innovative products and services, embrace newer technologies and provide better quality of service. There should also be good corporate governance practices in place so that there is due diligence with regulatory compliance, tariff fixing, KYC (know your customer) adherence, and appropriate advertisements. While it is easy to say that the above needs to be monitored by the regulators, self-discipline and regulation on the part of telcos is also a must. Poor customers depend on this vital infrastructure for their daily life, be it bill payment or requesting cabs.

Second, the government. By keeping higher reserve prices and providing little visibility on the future availability of spectrum, telcos have been forced to bid at high prices, specifically in the globally harmonized 900, 1,800 and 2,100 MHz bands. This has resulted in telcos borrowing funds from banks in huge amounts, both for the upfront payment for spectrum and for their capital needs.

Third, the governing mechanisms in banks to manage loans to telcos. With the exception of Vodafone, most of the foreign partners of our telcos, thanks to the spectrum scam, are afraid of infusing capital. Hence the dependence on our banks. However, loans obtained for payment of spectrum charges cannot be used as collateral repayment in case of defaults. Banks anyway are poor in converting loan collaterals successfully for repayment in other sectors as well. While it was genuine reasoning on the part of banks to lend to telcos as they are a crucial cog in the wheel of the digital economy, due diligence, especially in the case of struggling telcos, is a must.

Fourth, the game of customer acquisition. While the customer is queen in many sectors, it is turning out that the customer is at the mercy of telcos and over the top (OTT) service providers. Extensive data collection by these firms and subsequent manipulation of big data about customers, though intended to be beneficial for the customer, is a gold mine. These firms, while monetizing such collected data for ad-based revenue, cross- and up-selling of products, have shown utter disregard when it comes to privacy violations. In the absence of robust data protection regulation, the customer is at the receiving end of spam emails, and other inappropriate uses.

Fifth, the possible vertical integration and disregard of net neutrality rules by telcos. Direct and indirect network effects have prompted telcos to aggressively expand their customer bases with vertically integrated services all the way from simple voice calls to payment services. With the net neutrality regulation yet to be announced, this means customers can often be taken for a ride in the form of price and priority differentiation, and bundled offers.

It is time that the government accords infrastructure status to telecom, perhaps reducing regulatory levies and taxes which are one of the highest in the world, amounting to around 30% of gross revenue. It should also invoke strict penalties for regulatory non-compliance, including quality of service, and keep a market watch on the corporate governance practices of telcos for a better Digital India.

V. Sridhar and Rohit Prasad are, respectively, professors at IIIT, Bangalore and MDI, Gurgaon.

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