Price wars that followed the entry of new players saw the profits of the incumbents plunge, so there was every reason for them to see the new players out
Bhupesh Bhandari / New Delhi Feb 17, 2012, 00:21 IST
The Supreme Court’s directive to the government to cancel the 122 telecom licences issued in 2008 has put a question mark over seven million users as well as equipment and information technology contracts running into billions of dollars. The subscribers can, of course, migrate to other brands. The equipment can be resold. But it won’t be easy. The companies whose licences have been cancelled will have to grapple with these problems in the days to come. Meanwhile, the shares of other service operators rose sharply after the verdict was handed out, as investors felt they would be able to raise call tariffs and hence report better earnings.
So, how much of the controversy was a result of rivalry between the incumbents and the new players? On the surface, there is no evidence that the newcomers were done in by the incumbents. The Supreme Court judgment came after the Centre for Public Interest Litigation and Subramanian Swamy moved the court over alleged impropriety in giving out the licences by the telecom ministry, then led by Andimuthu Raja. None of the incumbents was a litigant.
But it could be a different story behind the scenes. More than one person has said this in plain terms in the last year or so. When Prime Minister Manmohan Singh came under attack for instructing his office to be at “arm’s length”, a statement was issued on his behalf that this was done to ensure that the prime minister was not seen as favouring one business house or the other, and the autonomy of the Telecom Regulatory Authority of India (Trai) and the Department of Telecommunications was maintained. “It was well known at that time that there were conflicting interests between existing operators and new entrants,” the statement said. Telecom Minister Kapil Sibal too said in an interview that the industry was at war with itself and was, therefore, destroying the goose that laid the golden egg. And Shahid Balwa of DB Group said in the courts that he was in jail because of his business rivals.
What irked the incumbents was that the subscriber-linked criterion was raised when they asked for spectrum; newcomers were given spectrum freely. It is also true that that with new players in the market, the incumbents were in for some competition. But that competition remained on paper. Together, the new players owned less than seven per cent of the market. And more than half of those customers were with one service operator, Unitech Wireless. However, the entry of the new players led to serious erosion in tariffs — the newcomers launched inexpensive services to gain market share in an extremely price-sensitive market, and the incumbents had no option but to drop their tariffs. As a result of the price war, the profits of the incumbents plunged. So there was every reason for them to see the new players out. It was only last year that the incumbents were able to raise tariffs, once the threat from the newcomers had receded.
The underlying feature of the Indian telecom market is very low brand loyalty. Customers don’t think twice before switching their operators for better tariff or service. The churn in customers is as high as 10 per cent every month. This also shows up in the high incidence of one person owning two or more connections. It is estimated that 40 per cent of the 850 million connections in the country are owned by existing users. That perhaps explains why mobile handsets with slots for two SIM cards are so popular. This means two things. One, the Indian market is still under-penetrated; only about 40 per cent of the country’s 1.2 billion people own mobile phones. The opportunity is huge. And two, it is not very difficult for a newcomer to make inroads into the market; all it needs to do is tap the churn in customers. The newcomers alleged that it is for this reason that the incumbents tried at every stage to block number portability, which allows users to switch their service operators without giving up their number.
The newcomers also alleged that the incumbents delayed at every stage the rollout of the newcomers by not giving points of interconnection, and by insisting on discriminatory and non-reciprocatory interconnection agreements. The fight spilled over to the GSM lobby group, the Cellular Operators Association of India (COAI). The newcomers said it was wrong for four members – Bharti Airtel, Vodafone, Idea Cellular and Aircel – to have 80 per cent of the votes. COAI justified it on the grounds that voting rights have to be in proportion to size. Some of the newcomers also wrote to Trai that it should not consider COAI’s views representing those of the industry.
The Indian telecom market is no stranger to corporate rivalry. Lobby groups have clashed in the past over several issues. The biggest perhaps was the wireless in local loop technology, which enabled fixed-line service operators to offer mobility, albeit within a limited range. And now the incumbents allege privately that the whole controversy about roaming agreements between service operators for 3G services has been whipped up by a rival whose business plans could go awry because of it! There’s a familiar ring to it.
Spectrum is not the only battlefield on which the Telecom Wars are being fought. Away from prying eyes the Telecom towers have all been "nicely" monopolized - shared by a so-cosy cartel of incumbents. Newcomers (mainly Telenor) struggle to provide services.
Posted by: Srinivasan
February 19 , 2012, 17:43 IST
Not to forget Struggle for Cash-Debt Funds. Mega Cash Sums are needed in Telecom Oil-Gas Power. In Telecom for spectrum licenses roll-outs. This Mega Cash requirement serves as an effective and convenient barrier to block entry entry of new players. In crony-based political economies, Access to Political Power determines Access to Mega Debt funds - through PSU Bank channels.
Raja's action led to-
1) Greater competition - Awesome.
2) Loss of Rs 176,000 crore by the People of India. Terrible crime.
Incumbents were able to use his mistake (2), to create a mood against the new policy and so get rid of hateful competition(1). We need a policy which meets dual objectives - safeguards people's interests & national exchequer and fosters competition as well.
Is the author alluding that SC judgment was a result of lobbying by incumbents? BS going down hill. With the departure of Sunil Jain, are you not losing it??
Posted by: Srinivasan
February 17 , 2012, 16:06 IST
I agree. It is quite horrible for the BS to write in favor of greater competition! Competition does more to help consumers than regulatory oversight. It also creates the pressure for innovation and has provided a fillip for sectoral growth. BUT, BS to kindly note - it prevents incumbents from making easy money and increases stress-levels for the incumbents. That makes it fundamentally anti-business and totally, totally unacceptable. In future, please remember to plug for policies which decrease Sectoral Competition.
The greatest collateral damage in the telecom wars has been caused to the government. It should eliminate the arbitrage from availability and pricing of spectrum that favours the earlier entrants. It could increase licence fees from the proposed 8% of gross revenues by a figure that matches what it now earns, at differential rates, from spectrum charges. The incumbents are fearsome competitors but let the newcomers have a sporting chance.
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