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Strategic Focus
“There is a clear need for consolidation”

Issue Date - 24/11/2011
B&E: Indian telecommunications industry may start consolidating by the middle of 2012 after the much-awaited National Telecom Policy, 2011, is unveiled in January 2012. How will this help the industry going forward?

Ranjan Mathews (RM): There are currently 12 operators or more in most of the 22 circles in the country. This has led to a situation of hyper-competition, fierce pricing battles, plunging profit margins, spectrum scarcity and oversupply. In fact, this situation has arisen as a result of the induction of five new operators in 2008 (the context of much of the 2G Scam) by the Department of Telecommunications (DoT). Further, between 2001 and 2007, there were many mergers and acquisitions (M&As) as older operators either exited the business or acquired other operators to cobble together a pan-India footprint. Significant of these were Bharti, Idea, Vodafone and TATA. Major operators who exited the business were BPL, Max Hutchinson, AT&T, Telstra, etc. Most experts now agree the market is ripe for another round of M&As to prune the market to a more sustainable six operators. This conforms to what is seen in most other international markets where there are no more than 3-5 operators. This is seen as more than sufficient to provide adequate competition in the market place. Thus, the benefits that will accrue as a result of such consolidation are many. One, we will have a healthier industry with adequate financial resources to invest in the technology advances (advanced networks, applications, etc) which are needed to keep the Indian mobile communications industry at the forefront of global advances. Second, one can expect affordable services for the customers. Expanded employment opportunities, reduction in the digital divide, increased rural penetration, more efficient use of scare spectrum, increased availability of loans and equity funding for needed roll-out of telecommunications infrastructure are some of the other benefits that one can expect from consolidation. Further, it will have a positive cascading effect on GDP as it has been established that a 10% rise in broadband penetration leads to a 1.3% increase in GDP.

B&E: But don’t you think it’s too late, in terms of safeguarding the industry?

RM: The initial flaw was that DoT ignored TRAI’s recommendation to not issue licenses in 2008 without ensuring there was adequate spectrum available. Further, due to the ensuing litigation surrounding the grant of licences, M&A activity could not proceed until the court cases are resolved. Once this happens, the new M&A recommendations made by TRAI will certainly help in facilitating M&A activity. However, another significant factor that will impact M&A activity will be the availability of additional spectrum, spectrum pricing and licence renewal terms for older operators that will see their licences coming up for renewal commencing 2014.

B&E: New players like Loop Telecom, which have invested thousands of crores in buying the spectrum licences, are now requesting the government for an exit. What, according to you, went wrong?

RM: The fundamental problem was that there were too many players in each licensed area. Contrary to all international norms, the number of operators went to 12. This caused a brutal price war as the new operators fought for market share. However, this only caused a downward spiral for all operators causing a serious decline in profitability. The scarcity of spectrum for the new operators led to many regulatory complaints and litigation. Finally, the eruption of the 2G Scam caused both international and domestic funding to freeze. This caused a liquidity crisis for the new operators who could not raise the required funds for network roll out and market expansion. The litigation also put the license of many of the new operators at risk which further exacerbated their business viability.

B&E: So you agree with the government that there is a need for an appropriate exit policy for the licencees?

RM: Certainly, given the number of operators in each circle, there is a clear need for market consolidation. I believe the government should provide an easy exit route for them. However, in order to provide for an orderly exit, the government will need to specify what penalties, if any, should be paid for failure to meet such licence conditions as roll-out obligations, spectrum use, revenue generation, etc. Once these are clearly prescribed, companies should be allowed to exit as quickly as possible in order to free up spectrum which is badly needed for the expansion of the industry. The point at which each company decides to exit the business and the losses they are willing to sustain will depend on the business model followed by each company and the financial viability each company possesses to meet the roll-out and market expansion obligations of the licence and the ability to compete in a hyper competitive market.

B&E: How do you see the Indian telecom sector shaping up post-consolidation?

RM: We expect the number of operators to go down from the present 12 to about six or so in the next five years.

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