Telecom sector has thrived and grown in the face of acute competition, whimsical policy, resource crunch and dodgy business models. The sector has witnessed the inglorious exit of many service providers who lost a lot of money. And most certainly even those who remain are in debilitated financial health that impairs their ability to reinvest in the business. It would however appear that the storm has crossed the coast and things are settling down and there is good reason to nurture hope of a new dawn.

Let us pick the story from the recent past. In the year 2016, the sector was thrown into disarray with the most viciously predatory and imaginatively bold entry of Reliance Jio announcing Voice calls that contributed to 70% of the sector revenue will be free on a minimum monthly commitment. If this was not enough, the distress of the incumbents was amplified by adverse ruling on what constitutes revenue on which share was to be paid to the government. Vodafone- Idea was ready to call in quits and that would have adversely impacted the creditors, government included, consumers and also the investment and competitive play in the sector.

The government eventually came up with the most imaginative rescue plan offering to accept equity against what the service providers owe the government, in addition to a slew of policy and process liberalisation and the promise of more such initiatives

At this crucial inflection point, there are still several imponderables: –

1. Nature of competition and cooperation: Telecom sector has witnessed unique experiments
   of service providers coming together to share infrastructure, offer roaming services to subscribers of other network, retaining vendors to provide managed services and creating alliances across other sector, even while processing acute competition with other players. How will the competition landscape change with the number of private players coming down to just 3? What happens to the hapless public sector player?
2. Vodafone’s will to stay on: In accepting the government offer, Vodafone has signalled its intent to dig in and fight. But given the acute financial stress and relatively lower investment in infrastructure will they slip on comparable service quality? If the ARPU improvement is muted and staggered, will they be able to survive? What is required of Vodafone to become a strong third player?
3. Is the sector ready for 5G Opportunity: 5G technology holds the promise of significantly better
   speeds but there is still some distance to go before many of the ‘use cases’ become commercially viable. Do we expect a gradual migration to 5G or an accelerated switch over? What are the likely contours in terms of spectrum and network partnership?
4. Creating new revenue streams: Unlike service providers of internet mail, social media, Internet browser and Search services and educational and entertainment content, most of whom have successfully transitioned from a ‘Free’ business model to a financially viable business, telecom service providers have struggled to make significant progress in creating new ‘value-added’services. What explains this indifferent performance and is it at all possible for telecom service to create alternate revenue streams? What new products and services can telecom providers create consistent with their core strength?
5. Pandemic effect: The pandemic created a huge uptick in the appetite for data connectivity and consumption. What is the long-term implication for the sector when the pandemic recedes?
6. Policy initiatives and regulatory framework for sustainable growth: What policy interventions
   are required to restore financial health and create conditions for investment in infrastructure
   to improve the quality of service and for launch of new products and service? What key changes are required in the regulatory framework to minimise the disputes across different players and with the policy making body?

We will take up each point for a detailed inquiry with a view to envision the potential trajectory of
different players and the sector. We will explore different scenarios and take a view on the factors and parameters that will come to dominate or determine the outcome.

Before we get to the discussion points let us first capture the change the sector has seen over the last 5 years.

In the table below we capture the key performance indicators of the sector

# Data Source: TRAI report of performance indicators
# Realisation per minute or GB is an analytical measure by the author

The sector has undergone a drastic change in the last 5 years

• Voice usage has more than doubled while data usage has increased by 80 times
• And yet overall revenue is about the same
• Consequently, revenue per min has crashed by 60% and revenue per GB is a mere 1% of what it was 5 years back
• It is curious to note that the number of Subscribers has not seen significant change at 14% growth. In this period the swing in data usage and multiple devices being used by each individual should have reflected a sharp increase in customer base. That may well have happened but is marked by the sharp drop in incidence of multiple voice subscription.

This order of swing in key parameters is unprecedented and it provides damning evidence of the untold story where in the aggregate the sector had to make huge investments in network quality and capacity, only to realise about the same revenue

1. Nature of competition and cooperation

Reliance Industries Ltd has raised a record ₹3.24 lakh crore in capital from stake sale in units, rights issue and asset monetisation

Reliance is under no pressure or urgency to raise the tariff as they aggressively pursue 50% market share. It is also possible that Jio may simply roll out 5G at a premium and take only a modest increase in tariff for 4G. Reliance has another 7 to 8 years of validity for some part of the spectrum and another 13 years for balance part. They have the financial depth and critical market share to play the waiting
game. All the reforms in the sector provide a very big upside for Jio and they will be emboldened to stretch their market leadership.

Reliance is also aware that by not taking a price increase in telecom, what they deny for themselves in terms of revenue and EBIDTA upside in the short term may yield a huge upside in the medium term. Depressed ARPU could well precipitate the exit of Vodafone and a quick integration of a lion share of Vodafone- Idea subscribers and revenue into Reliance Jio. The opportunity to buy the network assets at a discounted price may well be the bonus that is not factored at this point in time.

And waiting in the wings for their share of the spoils is Airtel. In this curious competitive play, it would appear that Airtel stands to gain more if Vodafone exits and less by allying with them. Airtel may therefore move towards creating alliance with Reliance for spectrum and network sharing and may maintain a distance with Vodafone.

Though they will still see value in spectrum sharing with Airtel and Vodafone Reliance business philosophy is to go solo and organic and they are likely to take unilateral decisions to roll out their own 5G network.

Equally, the 3 players are likely to hold divergent views on many policy matters such as IUC charges, minimum tariff and so on. Even in areas where they find common cause such as revenue share, SUC and GST, it is possible they will have different perspectives based on who wins more!!

This cat and mouse game is not over yet. May be calibrated cooperation at some level but the competition is still on.

The drift and lack of purpose of public sector telecom service provider may
continue as the Government has not been able to either provide them a purpose or make them competitive or simply put them up for sale.

2. Will Vodafone stay on:

After the Government announced its reform package, Vodafone has explicitly accepted key elements of the offer and expressed intent to stay on. And yet there are still many imponderables and it likely at several stages the matter will be re-assessed by the promoters of Vodafone- Idea

The financial results of Vodafone capture their stress in the most eloquent terms

• The Company has incurred losses of Rs. 467,000 Mn for the year ended March 2021 and the net worth is negative at Rs. 382,280 Mn.
• Total debt (including interest and AGR liability) is at Rs.1,867,790 Mn

Key takeout

• The operating income is barely adequate to meet the running finance costs and with depreciation remaining uncovered, the net position is loss
• Ability to raise debt from market or financial institution or vendor impaired Investment in 5G spectrum and electronics coming up soon

The government recognized that if the company goes down, they will have to directly suffer the financial loss on account of AGR dues, spectrum dues and interests and the balance burden would also be borne by public sector financial institutions. The effort to convert this debt to equity to make the promoters bring in fresh equity was the only viable alternative.

Whether Vodafone will stay on is contingent on the answers to the following questions:

• What equity needs to be issued to the Government against the dues relating to AGR, interest, spectrum etc.?
• Can they raise money to invest in 5G and stay competitive on network quality?
• Can they afford an extended wait for tariff and revenue to go up?
• What market share will they continue to lose on account of network quality disadvantage and erosion of brand equity
• What is the projected revenue and net profit in the residual license period?

Eventually it is about the promoter’s appetite for the business risk and reward. It is most unlikely the business case obtains in the current license/spectrum validity period. The promoters are not going to infuse equity in a hurry as all that gets invested is irrevocably committed and lost if eventually, they decide to exit

Vodafone- Idea has to literally and figuratively believe in the “ Next- Life” (Next- Spectrum-period of 30 years) to stay on with the hope of a gradual recovery. And this resolve has to stand the test at various stages based on market share erosion, delay in tariff increase and expected reserve price for 5G spectrum. The suspense about Vodafone staying on is also not going away anytime soon.

3. The next big opportunity presented by 5G

What will 5G deliver

a) 5G is expected to offer 10 times faster download but for the average consumer surfing net or downloading or streaming video, the experience may not be substantially different from 4G.
b) The speed difference will provide a quantum jump in network capacity but that is another matter altogether to be weighed against the additional upfront investment.
c) 5G is expected to cut latency (response time) by half from 20-30 milliseconds to less than 10 milliseconds and is expected to usher IOT and accelerate machine to machine connectivity
d) 5G has futuristic opportunities such as

• Creating and connecting smart cities and making autonomous vehicles a reality
• Create sensor networks to track patients and share information faster than ever
  before.

Should India fast track 5G

Adoption of 3G was slow and tardy but the advent of Reliance Jio fast forwarded upgrade to 4G. And yet there are 200 million plus subscribers in India (20% of base approx.) who are still on 2G.

India has followed every new generation of technology 6 to 8 years behind global leaders. In a sense therefore with 5G hitting the global market in 2019-20, we can wait for the technology to stabilize, the ecosystem to bloom and electronics equipment rates to drop. There is a good case to wait and learn from the 5G experience of other operators and make a more informed choice on spectrum frequency to adopt, business case and then take a plunge.

Are the operators ready for 5G?

Airtel and Vodafone-Idea have just invested into 4G network at a time when their revenue has taken a serious hit. They are in complete financial disarray desperately catching up with Jio.

In their current debilitated state 2 of 3 private sector operators—Vodafone-idea and Airtel are in no position to invest further in spectrum or towers. They cannot raise more funds and opting for deferred pay-out plan that may be offered by the government for spectrum and equipment manufacturers for electronics, will entail interest liability

Likely trajectory for 5G

Even with all the hustle that Reliance Jio will bring to bear, 5G will most likely go through a phased roll out in India. The spectrum profile for 5G may require additional towers in last mile towers and the combined impact of cost and roll out time will make it a slow and gradual process. The operators are likely to invest in HNI dense metro markets, price at a premium and extend the roll out gradually.

It is possible there will be a few tactical partnerships amongst operators though it would appear there are different perspectives on standards, indigenous development etc.

5G- Good opportunity to improve tariff

Taking advantage of the compulsion to opt for phased roll out, it is likely Reliance Jio will choose to position it as a premium service and sweeten the deal by bundling additional content (Movies and TV channels). While, Airtel will follow suit, it is likely that Vodafone will be torn between deferring the investment till the use cases blossom and jumping into the fray in the hope of gaining additional ARPU.

4. Value added products and services

The core telecom network creates access and connectivity for a large customer base. The basic access that provides airtime or data is like a commodity and in a competitive context the prices are driven downwards.

Telecom service provider has to create many layers of value-added services both from the point of view of differentiation and for creating additional revenue streams. The traditional value-added services such as SMS, roaming, push mail, special content subscription services and frill services such as caller ring back tone etc are now subsumed as part of core services. Telecom service providers need to dig deep to create new value-added services such as mobile advertising, location-based services, business listing and E- commerce services and mobile applications for productivity, convenience, transaction, entertainment content streaming and mobile payment. The large customer base as a huge asset provides a captive market for delivering and monetizing value-added products and services without any incremental customer acquisition or servicing cost.

While it is fashionable to talk about value-added services, it would be more useful to evaluate what are the constraints in converting this opportunity

In this note we look at 3 outstanding examples of what holds back creation of innovative products/services to spin of additional revenue stream

Mobile wallet/payment

The Fintech revolution is upon us with India pulling ahead of USA and China in terms of digital payments. Mobile wallet and money transfer is an opportunity that Mobile service providers should have championed but several private players such as PayTM, PhonePe and G-Pay have hijacked the digital payments market. Mobile service providers dithered in terms of creating interoperability and failed to enlist merchants for the service and seem to have lost the opportunity

Mobile Advertising

Mobile advertising platforms were set up by service providers, 10 years to 12 years back and yet they have not been able to create any substantial revenue

Facebook with 340 million subscribers generates Rs.9300 crores annual advertising revenue in India while Airtel with equal number of subscribers generates less than Rs.100 crores annual advertising revenue. In fact, the entire Airtel Digital platform generates just Rs.550 annual revenue

So clearly mobile service providers have not been able to create a compelling value proposition to the advertisers despite having captive, always connected Subscribers and despite unique advantage such as embedded location tracking

Among other things, the failure is largely attributable to lack of robust profiling of subscribers and inability to create or replicate value proposition on the mobile screen

Mobile E Commerce marketplace

With 320 million plus captive subscribers, mobile service providers have the unique opportunity to create a subsystem/directory of its subscribers where the business owners offer products and services to the members of the same subsystem. Each mobile service provider can create a captive E-Commerce platform that can include powerful PINCODE or location tagging and create additional business leads for the business owners and offers/deals with instant delivery for the consumers. The captive subsystem can also be made interoperable if the service providers come together. This opportunity is waiting to be
converted but there is no public evidence of any attempt by any mobile service provider

5. Pandemic effect

The Pandemic created unprecedented requirement of conducting business and delivering virtual learning for students to study from home. It boggles our imagination to think as to how the pandemic crisis would have been handled without voice, data access and streaming video. Telecom saved the day for our country and obviously hugely grew and benefitted When the pandemic recedes and normal life is restored there will be some roll back of data usage and revenue in the immediate term. But business and people from all walks of life are now alive to the possibility of data connectivity and its impact on personal productivity and more. Data usage and connectivity will manifest in many ways to entertain, engage and enable productivity. This is a huge boost to digital adoption and an unimaginable boost to
telecom

6. Policy initiatives and regulatory framework for sustainable growth:

There are still many cobwebs to be swept away for telecom to start firing. Mobile service providers have for too long been raising issues relating to financial health. While the Government has displayed unbelievable imagination in the slew of policies announced recently, there are still many initiatives whose time has come. Some key reforms that are still waiting to happen

• Reduction in GST (Service tax)
• Reduction in revenue share
• Removal of SUC for all spectrum bought under auction
• Minimum tariff for voice/data and/or capping of bundled voice at different levels of monthly commitment
• Trading/Surrender of excess spectrum
• Lower reserve price for all spectrum going forward

The regulator has to assume responsibility for the financial health of the operators and not remain a mute spectator to all the carnage and wastage the sector has seen in the last 25 years. Consumer interest cannot be eventually protected if the service providers are not financially healthy and cannot invest in
the development

The regulator can facilitate 5G roll-out by permitting unrestricted spectrum share, active network share and intra-circle roaming with low or nil fee associated with sharing

The regulator needs to reset the terms and equalise the tenure for all players and ensure the anomaly of entry at different points of time with the associated evils is never entertained in the future. Enforcement of consistent and equitable policy is a key role that the regulator and government have to play for long term healthy growth of the sector.

It looks like a new dawn but with a liberal carry forward of all the vagaries excitement and competitive play that is endemic to the sector.

Author: Prof. Surya Mahadevan
Professor
Head- Corporate Engagement and Head PGDM- Marketing
TA Pai Management Institute

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