The Plight of the Indian Telecom Industry

Of late, I have been in conversation with my colleagues regarding the present and future of the Indian telecom industry. Here is an excerpt from our day-to-day discussion. If you find it logical, please let us know too. If you think that we are engrossly wrong in the way we are reading the market, we need to hear from you even more. Your comments are most welcome.

Question: How do you perceive the contemporary telecom industry in India?
Kausar Fahim: From the perspective of the Indian economy, it has been an industry of paramount importance, as it helps the economy grow. Almost all industries depend on the telecom sector, for strategic and operational reasons. But, from the perspective of the telecom industry, I think that the telecom industry has matured a lot, although there is an acute need for improving the quality of the services. Looking at the kinds of strategic games that are being played, such as stiff price-war while the market penetration rate is just 30% and the ARPU is just INR 100+, I am very, very dubious of the profitability of the sector itself, and especially of the new entrants. In other words, if I were a new entrant, I would not enter into the Indian telecom industry now. I would rather wait and watch for the market consolidation to happen. In Economics term, I would rather wait for the market to be either Cournot Oligopoly or Stackelberg Oligopoly, but definitely not Bertrand Oligopoly.

Question: In which stage is the Indian telecom industry?
Kausar Fahim: I think it has matured enough to play strategic games, with dire consequences. It has become capable of erecting barriers for new entrants. Not many entry barriers are there, as the government is extreme care of not having a monopolisitc market in any of the circles. In an Economics term, I would say the telecom market is Bertrand Oligopoly, with a "beggar-thy-neighbour" policy. It is definitely good for customers, as they are getting products and services for cheap, but, then, they won't get quality services, as the bottom-lines of the players are heading southward.

Question: Why do you think the quality of services is poor, or is not up to the mark? What could resolve the issue?
Kausar Fahim: Look at the call-drop rates. Even in metropolises, such as New Delhi and Bangalore, the quality of the network connectivity is poor. Much worse are the conditions in the smaller cities! I think 3G could solve most of these kinds of issues, as the majority of the problems is of insufficient spectrum.

Question: Why is the 3G spectrum not yet there?
Riyaz Ahmad Khan: 3G has been procrastinated by the Indian government because of several reasons:

1. The Indian Defence is still occupying most of the 3G spectrum, and has to migrate to some other band of spectrum. In order to migrate to some other spectrum, they have to change their equipment -- which takes time and involves budgetary issues.

2. The Indian government did a lot of study not to leave any stone unturned in order to squeeze the maximum cash out of the sales of spectrum and licenses. A special team was sent to the US to study the pricing of the 3G spectrum. A delay could be part of the pricing strategy, wherein, you let accumulate as many buyers as possbile, with as much appetite and desperateness as possible.

3. There has been a lobby working with the Indian government that has been influencing the government not to auction the 3G spectrum anytime soon, as they want to reap maximum benefits out of their 2G-related investments. Moreover, they are also not ready for capitalizing the 3G spectrum. This is also in the interests of the government, as the 3G spectrum is going to be auctioned, and you always want as many bidders as possible for any auction.

4. The Indian government do not intend to repeat the mistakes it made at the time of the auction of the 2G spectrum. The government intends to auction the new spectrum on a profit-sharing basis, obviously along with the downpayment by the higgest bidder.

5. The whole process of the 3G auction also got delayed because of the change in government at the centre -- from the BJP-led government to the Congress-led government.

6. New operators also want a delay as they are busy setting their operations up.

7. For long, telecoms operators had contemplated on which way to go further: Wimax or 3G. This added further delay to the auction process.

Question: How do you see the Indian telecoms industry in the future?
Kausar Fahim: As we all know, India is a country of poor people! 25% of the resident Indians are below the Indian-standard of the poverty line! And, amongst the rest, a majority just earn enough to support a living somehow! And, every telco knows that it cannot sell value-added-services (VAS) to poor people, with a high profit margin. If it HAS to sell value-added-services to poor people, somehow, or anyhow, the solutions lie in very low prices that might trigger another spree of a price war amongst the telcos that undoubtedly will rob them of their high-margin businesses, hitting their bottom-lines the most.

Secondly, companies grow with the economy. No company can grow at a faster pace than the economy in which it operates for indefinite period of time, otherwise the company will engulf the economy! India is growing at 6% per annum. Even if we assume that the telecom industry will outpace this growth for some more years, but, then, the growth in the sector is already being shared by many hands! What would be the net-profit share of each company in this kind of Bertrand Oligopoly? What would be the implications of all these in the short-term, medium-term, and long-term? Dubious?

Thirdly, telcos are busy acquiring customers at the cost of their net profits -- and this makes business sense to some extent, especially when this is the max they can do. The big players want to earn as many customers as possible, even if it means low net profits. Going forward, they know that there are two sources of prime growth:

1) by selling VAS to relatively well-off people who are ready to consume VAS. For this telcos need 3G, the fate of which is still not decided. It is apparent that big, ready players have to bleed for some more time.

2) by capturing the fragmented rural markets and poor people in urban areas to primarily raise their ARPM (Avergae Revenue Per Minute), and, if possible at all, then also raise their ARPU. A price war might increase the market share and revenues to some extent, but it certainly negatively impacts the bottom-line, which is the ultimate objective of fighting any war.

Thus, my concern is that what is the guarantee that a price war will not happen for selling VAS once the 3G spectrum is in place? Consequently, what would the impact be on the ARPU, ARPM, ROI, ROTA, ROCE, etc.?

In short, I am bearish about the Indian telecom industry in the short-to medium term. If Mergers and Acquisitions (M&A) happen in the industry, there could be substantial growth, going forward thereafter, otherwise the industry will grow, with the economy, at a rate of 8 percent to 10 percent Y-o-Y -- which would be a mediocre performace as per the industry expectations. The rationale behind this is the portion of the disposable income of the masses that is spent on telecoms products and services. Moreover, there is a plethora of VoIP-based telephony services that pose a big threat to the industry's revenues.

Riyaz Ahmad Khan: I am bullish about the Indian telecom industry because the mobile phone is something that we are always carrying while we are awake! It is unlike most of the other products that we use just for a couple of minutes everyday. The other important factors are the sheer population of India, and the untapped potential lying therein. With just 30 percent penetration rate, the telecom industry has a long way to go forward.