Explained: Why telecom operators seem to be in no rush to embrace 5G

Are Indian telecom operators ready to make the massive investments necessary to roll out 5G mobile services? The three telcos — Airtel, Vodafone-Idea, and Reliance Jio — have already invested over Rs 280,000 crore on 4G rollouts. And they plan to sink another Rs 100,000 crore this year to expand their networks and upgrade more and more 2G and 3G customers.

The Cellular Operators Association of India (COAI) estimates that if telcos decide to chase the 5G dream simultaneously, they have to pump in another Rs 300,000 crore over the next four years (based on current spectrum price). Truth is most of them are already over stretched. 

Telcos say they are closely watching global trends, where there are clear signs of consolidation taking place. In China, for instance, there are talks of a merger between China Unicom and China Telecom. If that happens, it will create a 600-million subscriber behemoth and the number of telcos in China will come down from three to two. In the US, too, Sprint and T-Mobile are expected to merge, which 
will bring down the number of major telcos in the country from four to three. Verizon and AT&T are the two other big telecom operators in the US.

In India, the advent of Reliance Jio changed the rules of the game, and the consolidation in the telecom industry has already slashed the number of players from seven to four (including BSNL/MTNL, which is state-owned). Senior telecom executives predict that eventually, the market could be shared by just two giants with deep pockets, with the public sector unit (PSU) remaining a marginal player 
or being sold. 

Telcos know that 5G is a money guzzler and right now, they are focusing on expanding their 4G networks. Airtel and Vodafone-Idea, which together have only 27 per cent of their subscribers on 4G, are looking to get over 450 million predominantly 2G subscribers to upgrade. 

Jio is also focusing on strengthening its hold on the 4G market and is rolling out fibre to home broadband (FTTH) as well.

Telcos have not been able to get adequate returns on their investment because of a bruising tariff war kicked off by Jio. If the burden of paying for 5G spectrum were to be added to this, the current Ebitda of the three telcos (Rs 36,752 crore in FY19) would not be enough to even pay for their annual spectrum outgo (Rs 50,000 crore). This would force them to either borrow more — they already have a debt of over Rs 600,000 crore — or monetise their assets further. Jio is already spinning off its tower and fibre assets, and Airtel and Vodafone-Idea are also monetising these assets. 

The good news for the telcos is that 4G tariffs are becoming stable and revenues are expected to grow. But they have to increase tariffs if they want to get reasonable returns on their investments. 

Given their financial constraints, telecom operators are clearly not enthusiastic about buying 5G spectrum at high prices and launch services in 2020. 

COAI Director General Rajan Matthew says: “5G spectrum prices are too high, making it unviable at this point. Also, for telcos it makes sense to wait. Global 5G equipment prices will drop as more telcos get onto the 5G bandwagon.” 

The commercialisation of 5G in China by 2020 will lead to huge orders for equipment, which is expected to bring the prices of telecom gear down.

A senior executive at an Indian telco agrees that the waiting game will help since the equipment cost over $1,000 and hence, are unaffordable by Indian standards. A CLSA report, too, says that deferring the decision to buy 5G spectrum could lead to a cut in its price. Historically, the government has dropped spectrum prices by 30 per cent to 40 per cent in case of  a lack in demand. 

Analysts predict that the total investment needed for 5G would be about 1.2 to 1.5 times more than what the telcos invested in 4G. This is because 5G services will require not only new radios, software and spectrum, but also a major overhaul of infrastructure. Only 25 per cent of the towers in India have a fibre backhaul. The rest have microwave, which is not suitable for transporting large amounts of data at high speeds, which is the USP of 5G. There needs to be a huge expansion in the number of towers as well. 

An internal note by the Department of Telecommunication (DoT) has projected that the country's fibre infrastructure has to be increased fourfold to 5.5 million kilometres and the number of towers ought to go up by three times by 2022 if the government's dream of giving 50 MBPS data speed to every Indian is to become a reality.

Some experts suggest that instead of an auction, the government could opt for a pay-per-usage model for spectrum, which will reduce the ouflow of cash from telcos. A senior executive of a telecom gear operator says that the auction for 5G spectrum could be city-wise (depending on where the bulk 
of the users would be) rather than on circles. 

In the long term, 5G will likely revolutionise telcos' earnings. However, as of now, there are no killer apps globally for 5G mobile consumers, and telcos believe that no one in India will pay a premium for only higher speeds or augmented and virtual reality, which anyway has a niche market. Also, the various business-to-business applications of 5G such as remote surgery and autonomous cars are at least three to five years away from being commercially available.

In a recent report, global analyst Morgan Stanley admits that the adoption of 5G has slowed down after its initial launch in Korea and the US. European telcos have also decided to go slow on 5G. In India, too, telcos seem to be in no rush to embrace 5G.

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