The decade that was best for customers, but worst for telecom firms

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For customers, it’s been a dream run. At the beginning of the decade, active subscribers paid an average of 50 paise a minute for a voice call and a monthly bill of Rs 140 a month. At the end of the decade, voice is virtually free, their monthly bills are 20 per cent lower at Rs 113, and they enjoy huge amounts of data to watch movies, sports, and TV channels. 

For the telcos, it’s been more like a bout of ethnic cleansing. In 2010, six of them, including big foreign players, had jumped in, thanks to new licences issued by the government. They kicked off a price war as they jostled for market share in what was considered to be the great Indian growth market for mobile services. 

As the decade ends, the bloodbath in the market has forced consolidation and closures. The number of players shrunk from a peak of 15 to four. With the writing on the wall for Vodafone Idea, whose promoters are unwilling to pump in more money, the four could reduce to three, even though the number of subscribers has doubled to 1,100 million. 

A market once based primarily on voice dramatically shifted to data in just a decade, thanks to the entry of Reliance Jio. The company rewrote the rules of the game when, in 2016, it offered data at rock bottom prices on an only 4G network with high speed. As a result, usage has gone up by over 100 times.

The other fundamental change it kicked off was to push convergence-making mobile devices as the alternative platform for viewing movies, sports, and entertainment for consumers, rather than TVs. Suddenly, for many homes, the mobile became the second personal TV set and 300 million active customers are now glued to OTT platforms.

These changes were all good for customers but foreign telcos, which included the likes of Vodafone, Telenor, Maxis, Sistema, and Etisalat, who had invested in India lost their shirt. They were unable to negotiate the regulatory changes, cut-throat competition, tax authorities, or the courts. 

Some, like Telenor and MTS (which tried a second time to come back), lost miserably. Most of them quit or sold their assets for a song. The result was that foreign telcos lost or wrote off over $25 billion. 

Vodafone has said it might have to shut shop. Even those who survived saw their debt go through the roof from having to fund the expensive spectrum cost, whose base price was kept artificially high for the government to rake in the moolah. 

That is why, from a mere Rs 1.2 trillion of industry indebtedness in 2010, it has ballooned seven-fold to more than Rs 7 trillion at the end of the decade, forcing Reliance Communications and Aircel to go to the Insolvency and Bankruptcy Code because of their inability of pay back the loans.

The seriousness of the problem can be gauged from the fact that the industry’s interest burden as a percentage of EBITDA (earnings before interest, taxation, depreciation and amortisation) has doubled from 41 per cent in Q3 FY 2018 to 80 per cent in Q4 2019. To be sure, the government was, like customers, a key beneficiary. But unlike the latter, the contribution of the industry to the exchequer peaked at Rs 51 billion in Q1 2017 but dramatically fell to Rs 31 billion in Q4 2019, as revenues fell, the interest burden soared, and profits careened downhill.

Rewinding to the past, two decisions taken by A Raja as communications minister were to shape the beginning of the tumultuous decade. By limiting the amount of 3G spectrum to 5 MHz (globally it was 20 MHz) in the first big auction at the end of 2009, Raja ensured fierce competition. Telcos shelled out Rs 67,000 crore. Despite that, players like Airtel, who bid aggressively, were not able to win pan-Indian spectrum. 

The decision did three things: It forced telcos to borrow more to finance spectrum and triggered a debt cycle, which never ended; kept 3G tariffs high, making data unattractive; and slowed the roll-out of mobile services.

Raja’s second decision had a catastrophic impact. He changed the rules to allow granting licences to new operators on a first-come-first-served basis, allegedly to help his friends. With four to five new players entering the field, what ensued was fierce competition as ARPU (average revenue per user) fell below Rs 100 in June 2011 when 15 players slugged it out for market share by dropping tariffs.

But the worst happened when, taking cognizance of a Comptroller and Auditor General report that the exchequer had lost Rs 1.76 trillion by giving away licence and spectrum free, the Supreme Court cancelled 122 licences, which included those of Telenor, Sistema, and Etisalat. Raja went to jail.

For those who survived, there was some relief that with the number of players coming down after the cancellation, they were able to marginally increase tariffs and improve realisation per minute without losing customers.

But it was clear that all spectrum would be auctioned by the government and with the introduction of the UASL licence, spectrum would be de-linked from services so that telcos could use any spectrum for any service — 2G, 3G or 4G.

The auctions that followed in 2015 saw a massacre, especially in the 900 MHz band (the licence for this band was expiring for incumbents but it was a popular band for 4G), and prices went up by three to five times. The telcos spent more on spectrum — Rs 1.75 trillion in just two years, 2015 and 2016 — than what they had done since they launched services (Rs 1.5 trillion). Their debt shot up.  

Another challenge came with the commercial launch of Jio. It offered voice free and data prices which were 95 per cent cheaper than competitors. Data usage shot up by eight times in just a year. 

The regulator also lent a helping hand by allowing Jio to offer free services to customers for six months, adversely impacting incumbent operators. The incumbents had no choice but to match tariffs and increase investments to catch up quickly with Jio in building their 4G reach. 

While Bharti Airtel was able to maintain its revenue share turf even though it also lost money, Vodafone Idea, immersed in a merger process, has been losing customers as well as revenue share and sinking deeper into debt. Then came the proverbial straw. Towards the end of the year, the Supreme Court directed the telcos to pay a staggering Rs 1.44 trillion as AGR (adjusted gross revenues). Vodafone Idea has made it clear that if the government does not provide relief on the payments, it will pack up. Bharti Airtel, in a far better position, is raising $3 billion through debt and equity to pay for the dues. Both are waiting for their review petitions to be heard by the courts. While the telcos have hiked tariffs between 15per cent and 40 per cent, it won’t be enough to absorb the Supreme Court hit. 

The future play in the market is contingent on two things. If Vodafone Idea goes under, Reliance Jio and Bharti Airtel can grab its over 300 million customers. This in turn hinges on whether the Supreme Court gives a favourable decision on the review petitions and whether the government follows it up by allowing staggered payments for the AGR dues.

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