By Indroneel Das
The Indian telecom sector has always been a vivid and controversial space. However, now more than ever, it finds itself amidst a wave of disruptions, increased competition, and consolidation, all of which are so dramatic that they are threatening the teleco incumbents and making mere survival in the business sound like a steep ask.
Telecom’s pain points
Let us look at the two main problems of the sectora significant debt overhang, and a steep fall in tariffs. The telecom business, by its very nature, is very capital intensive. Telcos have to pay thousands of crores to acquire spectrum, using which they mobilise data and voice. This spectrum and the wireless signals generated by the mobile devices are also dependent on towers for ensuring the network waves reach everywhere. Therefore, it is essential to have towers in dense concentrations in all parts of the country to provide seamless network coverage. Although telcos dont buy the towers, they can occupy and use towers set up by specialised companies on leases, and treat it as their infrastructure. These are all heavy fixed costs and need to precede demand, making frequent and heavy capital expenditures a need and a practice of the business.
Because the gains from such an infrastructure are only realised over many years while the costs are upfront, telecom companies cant usually finance these expenditures all on their own. They depend on heavy borrowings for the same, and therefore in a market like India, where smartphone and data penetration is playing out as an economy-wide, structural theme, it is inevitable that telcos will be heavily levered. The problem with a heavily levered structure, in any business, is that levered companies and sectors are ill-equipped to handle volatility. This is because debt amplifies both profits and losses. Any fall in revenues hits the bottom line much harder if the interest outgo is sharper, on account of a debt burden. This essentially defines the problem of the telecom sector, albeit very simple.
The free fall in tariffs: No one wins a price war
Ever since Reliance Jio burst onto the telecom scene, tariffs were never the same again. There is no doubt about the positive impacts of the same for the consumer and the economy- services were bundles, massive fall in tariffs, increase in affordability combined with a demand-commensurate infrastructure led to a very rapid penetration of data, and India became the top consumer of mobile data in the world. Reliance Jio became the face of the governments push to ensure the internet and digital transactions were available to every Indian.
However, all this spelt doom for the incumbents. Tariffs came spiralling down and as revenues fell, suddenly the debt overhang became an albatross around the neck. The telcos have to pay two additional charges namely IUC (Interconnect Usage Charges) and SUC (Spectrum Usage Charges). Interconnect usage charges are based on calling MoU (Minutes of Usage). Since incoming calls are free on all networks even though it does affect the bandwidth of an operator, it entails a cost. The cost is therefore paid for, by the other operator who is earning money through that callthe operator for the outgoing call. It is easy to imagine why Jio made calling free of cost to its users. Therefore, all those on Jio networks made the calls while those on other networks would obviously prefer receiving calls. Therefore, Jio ended up paying significant IUC to other telcos.
War in vain, Jio gains
In a recent appeal to TRAI, Jio says that IUC is too high and should be slashed for the welfare of telcos. As you might expect, all others (especially Vodafone), strongly opposed the move because the IUC was a precious source of earning, even as overall revenues dropped. In this regard, another important concept must be explained, that of AGR (Adjusted Gross Revenue). The SUC that the telco pays, is a direct function of the AGR. The higher the AGR, more is the SUC paid by telcos to the govt. Even in this regard, it has been a win-win for Jio. Bundling services and offering ultra low tariffs meant that the AGR for Jio was a fraction of what the other telcos had. This, in turn, translated to SUCs for Jio, that are a fraction of the SUC paid by other telcos.
Jio has been compromising its revenue and profitability to gain market share. This is typical of companies with deep pockets, cut the competition size and then rule. The incumbent telcos facing a heavy cash crunch will need to restructure their debt. About 70% of the debt with an interest coverage ratio, (a measure of the ability of a company to service their debt from their operating profit), of less than 1 belongs to telcos, along with power companies. However, faced with such stiff competition and burgeoning debt, incumbents have responded by consolidation and scaling up value-added services.
Survival of the fittest
Idea and Vodafone, two of the top three telcos of the country, expect to merge together by the end of 2018 and we may have a telecom behemoth with a combined revenue of about Rs. 80,000 crores. That kind of market power and economies of scale will certainly protect market share and profitability. Also, Airtel has recently come up with VoLTEVoice over LTE. It is a technology developed to transmit voice signals using the same bandwidth as high-speed data. Which means, very high-quality voice calls and minimal call drops & disruptions will soon become the order of business.
The telcos appealed to TRAI to reduce SUC, reduce the interest rates on their outstanding debt, provide more time to stagger the SUC payment to the government. While the government did reduce interest rates and increase the time frame for staggering SUC payments to 16 years from the current 10 years, it didnt agree to slash SUC or changing IUC.
Calming the wrath
An IMG (Inter-Ministerial Group) has also been formed by the government to actively resolve the issues faced by the telecom companies. Among many other agendas including pushing growth, penetration, and improving domestic telecom related manufacturing (which is also being addressed by way of reforms in theNew Telecom Policy (NTP), the IMG is expected to come up with immediate resolution mechanisms for the sector and the 5 crore worth of debt that telcos owe to their lenders. The NTP is expected to be out in 2018 and push internet for all as its primary objective.
Featured Image Source: Visual Hunt