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Covid-19 and the demands of telecom

If there is any segment of the economy one could point to that is bucking the trend of decline due to COVID-19 and the necessary lockdown it has to be digital. Well at least most of it. The core of the digital economy consists of telecom networks that have been built assiduously over the last two decades and have been a key reason for the success of the digital economy and all the macro and micro aspirations that have been built around it. At the macro level India pronounced it will reach USD 1 trillion by 2025 and at the micro level it dreams of becoming the start-up capital of the world. At the other end of the spectrum are citizen services like direct benefit transfer enabled through the JAM trinity (Jandhan, Aadhar and Mobile) that has made all countries look to India to energise their own payments ecosystems. India’s payment stack has truly become the envy of the world. Each use case that has succeeded demonstrates that access to telecommunications is an important catalyst to realizing productivity and efficiency improvements thereby making it potentially possible for the benefits of economic growth to be shared. Over a billion mobile phones and over half a billion internet users can tap into digital resources and growth opportunities much more easily than those who are unconnected.

The pandemic has intensified the digital shift. Demand for online services has surged, putting immense pressure on the telecom networks that are forced to carry the burst in bandwidth hogging video and data traffic. By and large the networks have been coping and are running at 100 percent capacity, up from around 75 percent at normal times. This is not sustainable though and more on this ahead. Amazon is hiring more staff, Netflix has seen a surge in share price and has added more than 6 million subscribers globally this year and Zoom has become a household name just like Google before it. If ‘to Google’ means to launch a web search, to Zoom is now a verb indicating the conduct of an online meeting or webinar.

If this surge continues investments will need to be made to assure quality of service not only to cater to new demand but also to prepare for the post COVID-19 world where some of the shift in favour of digital transactions might become permanent. If it does, then there will be structural change in the way businesses transact and in the way people interact. Let’s consider for example the immediate impact of demonetization. The shock of withdrawal of 86 percent of the cash from the system led to a spurt in digital transactions only to see a decline when cash came back into the system. However, demonetization inspired many first time digital transactions and helped address some of the lurking fear of making and receiving payments online. Four years on, India’s much advertised United Payments Interface (UPI) has registered over 100 million users and approximately one billion transactions, making it the fastest adopted payments system in the world. That behavioural change in favour of digital transactions means that even small payments to India’s omnipresent panwalas are now enabled through apps, and the imminent increase in broadband and smart phones will only further the trend.

For the digital economy as a whole we may be at a point of inflexion. Telecom is slowly but surely moving away from voice to data and integration with content creators and platforms to deliver apps, entertainment and items of daily need is becoming more and more visible. Post Covid-19 the online world could look very different. But there is a problem. No doubt the lockdown has provided the telecom sector a much needed lease of life in the form of increased demand, but it is a double edged sword. The operators must figure out quick ways to cater to the traffic surge and increase network capacity over time. And do all of this when all of them, save one, are crippled with high debt burdens.

Regulatory burden is a feature of every telecom market in the world since it involves assignment of spectrum, a natural resource owned and sold by the government. Besides, the cost of administering sector licenses is also passed on to service providers. The total tax collected from the sector is thus used to fund the cost of administering licenses, the cost of providing universal telecommunications services in remote areas and to fund general government expenditure. The extent to which the telecom sector tax is used for meeting general budgetary expenditure naturally varies across jurisdictions and what is optimal will depend on several considerations. In India a case can be made in favour of easing the regulatory costs since these have become excessive by global and our own standards. Compensations of high regulatory burdens are not unheard of, but are admittedly quite rare. The last this occurred was in 1999 when the irrational bids of telecom service providers wanting entry into the nascent Indian market were converted into a regime that linked license fee payments to a share of revenue earned, thus derisking the liability. This is a 1999 moment again for Indian telecom, but the fundamental difference today is that other government revenues have plummeted due to the lockdown and it may not be in any mood to award concessions. And even if it did the follow up question would be, why telecoms?

Much like roads and electricity before it, telecom infrastructure in modern economies has characteristics of a public good that produces substantial economic and social benefits. Many decades ago, Keynes made a strong case that investments created multiplier benefits, both direct and indirect. Because access to telecommunications facilities improves the efficiency of user sectors, the indirect effects are likely to be much more pronounced than the returns to the sector itself. For emerging markets these multiplier impacts are reckoned to be higher because they make up for the lack of other infrastructure. This is not intended to suggest that telecom infrastructure is a substitute for other forms of infrastructure. Until upgradation in other forms of physical and social communications affords an opportunity to create vast dividends. And along with other forms of infrastructure it has the potential to be a force multiplier. Either way, you cannot lose.

What is more, the theoretical linkages between telecoms infrastructure and macroeconomic growth are sound. By reducing information asymmetries and transactions costs that cause markets to fail, telecoms drive efficiencies in the economic system. Empirically, while estimates vary by geography and time, the available evidence unambiguously shows substantial benefits. For India, every 10 percent increase in India’s investment in telecommunications has the potential to deliver on average a 3.3 percent increase in GDP. Along with greater demand for digital that we are experiencing, a case could be made out for a calibrated fiscal stimulus for telecom that could deliver increased revenues for government in the medium to long term.

A non-pecuniary regulatory burden that service providers often grumble about is the cost of delays, such as in receiving clearances for setting up infrastructure such as towers, in spectrum assignment and in resolution of license fee disputes to name a few. As services become more complex and data intensive delivered through third party apps resident on smart phones and with majority of internet traffic being routed through specialized content delivery networks (CDN), the task of sector oversight will become harder.

Necessity, they say is the mother of invention and service providers on their part have innovated to remain relevant to the times. The gatekeeping role that they assayed and exploited in the days of yore has been fundamentally altered by apps, which are both complementary and in competition with the services of the operators. When apps first burst on to the scene circa 2014, the strategy deployed by the telecom providers was to contest and campaign for a licensing regime to cover apps that provided voice and data services in direct competition with their own licensed services. But the realisation that such concessions were unlikely, operators began to develop their own apps or to partner with content developers to deliver services to end users. This model of vertical partnership will intensify as 5G offerings take hold. Facebook has already invested in Jio, Google is exploring a partnership with Vodafone-Idea, while Amazon is in talks with Airtel. And this is only the beginning. Convergence of services will become the norm and inherent network effects will create a scale of operation that it will not be possible to support 8-10 service providers in the market. We have seen exit in telecom and more will likely follow to reinforce the eternal empirical truth that most if not all markets tend to be dominated by three to four large firms. One hopes that it is not just one!

In a world of converged services in which network effects are pervasive, strengthening competition does not mean accommodating 7-8 players, but ensuring that there are a few alternatives that preclude anti-competitive conduct on the part of any one. The market itself is showing how competition among the few can be fortified by building partnerships, but the pandemic also provides an opportunity for the government to consider easing regulatory burdens to promote the cause of strong and adequate competition.

And finally, as we acknowledge and reflect on the extraordinary technological developments in networks and content, leading to service convergence, the pace at which institutional convergence has happened (or not happened) remains an issue for discussion. At the turn of the century, the Fali Nariman Committee had proposed an institutional convergence prototype that has languished. Given the eruption in data and converged services we are witnessing today, it is an appropriate time to resume that conversation.  An enduring lament about institutions in general has been their fragmentation (operating in silos), the associated delays and a palpable trust deficit on either side. Several institutions are currently responsible for different facets of the digital economy and these are Ministry of Information and Broadcasting (MIB), Department of Telecommunication (DoT), Ministry of Electronics and Information Technology (MeitY) and the competition authority, Competition Commission of India (CCI). In addition, a data protection authority has been proposed. While the trust deficit is a larger issue that cannot be immediately addressed by institutional convergence, the pandemic provides an opportunity to debate institutional convergence in the Indian context, its desirability, the nature and skill requirements especially for a 5G scenario, where everything will be connected to everything. Operating in a fragmented institutional framework will be a high cost way to lead the transition to a truly digital future.

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