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How our telecom market might yet thrive with less competition

In three swift moves over the past few weeks, Jio Platforms, which houses Jio’s telecom business, JioCinema, JioNews, JioSaavn and Jio Mart among other digital services, has managed to raise a staggering Rs. 60,000 crore-odd by selling just under 14% of its equity to Facebook, Vista Equity Partners and Silver Lake. This implies a valuation of around Rs. 4.9 trillion for the Reliance-owned Jio Platforms.

Jio’s main rival, Bharti Airtel, is currently valued at just over Rs. 2.9 trillion, while the third player, Vodafone Idea, is valued at a little over Rs. 13,000 crore, at closing market prices on 11 May. The game changer is Jio’s ability to raise so much money at such high valuations. This, taken together with Airtel’s own high valuation, implies that Vodafone is seen to be in trouble. The only situation in which it can remain a major player in India is if its two promoters, Vodafone UK and the Aditya Birla Group, dig deep into their pockets to raise a large amount of equity.

For some months now, Jio and Airtel appear to have been gaining customers at the cost of Vodafone, as visible in the recent subscriber base numbers. Three years ago, in May 2017, when Vodafone and Idea Cellular announced plans to merge, they had a combined customer base of 407 million. Today, the merged entity seems to have fewer users, with Airtel drawing level at 328 million, and Jio far ahead of it with 376 million, according to subscriber data for January released by the Telecom Regulatory Authority of India. Jio reported a user base of 387 million at the end of March.

The game is changing for three big reasons. One, only two of the market’s major players, apart from government-owned Bharat Sanchar Nigam Ltd, are technically capable of raising the kind of equity needed to support growth, especially investment in expanding networks and bandwidth. Two, given the overhang of dues payable to the government by both Airtel and Vodafone Idea after the Supreme Court delivered its adjusted gross revenues (AGR) judgment last year, money raised by Vodafone is likely to do nothing more than enable it to pay the government. And three, when the government announces auctions for 5G spectrum, even assuming that reserve prices are drastically cut to make it affordable, the investment required to roll out new 5G networks and services currently looks beyond the capacity of weaker players.

A few conclusions emerge from this scenario. First, the market may become a duopoly, effectively, with the public sector player in existence only to drain taxpayer resources and play a me-too game. Secondly, since the investment requirements continue to remain huge (5G rollouts, more cell towers to boost signals, and added optic fibre capacity as demand for data rises exponentially), it is only the stronger players that have the requisite staying power. Vodafone has suggested its operations may be unsustainable if it gets no relief on its AGR dues. If it chooses to call it a day, or become a niche player, there would be only two options left: one, to nationalize its operations and wipe out its dues with taxpayer resources; and two, to let the other players cannibalize its customer base. Either way, it would result in a duopoly.

A duopoly, with a third public sector player, need not be an altogether bad outcome in the development of India’s telecom industry. One reason is that tariffs may get a chance to stabilize and/or rise steadily, enabling the industry to fund data traffic growth with its own resources. Network effects will kick in once almost all customers belong to one of the two duopolists. This could enable companies to reduce voice call costs to near zero within their own networks. Thorny issues like interconnect usage charges may vanish, as neither player will have much to gain from them.

In any sector, there are two ways to fund expansion and improvements in the quality of products or services. One is through taxpayer subsidies, and the other is to get the consumer to pay for it. If we assume that BSNL may often need handouts from the taxpayer to maintain a minimum level of service, the two big players would have pricing power that will be enough to take care of expansion and improvement costs. Banks would also be more willing to lend to a sector that is considered financially stable.

In this two-plus-one player scenario, the regulator and competition commission will have a larger role to play in ensuring that there is no cartelization or attempts to gouge the customer with repeated tariff hikes. But this situation, where regulators and players wrestle over tariffs, is arguably better than one where the taxpayer is repeatedly asked to bail out some player or the other.

There is a case for easing regulations on ownership of spectrum, freeing spectrum transfers between players and niche players that may spring up later, and for spectrum being made available on tap in multiple bands all the time, and much more cheaply. For the sector and also for consumers, strong regulation to ensure consumer rights and light regulation in other areas would be a significant plus.

A market with fewer but stronger players seems to be the likely future. While this will mean less rivalry in the Indian telecom market, competition oversight could yet ensure that customer interests are well served.


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