A brutal predatory price war, in 2016,
aided arguably by a biased regulator, led to the Telecom Industry consolidation.
The number of operators in India’s thriving Telecom sector shrank from 12 to 4 –
Airtel, Vodafone – Idea (VI), Reliance Jio & state run BSNL – MTNL. The
Supreme Court judgement on Adjusted Gross Revenues (AGR) forced the promoters
of VI – Britain based Vodafone Plc. & Kumar Mangalam Birla – to throw in the
towel, triggering a state mounted rescue – with Government of India (GOI) taking
a 33% stake in VI in lieu of Rs 16100 cr. – a part of pending dues. This has,
in effect, reduced the industry to 2
telcos – completely in the private sector – along with other private players
like Tata Tele Business services that now offer only enterprise services - post
selling their mobility vertical to Airtel.
Increased NPAs (Non Performing Assets) of the Indian Banking sector was
the natural collateral damage lost in the din of consumer delight while
enjoying low cost data. The debilitating price war in the sector has since
ended, leading to a welcome rise in ARPUs (Average Revenue Per User), but the
following trends could impact the revival of the sector, especially when rewards
in digital advertising, e-Health & Mobile education are a slow burn.
(1)Clash
between Technology Firms & Traditional Telecom Service Providers (TSPs) : Indian Cabinet Approval, in June, for the setting
up of private captive networks, to spur innovations in Industry 4.0
applications in M2M (Machine to Machine communications), IoT (Internet of
Things), Artificial Intelligence (AI) across Auto, Agriculture, Healthcare, Energy
& other sectors, invited the ire of the TSPs. This appears to have been
prompted by Broadband India Forum (BIF) - boasting of members such as TCS, Cisco,
Google, Facebook, Qualcomm, Intel etc.
& interestingly Indus Towers & One Web owned by Airtel as members. However, “administrative
allocation of spectrum” has been opposed by COAI (Cellular Operators
Association of India) with TSPs (Airtel, Jio & VI) as members, as it goes against the principle
of a “level playing field” – offering, effectively, a back door entry to technology
players to provide 5G services & solutions without regulatory compliance
& levies, otherwise paid by the TSPs. This would diminish revenues, affecting
the business case of 5G, they allege. They are against “direct spectrum allocation”
to System Integrators & intermediaries as it runs the risk of spectrum
fragmentation, viability of the 5G business case, apart from having serious national
security implications.
BIF’s President T V Ramachandran
lambasted the ‘level playing field demand” & averred that “no mature
regulator in the world imposed regulation on a player with no or minimal market
share” as they cannot abuse their position as private 5G networks are for “self
consumption” alone – will not sell services or earn revenues. Tech Mahindra’s
CP Gurnani opined that if GOI wants to make ‘ the country more technology competitive,
more productive & citizen service oriented, they should give it (spectrum)
free for a few years” & enterprises – hospitals, factories to Industrial townships
- should be free to go to any service provider –TSPs or Technology companies -
& ‘not pay any licence fees”. Manufacturing, auto, oil & gas sector are
extremely bullish on adoption of private networks worldwide he added &
argued in favour of disintermediation by eliminating the TSP layer
It is a fact though that launch of “private
5G networks” would lead to the drop in revenues of existing TSPs, translating
into a drop in revenues to GOI who earns a fixed % as revenue share. Why is GOI
making such a move?; Is it an attempt to
prompt TSPs to bid higher in the impending spectrum auctions – leading to
higher GOI revenues - & accelerating the launch of 5G – which the, otherwise,
debt strained TSPs would have liked to be pushed down the road?
(2)Entry
of New Players: Adani, meanwhile, surprisingly, has thrown its hat into the ring
of spectrum auctions, scheduled for 26th July 2022, instead of
opting for the cheaper option of securing a direct assigned spectrum, without paying any license fee
& entry fee, under the “captive non-public network (CNPN) category. COAI
welcomed the move. Adani Data Networks – a 100% subsidiary of Adani Enterprises
- that incubates new businesses – has secured a letter of intent (LOI) by Department
of Telecommunications (DOT) for granting Unified access license with
authorization of National Long Distance (NLD) & International Long Distance
(ILD)for & Internet service Provider - ISP (B) for the Gujarat circle. Under
ISP (A), a company can operate in all the 22 circles across the country while
under ISP (C) licence they can operate in a part of a circle. The company has
data centres across the county & is currently paying TSPs “carrier charges”
which it could potentially save by launching its own services & create an
additional revenue stream by carrying the data & voice traffic of other Telcos
& enterprises.
Bank of America opines that lacklustre
ROI, inadequate spectrum, low potential for differentiation & low tariffs
could render infructuous any business case for a non 4G player in consumer
mobility. Having already entered into a
definitive agreement to acquire Cement maker Holcim’s stake in ACC & Ambuja
Cements at $10.5 billion deal, Adani is unlikely to make a bid for the beleaguered
VI, especially with Telecom ARPU’s trending around $2 only. Adani press
statement which reads ““We are participating in
the 5G spectrum auction to provide private network
solutions along with enhanced cyber-security in the airport, ports and
logistics, power generation, transmission, distribution, and various
manufacturing operations.” helped clear the airs of speculation. As
against an Earnest Money Deposit (EMD) of Jio (Rs14000 cr.), Airtel (5500 cr. ) & VI (2200 cr.),
Adani at Rs 100 cr. only signalled limited bidding.
During
the last Spectrum auctions, in Mar 21, EMD of Rs 13475 cr. attracted bids Rs
77815 cr. (5.77X); as per an Economic Times Now )report, the multiple in
generally 5 -6 X. We can therefore expect bids this year with EMD of Rs 21800
to be in the 1 - 1.25 lakh cr. range.
While
72GHZ of spectrum in the low frequency (600, 700, 800, 900, 1800, 2100, 2300,
2500 MHZ), mid frequency C Band (3.3-3.67 GHZ) & High frequency (26GHZ) are
up for auctions for a 20 year tenure, the greatest interest would be focussed
on the mid frequency as most of the 5G ecosystem has developed around the same
apart from the 26 GHZ airways used for the captive private networks – priced low
at Rs 7 cr. per MHZ for pan India spectrum; 700 MHz, albeit costly, grants
better coverage. Lower frequencies are used for “coverage”, with TSPs progressively
using graded frequencies up the spectrum for “capacity”. Payment of zero
Spectrum Usage Charge (SUC), on spectrum acquired in the impending auctions, provides
a significant relief to the industry.
(3)Government
of India (GOI) Targets Chinese Companies: Chinese companies, ZTE & Huawei,
are still to secure the “Trusted sources” tag – a mandatory requirement for
supply of network equipment; their Indian, US & European counterparts,
meanwhile, have secured the same, pushing Chinese companies out of contention
on supplying 5G gear to telcos The offices of Huawei were searched in Feb &
Huawei in Aug 2021 by the Tax authorities on suspicion of tax evasion. Furthermore,
GOI issued a lookout notice on Huawei India Chief Li Xiongwei, in May 2022,
which prevented him from flying out to Bangkok to attend a business meeting. These
steps allude to a decisive move, by GOI, at decoupling to protect “security”
interests. Chinese handset manufacturer – Xioami, Oppo Mobiles, etc. enjoying a
dominant markets share, in India, too are facing similar pressures; they have
been served notices by the IT department for custom duty evasion, non addition
of “ royalty & license fees” in the transaction value of imports & inflated
payments against receipt of technical services from related parties outside
India.
Telcos are falling in line with govt.
policy despite initial murmurs of protest, on increased consumer prices,
consequent to replacement of cutting edge Chinese gear with costlier western
products. GOI has banned Chinese apps but not Chinese gear but regulatory
barriers could serve the purpose. Chinese gear is, however, blocked in US, UK
& Sweden & Canada has accused Chinese firms of spying. In Nov 2021 the
US Federal Communication Commission (FCC) revoked the licence of China Telecom
to provide telco services on security concerns, continuing with their March
2021 decision to revoke authority to 3 other Chinese firms - China Unicom, Pacific Networks & ComNet
& disapproval, in 2019, of China
Mobile’s application, in provide telecom services between the US & foreign
destinations.
(4)Telecom
Signal interference with Aircraft Altimeters & Telescopes: Airlines
for America & Aerospace Industries Association, in Jan 2022, complained that the FCC has failed to explain why it rejected the “detrimental
impact of interference” of the C band 3.7GHz licences on radio altimeters. They
are not seeking a full stop of new 5G services but only a stay on roll out in
designated locations at 135 airports. “Airlines will not be able to rely on
radio altimeters for numerous flight procedures & thus will not be able to
land at certain airports” its filing read. Cellular Telecommunications Industry
Association (CTIA), however, debunked the complaint & alluded to 5G
operating safely in over 40 countries without harmful interference & FCC
rejection of interference claims 2 years ago after exhaustive review.
Meanwhile, in India, Giant Meter wave
Radio Telescope (GMRT) Pune, a project of the Department of Atomic Energy,
operates in the 100 -1500 MHz frequency bandwidth has been complaining of
signal interference from telecom towers operating in the 800-900 MHz band corrupting
data quality. The solution is to operate the towers, within the GMRT protection
zone, in the 1800 MHz band.
Conclusion:
The revival in the telecom sector’s
fortunes, via consolidation, would be impacted by the entry of new players like
Adani – in case they decide to enter into the consumer space unlike captive private
networks alone; their $10.5 billion bid for Cement Maker Holcim’s Indian assets
could restrict their Telecom ambitions in the near term. VI though, continues
to remain an acquisition target. The Cabinet approval for the administrative
allocation of spectrum, based on likely intense lobbying by the BIF members
like TCS, L&T, Google, Amazon etc. has the potential of reducing govt.
revenues, if processed; the announcement appears more an attempt to spur, an
otherwise, recalcitrant TSPs, burdened by a huge debt overhang, delaying 5G
rollout, to act quickly, to protect their turfs & deny space to Tech firms.
Sino-Indian decoupling of telecom gear,
by denying “trusted sources tag” to Chinese manufacturers like Huawei & ZTE
is, perhaps, work in progress, with India collaborating with its Western
counterparts. But since gear from western players too comes with its own Trojan
horses, “atmanirbharta” in gear manufacture, courtesy the PLI (Production
Linked Incentive) scheme, is the new forward.
References
https://www.fiercewireless.com/regulatory/china-bites-back-after-fcc-china-telecom-order
