Exciting time for telecom

But let’s be careful about 3G technology

Ajit Ranade

The much awaited reduction in long distance rates for both, fixed line and mobile calls, is another shot in the arm for telecom in India. Below a critical price level, the demand for air time or wire time is quite elastic, and phone companies may well make up lost revenues from increased volumes. The recent spurt in Diwali/Christmas/New Year’s cell message volumes is an indication of latent demand for reasonably priced services.

Telecom services in India contribute about 1.5 per cent to GDP. This excludes hardware and telephone equipment manufacturers. This also excludes other telephone-enabled services, such as software exports. The growth in the Indian telecom sector has been phenomenal. Fixed line, wired telephone connections have grown at 22 per cent per annum for the last five years. Wireless connections have grown at 80 per cent per annum during that same period. This pace is likely to be sustained (if not accelerated) in the next few years because of the low base of our current tele-density, and also now because of better pricing. The growth in pre-paid cards is huge and we’ll also see increased traffic of voice, text and data.

As our national telecom policy articulates, we want to achieve a tele-density of seven by 2005, that is, 75 million phones. This will need additional investment of almost $40 billion. A bulk of this will come through foreign direct investment. In fact, foreign investment flows to India during 2001 were higher than 2000. Clearly, foreign funds are finding value in Indian destinations. Much of this growth during the nineties can be attributed to the right kind of regulatory policy. Like allowing for private entry, removing state monopoly, thinking about convergence, and putting in place a neutral and credible regulator. Some policy mistakes were made (like the first auction which generated an unrealistic Rs 1.2 trillion), but later corrections revived the industry.

The latest national telecom policy, the second one in a decade, points out that telecom is a necessity, and also the bedrock upon which other growth fueling service industries like software and finance can flourish. But telecom’s growth has also come from rapidly changing technology and continuously decreasing costs. Because telecom technology changes so rapidly, and policy needs to anticipate rather than follow those changes, it is easy for policy makers to make mistakes.

The Indian government erred in using auctions to generate revenue, when really the auction mechanism should have been used to allocate each telecom circle to the best suited two players. The huge amount raised during the 1994 auctions later turned out to be too good to be true. Since companies started to default, the arrangement was changed from pure license fees to revenue sharing. A similar auction story disaster was unfolding early last year in Europe. Major telecom companies such as Deutsche Telecom, BT, France Telecom, Telecom Italia and KPN bid hundreds of billions of dollars for spectrum licenses for 3G.

Third generation technology is an emerging technology for mobile services. The focus is on mobile because the world today has more wireless mobile phones than fixed line instruments. India has 35 million fixed line subscribers and five million wireless subscribers. But in China these numbers are 175 million and 132 million respectively, and very soon mobile connections will overtake. Current mobile connections are slow. But 3G promises very high speed bandwidth for mobile connections. Despite limited success in Japan (the 3G cell phone company is Japan’s biggest ISP), the 3G dream remains a pie in the sky. The strongest evidence of that is from the stock market. The shares of all those companies are down by almost 70 to 80 per cent, as sustainability of the debt that they took to pay for the auctions is in doubt. It is remarkable that these companies’ losses through market cap are more than their governments’ earnings through auctions.

3G has many detractors, and one of them is Professor Nicholas Negroponte, the vice-chairperson of India-based MIT MediaLab Asia. He has said that because of the auctions, 3G operators will not be able to provide services below $1,000 per subscriber. And this high price for a system which has no infrastructure yet, no reliable and cheap handset, no research, and no new services. It is also unclear whether 3G services will be so vital that people won’t mind paying premium prices for them. Additionally, 3G is not even based on pure internet protocol standards which might help its spread. Instead, the low cost GPRS (already available here) which uses unlicensed spectrum and provides 64 kbps speeds will be good enough for most people. In fact, Mr Negroponte feels that India has an advantage since it can skip 3G, wait for 4G, and meanwhile, use cheap, unlicensed spectrum to attain rural connectivity. Laggards can leapfrog!

Ajit Ranade is Chief Economist, ABN Amro Bank, India