1. Editorial: India’s telecom disconnect

Editorial: India’s telecom disconnect

Can’t have high spectrum costs with low tariffs.

By: | Updated: March 27, 2015 1:00 AM

While the short-term impact of the just-concluded telecom auctions will be negative for all telcos given the additional debt burden for purchasing spectrum that doesn’t add to ebitda—most of the R1.09 lakh crore paid has been for re-purchasing spectrum the telcos already owned—the important thing to keep in mind is that there has been a fundamental change in India’s telecom compact over the years. In the past, telecom grew by leaps and bounds since there was low-cost spectrum and that allowed low tariffs which, in turn, ensured a situation in which India was adding crores of new customers each month. Indeed, in the initial years, when telcos vastly overbid for their spectrum, though there were other issues also at play, they almost all went bankrupt. After the Vajpayee-NDA put the industry back on track by moving to reasonable revenue-sharing licence fees in 1999, matters proceeded smoothly till 2008 when the then minister A Raja decided to squeeze the spectrum path for telcos and that is what led to the outsized bids of 2010. Industry had barely absorbed this shock when the UPA decided not to renew the 900 MHz licenses; this was made worse by the Modi-NDA refusing to add more spectrum to the kitty despite it being available from the defence forces. From a low-cost regime, mostly run on a revenue-share basis, India has moved to a high entry-cost regime with the revenue shares unchanged—naturally, this cannot be sustained at current tariff levels.

In the event, with telcos spending around $48 billion for just spectrum so far—$30 billion till date and another $18 billion in the latest auction—they need ebitda earnings of around $7 billion just to defray the annual costs of interest and amortisation. With an equal amount having been spent on capex, industry needs another $10 billion of earnings to cover costs. As compared to the need for $17-18 billion, the industry ebitda is in the region of just $6-6.5 billion right now. In other words, the industry simply cannot afford to pay what it has bid for. The only way out, and this will be seen over a period of time, industry will slowly start hiking tariffs, figures of 15-20% are being talked of as likely tariff increases. The best way to do this is for telcos to start offering attractive data packages to consumers, with voice minutes bundled in free, since data earnings (ARPU in telecom jargon) are typically higher than voice earnings. Since some of the smaller telcos are likely to wind up or get bought out by the bigger players, increasing consumer tariffs will also become a bit easier, although the process could take a year or two, more so since the government will continue to use taxpayer money to support the loss-making MTNL and BSNL.

Another immediate casualty will be the government’s Digital India project since, with their current balance sheets, telcos simply cannot afford to invest the kind of money they need to for creating world-class broadband infrastructure—estimates are firms will need to spend $5 billion annually on top-up capex and probably another $5-10 billion over the next couple of years to build the requisite broadband capacity. While the bigger telcos have the balance sheets to withstand the latest auction, the government treating the sector like a milch cow has badly hit its prospects. That’s unfortunate for a government that is trying to convince investors India is a great place to do business in.

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Tags: Spectrum
  1. R
    Mar 28, 2015 at 11:42 am
    What Vinod Rai and co., did not understand or did not care about is that whatever money Govt. earns in whatever form, taxes, license fees price of goods and services provided by the public sector etc. , is ultimately from the general public. Another very important factor ignored by the public is that for any organisation to grow it must generate an excess over the expenses. This excess is the profit, which is often given a bad name. Profit is the fuel which keeps an organisation running and also grow. If by the arm twisting of Govt., huge money is generated, this is not healthy economics, that is actually taxation in a different form which every single individual with a cell phone stuck to his/ her ear pays.
    1. B
      Mar 31, 2015 at 12:19 pm
      lesser the mobile tarrif, result in unwanted long duration calls. hence more loss to public health. Govt has spend on more for public health. telcos will not care for public health.Their aim is making money with spectrum (RF radiation) at the cost of public health. Part of the money received by govt through spectrum auction to be spent for guarding the public from dangerous EMW radiation. Now public is in RF oven.
      1. K
        kulkarni s
        Mar 31, 2015 at 6:51 pm
        firstl govt of india has not helped bsnl for a single rupee two much players nearly 14 are spoling indian telecom market govt needs to control competion
        1. V
          Mar 31, 2015 at 9:50 am
          Batting for telcos, false argument.

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