Telecom mergers

Updated: Aug 31 2007, 04:36am hrs
It may seem strange to argue that a thriving market needs more competition, and Indian mobile services are clearly booming. But there is something that gives telecom the characteristics of a winner-takes-all sectorwhich means that the few players that do well tend to do enormously well, while the rest trail off. The net result is that those service operators that have largely depreciated their high fixed costs on network creation have a big advantage vis-a-vis new entrants and smaller players. This also means that barriers to competition are especially high. Therefore, there should be no let up in the vigilance on whether there is enough rivalry in this sector. And when the Telecom Regulatory Authority of India (Trai) takes measures to make mergers and acquisitions (M&As) easier, one must ask what effect it will have on the state of competition.

In its review of licencing norms, the regulator proposes to allow a company to buy up to a 20% stake in a rival within a circle, up from the earlier limit of 10%, while leaving the number of service providers in a circle uncapped. To the extent that this spells more business freedom for operators, this is good, though the case-by-case nod needed for buying more than 10% is a caveat the market could do without. Trai also wants to let a merged entity go beyond the 15-MHz spectrum allotment limit that is currently in place. This is sensible, since requiring two merging players to squeeze into the air space of one is as good as disallowing mergers. To ensure that no one gains excessive dominance of a circle, however, Trai wants the maximum market share of a merged entity to be limited to 40%, down from the earlier 67%. Besides, each circle must have at least four players. From a competition perspective, these rules are reasonable, and DoT ought to approve. But when it comes to the proposed policy for the allocation of additional 2G spectrum for the expansion of operations, one big question arises. Since this is a scarce resource, Trai wants a one-time fee to be levied for allocations beyond 10 MHz, with the sums fixed arbitrarily for assorted circles. This is neither here nor there. Why not let the market mechanism operate here, too An auction would be fairer and perhaps more remunerative.