Telecom tangle

With a host of companies already applying for long-distance telephony licences, and telcos now coming up with lifetime free-incoming calls at a one-time cost of only Rs 999 and a recharge of around Rs 10 every six months, it’s clear that last year’s telecom success is likely to be even stronger this year. If the year closed with around 4.5 million new mobile subscribers in December, January promises to be even stronger, and so on for the rest of the year. And with long-distance rates all set to crash with more players coming in, and Skype-type internet telephony now allowed (of course this is only for existing “access” providers like Hutch and BSNL—newcomers like Skype will have to pay Rs 1,500 crore or so for an all-India access licence and so will not come in), it is likely the long-distance minutes called will also see a quantum jump. Add to this the plans of companies like Motorola and Nokia to produce handsets here, and you have the recipe for a great year ahead for telecom.

The flip side is that this will also play havoc with the industry. For one, the new lifetime-incoming-free will reduce the average revenue per user (ARPU) from around Rs 175 per month right now for new users (it’s around Rs 400 including the old and the new users) to around Rs 45 or so—based on a reasonable assumption that the lifetime-incoming-free subscriber will hardly make any outgoing calls, receives 150 minutes of incoming calls, and a telco earns 30 paise termination charge on each such call. So, unlike in the past, it will no longer be possible to judge a company’s worth based simply on the number of subscribers it has since the number of near-dormant or dummy ones who’re just there for free incoming calls will rise dramatically.

This, of course, will also create another problem as far as the current fight for spectrum (or the airwaves on which telcos transmit their signals) is concerned. Since, so far, the allocation of spectrum has been linked to the number of subscribers, continuing with the present system will be even more open to abuse. And since most firms are facing a severe spectrum shortage even now, this is likely to play havoc with their future ability to service subscribers. Eventually, if the government is interested in an orderly development of the sector, it will just have to move to a system where spectrum allocation is auctioned to weed out the problem of booking dud/near-dud subscribers as well as the one relating to the relative spectral efficiency of GSM versus CDMA mobile technologies—problem is, right now, the telecom regulator and even the department of telecom are interested in allotting spectrum on the old method. Frankly, if this is not resolved quickly, the entire telecom party could go for a six.

Another issue that has the potential to spike the party is the power of the regulator to discipline incumbent players. So far, this has been quite poor and BSNL, for instance, has repeatedly refused to allow competitors to link to its network—last year, the telecom regulator cited 918 cases where BSNL denied interconnection, of which 367 were pending for more than a year! And when private sector rivals managed to rope in clients for their VPN internet services, BSNL refused to provide them leased lines even though the law prohibits it from doing so—it even issued a circular to division heads instructing them not to provide leased lines to ISPs that offered VPN services. Later, the government even changed the rules of the game and said VPN services were not part of the original ISP licences and arbitrarily jacked up the licence fees from one rupee for all ISP services to Rs 10 crore for the VPN one—in each case, the regulator was a helpless spectator.

An interesting twist to this is a story in a recent issue of BusinessWeek which reports on the new threat internet firms like Google and webphone provider Vonage are facing with the possibility of broadband access providers blocking calls from internet service providers—one such case has already been reported and telcos are openly talking of doing this! While this is far from happening here right now, imagine a situation where, on your Hutch/Airtel/Reliance PDA phone, you use a rival’s IP telephony to call your cousin in the US, and Hutch/Airtel/Reliance blocks or slows down access to this rival’s service. Will the telecom regulator be in a position to do anything about this? Based on the experience with BSNL, it appears unlikely.

Another serious area of concern is the lack of action on the Rs 5,000 crore annual access deficit charge (ADC), which users pay each time they make or receive a long-distance call. So far, this money that was given to BSNL, primarily, was supposed to make good the gap that BSNL faced when it charged users politically mandated below-cost rentals. While rivals, like the mobile phone firms, whose subscribers had to pay the ADC have long argued that the ADC was used by BSNL to subsidise other businesses like the mobile one, the telecom regulator has continued to deny this—no data has, however, been made public to substantiate this claim. But with BSNL slashing its telephone rentals further on January 1 this year, the claim that it requires the ADC for its below-cost rentals surely looks hollow. It doesn’t help that Trai has consistently changed its position on the ADC and its estimates have fluctuated from Rs 13,000 crore in May 2003 to around half this in October the same year, to Rs 1,402-3,436 crore in June 2004 and then to Rs 5,300 crore in January 2005!

In a nutshell, the government’s ability to influence the party, and to play favourites, hasn’t diminished. So pick your winners keeping this in mind