Is 4G driving a Paradigm Shift in Telecom Business?

Conventionally the telecom operators are in the business of selling voice and data running in separate pipes. Typically voice is charged @ Rs/Min and data @ Rs/MB. These entities are packaged in plans with different validity periods. The operators tweak these plans to drive usage for maximizing revenue. The rates are optimally set so that the usage is within network capacity defined by spectrum and equipment. Capacity can be increased further by spending on additional capex but may impact profitability, unless it (increased spend) drives more usage. Whereas in 4G, both voice and data are integrated into a single pipe, with voice consuming a very small fraction of the total capacity - enabling the operator with plenty of room to offer "unlimited voice". See my earlier note - "How "Unlimited Voice" Impact Indian Operators". Also, complex tariff plans (to manage voice and data usages) are no longer required, thereby shifting the focus of operators only on managing ARPU (average revenue per user). But, how can ARPU be increased when voice is no longer metered @ Rs/Min and data is offered either free or at a rate which is substantially lower? The obvious solution is to a) increase the fixed monthly rate, b) ramp up low ARPU subscribers to the fixed plans, c) explore new ways of monetizing data.

Now, the monthly rate can only be increased if your competitors also follow suit. What if they don't? These leaves us with the other two options. But in order to uplift the low ARPU subscribers to fixed plan, we are dependent on the availability of low-priced handsets in the open market. Why would a "value user" buy a new handset at a higher price and also pay more for services? He will do so only if he is motivated by incentives (free or subsidized handsets, unlimited voice etc). Afer sometimes, this option might also plateau and therefore the only other way to increase revenue is to find new ways to monetize data. But, there are challenges and regulatory hurdles. Let's investigate.

To be able to monetize data the operator must offer his network as a platform (market- place) - facilitating both users and producers to transact business over it. In the process, the operators can hope to keep a cut of the transactions incurred. But, why would anyone pay a telecom operator for transactions undertaken over data pipe which the operator has already been charged for? Any further claim is possible only if the operator has uniquely facilitated the transaction. But he can't, as the 8th Feb 2016 order of TRAI prevents any commercial arrangement between the operator and a third party for offering differential tariffs. Nor can the operator throttle traffic or enable fast lanes without violating "net neutrality" rules, which the TRAI is in the process of formulating. The clause 3.2 of the TRAI's Feb 8th order is reproduced below for reference.

No service provider shall enter into any arrangement, agreement or contract, by whatever name called, with any person, natural or legal, that has the effect of discriminatory tariffs for data services being offered or charged to the consumer on the basis of content

But, some leverage still exists. TRAI's Feb 8th order also has the following provision.

Provided that this regulation shall not apply to tariffs for data services over closed electronic communications networks unless such tariffs are offered or charged by the service provider for the purpose of evading the prohibition inthis regulation.

Hence, the operators can host content over its own network and offer them to its own subscribers over free or subsidized data. This will encourage the consumers to use its (operator's) services than those offered by generic platforms. There is one more way of exercising leverage over consumers. An operator can tweak the UI (user interface) of handsets and offer them to its consumers at a subsidized rate or bundled with free data. These UIs will have preloaded applications pointing to services promoted by the operators, thereby driving traffic away from conventional platforms. Currently, there are no regulations which prevent this practice. Local handsets players are already making money from developers by selling handsets preloaded with applications developed by them. Also, the large reach and distribution networks of operators can be very handy to drive services like "payments", as conventional banks might find reaching out to remote areas of the country unviable.

With the advent of 4G, the conventional business practices will see a paradigm shift. The real pressure will come from "platform businesses" trying to ride free on top of operator's networks - built with huge investments. Operator's profitability will erode unless it is able to leverage all possible options to stay motivated to keep investing in new technologies and continue to expand its existing networks. Unless we allow that flexibility, we will not be able to ensure robust networks of optimal quality capable of supporting ubiquitous internet connectivity and that will not be in the interest of any of the stakeholders involved, including the consumers.

(Views expressed are of my own and do not reflect that of my employer)