Is the Indian Telecom Industry Bleeding?

Authors: Gino Raphael Dcruz, Harsh Kumar Kataruka, Sameeksha Arogyaswamy, Shivani Vinoth, Sumegha Agarwal, Vaibhav Handuja

Over the years, the Indian telecommunications sector has contributed significantly to the growth of the Indian economy. Until 1990 the telecommunication sector was owned and operated by the government. Since then, it entered the age of privatization, with the establishment of the National Telecom Policy. Post-March 2000, the government issued licenses to almost every private operator at reduced licensing fees. This led to a phase of profitable growth for the operators. India is now the second-largest telecommunications customer globally and has a market with around 1.6 million customers. 

The industry is split into 3 major segments – Wireless, Wireline, and Internet, with the former segment accounting for close to 98% of the subscriber base as of Jan 2020. Further, rural users accounted for about 43.69% of the total base.

India's total current user base is 627 million holding the greatest data usage per smartphone stats coming to around 10 GB a month. The sector continues to be one of the fastest-growing; however, it is still incredibly price-sensitive, with three major players having to slash prices and fees to remain competitive. Several government initiatives and policies have been crucial to the sector's development over the years, helping speed up the country's internet revolution.

Transformation in the Telecom Industry and its Sustainability

A once competitive industry came down to a potential duopoly in no time. After the entry of Jio in September 2016, there has been a rejig in the telecom sector. The launch of the Voice over LTE by Jio is what started the storm in the telecom industry. This advancement allowed them to price their plans at a substantially lower rate than their competitors, which is essentially how the price war between them began. Suddenly, almost everyone could afford access to the internet, and this also coincided with the age of the OTT. With this offering from Jio, many people could now opt for internet plans and stream shows and movies from the little rectangles in their palms. Customers could now enjoy cheaper bundle plans, data at lower rates, and make unlimited calls. 

To keep up with Jio, other telecom operators started matching their plans, but their pursuit of retaining their customers also made them run into huge losses. The existing players faced severe revenue loss with Airtel, Vodafone, and Idea, seeing a plunge of 7%, 10%, and 20%, respectively. This led to a flurry of mergers and acquisitions, among whom the major one was the Vodafone and Idea merger, making it the biggest player in the market. 

The lower bundle prices implied reduced revenue per user, which added to their woes. Airtel and Vodafone Idea owed huge sums to the government for the spectrum license under the AGR policy. This license fee pushed Vodafone Idea on the brink of bankruptcy, as a result of which Vodafone Idea has been losing their customers to their competitors. Further due to the lockdown imposed in India, customers were unable to recharge their voice or data plans from retail outlets, and the telecom operations had to increase their validity for free. This resulted in more revenue losses for them. The price wars have led to the incessant bleeding of certain telecom companies' funds, while the newest entrant into the market gains market share. 

The current market scenario has three major players, with Jio holding a 28%, Vodafone, and Airtel, each with 28% market share. The competition seems to have stabilized after the Telecom Regulatory Authority of India notifications to increase telecom package price throughout the industry. Airtel and Vodafone-Idea's revenues have started to increase again in 2019 after seeing a reversal in 2017 and 2018. With the entry of Jio and Airtel, the competition has shifted to fixed-line broadband optical connectivity.

What is the AGR fiasco?

In 1999, the National Democratic Alliance government established a revenue-sharing fee model as an alternative to the existing high fixed license fee system. Telecom companies now paid spectrum usage charges and license fees based on their annual Adjusted Gross Revenues (AGRs). This was a welcome change at the time. However, the Department of Telecommunications' (DoT) definition of AGR included revenue from non-core activities, such as interest income and profit from investing activities. Although this was a matter of legal dispute, telcos did not record tax liabilities by the DoT's definition. As a result, when the Supreme Court ruled in favour of the DoT mandating telcos to pay these increased dues calculated over 20 years, it directly affected 15 firms, and liabilities shot up drastically. Several telcos incurred losses, reflecting in their share prices dropping as well. Vodafone-Idea Ltd., Airtel, and Tata Teleservices were most affected, owing to a total of over Rs. 1 lakh crores out of the aggregate Rs. 1.47 lakh crores. It was speculated that some firms might be forced to exit the market, potentially leading to a duopoly and a drastic reduction in consumers' power. In January 2020, the Supreme Court accepted the telcos appeal to extend the dues' deadline, albeit reaffirming no changes in what was owed.

What does the future for the Indian telecom industry look like?

India's telecom industry is likely to reverse from the 2-year downtrend, with revenues continuously increasing. In 2021, the revenue is expected to grow to US$ 27 billion. The number of Internet subscribers is expected to be doubled to over 80 crore people by 2021. But this comes with the advent of 5G, which has its problems. In the business model that telecom companies operate currently in, capex expenditure is supposed to rise. All the major companies are looking to monetize their 4G investments before moving towards 5G spectrum. Along with it, hefty government spectrum fees are posing a challenge for the companies in the adoption of the 5G spectrum.

To counter that, movement across the value chain needs to emerge. 5G offers more speed, higher traffic, enterprise solutions, and home automation using the Internet of Things. These services need to be exploited for the telecom operators to achieve the profits forecasted. A long-term plan needs to be put in place that allows cross-functional roles of the telecom sector, from mobile networks to IoT solutions and more.