No Technology Can Win Without a Conducive Regulatory Framework, Agree?

To enable us to decide, let's investigate the Indian telecom industry from this context. In the process, the readers can themselves conclude as to how the businesses would have performed in case the "regulatory framework" got altered.

CDMA vs GSM

CDMA (Code Division Multiple Access) was introduced in the Indian market in the early 2000. This technology was initially used by the basic services operators to offer limited mobility service by replacing the last mile copper wire with a wireless link, thereby saving greatly on capex and opex. On the other hand, GSM (Global System for Mobile) technology was used by cellular operators to offer full mobility services. Basic services operators paid lower license fees, and also had superior technology with significant capacity (CDMA is much more efficient than GSM) and coverage (CDMA needed lesser BTSs) compared to their GSM counterparts. In-spite of these advantages, CDMA technology could not win the technology battle. Why? Let's discuss.

CDMA got 50% Less Spectrum

Before 2010 (the year of 3G auction) the spectrum was bundled with the license. CDMA being efficient, was assigned 50% less spectrum compared to GSM. Why? To create a level playing condition. "Voice subscribers" was used as a metric to measure the quantum of spectrum needed by an operator. The GSM technology being inefficient, therefore an operator running on GSM technology needed more spectrum. Hence it was assigned double the quantum of spectrum compared to the CDMA operator. The impact of this regulation was that a) the CDMA operator failed to unlock its ability to offer data services. Recall that in the year 2002 South Korea rolled out EVDO (Evolution Data Only/Evolution Data Optimized) services using the CDMA platform. However, the Indian operators could not, as they was throttled by the "voice based" spectrum assignment criteria - compromising their technological leverage. b) the CDMA operator failed to leverage its bundled handsets with the network to create a competitive advantage. Recall that the CDMA operator used to offer handsets bundled with service. The idea was to control the quality of devices so that network capacity is not compromised due to entry of poor quality devices. But since focus was on voice, and the GSM operators were compensated for their inefficiency, loss of network capacity due to poor quality handsets did not create a competitive disadvantage for the GSM operators. On the other hand, they (GSM operators) were advantaged as they did not have to carry inventory, and the customer had the flexibility on the choice of devices.

LTE vs 3G & GSM

LTE (4G) got launched in year 2016/2017. With its launch it was able to created a huge competitive leverage compared to its GSM counterparts. But how an LTE operators created such a huge leverage and the CDMA operator in past couldn't? Let's find out.

Spectrum and License was de-linked

Form the year 2010 the spectrum was assigned through auctions, and LTE being more efficient compared to 3G and GSM can now fully leverage the capacity of spectrum (unlike in past when the CDMA operator was constrained by regulation as already explained earlier). This also enabled the 4G operator an opportunity to optimize their network's data carrying capacity by bundling handsets (which they anyway had to do to acquire customers), and quite unlike the capability of the CDMA operators in the past (focus was on voice and not data).

Interconnect Usage Charge was Reduced

Interconnect usage charge is paid by the originating operator to the terminating operator for the services rendered by the terminating operator to carry the call to the subscriber at the other end. The terminating operator has no other way to recover the cost of carriage, as the regulator has prevented it from charging for the terminating calls by announcing the Calling Party Pay Regime. The TRAI regulates the cost of carriage for the terminating call, i.e how much the player (originating the call) had to pay to the other (terminating the call). Recently, the TRAI reduced the IUC rate from 14 paisa/minute to 6 paisa/minute (finally to zero by 2019/20). The rationale used by TRAI was that the cost of carrying voice on 4G is very low. Why? 4G is significantly more efficient compared to 3G and GSM. However, the GSM operators were at competitive disadvantage, as they hadn't invest in 4G networks significantly and therefore had no choice but to use the high cost 2G networks to terminate incoming 4G voice calls.

Compared to 800 MHz, 700 & 900 MHz bands were over priced

Lower frequency bands are extremely valuable for 4G (VoLTE) to run efficiently. Why? VoLTE runs on higher bit rate (compared to 2G), and therefore the 4G network coverage shrinks at the edge for voice service. To compensate for this decrease, one needs to run VoLTE in the lower frequency band where the radio wave naturally travels further (compared to higher frequency spectrum bands). Unfortunately, compared to 800 MHz band (used by RJIO), the price of 700 and 900 MHz went disproportionately high. The reasons: a) 900 MHz band price increased as the GSM operators bid very high to stay in business in 2015/2016 auctions (GSM operator's licenses were expiring), and b) the 700 MHz price was artificially set very high by the regulator probably due to an inadvertent error, which later it (TRAI) corrected in its recent 2018 recommendation. See my earlier note titled - Is TRAI's 700 MHz Price Outcome of an Inadvertent Error? The impact : a) The higher price of 900 MHz band sucked vital funds out of the GSM operators. b) Also, they were unable to use it for 4G, as it was occupied by GSM which they could not have dismantled abruptly. c) The alternate 700 MHz band remained out of their hands, which otherwise could have been used for offering VoLTE services. d) The GSM operators were ill equipped to offer unlimited voice, as 2G network will choke it being highly inefficient compered with 4G (lower frequency spectrum bands are best for offering unlimited voice). See my earlier note titled - How "Unlimited Voice" Impact Indian Operators.

Possible Countermeasures By Effected Players

In order to counter the regulatory onslaught, the effected operators could have used some countermeasures. These are listed under.

Seeking Auction of All Spectrum

In the battle between GSM and CDMA technology, the CDMA operators should have offered to take 2G spectrum through an open auction. You might recall the same was offered by Rata Tata in year 2005 for 3G license. See story -3G spectrum to ring Rs 9,000 cr in licence fee. In my view, this offer (which the GSM players opposed vehemently) became the basis for the government to auction 3G and BWA spectrum which ended up enriching the government by a whopping Rs 1.05 Lakh Cr. Also, in my view, had the same being offered for all spectrum, the competitive leverage for the CDMA operators would have been quite different. It would also benefited the GSM players by preventing the 2G scam, which vitiated the environment by allowed entry of larger number of players at subsidized rate in the year 2012, thereby destroying the trust of the people and government in the telecom industry. Also, the same could have prevented the 3G auction prices of 2010 to increase astronomical levels (large number of players chasing only 3 slots of 3G), thereby arresting the spectrum prices for future auctions.

Seeking Native VoLTE to VoLTE Interconnection

The entry of the 4G operator in the telecom space was not an surprise. The intent was clear in 2010 when RJIO acquired 4G spectrum in 2300 MHz band. Thereafter, it took more than 6 years for them to launch services. GSM operators should have seen this coming. As regards 4G spectrum in concerned they had no less. They could have prepared themselves for 4G, and at least launched a thin network (on a small fraction of their spectrum). This would have enabled them to create a perception before the regulator/consumers that they are not holding back the march of technology. But how could this positive perception helped leverage policy in their favor? Leveraging this perception they could have persuaded the regulator to allow native 4G voice interconnection between networks, and proposed a lower IUC for the calls for which no trans-coding (VoLTE to GSM) was necessary. And for those calls which needed to be trans-coded, they would have demanded a higher IUC (cost of carrying voice in 2G is high). How? As why should they be require them to invest in 2G networks to carry someone else's 4G traffic (voice calls terminating from the 4G player was asymmetric)? It would have been extremely difficult for the regulator to overlook this logic. On the other hand, the 4G player would have no alternative but to terminate its VoLTE calls by trans-coding it to 2G, due to the absence of VoLTE capable handsets on the other side.

Seeking the rationale of 700 MHz pricing

TRAI's error on 700 MHz band which resulted in pricing it to 4 times that of 1800 MHz band (instead of 2 times) was known since 2012. In 2016, when TRAI used its earlier recommendation to price 700 MHz band, the operators should have protested. Had the 700 MHz properly priced then some operators like Vodafone and Idea would have purchased 700 MHz spectrum instead 2500 MHz band in the 2016 auctions. Availability of 700 MHz band with key players would have created huge competitive advantage for the incumbent GSM players.

Conclusion

It is clear from the above discussion that technology alone cannot win, unless supported by a conducive regulatory framework. All players should be conscious about this fact and take proper counter measures to prevent a regulatory disadvantage. Also, the government should be aware of this fact, so that while drafting regulation it does not let the incentives get misaligned which might prevent the nation to enjoy the benefits of the latest and best technology. Doing so will be in the interest of the stakeholders and the consumers.

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

PS: Find the list of other relevant articles in the embedded link.