Telecom Sector: The Key Issues Pending Resolution

There are only a couple of days left for the current year to end. Now is the time to introspect. Last year, collectively we have accomplished a lot, but there are some key issues which need urgent resolution. The purpose of this note is to list these issues and describe the implications, in case these are left unresolved.

Resolving License fee Dispute

DoT (Department of Telecom) levy license fees as a percentage of total revenue collected by the operator. Note that this is not a tax, but fees, that operators need to pay in lieu of DoT allowing it (operators) to operate telecom services. The definition of revenue is expansive, barring the termination and roaming charges, which are allowed to be deducted - as these charges are collected by one operator on behalf of the other. The proposal to collect a license fee as a percentage of revenue was offered by DoT on 22nd July 1999 to bail out the operators. The situation emanated due to excessive bidding by operators for the "basic services" licenses in past. Though the license is just a paper document, it made sense then to collect fees for it, as spectrum was not auctioned, but was assigned to the operators based on defined criteria.

From the inception of this model, the operators are in direct conflict with the govt on the definition of what constitutes "revenue". The government wants revenues from all activities (which the telecom players undertake) to get included for the purpose of calculating the license fees, but the operators want only those items to be included, which are directly linked to telecom activities, for which it has taken a license. See my earlier note in this regard to get a better understanding - "License Fees @ percentage of Revenue: What is the dispute all about?"

The implications are huge in case this dispute is kept unsettled for long (already 15 years have passed). This impacts investor's confidence, as a portion of operator's revenue is at risk. See the link to a recent article - "Telecom Department Sends Rs. 29,474 Crore Demand Notice To Six Telcos". Also, the current model severely limits the operator's ability to outsource some activities for creating more operational efficiency. This is bad for the government too, as the benefits of some reforms such as VNOs, spectrum trading etc will not get fully realized. See my earlier note - "How Effective are the VNO Guidelines?". The seriousness of this issue mandates DoT should looking into it with an open mind, as charging "license fees" at the time when huge revenues are getting generated through "spectrum auctions" in itself is a double whammy situation, thereby increasing the cost of services.

Making 700 MHz Affordable

The 700 MHz band had no takers in the last auction. As the reserve price for it was set at Rs 56 K Cr for 5 MHz ($ 8.6 billion). This is 2.26 times the price of the 800 MHz band. While calculating the price of 700 MHz band it appears that TRAI had committed an inadvertent error. In its April 2012 recommendation, it compared the $/MHz/pop values of 800 MHz and 1800 MHz band of some countries and concluded the price of 700 MHz as four times that of the 1800 MHz band - even though based on its own data, the ratio turns out to be "two" (not "four"). This is described in my earlier notes - "Is TRAI's 700 MHz Price Outcome of an Inadvertent Error?" and "Pricing Rationale of 700 MHz band".

Setting the price of 700 MHz band right is very important for the sector especially when the market is moving towards "unlimited voice". To support this, the operators will need spectrum in the lower frequency bands at an optimal price, as VoLTE (a tool to drive unlimited voice) works best in the lower frequency bands. Please read my earlier note - "How "Unlimited Voice" Impact Indian Operators". The rationale for affordable 700 MHz band emanates from the fact that the operators will not get proportionately compensated by the user consuming "unlimited voice" (they can only charge a fixed value).

Driving End to End VoLTE

Currently, VoLTE calls between networks of two operators are converted into 2G for the purpose of termination. This reduces efficiency and degrades the quality of the VoLTE calls. This forces operators to make additional investments in legacy technologies which will get obsolete soon. Also, in order to leverage the full capabilities of the 4G technology, the VoLTE calls need to be transmitted in native form across networks of different operators.

DoT should define and publish standards which all the operators should follow to connect VoLTE calls, just like it (DoT) has done for 2G.

Delicensing of 60 GHz

Currently, we have two spectrum bands (2.4 GHz & 5 GHz) reserved for unlicensed operations. This means that a user does not have to go through the complicated process of seeking approvals to radiating in these bands. The total quantum of spectrum available for use at a time available is only 20/40 MHz, though a total 200/400 MHz is assigned. As most of it get consumed for managing interference. See my earlier note for more clarity - "Spectrum Management for Dummies". To drive higher data rates and for backhauling traffic from the WiFi hotspots, more spectrum is required. 60 GHz band is an excellent choice for this purpose. Other countries have opened it up for unlicensed operations, as it easy to manage interference in this band (compared to other bands) - radio signals traveling in this bands gets naturally attenuated by the oxygen molecule's interaction with it. Opening up this band for unlicensed operations can greatly increase the opportunity of deploying WiFi hotspots in the country, which is currently constrained due to the need for costly fiber-based backhaul even for carrying traffic to small distances.

Promoting Local Manufacturing

India has already become a manufacturing hub for smartphones. To most Indians, they (smartphones) are the only means of accessing broadband. Hence, these devices need to be affordable. India has the best talent at the cheapest cost. We have to leverage this to our advantage. This we can do only when "Local Manufacturing" of smartphones is incentivised. The manufacturing of smartphones should not be just limited to "assembly", but the manufacturers should be motivated to add more value. With the introduction of GST, the current incentive structure needs to be changed and aligned towards the manufacturers who choose to add more value. Please refer to my note this regard for more clarity - "How GST Impacts Manufacturing of Mobile Phones in India".

I have listed only the key issues and deliberately left out the others. This I have done to prevent the reader's focus getting digressed from the most important ones. Concentrating on the key ones will ensure effective execution leading to huge benefits to the industry and the consumers.

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