The telecom mess

As of the time of writing, the mess in the telecom sector shows no sign of resolution, despite meetings between promoters and ministers. Consider a few of the scenarios that may pan out. Vodafone-Idea (VIL) is effectively being driven bankrupt, and it will probably shut down if the adjusted gross revenue (AGR) demand is not waived, or cut very substantially. Even if the AGR is waived or reduced, the company may already be too financially damaged to survive in the long run.

Bharti Airtel can find the financial resources to pay the AGR demand. But finances will be very stretched if it has to pay up and then manage new capex. Reliance Jio is in better shape than Airtel and VIL. But Jio is also cash-negative and the parent is going to have to raise and invest more cash, if it has to absorb more customers. That could mean an initial public offering (IPO).
 

If the sector turns into a duopoly (ignoring the struggling BSNL-MTNL combine for the moment), Airtel and Jio will find it hard to absorb the 300-million-plus VIL customers who will have to be ported. If BSNL-MTNL also goes down the liquidation route, that will be 500-million plus subscribers in search of a new service provider, or providers.

Both Airtel and Jio will find it hard to buy the VIL network in order to keep servicing that influx of new customers. Spectrum licensing rules would have to change and VIL’s spectrum would have to be “re-licensed” at deep discounts. Otherwise, we will experience clogged networks with inadequate capacity and many 2G customers will be forced to buy new instruments and move to 4G. In this scenario, forget about 5G rollouts – no service provider will be interested in the required capex to set up the new networks.

This is a policy problem with major political dimensions. Right or wrong, VIL customers will blame the government if connections are terminated. That would be a lot of unhappy voters. It is also a major economic issue, of course. The telecom sector has large externalities and the loss of a big service provider will have a noticeable impact on an already slow economy. It would mean another round of massive layoffs, for example.

A further deterioration of quality of service on already crowded networks will also impact every telecom-enabled business. This means every type of business and in particular, it will afflict sectors like fintech, conventional banking, goods and services tax () filing and e-commerce as well. The concept of Digital India and the government’s ambitious promises of delivering service via digital means will become just catchy slogans, given a duopoly with poor quality of service.

In theory, the government could auction assets and re-issue spectrum at lower rates, but there may be no buyers, even at very deep discounts. The government could also decide that it would forego AGR revenue that it will not be able to actually collect, by agreeing to the telecom industry’s contention revenue sharing should only apply to revenues from voice and data, with retrospective effect. That would be one solution.

If the industry does become a duopoly, telecom tariffs will inevitably go up, and indeed, tariffs may go up considerably. The two remaining operators will have purchasing power, and the demand for their services may exceed their capacity for a while. Also, those two service providers will have to recover the capex costs they will incur to create new capacity to absorb the ported customers.

Many analysts are making assumptions that the jump in market share will be good for the two survivors. Perhaps it will, but it should be noted that telecom is a very price-sensitive industry. We have ample evidence of this in the experience of the last 15-20 years. Voice usage climbed when tariffs dropped; data usage zoomed as tariffs dropped.

The opposite will happen if tariffs are hiked. If tariffs are raised, people will curb usage, and some may even give up connections. To assume that Average Revenue Per User will climb by 35-40 per cent for the survivors, as some analysts have already done, is unrealistic. If data usage does dip, several industries, including entertainment and net-dependent businesses, will be badly affected.
 

It’s hard to make recommendations in such a situation. Whatever happens in the next few weeks will shape the industry for the next few years.