By Dr. Jaijit Bhattacharya
The last few weeks brought challenging news for our telecom companies. The first was about telecom companies losing Rs. 250 crore in business SMS revenue. This is based on the research conducted by Juniper Research. So as per Juniper Research, who is providing the business messaging service that is replacing SMS?
It is the Over The Top or OTT players, who basically sit as an app in our phones and help in messaging. It clearly is great for the economy as the advent of newer technologies increase economic efficiency. OTTs certainly bring in newer technologies to provide the required service, and telecom companies should certainly take the hit if it is not able to compete.
However, the equation is not as simple as that. The OTTs run over the telecom networks. The telecom networks are a capital guzzling industry, which consumes enormous amounts of capital and spits out unacceptably low Return on Capital Employed (ROCE).
The ROCE of telecom in India is in the low single digits. Why would anyone provide capital to an industry that has risks associated and provides a return that is comparable to a risk-free fixed deposit in a bank?
This is where the second news comes in. Airtel, which is one of the two key telecom companies in India (the other being Jio), is exploring ways and means to raise $1 billion (Rs. 8,500 crores) of funds, just to repay the spectrum dues. This does not include the capital spent in rolling out 4G networks or the 5G networks.
The capital requirement for the equipment for the physical network itself is another humongous investment. And alarmingly, the telecom companies are being pushed into the next cycle of investments even before they have recovered the investments pumped into the previous cycle of technology rollout.
In fact, Airtel needs to pay out Rs. 12,000 crore pertaining to spectrum buys in the 2015 auction. So this bill does not include the additional significant costs of the recent 5G auctions. For the records, the 2015 spectrum auctions cost Airtel a whopping Rs. 29,130 crore.
To put this cost into perspective, this amount of money can buy one and half massive aircraft carriers for the Indian navy. And this is only the spectrum cost, and not the cost of equipment to roll out the new generations of telecom technology.
Now add to this the need to continuously invest into equipment to ensure the response time of the network is high and that the network is able to cater to the exponentially increasing data usage, especially by those OTTs that are Large Traffic Generators (LTG) such as those the ones that provide us with movies and other content over the broadband.
If LTGs (entities that push in large amounts of data into the network) run on telecom networks, and if the telecom networks are steadily heading towards a situation where they are no longer interested in further capital investments, and LTGs are eating into its business, then the telecom companies could potentially collapse. That would be catastrophic for India’s growth.
This is the Kalidasa effect on the telecom companies.
Just like the great author Kalidasa, before he attained wisdom, had cut the same branch on which he was sitting, we find that LTGs are cutting the telecom companies, over which they operate.
This is certainly not desirable, especially in the situation where only two large, financially stable telecom operators are left in this country. And also, telecom companies are providing voice services for virtually free and are supposed to make revenues from data.
With data costs in India being one of the lowest in the world, while the cost of telecom equipment is the same as in any other part of the world, how can Indian telecom companies provide an acceptable return on their capital?
There are many counter arguments that the telecom companies are very profitable and generating significant cash. Unfortunately, profitability is not the correct criteria at all in this context. The profits need to provide sufficient return on the capital employed, else it would be difficult to raise future capital, in the absence of which, Indian telecom networks will get held back in technology adoption, and very soon, we will be left with the equivalent of the venerable Ambassador cars of telecom.
What is the way out?
As discussed in my previous article in ETGovernment, one of the potential mechanisms is for the LTGs to share revenues with the telecom networks. There appears to be an urgency to this mechanism in the light of the two news articles mentioned in the beginning of this article. If LTGs are pushing the telecom operators to invest more into the network for the network to be able to handle the data that is being generated by the LTGs, then the LTGs need to pitch in for that additional cost.
If regulations need to be tweaked for the market forces to step in, then that may be desirable. We should not be caught up in “isms” that prevent such changes needed for the nation’s interest.
In addition, there is also a need to think of additional mechanisms to increase the ROCE of our telecom companies to ensure that India continues to have the state of the art telecom networks that are critical for a fast growing modern economy. One such mechanism could possibly be reduced spectrum charges, which again contributes to capital requirements of the telecom companies.
Between the need for massive capital deployment and reducing headspace for revenue generation, telecom companies appear to be headed towards the Kalidasa effect.
This article first appeared in ET Government, https://government.economictimes.indiatimes.com/news/governance/large-traffic-generators-unleashing-kalidasa-effect-on-telecom-networks-what-is-the-way-out/105525871