INDUSTRY INSIGHT: TELECOM The silver lining for the industry comes from the reduction in competitive intensity.
India’s telecom sector has faced tough times over the past four years, primarily due to significant legal challenges to government policy (particularly the process of licence issuance) compounded by a sharp erosion in key operating metrics of leading telecom operators. Pressure on pricing arising from hyper-competition led to a steep decline in realisations per minute (RPM) and average revenues per user (ARPU) and mounted pressure on operator profitability. However, with the competitive intensity abating and data traffic surging, we anticipate an improvement in industry revenue growth and profitability over the medium-term.
In February 2012, the Supreme Court cancelled all 122 2G telecom licences allotted on or after January 2008. The Supreme Court’s decision compounded the regulatory overhang in an industry already grappling with numerous uncertainties. Foreign investor sentiment too was adversely impacted, with at least two major foreign operators arguing that they had been unfairly penalised although they had not indulged in any wrongdoing. While some operators chose to re-obtain spectrum at much higher prices, others such as Etisalat and S-Tel have chosen to exit, as they have found continuing operations unviable in the current environment.
In May 2012, the government unveiled the new telecom policy (NTP) that is broadly positive for the industry. The NTP proposed de-linking future licence issuance from allocation of spectrum, as well as allowing spectrum pooling and sharing. The policy also seeks to remove roaming charges and create a one nation-one licence regime across service areas. This will have an impact on operator revenues as the move will eliminate earnings from roaming and STD charges.
The government also stated its intent to go for spectrum refarming, which would be a negative for established operators, since many of their licences are due for renewal from 2014 to 2016. It could lead to a significant downside for them, as the re-allotment of spectrum in a higher frequency band will imply higher capital investment to maintain current service levels. Also, the announcements on one-time fee on existing spectrum would further strain operator cash flows.
Another issue requiring clarity is with regard to 3G roaming agreements. At the moment, there is a dispute on roaming arrangements between the government and three leading operators on offering 3G services in areas where they do not hold 3G spectrum in their individual capacity. The matter is now being heard in the courts of law.
Tepid response to 2G auctions
Following the cancellation of licences as per the Supreme Court order, the government conducted a round of the 2G spectrum auction in 1800 MHz in November 2012. Owing to the high reserve prices, the response was tepid with less than half of spectrum blocks up for grabs finding takers, with all the acquired spectrum blocks (except Bihar), being at the reserve price.
The muted response forced the government to re-think its initial reserve prices, for circles where bidders evinced no interest (Delhi, Mumbai, Karnataka and Rajasthan). The Empowered Group of Ministers (EGoM) recently proposed that the reserve price for the next 2G auction in these four circles should be 30 per cent lower than the price decided for the November 2012 auction. It was also announced that a spectrum auction in both 900 MHz and 1800 MHz (GSM) would be conducted for all circles in March 2013, followed by auctions in 800 MHz (CDMA). The EGoM also recommended a reduction of up to 50 per cent in the reserve price of CDMA airwaves.
Amidst hectic regulatory activity, the silver lining for the industry comes from the reduction in competitive intensity. Net subscriber additions have reduced with some of the operators shutting / scaling down operations and existing operators cleaning up their subscriber base.
Pricing pressure on operators has also reduced, and in few circles where operators have a strong market position, they are in the process of increasing tariffs gradually. Operators whose licences were cancelled and chose to re-acquire spectrum at high prices under the fresh auctions would not be able to offer services at extremely low tariffs, consequently reducing any possibility of pressure on rates. The clean-up of subscriber base along with reduction in competitive intensity will mitigate pressure on key operating metrics.
As a consequence, ARPU is expected to increase in 2012-13, compared to 2011-12 (the first such increase in the last few years). In the long-term, improvement in ARPUs would be helped by a surge in data revenues.
RPMs (realisation per minute), which have been declining for the last few years, are expected to stabilise at current levels and increase steadily thereafter.
The author is Director, Crisil Research, a division of Crisil