India could do with just three private telecom operators and the telecom regulator needs to have a longer term vision for the sector rather than just react with policy changes ´in fits and starts´ to market developments such as predatory pricing, believes Bharti Airtel chairman Sunil Mittal. Edited excerpts from an interaction with journalists at the Mobile World Congress :
The telecom secretary has said India can do with five telecom opertors. You have called for consolidation that may reduce the number of players to four…
When we went from 2 to 4 players or 4 to 5, it was okay, but going all the way to 12 operators has led to $20-25 billion being written off. You could have built roads, bridges and God knows what all with that amount of money. We just let it go up in smoke. If you take BSNL out, it is four operators, which is clearly us, Vodafone-Idea combined and Jio with one more, which could be RCOM, Aircel, Tatas. If all three of them come together, then there maybe a case for a fourth operator. But just between the two of them, they are sub-10% market share and declining very fast because you need serious investments not only to cover up 3G networks, you now need a rollout of 4G networks. So my own view is that there is a question mark whether that entity will come into some shape form with three of them coming together. My own view is that you could be down to three operators.
Will that allow competition in the market?
The competition now lies in the space which is increasingly outside our control. People are using us just as a journey to get to the destination whether it is Facebook or Whatsapp. So most of the battle is being fought there.
Over here, you are looking at of 1 GB a day. The paradigm has shifted. You are not talking about 1 GB a month. You are talking about 1GB a day by giving 303 rupees plus eight or nine rupees a month for the next 12 months. That kind of amount if it carries on, or even half of this after the promotional offer, it’s very inexpensive compared to any part of the world including Africa, Bangladesh. Finally, you can always have the power to intervene. Just because you want to control tariffs, you can’t have an unviable market structure.
Do you see forced consolidation happening?
It´s already happening. Economics are dictating it, not the regulator. This industry is not like you put up a fertiliser plant or a refinery or a steel mill that keeps on producing with some repairs and maintenance. You need to invest a lot of money every year. So if you don’t have the balance sheet to do it and if Airtel is in a single digit ROCE (return on capital employed), you can imagine where Voda and Idea are and Jio will of course will be some time away. You can’t have an impaired industry if the dream is to have a Digital India.
What can the government or regulator do to stop this bleeding?
It is self-inflicted. There is a new operator in town and everbody is trying to hold on to their market share. So there is pressure on tariffs. What can the regulator do - encourage consolidation which it appears they are very clear about and I would say clearances for mergers should come expeditiously. The second part is spectrum pricing which in India has gone really really out of control. Whatever has been paid in the last few auctions is not sustainable to give the low value proposition to the customer. And finally, telecom has to be a means to an end and it can’t be an end in itself. If just want to pick up a lot of money upfront, then you are compromising your rollouts and investments in networks.
Can spectrum prices be cut when agencies such as CAG, CVC or CBI could question the same?
They will reduce it because every time they will come out now, it will be unsold because you see what happened in the last auction? Who is going to buy expensive spectrum? There’s no capacity to buy expensive spectrum… Don’t forget in the earlier auctions, both 800 and 1800 MHZ were lowered down. So there is a precedent which nobody has challenged or objected to. It should be a fair, open auction. We are not saying go back to the days of giving out spectrum — India can’t do what China has done (give spectrum free). That’s the most ideal situation but India can’t do that because we have a Supreme Court ruling now, so they will have to go through auction. All I am saying is if the auctions don’t yield results, you have lower pricing.
Would you like to see another auction this year?
It won’t happen. There is enough spectrum that has been tanked up by us, at least. Vodafone-Idea merger will yield a lot of spectrum for them. I would say Jio has picked up the spectrum they have wanted. They may want a little bit here and there, I don’t know. So who is the buyer? We have moved to a spectrum surplus situation for the moment. Eventually when the data consumption goes up, you will need spectrum. My prediction is that there can’t be an auction in 2017-18. Can you imagine there was a time when you were clamouring for more spectrum. But now, with our Telenor acquisition and all the spectrum that we bought from Videocon, Aircel, Qualcomm, we are done with auctions, more or less.
Jio has said they are going to charge for services from April 1. How would this impact operators like you and when do you see the situation easing?
It will ease once Reliance probably gets some scale. Their whole need is to get scale, customers, revenues. The good news is they have announced they are going to charge from April. But, we think it is unsustainable for the industry to give 1GB day for that price. It is pretty low.
Will it hurt revenues and profits?
It´s better than zero. We have been living with zero for the last six months. Eventually, this industry needs to have return on capital or else investments in future networks will slow down.
Are you disappointed at the lack of action to rein in the industry´s bleeding and the regulator´s role?
This time, we went straight to the various authorities (over Jio´s promotional offers). We went to TRAI, they came back with a message that they believe it´s fine. The next forum is to go to TDSAT. That’s where we are currently. But I was kind of happy to see that the Telecom Commission has also taken note of the revenue impact for the government --- at the end of the day, every 100 rupees the industry gets on the top line, nearly Rs 40 belongs to the government.
Your last quarter earnings were dented thanks to Jio. How long do you think this will go on?
Watch out for March 2018, when the dust will settle down. They (Jio) are going to charge from April 1, so by 31 of March you will start to see a new order emerging from this industry. I am hopeful it will be better. The tariffs they have announced are still very aggressive. Which means you have to got to respond. You have go to do more packages, throw in more data. All those things need to be done.
With these pressures, is the option to exit Africa on the table?
No. You must understand our Africa operations are not a load on India. Africa currently has about $3.4 billion dollar in revenue and around $ 800 million-plus in EBITDA. Its spends about $600 million in capex. Overall Africa is taking care of itself so its not a load on India. But would we want to see superior returns, healthier EBITDA.
Are you looking at consolidation in Africa too?
We will look at a few countries where we feel that market restructuring is important like India, and we will be looking at a few countries where we should acquire or merge to change the market dynamics. It is hard for me to put out countries. But wherever we are not in the top two, which is not too many countries, we would like to step up. We acquired Warid in Kenya and Uganda. Uganda has become very strong for us and we acquired Congo-Brasville. Kenya was Essar. We keep on doing this. Recently we acquired the cable network of Orascom. We have to get the structure of the industry right.
Would you say the new tariffs of Jio would be the new normal?
Well, if people can pay 311 Rs a month for 1 GB and that becomes a norm, it's twice the current ARPU (average revenue per user).
But it's also many times the data that industry is giving right now…
I know. The costs of the network are not linear. If you go to ZTE or Huawei and ask them to demonstrate massive Mimo, you can quadruple or probably go eight times your capacity with the same spectrum. Nice good innovation is happening on the network side where you can generate a lot more capacity than in the past. So technology is also coming to help. It's not that if I have 2000 terrabits capacity today, I have to get to 5000 and double my investments. It´s probably just 20% more.
Wouldn't that be more difficult for incumbent operators like you with legacy networks?
There's no such thing as a legacy network. It's just like phones. It´s like saying ´Do you have a legacy phone?´ Every two to three years, you change. These networks have been constantly getting changed… there are no networks we have which are pure 2G networks. They are all common strands, common cabinets — 2G, 3G, 4G — I mean it's software upgrades Few cards change.
Are you saying the cost is the same for everyone?
Yes, but you have to keep on adding more. We still spend $2 billion a year. It doesn't mean the same network will produce more, but I am saying it´s not that it becomes $5 billion a year. I was spending $2 billion in 2G, I spent $2 billion on 3G and I will still be spending 2 billion in 4G with these massive capacities.
There is talk that sellers are settling for lower valuations…
That's obviously the case. It goes without saying. there's less people buying spectrum, the spectrum prices go down. The less buyers for exiting telecom companies… and it's the same case everywhere. If I had to sell my Africa assets five years back, I would have got a lot more money than if I do it today. We sold Sierra leone and Burkina Faso to orange. If I would have sold two years back there would have been more money to be made. It is a function of an industry which is in decline.
Are you disappointed by the way the telecom sector has moved in the last two years? There are operators now with no option but to sell off. What is the policy prescription?
Going to 12 operators was a wrong decision. It´s not just India, but the world over. Look at Africa. There are still some countries I go and meet regulators… they want to dangle one more licence. I met an African minister now who´s persuading me to come and get a fourth licence. I said you should merge your third with your second because your country is small, you can't even have three operators. So the policy prescription has gone wrong everywhere. The good news is I think that governments are realising the need to consolidate.
What do you make of the fact that Jio has 100 million subscribers, but incumbents like you haven´t lost as many users?
That's simple. It's dual sim. Almost anybody with a Reliance sim has another sim, so you are right. We have not lost customers, we have gained customers. But they also have 100 million, so the math doesn't add up. The answer Is double sim. The usage moves.
Reliance Jio is investing in content. Is there a plan to acquire content?
No, our philosophy remains different. We would like to collaborate with content providers. Thats been our stated position from day one. We will collaborate with all of you for our news, so become the platform of choice and so we would like to be neutral on content rather produce curated own content.
What´s your take on 5G in India?
Well some experiments have started. Before u take a breather from the 3G and 4G launch, I was thinking that 5G will come in 2021, but now it looks like it may be 2019, when you will start seeing some early networks and handset availability. But in India, my view is that 5G applications are more in IOT (Internet of Things) and that needs to develop much more in India. Today, all electricity meters should be read by IOT. Why should anybody go for meter readings, I can't imagine. We should be able to just have an embedded chip meter that would pay for itself as well. An Airtel money account or another wallet reads the meter and pays for itself. These things are going to happen but I think India is slightly lagging behind.
You have set up a group in the GSMA to figure out how to do network sharing so that everyone is not building Highways of their own.
It´s silly but I think large parts are settled. Passive sharing is settled but active isn't, and there are challenges. You like a particular band of spectrum to run your network, I like a different spectrum, you have to put the spectrum together and if you are a strong operator, you want 50000 base stations. I can't afford to build another 50000 I want 25000. These are the kind of things where discussions fail, and inevitably have failed. And the other part is suddenly when you do these things some m and a happens, and that creates difficulties. So these are some difficulties that we are trying to overcome. One option is to go for a netco.. Like Independent tower companies, can there be an independent network company that produces the mbs and minutes. Now that's a futuristic idea. My view is one day, that's going to happen. But that will happen when you have in a country three strong operators like America, two strong operators in a European small country or three in a large country, four in India. Today, between us, Idea and Vodafone (let's leave Jio for a moment) more or less, there's a 10% difference in networks that are available, sometimes someone Is higher. But in the last two three years, we took the leap because we really went absolutely gang bust with the network deployment. But in the end, it's a 10-15% margin. If you are at that kind of margin and replicating full costs of 100%, then you will start coming to your senses and say, let's come together. But when you have a difference of 40% to 50% then it won't happen.
Post the Telenor deal, Moody's has retained its credit positive rating on Airtel, contingent upon your deleveraging plans to slash debt?
We are not overtly focused on that. Whenever we can sell something, we will, but this is a company which has solid free cash flow. Out of our large debt that is being talked about, you have to focus on one thing. There's no bank that chases us, we have no overhang of bank debts coming on our heads, we have a 12-year plan to pay the DoT and there are no covenants on that. It's got higher interest rates of 9.5 or 9.25 per cent for the new auctions, we will like that to be lower. That´s about $6 billion. Another $5.75 billion is our bonds in Swiss francs, dollars and euros. By the time they mature, we can repay them by issuing fresh bonds. So nearly $12 billion is in these two buckets. Today, banks keep coming to us to lend more money, but we don´t take it. So it's not an issue. The market is overtly focused on this. We are very conservative in our debt situation, we like to be at 2.5 debt to EBITDA ratio, we are probably just under 3 now. It´s always nice to have some headroom, but do keep in mind that all other operators in India are at 5 or 6. So we are in very good shape.
What's the progress on (hiving off) Bharti Infra?
We have set up a committee (but) after this Vodafone-Idea merger, we have seen the stock yo-yoing, so we will probably take some decision in the coming weeks. Hopefully, before the next board meeting in April. Also, we have not taken a decision on whether it will be a majority or minority, all these decisions are up in the air.
So is it just KKR that is in the running or there are more?
No we have had interests from several. KKR has been in the lead but there are others who have expressed interest.
In a couple of markets, you have over 50% share with Telenor. Is that a concern?
I don't know, I just ot a message saying it's only Bihar and by 2% or 3%. By the time the merger goes through, that won't be there anyway. You must understand the day Jio starts to charge, that first quarter itself, even just if you mathematically say they are 10%, everybody's share comes down by 10 per cent, because it's a mathematical calculation. Today we are 33% of the pie ex-Jio, when Jio pie gets distributed it resets the table, so it's a very small breach of 2 or 3 per cent which will disappear anyway.
Do you believe that once Jio starts charging, its user base will come down from 100 million?
Usage will come down. Subscribers, I don't think so. People have to use two sims out of four operators, chances are two of the leading operators are in every handset. So I don't think the number of customers will drop that much but the shift of usage to their side that was free, will start to get moderated.
What is the status of the point of interconnect issue?
I don't hear a cry, except one or two circles. You don't hear a lot of that noise anymore.
TRAI has come out with a paper on predatory pricing. Is it too little too late? You said it, I am not going to say it. My view on that is that the regulator needs to have a long term vision for the sector. You cannot be doing things in fits and starts. I think too much of activity is happening in a reactive manner. I am therefore, glad that the TRAI has called upon group of experts where they include industry to look at the long term roadmap for the industry that will talk of interconnect, issues of tariffs, predatory pricing or closed user network issues. All these issues need to be dealt with in longer term. This industry deserves, to my mind, much better, because if the Prime Ministers vision of a Digital india has to be realised to its fullest extent, telecom has to be there at the centrestage at the core of that vision. I think it´s the responsibility of the regulator TRAI to ensure there is an amicable co-existence of operators. There's less noise and more work in the system and some stuff is being done by TRAI but all I would say is don't do it in fits and starts, have a comprehensive view of this industry. TRAI is coming alive to some of these (long pending) issues. I only hope when these recommendations come from TRAI, they don’t land us in further litigation, but are futuristic, visionary and takes care of all stakeholders.
On fibre installations, Bharatnet is coming up while private players as well as BSNL is setting up capacities.
This is a wasteful expenditure. Like tower companies, why can´t there be a Fibre Company that everyone can use. Unlike radio spectrum, where technology keeps moving, nothing changes much here except the electronics. You can have your own electronics on both sides, but the fibre, the digging of streets should be a Fibre Co. IF there are five fibres running in parallel, which are using a fraction of the capacity, it´s a national waste.
You said that the telecom industry´s global reputation is just slightly better than tobacco…
Yes, it´s terrible. We did a survey. It has improved by 1% last year, but that´s nothing. People remember us only when there are call drops or a data session is going slow and you keep watching the windmill going around. If you have no problems with downloads or calls, you are not going to remember me, because that´s a given. The problem is that no one sees the hard work needed in this industry, digging up streets, dealing with RWAs, government and all the technological shifts. Electricity is needed 24-7. All this is not seen by the customer. That´s human nature. When we don’t perform, we get seen as that’s the time you think about us and then don´t rank us highly.
Of the four or five issues we picked up, the biggest one is international roaming and we have woken up to that. I have taken the lead as the GSMA chairman on that and I must say that most of the other big operators, I met nine out of the global ten… some murmuring was there, because there´s a large roaming revenue pool of about $50 billion. It does two things — it reduces your local rates, because it offsets as you make more money here. The ROCE is still 12% for the global industry. It´s not that we are having ROCE of 32%. It´s 12% because of the roaming, now if the roaming drops, this pool drops and if that happens, local tariffs may go up. My view is that if the local tariff goes up by a few paise, its alright. Don’t have those roaming shocks that keep on coming across the globe. Other fear was Romania has much lower tariffs. If that sim starts coming to Germany and they start living there, then you have destroyed the local market. Like we have a fair usage policy, we will create a fair roaming policy so you can´t just take a sim and stay somewhere else for two months. Human nature is such that if the price of Germany is higher than Romania, sims will get smuggled there. So we will put some boundaries around it. Currently, if you don’t take a roaming pack, it would be Rs 65000 bill instead of Rs 6,500. That will be history from April 1, we have said. I have heard from about ten operators and they are going to follow. In this one year, my personal delivery to this industry is that this international roaming should go away and bring 5% to 7% up our reputation index.
