In the early 1990s, India had merely seven million telephones with a waiting time of seven to eight years to get a connection. The simple reason was that the cost of installing a landline telephone was too high and the required average revenue per user (ARPU) just to break even was ₹1,250 per month, which was too high for most Indians at that time.
Indian telecom grew at a slow pace through government budgets and subsidies. It is in this context that wireless telephony was introduced. This would bring down the capital cost, make telephones affordable in India, would be easier to install and bring in private investments for a potentially profitable business.
The results have been nothing short of dramatic. The telecommunications sector has grown at a rapid pace, riding on a virtuous cycle of growing demand and increasing competition that has pushed down prices to levels not seen anywhere else in the world.
Today, the sector is at a turning point. The troubles of today are rooted in the fast-paced growth of yesterday and regulation that increased tele-density by pushing down ARPUs. This drove businesses to work with a single mind focus on consumer acquisition as the base of users ballooned. It is important to take a historic look if one is to understand the imbroglio of today.
The first telecom auctions for private players were in 1995. The financial bids were unbelievably high; some international consultants proposed large licence fees without understanding Indian affordability. As the dust settled, the winners realised that the bids were economically unsustainable. Several legal ploys were used to stop the payment against bids, cases multiplied, and the telecom dream was stillborn. In 1999, when Atal Bihari Vajpayee became Prime Minister, a group of telecom academics and professionals advised him that the only way out of this imbroglio was to cancel the licence fees due to the government and introduce the “revenue share” model. He was worried that he would be accused of selling the country and causing huge “loss of revenue”. But this group egged him on saying that India needed this bold step for telecom to thrive and he could do this only in his first hundred days. The Prime Minister took the bold step and licensees were offered an option to switch to revenue-share instead of upfront licence fees.
This bold step got mobile telephony going. The installation cost of wireless telephony was less than one-fourth of a landline telephone. Low ARPU was no longer a big concern. By around 2003, India had around 300 million telephone lines and the urban market was saturating. Airtel, Vodafone and Idea, with their GSM mobile-licence, were the leaders. The CDMA mobile licensees had grown slowly, stuck with a technology without a future and could not compete. Rural markets required lower tariff, but the GSM trio were happy with the urban market and resisted reduction in tariffs. The market grew at a slow pace since then.
It was around 2007 that the then government saw this imbroglio and found ways to give new GSM licences using primarily revenue-share. These newcomers, primarily Reliance Communications (RCOM) and Tata Teleservices, dropped tariffs and introduced per-second billing. Others had to follow. The market grew quickly to 900 million lines. Indian telecom was thriving. The operators were making decent money, even with lower tariffs. Till then, India was using only 2G telephony. Data and Internet was at very low speed; 3G telephony was just being introduced and operators were haggling for more 3G spectrum in 900 MHz and 1800 MHz bands. The government was periodically conducting auctions since 2010, fetching large spectrum bids.
Old versus new players
Around 2013, the Government made available some spectrum in the 2300-2500 MHz band. This was not considered suitable for 3G telephony then; 4G was in its infancy and there was some concern about technology standards and technology readiness. A new company, Reliance Jio, betted on it and won the whole spectrum pan-India through a partner company at a relatively lower price as there was little interest from established operators. Jio had to wait four years to get the technology ready and launched the 4G service late in 2016 and caught the imagination of users. It made voice calls almost free and offered good quality video on smart handsets at very low tariffs. Others did follow suit but paid higher amounts for spectrum in later auctions. Jio has been gaining market share since then. The older operators have been on the defensive, facing serious erosion in market share and profitability. RCOM and Tata Teleservices have been wiped out. Vodafone and Idea merged to just about survive. Airtel, the strongest operator two years back, continues to lose market share and profitability.
Issue of penalties
It is at this time that the revenue-sharing agreement that companies like Airtel, Idea, Vodafone and others signed in 2001 has come to haunt them. The Supreme Court ruled this October that these companies are liable to pay revenue share not just on telecom revenue but all revenues of the company — sales proceeds on handsets, renting of their towers, infrastructure sharing, and even on dividend incomes from any investment. Furthermore, they have to pay huge late-fees and penalties, totalling ₹1.3 lakh crore.
While the court has rightly interpreted the written agreement of 2001, the amounts are enormous that when paid, is likely to bankrupt these players. The industry is already saddled with debt of ₹7 lakh crore. Once again India is faced with the prospect of a telecom monopoly or duopoly. Further, except that it says so in a contract, it makes little sense to pay revenue share to the government on unrelated businesses. If the operators ever thought otherwise, they would have hived off these businesses to a sister company as many have done since then.
It is precisely in such a precarious situation, that the government needs to act, just like it did in 1999. They could offer the operators payment of principal in instalments and waive off interest and penalties. It is critical for the nation to have multiple players compete in telecom services. Besides, the time has come to relook the role of telecom in the country. The Prime Minister has rightly emphasised the role digital connectivity plays in society. If India is to reap the benefit of being fully digital, government’s taxes and earnings from telecom should be limited. Today, in addition to corporate taxes, the government’s telecom revenue includes Goods and Services Tax, spectrum auction, revenue share as licence fees, amounting to about 30% of customer bill. The government should not look at the telecom sector primarily as a revenue-earner. The money could be better spent by operators to improve today’s average service-quality. This would help telecom reach the remotest parts of the country and the service needs to continue to be affordable.
Ashok Jhunjhunwala, a Padma Shri for his work on wireless telephony, is a Professor at IIT Madras and has advised the government on the telecom sector in the past. Through The Billion Press