The emerging specter of a telecoms monopoly


With its gross debt as of March 31, 2021 placed at 1.8 lakh crore and losses in the previous quarter totaling over 7,000 crore, Vi (formerly Vodafone Idea), once India’s largest telecommunications company in terms of base of subscribers, look at bankruptcy.

In a last ditch effort to gain state support for survival, Kumar Mangalam Birla, Vi’s chairman, wrote to the government in June, offering to divest Aditya Birla group’s nearly 27% stake in Vi. He later also resigned as president of Vi, as if to show that his offer was credible.

The “free stock” offer was conditional on a formal bailout that would include reviewing the company’s Adjusted Gross Income (AGR) liability, announcing a moratorium on spectrum royalties, and obligation for the regulator to set telecom tariffs floors above the lows to which they had fallen as a result of the predatory price war launched by Reliance Jio.

The company’s debt included spectrum payment obligations in excess of 96,000 crore, AGR dues of nearly 61,000 crore and debt to banks and financial institutions of around 23,000 crore. A stay on payments in the first two of these liabilities gives the business a chance to stay in business. Birla is clearly trying to throw the ball in the government’s court, making the government at least partly responsible for solving the problems that a Vodafone shutdown would create for the company’s nearly 280 million current telecommunications subscribers.

Moreover, if all these subscribers migrate overnight to competitors Airtel, Reliance Jio and public sector MTNL-BSNL combine, the quality of service will necessarily be negatively affected for all subscribers. The government would not want that and would be pressured to respond.

Success

For the government, the concern is the credibility of the post-reform telecommunications policy, which has gone through many iterations over the years. The opening up of the telecoms sector to private operators is considered a success for at least three reasons.

First, it provided the government with huge revenues in the form of license fees and spectrum royalties, partly helping to alleviate its budget crisis.

Second, prices for telecommunications services have fallen dramatically (Chart 1), with data rates among the lowest in the world and voice traffic using the data for free.

Third, despite still pervasive digital inequalities, the number of telecom subscribers and data consumption in India has increased dramatically. The industry’s subscriber base has more than doubled, from 562 million at the end of December 2009 to 1.2 billion in May 2021.

These “successes”, however, are also the source of the government’s problem.

Competition between private operators to gain a foothold in the telecommunications market meant that on the one hand they offered huge sums to gain limited licenses and scarce spectrum, and on the other hand joined in a price war. to gain subscribers.

The tariff cut became steep after Reliance Industries (which was previously excluded from the telecoms sector due to the terms of the empire divided between the warring Ambani brothers) entered the business via Jio in 2016.

Jio’s entrance

Reliance Jio had enormous financial weight and had no legacy issues like the installation of previous generation technologies and the disputed AGR dues that had accumulated over the years. It launched a predatory price war to quickly gain and expand market share, which resulted in a drop in average revenue per user (ARPU) (Charts 2 and 3).

The tariff cuts neutralized the gains in terms of subscriber base and use brought about by these cuts.

The net result of the combination of high license and spectrum costs and low revenues has been a delay in investments in telecommunications infrastructure, affecting the quality of service of incumbent providers.

But more importantly, the industry has seen continued upheaval, with the number of operators shrinking to three in the private sector (Airtel, Jio and Vi) and two in the public sector. Vi’s potential exit signals that the shakeout is still not complete.

A corollary of this is the increasing concentration in industry. In the last quarter of 2009, the three main players in the industry – Bharti Airtel, Vodafone and Reliance Communications led by Anil Ambani – accounted for 54.8% of subscribers. This proportion subsequently declined but remained above 50 percent until the quarter ending December 2015.

But then a dramatic transformation began. First, Reliance Communications pulled out of the market because it was losing money and was part of a group that was suffering from attrition. Secondly, Vodafone’s merger with Idea in 2018 saw the number of subscribers of the second largest player in the sector increase from 213 million to 419 million between 2012 and 2018, making it the number one player in terms of the number of subscribers.

A price war

Finally, Jio’s entry into the market and its rapid pace of expansion led by the price war placed it in the top three, with a sharp increase in its subscriber base, from 72 million at the end of 2016 to 439 million in May 2021.

As a result, the share of subscribers of the three main players increased from 49% at the end of 2016 to 89% in May 2021.

Three-quarters of that 40 percentage point increase in the share of top three subscribers was due to Reliance Jio.

Its share rose from 6.3% at the end of 2016 to 36.3% in May 2021, well above Airtel’s 29.5%, making it the dominant player.

This rapid increase in Jio’s market share is unlikely to diminish, with more subscribers released by the release of Vodafone. The battle for market share may well continue, and now Reliance Jio has much deeper pockets.

This may affect the relative pace of 5G technology deployment, with implications for future market share. Short of funds due to AGR dues and spectrum payments, Bharti Airtel has called for 5G spectrum auctions to be suspended because it cannot lay out the infrastructure quickly enough.

It is not surprising that Sunil Mittal, the chairman of Bharati Airtel, backs up Vi’s plea for state support, perhaps hoping that the government would give in to Birla’s three demands on AGR dues, payments of spectrum and a floor tariff, to prevent the aggressive growth of Reliance Jio from pushing Airtel down as well.

If Reliance leverages its current strong position to establish a near-monopoly position in the market, it can pose several challenges. The least of them is a sharp rise in tariffs in the medium term, penalizing consumers.

More important is the control that Jio would establish over the data flow. Reliance Industries is a conglomerate that has diversified into areas ranging from e-commerce to the provision of various digital services including film, news, music and retail.

If the parent company has a monopoly on the pipeline through which these services are provided, it can stifle competition in several ways.

Monopoly is no longer a question of pricing to generate super-profits to the detriment of the consumer. It is the ability to eradicate competition and prevent entry into early stage industries by using dominance in an existing industry. This is the strength of platforms like Amazon, Google and Facebook. By controlling the means by which data is provided, Reliance will also acquire powers that can stifle competition. It remains to be seen whether the government will step in to stop this.


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