5G may shake up the old order - opening up a new front for next generation

Technology obsolescence and the advent of new platforms have been shaking up old and established markets and this may happen again

The successful conclusion of the 5G spectrum auctions, which fetched the government revenues of Rs 150,173 crore, would have been a cause for cheer. But the 5G revolution is likely to only exacerbate the telecom headache that has defied all the medicines that the government has tried out so far.

It is likely to make the older telecom service providers face competition from non-telecom companies that plan to get into the 5G game and focus on the most lucrative segments of the business.

Readers of this publication are well aware of the twists and turns of the Indian telecom revolution since the sector was liberalised. The telecom story has been pretty beneficial for Indian citizens – competition between mobile service providers and some policy interventions ensured that voice telephony charges became the cheapest in the world first, and after the advent of 4G services, data prices of mobile broadband have also fallen to record lows.

The 5G technology brings traditional telecom players like Airtel and Vi face to face in competition with non-telecom players like the Cisco, Facebook, the Adani group.

It has mostly been bad for the majority of global and domestic firms that forayed into it, and quite a recurring pain point for successive governments. Two things have been responsible for the pain. The first is the inevitable march of technology. The second involved successive government’s bumbling policy responses – which the present Government has done its best to sort out and pave the way for the future (this is our cover story).

The first two generations of mobile telephony mostly had to do with the voice market. 3G brought in some degree of data though the speed of transmission was not really practical for too many applications. 4G though brought in true mobile broadband while 5G speeds will enable both consumer and enterprise applications that are truly remarkable.

However, the generational changes in technology had a side effect. It has required companies to invest heavily and consistently to upgrade networks while competition has ensured wafer thin margins.

While 1G, 2G and 3G largely favoured legacy players who had got into the game early and painstakingly built networks and acquired spectrum, the advent of 4G along with a policy tweak, heavily favoured new entrants who did not have to deal with legacy cost issues.

Policies of the Past

The policy responses of different governments could however be said to be the real issue that has haunted the sector. When mobile telephony was first introduced in the country, the government of the day restricted the number of players and handed out licenses and spectrum only to the highest bidders in each circle. It quickly led to the winner’s curse –telecom service providers were unable to get enough consumers because of exceedingly high prices and also started defaulting on the license fees.

The next government introduced the revenue share model to solve this issue. It also allowed more competition in every circle and made a few tweaks to policy – all of which made the service more affordable and helped the penetration of telephony to the remotest portions of the country.

But then the authorities got greedy. First, it decided that the revenue share – the adjusted gross revenues (AGR) due to the government — would be calculated based on total revenues of the telecom service firm and not just the telecom operation revenues. At the same time, the government also handed out new licenses without following all the norms that had been prescribed for doing that. Both would come to haunt the government.

The spate of licenses handed out while disregarding well set out procedures ended up creating a controversy – the so called 2G Scam — that would at least be one of the main reasons why the government of the day failed to get re-elected.

But the biggest issue was really the AGR dues and it would come back to haunt the government. The AGR dues case was fought all the way up to the Supreme Court. Eventually, the Supreme Court upheld the government’s stance. But in the ensuing period, excessive competition, high license and spectrum fees, the advent of a wholly IP and data centric 4G technology, the entrance of Reliance with its JIO brand of services, combined with deep pockets — pretty well drove the existing players to the brink of bankruptcy.

By the time the government won its case, the telecom sector was in deep distress and had turned pretty well unviable. Reliance Jio had a clean balance sheet, while Airtel, despite its legacy costs and debt, was in a reasonably good condition. Earlier, Vodafone and Idea, the other two surviving players had merged to form Vi but even now the combined entity is losing subscribers and mired in too much debt.

When mobile telephony was first introduced in the country, the government of the day restricted the number of players and handed out licenses and spectrum only to the highest bidders in each circle.

Positive Policy Shift by the Present Government

The government’s decision post the Supreme Court verdict to allow telecom service providers with huge AGR dues to convert part of it to equity shares – which would be taken by the government — has been a huge reprieve (albeit could be temporary) for Vi.

It could lead to a long term issue for the government though. Vi has taken up the government’s offer and the latter will end up as the majority owner of the company after the conversion. This makes the government the owner of two loss making telecom entities – BSNL and MTNL – as well as the majority shareholder of Vi, which is still not out of the woods financially.

The spate of licenses handed out while disregarding well set out procedures ended up creating a controversy – the so called 2G Scam — that would at least be one of the main reasons why the government of the day failed to get re-elected.

The government’s recently announced package worth Rs 164,000 crore for BSNL doesn’t address the main problem – it has been systematically losing market share, will start offering 4G services when its three private sector peers are planning 5G rollouts and is still to merge with MTNL without which it doesn’t have a footprint in the Delhi and Mumbai markets.

Most importantly, the package doesn’t address the main issue – the inability of BSNL to take quick decisions which is absolutely essential to survive in the telecom arena. Unless BSNL is cut free and allowed unfettered decision making to respond to market forces, as it had done in 2002 when it launched a nationwide 2G mobile service that till today remains the most wide in reach (in the remotest of regions). BSNL’s problems aren’t about to go away very soon, but there is renwed hope, as the new Minister, Hon’ble Shri Ashwini Vaishnaw has extended a helping hand to ensure BSNL flies again.

This brings us back to the 5G auctions and why it could aggravate an old problem. That of technology obsolescence and the advent of new platforms shaking up old markets.

The 5G technology brings traditional telecom players like Airtel and Vi face to face in competition with non-telecom players like the Cisco, Facebook, the Adani group and new competitors in the enterprise segment (called captive non private networks of CNPN).

Some of them have bought spectrum while others have obtained UASL licenses in the hope of capturing a new market through collaboration or partnerships to get into the market and start offering 5G services. Initially it will focus on the lucrative enterprise market (which even today comprises nearly 40 to 50% of the market. But later these players will find a way to reach the end consumer – the retail customers.

5G allows providers to offer enterprises and consumers solutions like the Metaverse or Smart Factories and solutions that go far beyond normal telecom services. This will take away a large slice of the 5G pie that existing operators will be looking at.

While this will not affect Jio too much given that it is building 5G standalone networks and has a strong balance sheet, it may create difficult times for the legacy networks and operators that have a big debt burden. The cost of 5G spectrum and the investments required to make networks 5G ready will require additional capital, most likely to be raised via more debt.

For Vi, the limited benefit it got by converting its AGR dues to equity for the government, will not prove to be a long term succour. For BSNL and MTNL, without their own 5G networks and spectrum, it could add to the diminishing of market share – but this is expected to be sorted out immediately after the 4G launch – using equipment and technology developed indigenously by CDOT and TCS.

But the days are not far when the Government will soon have to deal with these new issues arising from new technologies. There will be need to find better solutions for the telecom sector and the continuing march of technology.

By Prosenjit Datta, Former Editor, Business Today and BusinessWorld Magazines

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