Telecom has transformed India but lost its sheen. Is there a political will to afford regulatory and policy relief to help the sector regain its strength?
By Rajan S. Mathews
Much has been written about the stupendous achievements made by the mobile telephony sector over the past 25 years. The growth of the sector during this period and the transformational changes it has brought about in the lives of all segments of Indian society is legendary. From being an aspirational service for the rich and well-heeled, where one waited for over seven years to obtain a telephone connection, to be available on-demand to even the poorest citizen, is truly remarkable.
The impact on the economic development of the country has been no less transformational. From being an instrument of simple connectivity, it has become a digital platform where everything from manufacturing, robotics, drones, artificial intelligence, remote medicine, distance learning, connected vehicles, electronic payments, among other things are all facilitated over the mobile network. The vaunted IT industry of India could scarce have achieved its global position and reputation if the underlying connectivity network had not been in place.
The investments in the sector of well over Rs 10 lakh crore, jobs for over two million direct employees at its peak and a network that makes mobile telephony services available to over 90% of the population of the country is certainly staggering. From a time when the average customer consumed less than 250 minutes of voice service a month to a point where the average consumer now consumes well over 750 voice minutes per month, and when no data service and internet services were available to now consuming on average over 12 Gigabits of data a month; from an all 2G network to a 4G LTE network pushing onto 5G, the change has been stunning.
In short, the last 25 years has indeed been revolutionary.
The adoption of 2G GSMA-based technology by the government proved to be a significant factor for the rapid progress of mobile networks in India.
This revolutionary journey was not without its twists, turns, and high drama. The decision by the then government to open up the telephony sector to private participation was a bold step in the long journey of liberalization. It stemmed from the recognition that the nation simply did not have the resources to make the investments required to get the country at par with the leading countries of the world. In 1994, telephone penetration, which was all copper land-line services, stood at a paltry 7%. The USA, UK and leading countries of Europe boasted land line penetration of over 90% of households, with mobile services being introduced rapidly in most countries. The decision to focus on mobile telephony and adopt 2G technology for mobile networks to be implemented in India was bold.
Around 1990, the US had just moved from analog mobile services to digital with TDMA and CDMA fighting for dominance under unique US defined standards (DAMPS). Europe, on the other hand, had adopted the GSMA-based 2G technology. The US continued to innovate under its own proprietary technology, introducing PCS – Personal Communications Services – in 1800 MHz band. However, 2G GSMA technology rapidly expanded to the point where operators in the US themselves largely adopted 2G GSMA technology at the turn of the century. This was due in no small measure from the loss of original equipment manufacturers (OEMs) in the US, pursuant to the break-up of AT&T and the disinvestment of Bell Labs (R&D and IPR), Bell Core (Standards), Lucent (manufacturing network equipment), Avaya (manufacturing IVRs, unified communications, etc.), among other companies that were previously part of the monolithic AT&T. OEMs like Motorola also wilted under the onslaught of Japanese products.
The adoption of 2G GSMA-based technology by the government proved to be a significant factor for the rapid progress of mobile networks in India. It provided scope and scale for equipment manufacturers (OEMs) to offer network equipment and handsets at prices that were competitive, globally inter-operative, and at par with the best global standards of customer experience. For operators, it provided freedom from being locked into any single OEM. The 2G GSMA technology allowed integration of OEM network equipment from different vendors using APIs creating a ‘mix-and-match’ scenario that allowed operators the freedom to choose the best in class components of the network.
Technologies that offered no such benefits found it hard to compete and networks based on alternative technologies such as CDMA soon withered and died. Global OEMs fiercely competed for business in India. Just about all the global OEMs were present in India – Ericsson, Nokia, Lucent, Alcatel, Siemens, and Nortel, among others. On the handset side, Nokia and Ericsson dominated in the early years. Chinese vendors came in later and the handset market saw fierce competition drive prices to levels not seen elsewhere in the world. This again provided the impetus for rapid subscriber growth.
Having chosen GSMA technology for networks in India, the government initially granted two licenses in 1994, for mobile services in each of the four Metros – Delhi, Mumbai, Kolkata, and Chennai. The awards were contested in the courts and finally settled. The government then called for sealed bids from interested parties to provide both mobile and landline services in India in the 22 or so Licensed Service Areas (LSAs) of India. The bids required majority Indian partners to hold at least 51% ownership and technology partners with substantial global operational experience to hold not more than 49%. The bids drew attention from just about all the major US and European mobile operators partnering with major business houses in India. The winners – two in each LSA – were whos-who of Indian business houses and global operators. Brands such as AT&T, Birla, BPL, Southwest Bell, Tata, Canada Bell, Escotel, Modi, Telstra, Swiss Telecom, Hughes, Essar, RPG group, and Usha Martin, to name a few, were all splashed across the media. While mobile licenses drew much attention, the same could not be said for the landline bids. Only a few companies bid for these licenses and most exited in a short while given the difficulty of execution. There was general euphoria in 1996, as companies rushed to roll out networks, sign on customers, and meet the network roll-out obligations included in the licenses.
By 1997, it was becoming increasingly clear to operators that they had grossly overestimated the market and had overbid for licenses. Several operators defaulted on their bid payments. COAI, the industry advocacy group that was set-up in 1995, advocated for a “revenue share” regime to replace the fixed bid payment regime. The government under the then Prime Minister Atal Bihari Vajpayee, in 1999, made a courageous decision to adopt the revenue share model and introduced the historic National Telecom Policy 1999 (NTP), suffering brickbats from the media and political parties in the process.
However, history has shown the wisdom of that single decision. The government earned far more from industry through revenue sharing than it would have made if it enforced the fixed bid payment regime. The revenue share regime introduced the concepts of Adjusted Gross Revenue (AGR), License Fees (LF) and Spectrum Usage Charges (SUC). The industry and government settled litigation and claims against one another and among other things the industry also gave up its rights to function under a duopoly in each LSA. License conditions were changed, two additional operators were given licenses in each LSA, which brought in government PSUs MTNL and BSNL.
The decision of the Vajpayee government had far reaching positive consequences for the industry, freeing it from crushing financial obligations and allowing it to invest in network expansion and customer growth. It ushered in a period of industry consolidation and long-term growth.
NTP 1999 was followed by enabling policy measures so as to strengthen the telecom sector. The original TRAI Act and subsequent amendment of the TRAI Act on 25 January 2000 resulted in strengthening the regulator and greater clarity on its role and powers. The amendment also put in place a separate dispute settlement mechanism in the form of the Telecom Dispute Settlement and Appellate Tribunal (TDSAT) to expeditiously deal with and resolve issues relating to the telecom sector. These institutions have served the growth of the industry well, although not always in a linear progressive fashion.
A significant initiative was the introduction of ‘prepaid’ technology, which opened the way for faster customer acquisitions and growth.
A significant matter that occupied much time and energy of the government, industry and the courts between 2000 and 2002 was the attempt by Reliance to convert its land-line licenses into full-fledged mobile services using its last-mile CDMA spectrum. This too was ultimately decided by the courts and the industry settled on a relatively peaceful period of rapid growth.
Another major impetus to the growth of the industry was the introduction of the Calling Party Pays regime (CPP) in 2003. Previously, both the calling party and the called party paid for the call. The industry rose up in arms against this halving of their call revenues, but again, in the long run, this proved to be a major boost to the adoption of mobile telephony in India. Under the CPP regime, interconnect charges (charges paid by one operator to another to complete a call) became an important aspect of revenue generation. It also led to much altercation and litigation between operators and the regulator.
Among the many significant initiatives brought in early by the industry, was the introduction of ‘prepaid’ technology, which opened the way for faster customer acquisitions and growth. It must be seen that western operational practices functioned under a ‘postpaid regime’. Hence, all global networks supported only this regime. In India, operators soon realized that in the absence of any unique individual identification tool, collection of postpaid dues would remain a major issue. As a result, operators had to write off a huge amount in postpaid dues as ‘uncollectible’ in the early years. OEMs soon introduced prepaid technology and the industry fast-tracked its growth. It also helped countries similarly situated like India, and soon prepaid technology became an integral aspect of all networks. Today, over 90% of all customers are on prepaid accounts, allowing operators to minimize their financial exposure, reducing collection and bad debt costs, quicken customer acquisition and providing for price-sensitive customers to carefully monitor and meter their usage.
Infrastructure sharing was another innovation introduced by Indian operators to enhance operational efficiency and improve profitability. Soon, separate tower and infrastructure companies emerged, taking over the ownership of the passive elements of the tower infrastructure and saving costs by allowing multiple operators to share the same passive infrastructure. So successful was this innovation that it began to be adopted even by advanced countries such as the US. Soon infrastructure companies formed their own industry association in 2011, called TAIPA. In 2019, TRAI recommended that infrastructure companies should be allowed to share certain portions of the active infrastructure as well.
Mobile Number Portability (MNP) was recommended by TRAI and adopted by the DoT as a license condition in 2009. Two years after its mandate, the complexity of the exercise had left the matter incomplete. In 2010, under the aegis of COAI, the industry came together with the DoT to finally complete its implementation. Nowhere else in the world was MNP introduced with such complexity – over 12 operators, 22 LSAs, four metros, over 365 mobile switching centers, over 250,000 BTSs, several ILD (International Long Distance) and NLD (National Long Distance) licensees, and two MNP providers to ensure redundancy and competition. Recognition must be given to the acumen of our network engineers, the tenacity of the industry project managers, the technical arm of the DoT, and the secretariat of the COAI in helping to manage and implement this complex undertaking. MNP has ensured greater customer choice and focus on service quality by operators.
Spectrum has been the bane of the industry since its inception. Because the spectrum in India had been allocated to various government agencies, the availability of 2G Spectrum was a major challenge at inception. To address this issue, the government allocated only 4.4 MHz in the 900 MHz band for use by operators in 1995, with a promise that it would be brought to international standards (6.6 MHz) as the spectrum was vacated by other government agencies.
As subscribers increased, operators requested more spectrum to cope with the demand. The government brought on line 1800 MHz spectrum for allocation to operators. The allocation was done through a subscriber-linked method with commensurate adjustments to the LF and SUC. In 2010, the government introduced auction for 3G and 4G Licenses and Spectrum. These were bid for and bought at large premiums to the reserve prices set by the government. Thus, began the financial debt burdens on the industry. It would have been thought to be appropriate that once operators paid for the spectrum upfront, the legacy revenue share method would cease. However, the government continued with the extraction of both – upfront spectrum payments and revenue share from the industry. The deep slide into financial distress had begun.
In the context of spectrum allocation, a big blow to the sector came in the form of what is known in common parlance as the “2G Scam”. In a landmark decision in February 2012, the SC struck down the allocation of some five to seven new licenses granted by the government along with any grant of spectrum tied to it. All such spectrum and licenses were to be rebid through a public auction.
Over 25 years, the industry has shown its ability to take India to heights, match and exceed growth rates, innovation and set best in class practices.
The regulator, based on orders from the Supreme Court, initiated open consultation on spectrum auction. Based on the recommendations, auctions were held in 2012 and in 2013. However, both these auctions failed due to the high spectrum prices. The operators whose licenses were canceled, as well as other licensees, could not bid successfully due to exorbitantly high spectrum prices. As a result, this auction saw the departure of at least three of the operators and by the time the dust had settled, the number of operators in India had shrunk to seven from a peak of thirteen, with two of the seven being regional operators only.
In 2014, the government advanced the novel ideas of “spectrum re-farming and liberalized vs. administratively allocated spectrum”, to claw back previously allocated 900 MHz spectrum from incumbent operators. This was in the context of the expiry of the 20 years of the initial license grant. While the government could have granted a further 10 years extension to the licenses as per the stipulations of the license, it chose to not do so but to go forward with the auction of the 900 MHz spectrum held by incumbent operators. The ensuing hefty premiums bid by incumbent operators to “win back their own business”, further roiled an already tempestuous financial sea.
In September 2016, Reliance Jio finally rolled out its 4G LTE network and services with much fanfare. At its inception, it announced that all voice calls would always be “free” and data charges would be free for a period. In addition, various other content were to be free for a period. This caught the incumbent operators off guard, for it was not thought that VOLTE (Voice Over Long Term Evolution) could ever compete in voice quality with either 2G or 3G services or that it would be offered for “free”. The dramatic drop in voice and data charges by Jio forced competing operators to match prices. As a result of the hyper-competition and race to the bottom, three operators shortly exited the business, and two filed for bankruptcy protection.
The competitive pressure also brought about the merger of Idea and Vodafone under a combined entity called Vodafone Idea Ltd. (VIL). Airtel was able to quickly maintain its competitive position as it had already acquired 4G spectrum in the previous auction. It soon put up a spirited fight, but in the process, both Airtel and VIL suffered massive financial losses. The financial position of the incumbents stood heavily damaged with debt alone spiraling close to Rs 7 lakh crore for the industry. The vaunted “poster boy” of India’s economic liberalization policy appeared to be in tatters.
When it appeared that things could not get worse, in October 2019, the SC brought to conclusion the long-simmering battle around AGR, with devastating financial implications for operators – over Rs 1.6 lakh crore imposed on operators. The additional financial burden has heightened the financial distress of the industry. The long-term impact of the ruling is still working itself out and full clarity is still awaited from the SC.
It must be said to Jio’s credit that their prowess in perfecting VOLTE, marketing acumen, network rollout with fiber connecting a significant number of their BTSs, as well as speedy subscriber acquisition, firmly established Jio in the lead and ensured that 4G LTE would be the dominant network technology.
An indirect outcome was consolidation in the industry to three private players and two PSUs. Incumbent operators would soon seek to shut down 3G networks and migrate customers from their 2G and 3G networks to 4G. Airtel continues to go toe to toe with Jio with a spirited fight to grow their customers and expand their 4G network along with fiber, with considerable success. VIL, while staying in the fray, is handicapped by its stressed financial condition. The recent rounds of tariff increases have helped the industry stabilize their revenue streams through increased ARPUs. However, ARPUs must increase from the present levels of approximately Rs 145 to Rs 300 per subscriber per month before incumbent operators can see the light of day financially. Enterprise revenue will increasingly play an important role in enhancing the revenue streams of operators.
The onslaught of the COVID-19 pandemic has again emphasized the critical nature of mobile networks and the critical role it plays in the overall economic and social health of the nation. The cooperation evidenced between the industry, DoT, regulator, state and local governments to address and resolve issues during the pandemic and the recent cyclones on the east and west coasts could be a harbinger of a realization that cooperation is the only way to progress.
ARPUs must increase from the present levels to Rs 300 per subscriber per month before incumbent operators can see the light of day financially.
Over 25 years, the industry has shown its ability to take India to heights where it can match and exceed growth rates, innovation and set best in class practices of even advanced countries. It still remains one of the premier attractions for foreign investment. It remains to be seen if there is enough political will to afford the industry the necessary regulatory and policy relief, stability, and predictability required to regain its sheen.
The promises of 5G technology and its imminence could perhaps prompt us to hope that this would be an opportunity to recalibrate our aspirations, address the vexing problem of the affordable and plentiful spectrum, eliminate or redefine AGR once and for all, reduce or eliminate LF and SUC so that operators can retain financial resources to upgrade networks and usher in new technologies to please customers, promote innovation and self-reliance through the development of Intellectual Property Rights and place the industry in a position to make India a USD 5-trillion economy.
The vision of India, transformed as a leading global knowledge economy taking its rightful place in the pantheon of the three top economies of the world, need be no pipe dream. It would be worth striving for in the next 25 years.
The author Rajan S Mathews is former Director-General of COAI