Thanks to the heft that the telecom industry lobbies commands it has become first in the line for demanding help from the government. Especially, after the fall out of the merger between RCom and Aircel. Two of the weakest telecom players, who blamed regulation for the fallout of their merger. Today, Tata Teleservices which has been struggling for the last 21 years also said it is going to close down operations.
How did a sunrise sector reach a stage where it needs a bailout. Telecom service providers have borrowed heavily to pay for spectrum. The price of spectrum rose sky high due to aggressive bidding by both incumbent and new entrants. Though the TSPs blame the government for these high prices.
The huge debt combined with bad business decisions weighed down on their capital investment and the quality of their services deteriorated. The entry of Reliance Jio disrupted the pricing power and led to massive migration of customer base.
The questions is what is the government bailing out bad business decisions or regulatory problems that have harmed the sector. It is more of the first than the latter hence before any stimulus or bailout is handed out the sector must reform itself.
1. One of the first thing RCom did when its merger with Aircel fell through was withdraw the demerger of its telecom tower company. This is ostensibly done for legal reasons. Telecom towers is one of the many business decisions which has gone wrong for TSPs. Telecom towers are never owned by telecom service companies in the world. It is not even considered as a services business as it is more akin to real estate business. A telecom tower sits on land or a location and charges rent from service operators. Every telecom service provider (TSP) has invested into telecom tower company preventing efficiency of scale from happening though consolidation. Any debt restructuring for the sector should start with divestment of the tower business. It should be a pre-condition.
2. TSPs claim that Jio has disrupted their business by cutting down the price to almost zero for voice. This is true but all these companies had years, more than seven years to prepare for Jio and none of them planned for it. They did not upgrade their infrastructure to 4G till such time that Jio had actually launched in the market. Now that their growth and even existing subscribers are shifting to Jio they are crying murder. This is a bad business decision which every TSP and its management is guilty off. It is a surprise that the management in none of the TSP has been fired for it or shareholders have not demanded their resignation. A management change is really a must before any government bailout.
3. TSPs and their management have been arrogant to the extent that they did not have a sales department in the company. The distribution of Sim cards was considered as a sales activity and advertising was considered as marketing. This again is a business decision and the management of these companies are to be blamed. They did not think of new services. They did not plan to take their services beyond voice. They did not bring any services that would ride on just their data network. Now, that the voice business has been disrupted they are rushing around to build data led services.
4. For a long time the top three telecom operator cartelised the market with similar pricing. These operators did not allow other competing entities to enter or survive in the sector. New entrants were not given interconnectivity easily. Due to their powerful lobby the government never investigated this anti-competitive nature of the industry. This harmed the sector more than anything else. Now when the sector is under duress it is asking for a bailout. Such anti-competitive practices should not be allowed again.
5. The sector wants a reprieve on spectrum payment which they claim is almost 30% of their cost. It wants the banks to restrucuture their debt so that they can become profitable again. Banks have stopped lending to them and they want this to begin again. But TSPs are not willing to divest the tower business or other related business. They are not willing to exchange debt for equity and dilute the promoters holding. If the government considers any package for bailing out this sector it has to be careful as the decision will be weighed on several fronts. Including is public funds being used to bail out private money.