Regulations and cost threaten profits

Usha Rathod, a housemaid in Mumbai, is a proud owner of a mobile phone that enables her to stay networked with her folks and the many people she serves. The 45-year-old is one of 920 million mobile subscribers in India, making the country the world’s biggest cellular market after China.

This is no mean achievement for a nation that considered phone connection a “luxury” until 16 years ago, and telecommunication was the monopoly of the government stunting its growth. Unless you knew officials in high places, it used to take several years for a fixed-line connection. With a long queue of applicants there was no pressure on the state monoliths to invest in technology and making long distance calls was another waiting game.

The cellular phone, which made an entry into India in the latter half of the 1990s, took off in this millennium thanks to private enterprise and helped by a change in government policy away from socialist mindset, enabling rapid growth.

For the past several months, mobile operators have been signing up more than eight million new subscribers a month – the fastest pace in the world. This was made possible because of the cheapest call tariffs of as low as 20 paise, or less than half a US cent. And, incoming calls are free.

The pace of user additions has slowed however, from a peak of 19 million a month on average in 2010, and could take a severe knock when the government auctions radio airwaves afresh at steeply increased valuations.

The Telecom Regulatory Authority of India (TRAI) this month reaffirmed a base price of Rs36.22 billion rupees it set for sale of every megahertz (MHz) of nationwide spectrum in the 1800 MHz band – nearly 10 times the Rs3.8 billion rupees in a 2008 sale. The auction, due by August, follows a Supreme Court order in February to revoke 122 telecom permits awarded to eight carriers in a scandal-tainted state grant process, which a government auditor claimed cost the exchequer as much as $34 billion in lost revenue.

The proposed sharp increase in the cost of spectrum has drawn howls of protest from mobile operators such as Bharti Airtel, Vodafone and Idea Cellular, the top three carriers by revenue. “(It will) ring the death knell for the Indian telecommunications industry, and also lead to prolonged disputes and litigation,” said Sanjay Kapoor, CEO of Bharti’s India and South Asia operations. The TRAI has said the base price proposed was “in line with international prices” and claimed it would increase call tariffs by only less than four paise a minute.

No one is biting, however. The operators say such a high price for spectrum would push up call tariffs by up to 30 per cent, and have demanded an 80 per cent reduction in the proposed starting bidding price.

The regulator has also proposed to auction just about a fifth of the total available spectrum in 1,800 MHz initially, a move that would drive up bid prices like in an auction of 3G airwaves in 2010. “One thing is very clear, if you create artificial scarcity then the price is not a real market-discovered price,” said Marten Pieters, chief executive of Vodafone India.

There are 15 mobile operators across India, with the early ones having a leg up because they got the radio airwaves for free. The regulator has proposed to substitute the 900 MHz spectrum bandwidth that large operators like Bharti and Vodafone hold with relatively-inferior quality spectrum in the 1,800 MHz band before their permits are renewed starting in 2014.

The Cellular Operators Association of India (COAI), an industry lobby group, said in a presentation to the telecoms ministry the proposal would call for spending of nearly $24 billion by mobile operators to build new telecoms masts and allied equipment.

Clearly, the once-booming mobile operators are under stress, with their profitability dented by cut-throat competition. Bharti’s March quarter consolidated net profit fell to Rs10.06 billion rupees from Rs14 billion in the same period a year earlier. Third-ranked Idea saw its net profit drop to Rs2.39 billion from Rs2.75 billion, even as revenue rose 27 per cent to Rs53.7 billion rupees as the number of customers grew by more than a quarter. “The mobile market in India potentially holds big promise but regulatory bottlenecks are a huge overhang,” said one official at foreign company that has interests in the Indian cellular market.

“Policy revamp was inevitable after the telecoms scandal blew up,” he said on condition of anonymity. “However, demanding unrealistically high prices will be scoring an own goal. The authorities must look at the bigger picture and all the stakeholders.”

The mobile market is very price sensitive. Housemaid Rathod, grandmother of a two-year-old boy, spends Rs150 a month on her device which she mainly uses to receive calls than making them. “It will be hard if call charges go up,” she said. “I won’t be able to afford.”

The telecoms scandal that rocked India last year involves grants of permits by the government on a “first-come-first-served” basis to some Indian companies, which later sold stakes in the ventures at billions of dollars to foreign firms such as Norway’s Telenor. When the Supreme Court struck down the licenses, the foreign companies were forced to take heavy write-downs on the investment, and accusations of fraud against the Indian partners are being heard in the courts. The Central Bureau of Investigation, which is probing the scandal, has arrested former telecommunications minister A. Raja and has charged 18 others, including the top bureaucrat in the ministry.

The writer is a journalist based in India