Mobile telephony: Ringing high and fast - Views on News from Equitymaster

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Mobile telephony: Ringing high and fast

Jan 13, 2001

The liberalisation of the Indian telecommunication sector was initiated way back in 1991. However, slow government reforms and regulatory restrictions have slowed down the actual progress of liberalisation. After a long hiatus, the government has now accelerated the reforms in this sector. One such important announcement was the opening up of the national long distance telephony (NLD). Amongst various categories in the Indian telecom sector, the Indian cellular segment has come a long way. The government invited bids from private Indian companies for mobile licenses in four metropolitan cities viz. Mumbai, Delhi, Calcutta and Chennai in 1991. But due to disputes and litigations regarding the grant of licenses, it took nearly three years for these companies to actually receive permission to provide cellular services. Though low rental charges allowed easy access for the subscriber to the cellular network, high usage charges actually prevented these subscribers from utilizing the network.

The National Telecom Policy 1999 brought something to cheer about for the mobile telephony operators. Mobile licenses were issued for a period of 20 years, which are extendable for further 10 years. Licenses were issued for 2 operators per circle (a circle being a state) with the third operator being BSNL (Bharat Sanchar Nigam Limited) or MTNL (Mahanagar Telephone Nigam Limited) in each of the service areas. The Telecom Regulatory Authority of India (TRAI) also decided to shift from fixed license charge to a revenue sharing regime where license is based upon the revenue earned by cellular operators. Prior to this, cellular operators paid a fixed license charges irrespective of the subscriber base and airtime serviced. This pressurised cellular operators to a considerable extent. Cellular licenses were issued on the basis that these operators were allowed to carry domestic long distance telephony within their service areas and they are free to provide value-added services like voice and non-voice services, public call offices and data service.

Major players
Company Licenses
Birla-AT&T-Tata Maharashtra, Gujarat and Andhra Pradesh.
BPL Cellular Holdings Mumbai, Kerala, Tamil Nadu and Maharashtra.
Hutchison Mumbai and New Delhi. Close to acquiring
Calcutta and Gujarat
Bharti New Delhi, Karnataka and Chennai
Reliance Orissa, Bihar, West Bengal, Himachal Pradesh
and North-East licenses
Hindujas Gujarat and keen on nationwide acquisitions
RPG Chennai and Madhya Pradesh

The regulatory body also permitted foreign direct investment upto 49 percent through the automatic route. However, the TRAI has plans to increase this to 74 percent. According to estimates, India has attracted close to Rs 45 billion as foreign direct investment in the telecom sector till financial year 2000. Of this, close to 50 percent of the actual FDI was accounted for by the cellular industry.

Growing subscriber base
(`000) Aug-00 Sep-00 Oct-00
All India 1,469 1,574 1,682
Delhi 384 402 418
Mumbai 401 433 453
Chennai 79 83 86
Calcutta 125 131 145

However, one of the most encouraging factors for cellular service providers is the fact that the subscriber base has grown by more than 3 times in the first eight months of the current year (0.5 million) to 1.5 million. Since customs duty on mobile handsets were also reduced from 25 percent to 5 percent in the current year, demand for mobile handsets has also shown a sharp growth. Moreover, in case of cellular services, both the called and the calling party (in cellular network) have to pay for the airtime. But, once the calling party pays (CPP) policy is enacted, the cellular industry is expected to witness geometrical growth in subscribers base.

Meanwhile, TRAI has suggested that the DoT grant permission to the fixed service providers for offering Wireless in Local Loop (WLL) to its customers. WLL means that companies like MTNL, Hughes Tele and Bharti, which provide basic telephony services, can offer limited mobility to their customers. However, the spectrum has a range of a 20 kilometers radius at the rate of Rs 1.20 for 180 seconds (the prevailing local call charge).

The Cellular Operators Association of India (COAI) has opposed the move of allowing limited mobility to fixed service providers, as it would have an adverse impact on the revenues of the cellular operators. As a result of WILL, COAI also believes that actual FDI might slow down in coming years. To complement this, the TRAI reduced the annual revenue sharing fee for cellular operators from 17% to 12%. This has given a breather to the cellular industry. On top of this, cellular operators are also allowed to retain 5% of the long distance revenues, which earlier they were not entitled to. These announcements are expected to benefit the cellular industry.

Depending on the availability of the spectrum, TRAI has proposed to induct a fourth operator in each of the circles. As a result, valuations of circles have fallen considerably with in turn has affected sentiment. But the question is: Whether there is a need for the fourth cellular provider?

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