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Telecom sector consolidation gains pace - Views on News from Equitymaster
 
 
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  • Mar 10, 2000

    Telecom sector consolidation gains pace

    The domestic telecom sector is in a consolidation phase. After the Birla AT&T Tata deal, reports have come in that the Bharti and BPL groups may be considering an alliance for a common marketing and tariff strategy. Reports also state that Usha Martin and RPG Telecom may also be a part of this alliance.

    The domestic cellular telephony sector seems to have come a full circle. Apart from having recorded significant losses on account of low subscriber base and high costs (including license fee payments), the sector has been plagued with a fragmented structure. This prevented service providers from exploiting scale economies to minimise costs. Further to this, the intense competition led to scaling down of tariffs despite the mounting losses.

    However, things may now be looking up. This is mainly due the recent regulatory measures under which the existing license fee system has been replaced by a revenue sharing regime. This has reduced the pressure on cash flows of companies. Then the government has taken concrete measures to reduce the costs of handsets and battery packs by lowering customs duty. This measure again is likely to stimulate growth. Finally, the Trai has implemented a revenue rationalisation plan that has reduced peak rates. It has also proposed to make incoming calls free of charge. These measures have stimulated demand the user base grew to 1.6 m at the end of December 1999.

    Most importantly there is a trend in the telecom sector that is aiming at the root of the problem fragmentation. Telecom companies are coming together to forge alliances (and mergers as in the case of the Birla - AT&T Tata) in areas of tariffs and marketing networks. These are basically indications of large-scale mergers across various telecom circles. Telecom companies that operate in a larger number of circles benefit from scale economies. They are able to bargain better prices for capital goods even as the cost is distributed over a larger number of subscribers. Then there is a limit to the number of players in the market than once again restricts price competition.

    The trend of consolidation is not new to the world. The US markets have witnessed a spate of mergers that has nearly undone the exercise undertaken earlier to inject competition in the telecom markets by breaking up a monopoly. Then the government had broken up AT&T into several telecom companies. In recent years, a number of these smaller companies have come together in quest for a larger size.

    Whether such a move is desirable is a subject of debate. On one hand the consumer stands to lose out if competition is reduced. On the other, the telecom companies are the losers. However given the current scenario, some consolidation is necessary.

     

     

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