Fiscal year 2000-01 has been a year of fortunes for the Indian telecommunication sector. After having tasted the ‘success’ of previous policies, the Ministry of Telecommunication was forced to take immediate steps to improve the national telecom infrastructure in 2001. The emergence of the software sector and the consequent need for higher bandwidth and unlimited competition across the segments have yielded promising results. Notably the last-mile connectivity or the basic telephony segment has come out leaps and bounds.
The government of India framed the first National Telecom Policy (NTP) in 1994 with the primary objective of improving tele-density (which was less than 1%), ensuring better rural connectivity, expanding infrastructure to cater to more customer categories and to increase foreign direct investment inflow in the sector. As a first step, NTP-94 opened up the basic telephony segment for private players and licenses for 6 circles were awarded.
But the private players started providing services only from the fag end of FY97. The reasons are two fold. One, since there was limited competition, license fee was at astronomical levels and telecom equipment was cost due to stiff customs duty. Two, players did not have access to cheap funds, which was a major constraint in setting up networks to provide basic services. As a result, none of the players showed hurry in starting services.
With just public sector undertakings like Department of Telecommunication (DoT), Mahanagar Telephone Nigam Limited (MTNL) and Videsh Sanchar Nigam Limited, tele-density as well as communication infrastructure hardly improved between 1994-1999. Telephone on demand and rural connectivity was a distant dream. But the only silver lining was the fall in waiting list from as high as 30% in FY94 to almost zero percent currently.
But before going into NTP-99, a brief look at the state of basic telecom segment would reveal why tele-density hardly improved. DoT is a pan-India Basic Service Provider (BSP) except Mumbai and Delhi, where MTNL was given defacto license for basic telecom services in FY86. These two companies were monopoly in their circles and one knows what happens if a public sector undertaking (PSU) has a monopoly. Both these PSUs lacked aggressiveness and the service levels remained in a dismal state.
This changed when NTP-99 was framed. It has clear-cut objectives and before framing telecom policies, the Telecom Regulatory Authority of India (TRAI) was formed with an objective of framing unbiased telecom policies. The basic objectives of NTP-99 is as follows: Make available telephone on demand by the year 2002 and sustain it thereafter so as to achieve a tele-density of 7% by the year 2005 and 15 by the year 2010. Increase rural tele-density from the current level of 0.4% to 4% by the year 2010 and provide reliable transmission media in all rural areas. Make available high -speed data and multimedia, using technologies including ISDN, to all towns with a population greater than 2 m by FY02. But to achieve this, you need private sector participation and TRAI has designed suitable policies for that.
The basic telephony segment was broadly divided into 20 telecom circles corresponding to the number of states except for Uttar Pradesh, which is broken into two telecom circles and North East (except Assam) into one circle. The circles were further subdivided into categories based on the revenue potential i.e. ‘A’, ‘B’ and ‘C’ circles. The ‘A’ circle would typically include comparatively developed states like Karnataka, Maharashtra, Tamil Nadu and Gujarat.
The licenses were awarded for a period of 20 years, which can be extended by 10 years. The players were imposed a stiff license fee and a 15% revenue share with DoT. However, after lot of deliberations, the Telecom Regulatory Authority of India (TRAI), has amended the revenue sharing regime in mid FY01, whereby players (including PSUs) would be paying a revenue share of 12%, 10% and 8% for ‘A’, ‘B’ and ‘C’ circles respectively.
The six major players in the basic telephony segment are Hughes Tele.com (Maharashtra and Mumbai circle), Tata Teleservices (Andhra Pradesh), Bharti Telnet (Madhya Pradesh), Reliance Telecom (Gujarat), Shyam Telelink (Rajasthan) and Essar Commvision (Punjab). Following TRAI’s decision for unlimited competition, the existing basic service providers have cumulatively applied for 47 licenses for various circles (Aircel Digilink (Essar)–21, Reliance-11, Bharti-8, HFCL-3, Hutchison-3, Fascel-1). Once these operators obtain licenses, competition will further intensify across the circles and consequently, the growth in subscriber base is expected to accelerate.
Source: Department of Telecom Services
* Estimates based on trend
** Estimates based on a 16% per annum growth
The number of basic subscribers is expected to touch 49 m by FY04, implying a CAGR of 18.3%. Correspondingly, teledensity is expected to grow from approximately 1.8 lines per hundred population in 1998 to about 4.6 lines per hundred population by the year 2004. TRAI expects tele-density to touch 15% by FY10, a CAGR of 19.2%. Besides, private operators are expected to supply more than 45% of the new lines.
As per the DTS (Department of Telecommunication Services) projections, states with the highest number of telephone connections are Tamil Nadu (TN currently has 3.2 m basic telephone connections and is the highest), West Bengal, Maharashtra and Kerala with the basic telephone subscriber base of 12.3 m, 10.5 m, 10.2 m and 8.4 m respectively. However, in terms of growth rates, Bihar, Jammu & Kashmir, Assam and Kerala top the list.
The benefits of increasing the number of basic telephone subscribers are too important to ignore. One, this assist as a platform for other telecom related segments like Internet services. The potential of the Indian market has also attracted significant foreign direct investment inflows into the country (estimated at around Rs 43 bn), out of which investment in holding companies and basic telephone segment is around 28%.
But, off late, consolidation has become the name of the game. And there is a good reason to consolidate. The segment is fragmented and since these companies have to rely on either of DoT/MTNL for connectivity (which will result in revenue share), consolidated can enable players not only achieve higher economies of scale but can also help bypass the PSUs. The biggest merger talk to-date is the proposed merger between Hughes Tele.com and Tata Teleservices. Both the parties have signed MoUs and final details are awaited.
However, as larger players consolidate and smaller players exit, to an extent, the scope of competition gets limited. The reasoning is based on recent trends in the cellular segment. Airtime rates have come down by atleast by atleast 60% in the last two years in the metropolitan cities and the scenario is no different in the ‘A’ and ‘B” circles as well. Though consolidation has accelerated off late, damage has been already done. But in the case of basic telephony, the players are yet to complete their network expansion plans and competition in this segment is still at its nascent stage. TRAI has fixed the upper ceiling on basic tariff at Rs 1.20 per three minutes. But that has not yet come down as yet, which could not only result in higher paid-minutes but also result in higher Internet usage.
One of the key factors that determine the success of a basic service provider is his ability to fund its expansion plans. Basic telephony alone does not ensure stable revenue growth. These operators have to bundle their service with value-add services. Of course, these services come at a cost. But the customers will not mind if he is charged for a service, through which he is benefiting. So players have to differentiate themselves by providing value-add services, which the private operators with their state-of-the-art infrastructure are at the advantage.
Meanwhile, the TRAI finalised the spectrum and the revenue sharing agreement for basic service providers to provide Wireless in Local Loop (WiLL) services. However, the cellular operators association of India (COAI) had filed a writ against the commencement of WiLL stating that this is not under the purview of the NTP-99. The decision to this effect is still pending. Policies like these should be finalised sooner, which could actually boost tele-density in the rural segment as BSPs need not lay cables all the way through.
But, as we move forward, these structural issues should hopefully be ironed out and government along with the respective ministry should create a favorable environment for companies to expand services without any bottlenecks. And the recent trends suggest that we are on the right track!