A shakeout awaits the telecom sector

Fri, 2 Jul Pre-Open

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The Indian telecom industry is riddled with competition. Newly entered companies have been trying desperately to make a dent in the market. And in the process they've slashed rates to ultra low levels, forcing even the larger well established companies to drop prices. Indeed, the industry is in a mess.

But what could be worse is the current situation continuing for a sustained period of time. Years of subpar profitability and detrimental prices will cause the entire industry harm. An industry shakeout is needed, and is bound to happen too. The only question is: how long will it take?

Very soon, if Sanjay Kapoor, CEO of India's largest telecom company Bharti Airtel is to be believed. In a recent interview he is reported to have said that the Indian government's recent auction of radio airwaves for 3G wireless services could bring in the much needed change. That's because Indian companies and their investors will now be more aggressively focused on recouping the massive investments they've made in buying 3G spectrum.

He feels that it is likely that companies will now have to raise prices to survive. And expects the 14 odd wireless companies in India to be cut down through mergers and business failures. There's enough place for only three profitable wireless operators in India according to Mr. Kapoor.

And so, the much awaited 3G spectrum allocation may, among other things, also provide the much needed catalyst for consolidation in the telecom industry. Players in the telecom industry have invested huge amounts. It is only natural that they expect commensurate returns. If the returns do not come soon, or worse, if it is losses that follow instead, there is bound to be a shakeout sooner than later.

Bharti was among the biggest winners in the spectrum auction, spending US$ 2.65 bn on the same. Considering that the actual amount Bharti has shelled out turned out to be way higher than what was initially budgeted, how things in the industry shape up would definitely be of concern to the company.

All in all, the telecom industry now stands at a critical juncture. A shakeout seems imminent. Which companies buckle first is what remains to be seen.