Multi-Player Market Structure: Is It The Solution To India’s Telecom Needs?

Introduction



When telecom reforms were initiated in India in 1994, a duopoly market structure
was planned in both the basic telecom and cellular services. The failure of National

Telecom Policy (NTP) 1994 in the initial stage resulted in the need for a new telecom

policy. This paved the way for NTP 1999. The goals of NTP 1994 were thrown off-track

because of the huge license fee bids made by companies in their attempt to win licenses.

With NTP 1999 in place, the duopoly market

structure is giving way to a multi-player market structure. Similarly, the fixed license

fee system would make way for revenue sharing, at least for the new market participants.

The Group on Telecommunications (GoT), which was assigned the task to chalk out the new

telecom policy, failed to reach a consensus on the vital issue of market structure. The

pro-reformist Prime Minister’s Office (PMO) group supported the multi-player market

structure, while Department of Telecommunications (DoT) representatives in the committee

favored a duopoly market structure. Finally, the PMO group had its way when the New

Telecom Policy introduced the multi-player market structure.

Why a Multi-player Market

Structure?



In an emerging market like India, the major issue of concern is the low
penetration of fixed telephones. Hence, the prime objective of policy makers is to

facilitate a rapid increase in the fixed telephone penetration, which is one of the lowest

in the world at two per cent. The objective of NTP 1999 is to achieve a teledensity of 15

per 100 people by the year 2010. This would require installation of additional 130 million

lines with an estimated investment of about $95 billion. Looking at the issue from the

investment point, it would be difficult to meet the target in a duopoly market structure.

The privatisation of basic telephony services, which was initiated in 1995, has accounted

for investments of only $1.5 billion.

Market Affordability





The introduction of a multi-player market structure has raised many questions.

Can the market accommodate more than two players? Would the new entrants invest in

providing telecommunication services in the rural and remote areas?

An insight into DoT’s financials

reveals that a mere 2.7 per cent of the subscribers account for 46 per cent of call

revenues. These subscribers are corporates based in commercially important locations.

Given this scenario, private operators have based their business plans on weaning away

high value customers from the DoT. It is largely believed that any basic service project

that focuses on untapped markets may not be commercially viable. Hence, there is a lack of

effort on the part of private operators to target untapped market segments. This is likely

to lead to a few private companies competing for the high value customers.

If the private operators are successful in

cornering a considerable share of DoT's high value customers, the financials of this state

owned telecom service provider are likely to be affected adversely. Private operators, by

offering an array of high quality services, may succeed in their game plan. Another aspect

that needs to be considered is the corporatization of DoT in 2001. Currently DoT generates

surplus revenues through its high value customers. But if private operators are successful

in eating into DoT’s revenues, the state owned telecom service provider is likely to

struggle to meet its social obligations towards rural and remote areas. This is likely to

affect market expansion and with it the objective to provide telecom services to all.

Convergence of Technologies





The convergence of technologies adds new dimensions to the competitive

environment. In effect, the market ceased to be a duopoly when Internet service providers

were allowed to set up last mile links. Though Internet telephony is not permitted at

present, the situation is likely to change in the future. The new telecom policy allows

cable service providers to enter the business of voice services by acquiring a fixed

service provider license.

With technological advancements, basic

operators are expected to face competition from cable networks and Internet service

providers (ISPs). The cable industry is on the verge of a shakeout and is witnessing a

consolidation phase. Cable industry giants like Indus Cable and Siti Cable have already

received ISP licenses. With convergence becoming the industry buzzword, basic operators

would be forced to respond to these market developments. As a result, basic operators may

need to provide more than just basic telephone services to be able to effectively compete

in the market. This is likely to entail huge investments and only companies with huge

resources and long term plans are expected to survive in the market.

Stance of Financial Institutions /

Banks





Since basic services require massive investments, financial institutions (FIs)

and banks are likely to be very cautious in funding projects. Viability of projects is

likely to play a major role in influencing the decisions of banks and institutions. They

are likely to consider issues, such as, market affordability in a multi-player market

structure, and convergence of technologies before financing basic service projects. More

importantly, private operators are eyeing DoT’s big customers. Most of the circles

vacant are the "B" and "C" category ones, where business prospects are

comparatively less attractive as compared to category "A" circles. The refusal

of FIs and banks to finance these projects may completely jeopardize the New Telecom

Policy’s agenda. Under these circumstances, the situation is expected to be similar

to that of private basic telecom operators that are struggling to rollout owing to the

difficulties in achieving financial closure.

Rupee Depreciation





The continuing depreciation of the Indian Rupee is an issue of concern for

operators as well as foreign investors. Since 1991, the Rupee has been depreciating on an

average of 4 percent a year, which affects the return on investments for foreign

investors. Additionally, most infrastructure equipment purchases were made from

multinational-vendors in dollars, while the earnings were in Indian Rupees. With the Rupee

continuing to depreciate, vendors have also adopted a more cautious approach. This is

likely to further affect the ability of new operators to commence projects, as most of the

operators in India have been managing their finances through equity capital and vendor

finance. When licenses would be issued, a large number of companies are expected to seek

funding for their projects. In such a scenario, only projects backed by large groups are

expected to find favor with investors. 

Lack of a Strong Regulator





A very strong and powerful regulator is very essential for the success of any

telecom policy. Hence, in the absence of a strong regulator, the incumbent operator can

place hurdles in the path of new players. Despite the PMO’s initiatives to strengthen

the Telecom Regulatory Authority of India (TRAI), the regulatory body’s powers were

curtailed in the new telecom policy. This has sent wrong signals to investors. The

regulator should be vested with enough powers to see that market participants have a level

playing field. This is expected to continue to be an area of concern, more so in a

multi-player market environment.

Bitter Experience of Cellular

Operators





A multi-player structure has been introduced in cellular services too. While the

cost of providing services is the main issue of concern in basic services, acquiring

customers is the most difficult part for cellular service providers. The 22 cellular

operators, who are in their fourth year of operations, have a collective subscriber base

of a mere 1.1 million. Even operators that have achieved financial closure in metros are

finding it difficult to breakeven. The sorry state of affairs has been attributed to the

low subscriber base and airtime usage. The plight of circle operators has been attributed

to their failure in achieving financial closure. Given the bitter experiences of metro

operators, achieving financial closure may not be enough to solve the problems of circle

operators. So the entry of MTNL/DoT as the third operator in all circles is likely to

compound the problems of these operators.

Lessons to be learnt From Other

Developing Markets





There are not too many success stories of new basic service operators competing

effectively against the entrenched operator. This is especially true of developing

countries in Southeast Asia like Philippines. New operators have faced considerable

difficulties in raising finances for their projects. The depreciation of local currencies

also significantly reduced the return on dollar investments for the foreign investors in

the projects. BellTel, a company in Philippines, was given the license to provide basic

telecom services in October 1997. The company is yet to find local or foreign operators

willing to fund its project, and has not yet rolled out a single line.

Also, the absence of a strong regulator has

created numerous problems including considerable delays on the part of the incumbent

operator to establish inter-connect agreements. These delays lead to losses and companies

find it difficult to recover from the initial setbacks. Hence, it is very essential to

have a favorable market environment that enables financial institutions and banks to fund

new operators. In the absence of such initiatives, new operators are likely to go through

the same experiences as the current operators.

Conclusion





The decision to select a multi-player market structure maybe in the best

interests of the nation. However, there are several other issues, which could adversely

affect the growth of this market. On the positive side, the multi-player market structure

may also provide the necessary environment for some companies to target the rural and

undeveloped areas. There are a few examples of companies that have established themselves

as niche players catering to this market segment. Bangladesh Rural Telecom Authority is

one such company, which has been successfully providing telecommunication services in that

country’s rural markets. India is one of the few developing countries that can boast

of local research and development in telecom. The C-DoT switches and the indigenously

developed WLL solutions are very cost-effective and could play an important role in

providing rural telecommunication services. Once the regulatory and policy issues are

sorted out, telecom companies would be able to concentrate their energies on developing

the telecom market as against spending their time debating and deliberating on policy

matters.