With nearly 500 million subscribers, it’s easy to think of the mobile phone industry as a symbol of rising India. But while India sings paeans of Sunil Mittal & Co., some upheavals have unnerved the market in the last fortnight: A failed overseas deal, the regulator’s suggestion of a new pricing model that can dent revenues and, now, questions raised by audit reports have caused some telecom stocks to fall around 20% since end-September. It’s not just recent developments: This market is starting to look like a hammer beating down on an anvil, with consumers caught in the middle.
In this light, this week’s announcement that the telecom regulator will release a consultation paper on mergers and acquisitions (M&As)—a special focus on M&A policy—is encouraging. The sector is beginning to suffer from a multiplicity of inefficient players—the hammer. In a UBS survey of industry participants in March, 77% believed that new entrants don’t even have a good business case.
New subscribers in a finite spectrum with too many players create excess load. Hence the need for a new M&A policy to promote consolidation—helping a larger operator take advantage of a larger spectrum chunk and employ better economies of scale to improve services.
Illustration: Jayachandran / Mint
The government’s hand is all too visible here. Intending to promote competition, the government kept entry barriers low. But as much as India would like to take pride in this highly competitive industry, there is such a thing as too much competition. Low fees for auction and licensing has made it easier for firms to enter into this game. And thanks to lock-in periods, initially designed to prevent fly-by-night operators, they keep playing the game, no matter how inefficiently.
On the other end is the anvil—the finite spectrum. The roll-out of third-generation, or 3G, spectrum can offer an alternative bandwidth to take on increasing capacity and help revenues. But consumers will have to keep waiting: This month, telecom minister A. Raja suggested that the 3G auction, slated for this December, may not be completed until next year.
Between this hammer-and-anvil combination, both consumers and operators are trapped: shoddy service quality, on the one hand, and fewer returns with little expansion, on the other. If and when companies embrace a pay-per-second option, there will be a greater need to get rid of this combination to ensure profitability.
The government needs to rethink policies or make a push for implementation; a mere consultation paper doesn’t suffice. Otherwise, India will never be able to capitalize technology for high growth.
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