Published : Tuesday, 25 April, 2017 10:14 AM
Telecom Turmoil And Way Forward
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Read Current Affairs Topic: Telecom Turmoil And Way Forward
The history of telecom sector in India can be traced back to the year 1851 when first telegraph line was made operational on experimental basis between Kolkata (then Calcutta) and Diamond Harbour. In 1881, the first telephone service was made operational in India. Since then, the Indian telecom industry had made massive strides of progress and now it boasts of telecom density (number of phone connections per 100 population) of 89.90% as on December 2016. India also have the second largest telecom subscriber base in the world after China.
While the growth in pre-liberalization era was a modest one, in the post 1991 phase, telecom was one of the fastest growing industry in the country. The introduction of mobile telephony in 1995 was the most revolutionary change and it ensured the mobile connectivity to the remotest parts of the country.
From the holistic point of view Indian telecom industry can be divided into following four groups:
(a) Telecom Service Providers; Bharti-Airtel, Vodafone, Idea, Reliance etc.
(b) Telecom Equipment Manufactures; Nokia, Motorola, Samsung etc.
(c) Network Infrastructure companies; Alcatel, Lucent, Cisco, Ericsson etc.
(d) Telecom Solutions Providers; Tech-Mahindra, Aricent, IBM India, Wipro, Sasken etc.
The final consumer is usually concerned with the telecom service providers and equipment manufactures.
The market for telecom service providers can be classified as oligopoly which is characterised by few sellers and many buyers. The other three major types of markets are perfect competition (many buyers and many sellers), monopoly (one seller and many buyers) and duopoly (two sellers and many buyers). The oligopoly type competition in the telecom sector is responsible for one of the cheapest calling rates prevailing in India.
Currently, the Indian telecom sector is going through a rough phase particularly after the entry of Mukesh Ambani backed Reliance Jio in the market. Jio introduced 4G network services with aggressive tariff plans including free voice calls and low cost data and become the fastest telecom company to reach one million subscriber base.
The new strategy by Jio had shaken the other telecom service providers. Traditionally, the Indian telecom sector was voice driven but now the business model is being shifted to the data centric. As the telecom market is India is highly competitive, tariff for voice and data is consistently declining. The pre-tariff revision price of one GB data in India was about US$3.5 while in the US, it was equivalent to US$10, USD15 in the UK and US$6 in South Africa. However, such low level tariffs prevailing in India are not sustainable in the long run. The profit margin of the service providers was expected to decline in the future as they faced increasing pressure to retain the customers, thereby offering freebies and larger allowances.
Thus the entry of Jio has destabilised the equilibrium of telecom market, forcing the other service providers to scramble for merger and acquisitions (M&A) to consolidate their market position. The Reliance Communication (Anil Ambani group) is expected to complete the merger with Aircel by the mid-2017. Tata Teleservices is also in talks to join the merged entity of RCom-Aircel-MTS.
Vodafone, the second largest service provider is also in the process of merger with third largest service provider Idea. After the merger, Vodafone-Idea's revenue market share will be around 41% against Bharti Airtel's 36.5%. The combined entity has some regulatory challenges to content with, including the cases where its combined share exceeds revenue share and spectrum limits. Bharti Airtel is also merging with Tikona 4G business for deal of INR1600crores. The Norwegian telecom company Telenor is also exploring the options of merger with either Vodafone or Airtel.
Thus, the telecom industry in India is currently going through an upheaval if not turmoil and the current phase of M&A is nothing but adjustments to attain the new equilibrium. With the consolidation of telecom sector, there would be only five major players left in the sector - Airtel, Reliance Jio, Vodafone-Idea combine, RCom-Aircel-MTS combine and BSNL. While consolidation is good for the industry, for consumers it would mean less discounts as the level of competition dwindles. It is said that competition will reduce the competitive intensity, provide long term stable realisation and is expected to usher significant improvement in capital efficiency.
Major fallout from the consolidation is job losses. Aircel is expected to shed 700 employees before completing its merger deal with RCom-MTS. The combined entity of Voda-Idea may also see retrenchment. Thus, the on-going consolidation of telecom sector may not be attractive on the job front and for final consumer but for the industry, it will infuse stability.
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