A Market Structure for Digital India

If delivery is priced below cost, communications services will be unsustainable and ineffective.

Shyam Ponappa   |   October 6, 2016

The stress in the telecom sector is evident from the data. The market capitalisation of listed telecom operators has been stagnant since the 3G auction in 2010, while the government collected Rs 2.83 lakh crore of non-tax charges from them.1 In March 2010 before the auction, the capitalisation was Rs 1.84 lakh crore; in March 2016, it was Rs 1.71 lakh crore, with the BSE Sensex up nearly 60 per cent. A larger share of earnings has gone to government rather than shareholders, and also to banks as interest (Rs 2.08 lakh crore). The irony is that no operator has bid so far for the most useful spectrum bands on auction, 700 and 900 MHz. Uncertainties abound, and there are several questions.

Reliance Jio's entry, although expected, is a jolt. Will voice calls priced below mandatory interconnect charges be treated as being predatory or anticompetitive? The technicality is that Jio doesn't have high market share, apparently a criterion under competition law. Will this hold, given that Jio's entry has reduced total market capitalisation? Will delivery capability in terms of network size and/or market power from associated businesses be relevant criteria for dominance? What happens when Jio does have sizeable market share?

• On the face of it, lower prices seem better for users. Look more closely and it's not so simple, especially when you consider other services in India offered for free or at highly subsidised rates. One issue is the structure of a market that supports delivery below cost, and its quality of services/products. Another is the criterion that maximises social welfare that should drive government's policies. Is consumer surplus in the short term a reasonable criterion? As it happens, we have experienced markets with constrained consumer surplus for years. For example, in the category of infrastructure and essential inputs/utilities, we've had this approach towards fertilisers, electricity, petroleum products like kerosene, cooking gas and diesel until recently, water, and sewerage. We've also experienced this in our entire range of manufactured products earlier, when we had exorbitant import barriers. These experiences have been less than sanguine. The misuse of kerosene and gas, and the effects of diesel subsidies are prominent examples. The distortions that have set in, such as overuse of ground water and fertilisers, and the vicious circle with electricity and diesel generators, will be difficult to correct.
   
• Aren't there similar deleterious effects in communications from spectrum auctions and government charges that inflate input costs, and price wars that degrade investment capacity for network extension and delivery? As it is, the quality of services for voice and data is very poor. An essential resource for better connectivity is spectrum, yet government's approach to its management has been and remains inimical to its stated objective of achieving ubiquitous access of good quality. Governments make it difficult for operators to extend networks simply by not setting the right administrative policies. To quote Google Vice-President Caesar Sengupta: India is "a very large country with very little spectrum". It does not seem clear to our governments that broadband access through fixed lines for everyone is infeasible in the foreseeable future. Also, that unless radical changes are made, it is inconceivable that broadband services can be made available at prices and quality comparable to TV.

The Triad of Interests

Even if the criterion for public welfare is user benefits/consumer surplus, judging by price alone is simplistic, because it misses other aspects of service delivery that contribute to the cost-benefit package. One essential aspect is ubiquitous access. Another is effective, consistent service delivery, which requires quality, and stability. A third is the period or life cycle. It doesn't help if you have an inexpensive product or service today, and nothing tomorrow. The definition of long term also varies, depending on one's perception of the life-cycle cost of the product/service. For a user, it may be several years, or his/her life cycle. For a society, it may mean generations.

In addition to consumer benefits, other factors need to be considered from the perspectives of pragmatism and realpolitik. Realistically, a triad of stakeholder interests has to be balanced for a sustainable beneficial outcome. These are: consumer and producer surplus, and what might be termed "government interests" in the broadest sense defined below. The latter has been manifest in many global spectrum auctions, and although detrimental to the sector, is an aspect of reality that cannot be wished away. For example, our governments preferred rationing and auctions to more constructive approaches such as sharing infrastructure, and when the Supreme Court ruled that resources need not be auctioned, spectrum was excluded, which seems logically indefensible. For sustainable, consistent services, champions of all three criteria must partner to adopt mutually acceptable solutions.


Assumptions About Enabling Policies

Certain basic amenities comprise the essential infrastructure that everyone needs to be productive and have reasonable well-being. To some extent, this is linked to reasonably high per capita income. Without it, broad access to good infrastructure is infeasible. It takes that level of organisation, institutions and investment, including its implications for developing and organising human capital, to build such capabilities, as in Organisation for Economic Cooperation and Development (OECD) countries. Emerging economies have to manage with lower order platforms, or a subset of higher order services combined with others of lower order. Prioritisation then becomes the key, and areas of emphasis have to be chosen. This is where the priority accorded to Digital India comes in. If digital systems are crucial facilitators for development and productivity, they need to be accorded that level of importance and effort, with substantive changes to policies.

The government sets the policies and incentives. Government here means not just the central government and the states' executives, but the gamut of regulatory and government agencies: the legislature, the regulators, and the judiciary. These agencies must converge and persuade public opinion to support action in the public interest. Ultimately, society has to pay. If delivery is priced below cost in communications, the services will be as unsustainable and ineffective as in other distorted sectors with freebies.

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Shyam [no-space] Ponappa at gmail dot com

1: Krishna Kant: http://www.business-standard.com/article/economy-policy/spectrum-fees-leave-no-money-in-shareholders-pockets-116092701398_1.html, Business Standard, September 28, 2016

For a Telecom Revival

Positive steps on telecom and broadband need to be bolstered with more for a resurgence

Shyam Ponappa   |  December 5, 2013

The government announced momentous decisions subject to Cabinet approval on telecom policy on December 3*. There are some major pluses: increased spectrum made available, and higher market shares allowed through acquisitions. Less constructive for the sector are decisions like acquirers having to pay for spectrum above a floor (4.4 MHz for GSM and 2.5 MHz for CDMA) at market rates unless the spectrum was won through auctions. While there are positive decisions, more are needed for true resurgence in this sector.

Perhaps there's also a need to curb the inappropriate application of direct-democracy to complex issues. This refers to choices influenced by uninformed but vociferous public opinion, whereas the requirement is for logical conclusions based on knowledge and understanding of the facts, domain expertise, and skill in problem formulation, solution design and implementation. The underlying constructs may include factors like technology; economics and its dissimilar sibling, finance; society's organisation, capacity and inclinations; and the law. This is especially true for infrastructure, a recognised weakness in our economy. The issue is that misdirected policies can result from the indiscriminate application of old frames of reference, customary practices, or just following the herd.

Consider the state of telecom and broadband: how bad our services are, and how badly the sector is doing, despite the enormous potential. Decisions on spectrum have profound effects on how these services affect productivity and living standards, with inappropriate policies resulting in impediments and misdirection. This is especially important in developing economies because the opportunity losses are unaffordable, and recovery is difficult in the absence of robust institutions and processes. Negative examples like the drive to refarm 900 MHz spectrum and maximising short-term government revenues from spectrum make a mockery of government-for-the-people. "Refarming" refers to mobile operators having to give up most of their 900 MHz band holdings for redeployment of newer technology, primarily because more developed economies did so. Existing operators would lose much of this spectrum, unless they win it back through auctions or acquisitions. This is like taking away captive mines from established steel manufacturers to create a "level playing field".

There are differences, of course, between spectrum and mineral resources. Unlike minerals, spectrum is not depleted by usage, the time taken to develop a new mine is usually more than to deploy a new network, and so on. But refarming will entail significant costs for new networks with many more base stations. This will take years, requiring interim arrangements to avoid service disruption to existing users. It seems like an enormous burden, in effect cross-subsidising newer technology for the high-end user segment. 

How bad is the situation for the industry? Take indicators like profitability, debt, and spectrum costs. Chart 1 shows Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) as a percentage of revenue for mobile network operators in India, Indonesia, Malaysia, China, Thailand and Singapore, with India being lowest at 20 per cent.

Chart 1: Mobile Network Operators’ Profitability - APAC

Source - GSMA + BCG: http://www.gsmamobileeconomyindia.com/GSMA_Mobile_Economy_India_Report_2013.pdf

Regarding indebtedness, two Indian operators have Debt/EBITDA ratios at 4 and 6, well above acceptable levels. Others, whose debt is in line with Asian operators, are less able to service it because of lower revenues. While some urge that leveraged companies in difficulties be allowed to fail, the magnitude is such that there is a serious risk of destabilising the economy.

Spectrum reserve prices in India are much higher than in other countries (Chart 2), despite the average revenue per user (ARPU) being much lower in terms of purchasing-power parity (PPP), rendering investments unattractive.

                                            Chart 2

Source - GSMA + BCG: http://www.gsmamobileeconomyindia.com/GSMA_Mobile_Economy_India_Report_2013.pdf

It is because of this stressed situation that the authorities, the industry, and the public need to reconsider their basic approach to spectrum needs. One reason for the forced refarming is supposedly that 900 mHz spectrum is needed for more efficient technologies. Another is that some operators with no 900 mHz spectrum are at a genuine disadvantage in terms of in-building coverage. Of course, the most compelling reason may be simply the government's need for revenues to cover its deficit, despite the enormous negative consequences to the long-term public interest. The question is whether there have been adequate efforts to explore less disruptive alternatives to achieve the objectives of reliable, inexpensive communication services.

Spectrum Bands & Ecosystems

As of May 2013, the prevalent frequencies in LTE networks in Asia were as shown in Chart 3.


Chart 3: Spectrum Bands in LTE Networks (Asia) May 2013

Source: Wireless Intelligence
http://www.mobileworldlive.com/asias-apt700-band-plan-leads-the-way-to-large-scale-4g-lte-growth

The most common were 1800 MHz and 2.6 GHz networks. The 2.3 GHz band used in India (and China) is not very widespread, while 900 MHz is barely there. Bands that are not widely used are unlikely to benefit from scale economies. From this perspective, it is more logical to refarm 1800 mHz for LTE rather than 900 MHz, and the now widely adopted 700 MHz band.

The adoption of the APT700 band across Asia (including India), Latin America and Europe opens up the possibility of evolving into the largest LTE ecosystem with significant scale economies. As Verizon's established 700 MHz band in America differs from the APT700 band, the availability of devices may be a concern.

However, the fact that many countries have adopted the APT700 band improves the chances of quick development of equipment, starting with Telstra's planned trials in December 2013/January 2014.

For the resurgence of telecom and widespread access to broadband, the current positive moves to cut reserve prices somewhat, allow spectrum trading and consider uniform spectrum usage charges are not enough. Public opinion tends to view these steps as favouring telecom operators, or as sops to one operator or group. However, policies need to be formulated from considerations of the public interest, including that of users, the industry, and the government. Regarding auctions, there needs to be rethinking on the lines of the Swedish approach of bids for network investment and rollout, perhaps with incentives for faster delivery.


shyam [no space] ponappa at gmail dot com

* http://www.business-standard.com/article/economy-policy/m-a-rules-for-telecom-cleared-113120400012_1.html