Changing Landscape Of The Indian Telecom Industry

Major trends in the industry on a macro level which impact customers at a micro level

The Indian telecom industry has always been dynamic. Over the last couple of years, the telecom industry in India has been undergoing major changes resulting in changes in the manner in which services are provided to the customers, as well as, in terms of the legal regime. There has been an introduction of new services as well such as mobile number portability (i.e., retaining the same number while changing the service provider).

Countries like US, Hong Kong and Finland had already implemented mobile number portability in varying degrees. In India, the discussions were undertaken since 1998 for implementation of number portability and finally in the year 2009, licenses for mobile number portability were awarded by the Department of Telecommunications (DoT).Well, there have been many factors for driving changes in this sector;- one major driver for change has been technology! Some of the major trends that this industry has witnessed are identified below.

Move towards technology neutrality:

The initial licenses: basic telephone services licenses and cellular mobile telephony licenses (CMTS), were technology based licenses, wherein basic licenses could have been utilized to provide fixed line based telephony and CMTS licenses could have been utilized to provide GSM based telephony. Thereafter, evolved the technology neutral licenses named 'unified access service licenses' in 2003, which entitled the license holder to provide basic as well as cellular mobile services. The recent proposal is to further enlarge the ambit and introduce a 'unified license' regime where the licenses would also be technology neutral. This brings us to the question of categorization of licenses under the unified licensing regime.

Categorization of licenses:

The Indian telecom industry is unique by itself because of the diversity of players and consequently, the diversity of licenses/ permissions, as depending upon the kind of activities that a company wants to undertake, it may require different categories of licenses/ permissions from the DoT.

The Telecom Regulatory Authority of India (TRAI) has been conducting consultations in order to solicit industry views and has recently made recommendations to segregate various types of licenses into broad categories, such as 'Unified License', 'Class License' 'Licensing through Authorization' and 'Broadcasting Licenses'.

It is important to note that unified licensing regime envisages unification of licenses and not unification of services. While categorization of licenses into broad categories could simplify the licensing regime, it needs to be kept in mind that though simplicity is always desirable, it should not be the sole reason to ignore the different business/ operational requirements of various different types of players. Hence, a careful categorization of licenses/ permissions, to the extent that they can be reasonably, subjected to similar terms and conditions, is imperative.

Evolution of new technologies:

Operation of significant telecom licenses and more importantly, the provision of wireless telephony services are dependent on the availability of the right amount of spectrum/ frequency. This brings us to another trend which relates to evolution of spectrum technology as well as the growing need for the right amount of spectrum. Over a period of time, the Indian telecom industry has evolved from the use of first generation/ second generation based spectrum to the recently auctioned third generation based spectrum and broadband wireless access spectrum.

Spectrum-license mismatch:

The unified access service guidelines do not limit the number of service providers in a service area. While the number of services providers could be unlimited, the availability of spectrum for distribution (through auction or otherwise) is limited. In today's environment and, more so in the near future, a telecom operator will likely not think of a viable business model unless they can provide wireless technology based call/ data services to the end customers which inevitably would necessitate requirement of spectrum.

Under the extant legal regime, the only way to procure spectrum is to get the same allocated from the DoT. Also, at present, spectrum trading/ pooling/ sharing is not allowed in India. If a telecom operator is unable to use spectrum, the method to get rid of it is to surrender it back to the DoT. The DoT may, based on its rules, further allot such spectrum.

While ensuring availability is one aspect, another equally important aspect to consider is how to maximize utilization of spectrum? This leads us to a logical question as to whether spectrum sharing/ spectrum trading/ spectrum pooling is the solution? Is delinking spectrum from telecom license the solution? The draft national telecom policy 2011 proposes to permit these and also proposes for a separate Spectrum Act. While in the long run, these could prove to be methods to release unutilized spectrum from the existing operators and make it available to other operators, at the same time, it would be pertinent to see what checks and balances are stipulated for proper implementation of these concepts.

In India, the discussions were undertaken since 1998 for implementation of number portability and finally in the year 2009 licenses for mobile number portability were awarded by the Department of Telecommunications (DoT).

Auction-the new method of distribution:

While traditionally DoT has been allotting spectrum to operators based on their individual applications, recently, it has shifted to the auction method for allotting spectrum to operators. In 2010, the highest bid price for 3G spectrum went up to Rs. 3316.93 crores for Delhi service area and the highest bid price for BWA spectrum went up to Rs. 2292.95 crores for Mumbai service area.

Before these auctions were conducted by the DoT, the Reserve Bank of India modified its regulations relating to external commercial borrowings to permit 'payment for spectrum' as one of the permitted end uses for which ECBs can be availed by Indian telecom companies. While auctions is considered to be a more transparent method of allocation and for discovery of price, at the same time it has led to phenomenal increase in the price for allocation of spectrum.

Recently, the Hon'ble Supreme Court of India directed cancellation of licenses issued to telecom operators in 2008 and has directed for issuance of fresh licenses through auction method. Though these auctions are yet to be conducted, it looks like auction could be the method for grant of telecom licenses as well and for discovery of price in the future.

Break-even point:

The business of a telecom operator (in particular the business of roll out and provision of call/ data services to customers) has a fairly long gestation period before which a telecom company would start making profit. The reason for this is that while procurement of license and spectrum is just the first step, the provision of call/ data services by the telecom operators to the end customers requires procurement of equipments, roll out of services, etc. The operators may start earning revenue with the commencement of service, yet the journey till they reach break-even point would still be a long way to go. Also, with the increase in cost of procurement of licenses/ spectrum, this break-even point would be pushed further away.

In 2010, the highest bid price for 3G spectrum went up to Rs. 3,316.93 crores for Delhi service area and the highest bid price for BWA spectrum went up to Rs. 2,292.95 crores for Mumbai service area.

Merger guidelines:

Mergers in the telecom industry are not very frequent but are always much talked about due to the sheer volume/ impact involved. As far as merger of CMTS licenses/ UASLs is concerned, the same is governed by the guidelines issued by DoT in April 2008.

As per these guidelines, no merger activity would be allowed if the number of UASL/ CMTS license holders in a service area reduces below 4 or the market share of the merged entity is greater than 40% either in terms of subscriber base (separately for wireless as well as wireline subscribers) or in terms of adjusted gross revenue. Also, any merger of the said licenses requires prior approval of the DoT.

TRAI has made recommendations for modification of these guidelines. As per the most recent recommendations issued in 2011, the proposal is to introduce the concept of redline to green line as seen in the table below:

Also, as per the recommendations, the entire access market would be the relevant market for determining the market share and will no longer be classified separately as 'wireline' and 'wireless'.

These recommendations, if implemented, would relax the requirements both in terms of raising the bar from greater than 40% market share to greater than 60% market share and also in terms of calculation of market share by expanding the scope of the relevant market from wireless and wireline being separately considered to the entire access market being considered.

To wrap up... the above are some of the major trends that the Indian telecom industry has witnessed on a macro level. Apart from these, there are many more under-currents which create an impact on the end-customer at a micro level.

Disclaimer: The authors are part of Amarchand & Mangaldas & Suresh A. Shroff & Co., Law Firm. The views expressed are personal to the authors.