India - The mobile sector has an unsustainable structure, not in the interests of customers

[Gerson Lehrman] The Indian mobile telecommunications sector, like the country as a whole, is huge, remarkably diverse and exciting, and tinged with a distinctive craziness. This craziness is evident in the presence of 14 mobile network operators (compared to 3 to 5 in most other markets, including the largest ones), the race to the bottom in prices (as low as the equivalent of 1 U.S. cent per minute), and the policies and regulations which have led to inadequate amounts of spectrum being made available to operators as well as the tradition of levying high fees on mobile operators (new proposals are forthcoming as old fees are removed or reduced). These fees are an example of a tactic that runs the risk of killing the goose that lays the golden eggs (or hobbling the elephant that in Indian culture is supposed to ensure success in human endeavors). An impending crisis is apparent in the observation that while the number of cellular customers in India grew by over 50% from end-2008 to end-2009 – rising from 346.89 to 525.15 million according to TRAI - operators’ revenues increased by only about 10%. While it may be argued that more competitors mean more competition to the benefit of customers, the realities of physics and wireless network engineering mean that significant inefficiencies and costs are introduced, combined with low revenues, once this number increases beyond a certain point so that the amount of bandwidth which any one operator can acquire is inevitably limited. The problem is compounded when a price war breaks out and additional, unproductive fees have to be paid which add to operators' costs (e.g. the still largely unused Universal Service Fund contributions and TRAI's proposal to add new fees on the use of 2G spectrum based on the prices paid for 3G spectrum in the still ongoing 3G spectrum auction). In addition, the two state-owned operators (BSNL and MTNL) continue to be shown favoritism (e.g. early access to 3G spectrum) to overcome their uncompetitive cost positions, thereby further discouraging and handicapping private investors (foreign as well as domestic). The positive consequence of the tangled policy and regulatory environment in India is that domestic operators have had to be creative and ingenious in building business models that enable them to be profitable in this market despite the prevailing policies and regulations as well as the very low ARPUs that customers can afford to pay (about $4 per month on a blended basis). To the extent that these operators are able to transfer all or most of these operating models (which is not a guaranteed or slam dunk success) to other markets into which they are expanding as part of their strategies of globalization or at least internationalization they will be formidable competitors to operators who do not have this experience to draw upon. Nevertheless the long term success of the Indian mobile market itself - especially in the broadband era - will require fundamental changes in the attitudes and rules or policies not only of TRAI but also of other public sector stakeholders and influencers such as the DOT and the Finance Ministry. Otherwise operators such as Bharti Airtel may decide to apply their resources and expertise disproportionately to foreign markets to the detriment of India (a mirror situation of U.S. operators which have largely and perhaps for the long term unfortunately largely withdrawn from foreign markets other than for global enterprise customers). These policies and regulations should reflect a new, more sophisticated and broader recognition of the balance that is required between accumulating revenues for the public Treasury that are derived directly from the mobile industry and the impact of these revenues (costs for the mobile sector) on the economic (and social) value which mobile services can create throughout the economy (that among other consequences also generate revenues for the public Treasury) as a result of their influence on the attractiveness of this sector for private investors. The level of involvement and commitment of private investors to mobile telecommunications will affect both direct and indirect revenues and value. Everyone's benefits as well as total value could be lower in a lose-lose-lose outcome (for the public sector, overall economic development, and mobile operators themselves) even if in a very short term transaction-oriented mentality (a familiar attitude encountered from New Delhi to New York) it appears that one of these constituencies may be winning for now on the basis of current policies.

The Structure Of The Indian Telecommunications Sector Is Unsustainable