The Hindu Business Line : Unsustainable competition?

With a host of new players entering the telecom space, growing competition has been yet another reason for investors to worry about the prospects of the existing players. The worry is that if all the new operators, such as Unitech Wireless, Shyam Sistema and Etisalat DB, also expand operations, the tariff war may only hot up. However, these concerns appear overdone.

First, the company that started this war — Tata DoCoMo (or the GSM arm of TTSL) and Tata Teleservices Maharashtra Ltd (TTML) are both loss-making entities at the net level. Though fresh GSM operations may bring in subscribers, as seen above, they may not make significant inroads in garnering revenue growth. This, along with the fact that all operators offer per-second tariffs, means that the company, though processed with deep pockets due to its association with NTT DoCoMo, may have to weigh options sooner than later, taking a call on tariffs.

Difficulty scaling up

Second, large operators such as Bharti and RCom are able to offer such low tariffs largely due to scale economics attained over 10-12 years due to a variety of factors. Apart from tariff cuts, they have been aided by spectrum allocation in the efficient 900 MHz band in several circles, ability to carry traffic between circles on one’s own network, and so on.

Much of the spectrum allotted to new operators is in the 1800 Mhz band, where capex is quite expensive compared to what they would incur while operating in the 900 MHz band.

The total number of operators, new and existing ones, would be 10-12 every circle, and with most of them sporting similar tariff cards, the new entrants could find scaling up an uphill task. To add to challenges on this front is the fact that all further 2G spectrum allocation has been put on hold.

Even if the new players partner large incumbent ones for active and passive infrastructure, as some of them have, there is still substantial operating expenditure they have to incur.

Strategy that may not work

All these factors make it quite plain that new entrants offering rock-bottom tariffs from inception seems an unsustainable strategy. Conversely, if they do not offer these low tariffs, there would be no special incentive for subscribers to move to them.

Regional players in the past, such as BPL, Spice Communications and Aircel, were all sold to large domestic or international players. MTNL, despite operating in two of the most lucrative circles of Mumbai and Delhi, has been a survivor rather than a victor. Reports suggest that MTNL’s merger with BSNL would be considered after the latter’s listing. Operators who are unable to withstand the heat of this battle may well be candidates for consolidation in the next couple of years.

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