Failure lessons

| Updated on January 08, 2018 Published on October 05, 2017

The failed merger between Reliance Communications and Aircel points to the need for some urgent course corrections

The decision by Reliance Communications and Aircel to call off the merger between their mobile services business is proof that the telecom sector is heading towards value destruction. Given that both the operators have been reeling under mounting losses and debt, a merger would have not only given them a chance of surviving in a highly competitive market but also helped prevent valuable, high-cost infrastructure built over two decades from going waste. It would have helped the two operators combine resources, drive efficiency and pool spectrum holdings to put their infrastructure to better use. A merger would have also been in overall consumer interest as the level of competition would have intensified with one more strong player in the market. The telecom industry is at the cusp of transition from a largely voice-based business — where penetration levels are already around 70 per cent — to one based on high-speed data and internet services. But the spectrum and network infrastructure requirements for these services, including video streaming and entertainment on mobile devices, are far more than for ordinary voice telephony. These call for huge investments that neither RCom nor Aircel — companies burdened with a combined debt of over ₹65,000 crore — are in any position to commit. The uncertainty over their future is also threatening the jobs of thousands of employees.

The blame for this sorry state should be shared by both the operators and the poor regulatory environment. While the operators have to be blamed for not innovating enough on future technologies to build sustainable new revenue streams, the Centre is at fault for treating the sector merely as a cash cow. The combination of costly spectrum, high taxation and declining tariffs is making it tough for most operators to stay operational. The problem now is that there is no easy way for RCom and Aircel, or, for that matter, other struggling operators like Tata Teleservices, to exit. The reason for this is the restrictive policies with regard to mergers and acquisition, and spectrum trading. Currently, there are cross-holding norms preventing a telecom company from owning separate stakes in other operators. Thus, an RJio or Airtel cannot acquire a stake in Tata Teleservices or Aircel; they can only buy-out 100 per cent of the company so as to create a merged entity.

The absence of a rational spectrum trading regime also acts as a dampener. The Centre levies a charge on usage of spectrum on top of the upfront payment for acquisition of the airwaves through auction. We need a clear exit policy for telecom companies that do not want to remain in business. And if the golden goose is not to be killed off, some kind of fiscal relaxations in terms of lower levies and taxes could be considered for the operators who do remain in business, to help tide over the current crisis.

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Published on October 05, 2017
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