Apr 23, 2020

India’s Telecom Industry And Why It Should Remain An Oligopoly

When India announced its New Telecom Policy in 1999, it said the industry was of “vital importance” with “widespread ramifications on the entire economy,” and vowed to create an “enabling framework for the development” of telecommunications. While that worked in principle, there remained only a few key players in the industry.

Nevertheless, there seem to be all the reason in the world telling us to look the other way.

The Government’s Cut 

Policymakers likewise understood that the closeout of wireless transmissions and offer of licenses could bring billions of dollars, an income source key to narrowing the administration's spending deficiency.

For example, in a 2015 closeout, India raised a record $18 billion, after getting almost nearly $10 billion in the earlier year. Budgeted revenue by govt for 2020-21 from the telecom industry, including licensing fees, auctions, etc., is 1.33 lakh crore rupees.

When Vodafone entered India by acquiring Hutchison Whampoa’s Indian operations in 2007, the government slapped the buyer with a tax bill of $2.2 billion. Vodafone disputed the tax and India’s Supreme Court agreed that no law upheld the levy of the tax. But the then Finance Minister Pranab Mukherjee amended the tax rules retrospectively, and the carrier is still fighting the demand.

License cancellations

In 2008, the government allocated 2G airwaves and licenses without auction. The Comptroller and Auditor General in 2010 said that the method caused a presumptive loss to the government. Two years later, the Supreme Court canceled 122 mobile-phone permits won by companies including Etisalat DB, Sistema, and Telenor.

A sudden demand for fees

The nation’s Supreme Court, ruling on a years-long dispute, ordered several carriers to pay the government an additional $13 billion in due fees. Vodafone Idea Ltd. faces a bill of $4 billion, a burden that could sink the company.

Should the telecom industry remain an oligopoly?

It is common to assume that competition among firms is good for society, and monopolies or a few companies with large market shares are bad for commodity prices. That is true. But sometimes, it is efficient to keep the industry closed.

The Telecom industry is a perfect example of a ‘natural monopoly’. An industry that naturally has high barriers to entry, such as licensing fees and huge fixed costs, is usually dominated by a few or a single company. Usually, the product is uniform and cannot be differentiated.

For example, the clothing industry is not an oligopoly, as there are different styles and patterns. On the other hand, water and oil industries cannot be differentiated, so they usually form a natural oligopoly/monopoly. This leads to the price wars that get Indian consumers one sweet deal after another.

Spectrum costs in India are sky-high. The leading telecom operators in India pay the largest share of their aggregate revenue for airwaves at 7.6%, among the highest in the world. While the government set high prices, the carriers had themselves to blame too.

Competition drove the operators to outbid each other at spectrum auctions, driving up their costs. As a result, companies took on billions of dollars in debt to stay in the game even as competition among a dozen operators for a slice of the market drove down tariffs to less than a cent, weighing on their earnings.

In many cases, it is the government. The Government’s Public Sector Undertakings are usually present in these industries. IRCTC has a monopoly in Railways, DD channel had in the DTH industry, and BSNL was the first and the only company in the telecom industry until 1998. In these few handpicked cases, it is more efficient to have a few players in the market.

Let us understand using an example. Company A is the only company which provides water for a city. They have built the necessary pipes underground, gained exclusive access to water reservoirs from the government, and set up the massive filtration plants. All of this is part of the fixed costs, and they are massive. But the running costs are minimal. These include transportation costs, salaries, fuel costs, etc.

Let's say the government wants to double the quantity of water supplied. It has 2 options - bring in another company or increase the production of the first.

If the government lets company B join this industry and gives them access to the reservoirs as well. But now, company B has to build the same underground pipes, and the filtration plants again. Moreover, A and B will compete over prices, and spend more on selling costs. It just would have been more cost-effective to just connect more pipes and increase the capacity of the filtration plants.

The rationale is that the fixed costs start to spread across a large quantity as the quantity increases. Since the fixed costs are large, it would only make financial sense if the quantity produced is huge. The same is the case for the telecom industry.

There are a few running costs and massive fixed costs. And these high profits allow these companies to invest in research and innovation. India is on its way to becoming a mature 5G-ready country.

With all these complications of the Indian telecom market, it is difficult for companies to enter and survive. Even government intervention seems to be for the government’s benefit. The telecom industry is a mess so large it can’t be cleaned up.

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