Making the straightforward complicated Indian-style

Citation

Curwen, P. (2009), "Making the straightforward complicated Indian-style", info, Vol. 11 No. 4. https://doi.org/10.1108/info.2009.27211dab.001

Making the straightforward complicated Indian-style

Article Type: Rearview From: info, Volume 11, Issue 4

A regular column on the information industries

In the great majority of countries in the world, they have been able to deal reasonably efficiently with one or both of the following questions: how are mobile licences to be awarded and who is to be permitted to own them? However, there are one or two exceptions, among which India is by far the most notable.

India is an important exception because it is a huge market – the second-largest in the world by subscriber numbers – which is still growing rapidly. It is also important because it not only conducts its telecommunications affairs in an original manner, but in one that is in most respects – the obvious common element is the vicious political in-fighting – dissimilar to that in the largest market, China. In China, for example, the government has heavily restricted the number of mobile operators, dictated their technology and heavily restricted foreign ownership. Not ideal from a liberal free-market perspective, but ultimately effective (see Vol. 8, No. 6, for details).

Contrast this with India where the country has been divided into 23 “circles” with varying numbers of competitors in each one, the government is constantly at loggerheads with the regulator (the TRAI), the rules on foreign ownership and their interpretation are constantly in dispute, the state-owned operators are given priority on a random basis, spectrum is too scarce to meet the needs of 3G licensees and everyone is bemused by the constantly changing regulations.

Consider firstly the issue of ownership. It is hard to believe that, not so long ago, operators had reservations about investing in India. For example, France Télécom sold its stake in BPL Mobile in December 2004 and the then AT&T Wireless sold a 32.9 per cent stake in Idea Cellular in September 2005. However, inter alia, foreign investors were restricted at the time to a minority 49 per cent stake in an Indian operator, huge infrastructure-based investments were required despite a prospective very low ARPU and the regulatory environment was volatile. Nevertheless, the sheer size of the potential market and the expectation of the authorization of 74 per cent foreign control, which duly took place in October 2005, stimulated a surge of foreign interest in Indian operators during 2005 and 2006. For example:

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  Maxis Communications of Malaysia bought 74 per cent of Aircel during 2006.

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  Sprint Nextel was reported as negotiating a stake in Shyam TeleLink during 2006.

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  SK Telecom was reported to be negotiating a take in Tata Teleservices during 2005 and in Shyam TeleLink during 2006.

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  Telekom Malaysia bought a 49 per cent stake in Spice Telecom in June 2006, having failed to buy Aircel in December 2005.

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  TeliaSonera was said to be interested in Shyam TeleLink during 2006.

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  T-Mobile was said to be interested in Shyam TeleLink during 2006.

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  Vodafone acquired 10 per cent of Bharti AirTel from Warburg Pincus in November 2005.

However, the seismic event was the acquisition of a majority stake in Hutchison Essar by Vodafone at the end of 2007 (see Volume 9, Number 5, for details). Interest in this stake was also expressed by the Alfa Group, Maxis Communications and Orascom Telecom/Qatar Telecom, but Vodafone’s offer won the day by placing an effective valuation on the entire company of $18.8 billion. As a consequence, Vodafone was obliged to sell part of its existing stake in Bharti AirTel – in which Singapore Telecom also held a roughly 30 per cent stake – at a price which valued the whole of Bharti at close to $30 billion.

Valuations at this level caused other foreign operators to sit up and take notice. Did Vodafone know something they did not? Should they rush in to get a share of the action before they were completely priced out?

But the situation was far from straightforward. In the first place, by no means all existing operators held licences in all 23 circles. Secondly, some used GSM – the largest being Bharti AirTel, state-owned BSNL, Idea Cellular and the now Vodafone Essar – while others used CDMA, in particular Reliance Communications. Thirdly, the sector was restructuring rapidly. For example, Spice set out to merge with Idea Cellular, giving Telekom Malaysia a 20 per cent stake in the merged entity.

Most significantly of all, the Unified Access Services Licences regime, introduced in December 2003, had opened up the possibility of new entrants. Since there were already multiple competitors in every circle, this had not led to a rush for new licences, especially since there was a marked preference for GSM even among most existing CDMA licensees. But when the prospect of obtaining GSM spectrum in at least some circles was held out to any company that applied for a Unified Licence before 25 September 2007, the queue of successful applicants contained, inter alia, Unitech, Swan Communications, S. Tel, Datacom Solutions, Agrani Telecom and ByCell.

In September 2008, Etisalat agreed to pay $900 million for a 45 per cent stake in Swan Telecom which possessed licences in 13 circles and had been awarded spectrum in 10. In November, Telenor agreed to pay $1.1 billion for a 60 per cent stake in national operator Unitech Wireless. What this meant in effect was that any start-up operation, provided it possessed some licences and spectrum, could expect to be valued at $2 billion – something not witnessed since the bad old days of the dot.com bubble of 1998-2000 (which is why Telenor’s share price got hammered as a result). Nothing deterred, DoCoMo promptly moved to pay $2.7 billion for a 26 per cent stake in national operator Tata Teleservices. On the face of it, a valuation of $10 billion for a going concern did not seem that overpriced, but Tata had never shown a profit and was a CDMA operator in need of massive investment to overlay its network with GSM.

The news was met with astonishment. True, Vodafone had also apparently overpaid, but in practice it had transformed the now Vodafone Essar into an efficient operation with 55 million subscribers, and its head-to-head struggle with its even larger rivals, Bharti AirTel and Reliance, was rapidly driving down tariffs. Nevertheless, Russia-based Sistema set out to join in after buying roughly 72 per cent of national operator Shyam TeleLink, while Turkcell is negotiating a 51 per cent stake in Datacom Solutions (valuing it at $2 billion overall).

The most striking aspect of the above is arguably the absence, Etisalat aside, of highly acquisitive Middle East-based operators. They have never previously been much deterred by high valuations, so it would be unwise to assume that the Gadarene rush into India has run its course. And there is always the attraction of pending 3G licences to pull them in.

It is not possible to explain fully the Byzantine processes that have led to the latest utterances on which operators are to get 3G licence and when – at least not in the course of a Rearview – bearing in mind that it was originally intended to issue licences in 2003. The first point to bear in mind is that most GSM operators have been issued with, on average, 7 MHz of 2G spectrum – far less than in, for example, Europe and clearly not enough to roll out 3G services. Secondly, as ever, the military is sitting on a lot of highly desirable spectrum, which it does not want to release. Thirdly, the government intends to prioritize the needs of state-owned BSNL and MTNL.

The TRAI published its recommendations for 2G/3G in May 2005, which, inter alia, included provisions that there should be an annual licence fee for 3G spectrum and that new entrants should only be allowed to apply for spectrum not already allocated to 2G operators. In March 2006, the Department of Telecommunications (DoT) recommended that the amount of 3G spectrum allocated should be proportional to the number of 2G subscribers. The TRAI responded by arguing that 2G (for voice) should be viewed entirely separately from 3G (for data). In April 2007, the DoT over-rode the TRAI by recommending that only four licences should be issued in the 2100 MHz band with two reserved for BSNL and MTNL. By 2008, the DoT and TRAI seemed intent on little other than immediate contradiction of each other’s statements.

The current (March 2009) position is roughly as follows. The spectrum (whatever it turns out to be) will be auctioned some time soon – but impending elections may prevent this. The initial auction will probably take place either in 14 circles (says the DoT) or all 23 (says the Finance Ministry which also now appears to be at constant loggerheads with the DoT). Foreign companies will probably be allowed to bid for 3G licences provided they pay a supplementary fee of $375 million and acquire a local partner before launching services. However, every single fee remains a matter of fierce dispute. Of the initial 3-5 licences in each circle (with, potentially, a further five to follow later), BSNL and MTNL will be awarded theirs immediately – they have both already launched in limited areas. Other successful applicants will be required to pay 25 per cent of their bid immediately, but will only be awarded their spectrum as and when it is available. The armed forces are becoming increasingly intransigent about releasing spectrum so this process may take until 2011 to be completed. New 3G-only entrants will probably have to pay three per cent of their annual revenues to the government compared to one per cent for existing 2G licensees.

Endless deadlines have come and gone. What is clear, however, is that the structure of the Indian mobile sector will remain unstable until the process is completed. Meanwhile, the sector is increasingly looking like gorillas (with over 40 million subscribers) and apes (20-40 million) versus monkeys (other 2G operators plus new entrants) – but monkeys that in some cases are apparently worth $2 billion simply on the basis of their licences and some (unknown) spectrum.

And, yes, we are in the midst of the worst credit crunch for decades and rather large sums of money are needed.

Peter CurwenVisiting Professor of Telecommunications in the Department of Management Science, Strathclyde University, Glasgow, UK. E-mail: pjcurwen@hotmail.com