Trouble in the Telecom Land

The credit crunch and the slowing economy is beginning to impact everyone. How fortuitous can one(/I) get - slowdown effectively kicked-in just months after I reentered the industry in April this year. With the re-emergence of a sellers market in the country, jobs have now become a matter of chance than choice for potential job seekers. The Slowdown has effected almost everyone in the telecom value chain from equipment makers to phone companies and application developers. With the trouble continuously spreading to other verticals, there seems to be no safe haven for investments. Even traditional enterprise communication giants like Cisco that are more shielded because of multi sector clientele, are facing the heat because of slowdown in financial, IT and automative sectors. Announcements of gloomy sales outlook are a common place today but we must draw solace from the fact that although wireless may encounter slowdown, it will fare better than most other industries in these hard economic times.

With an extended housing slowdown in most of the markets, anything related to housing market is going to be in trouble. Now that the housing market has ground to a halt, demand for broadband, voice lines and IPTV/cable services will slow drastically. This will have a rippling effect on service providers resulting in tightening of their infrastructure spending. It is expected that there will be delays of close to one year in the NGN buildouts of companies like BT, Verizon etc. This will have a multifold impact on equipment vendors like Alcatel, Motorola, Nortel etc. Alcatel has already announced job cuts and Nortel is on the verge of filing for bankruptcy. The root of their problem lies in costlier credit - it is forcing service providers to postpone their capital expenditure spends like upgrading their networks and launching newer suite of services. The problems are extending to handset manufacturers too, with lower demand from new customers and longer than expected replacement cycles of existing customers. Whats disturbing for them is the fact that, lower demand from saturated markets is not being offset by robust handset sales in emerging markets.

The slowdown has different set of challenges for the Asian market. It could not have come at a worse time for Indian and Chinese governments who, after months & years of delaying the 3G spectrum auction currently find themselves wrong footed with a risk of completely missing the 3G bus if the auctions are delayed any further in search of right valuations. In the current macroeconomic scenario, the telecom sector plays the most important role in maintaining a robust GDP growth of over 7% for these two countries, and hence both governments are treading carefully to avoid any policy mismanagement. The Vendor ecosystem is waiting for the 3G auctions as the resulting network roll outs may just give them enough cash and time to counter the current economic slowdown.

Also the currently prevalent weakness does ripen the market for takeovers. The slowdown will accelerate further consolidation of the sector especially among smaller players. There will be renewed interest from companies looking to buy into US telecom assets. Huawei has already expressed soft interest in acquiring Nortel. The Private Equity players who have been missing from the telecom scene after the Avaya and Alltel transactions may renew their interests in the sector. Apart from mergers and joint ventures, further network sharing arrangements will become commonplace. Operators will also push their respective regulators to make sharing more appealing by introducing new policy initiatives. No matter what be the case, everyone in the ecosystem better gear themselves for a long, hard effort to fight slowdown.

A Not-so-Lucky Mascot

Discomgooglation: The feeling of distress or anxiety when unable to gain immediate information access. Inadequate dosage of daily internet access because of a faulty data card and the eventual relief once it started working made me realize that I am not too far from experiencing the symptoms of discomgooglation. Many things have happened since the previous post on the blog leaving me with no dearth of ideas to pen my thoughts on. Between the final 2 viz., the facebook phone and the lost billions due to 2G license sale, the quantum of the lost billions prevailed. This was not merely because of the policy decisions that led to it but also because of the far reaching impact it may have on the forthcoming 3G spectrum auction. This post is not about the classic Raja Vs. Maran comparison that the media is so fond of. Frankly both of them in their own merits have been India's best telecom ministers till date. If Mr.Maran was credited with lowering the overall call rates and fostering telecom equipment manufacturing in the country, Raja in his term should be credited with fostering competition and taking the biggest leap forward in comparison to his predecessors on the 3G spectrum auction - Unfairly though, his success or failure will eventually depend on whether he can successfully oversee the 3G auction as a telecom minister. India saw unprecedented growth rates during the term of these two individuals - 10 mn users a month - something we may rarely get to see again. No matter what be the case, the talk of a huge loss to the public exchequer by giving away 2G spectrum for free along with licences at prices that prevailed in 2002 is something which will always haunt Raja.

It all started when he took over the reins as Indian Telecom Minister from Dayanidhi Maran in 2007. After close to 5 months of "successfully" renegotiating the price for BSNL tender of 45 million lines, eventually saving Rs. 1500 crores (during which BSNL conceded its second position in the market to the then, Hutchison Essar), he set his sights on increasing the competition in the industry before setting the 3G ball rolling. This because it was felt that in the present market condition where 3 private GSM and 2 private CDMA operators were holding the aces, a spectrum auction may not yield "right" valuations. The two areas where he got it wrong were deciding to give away 2G licences at prices prices that 2002 and the much reviled First come First served basis of allotting licenses - both of which will be discussed later. What followed was mad rush for 2G licenses. From Realty to Retail, from consumer electronics to power, companies from every sector suddenly wanted a share of India's telecom pie. Selling licences at Rs.1651 crores and getting spectrum for free didn't look like a bad deal when many foreign players with big pockets were waiting for an avenue to enter India before the 3G auction. No one till date thought so much spectrum was ever available. We may never get to know the truth behind Maran's comments about spectrum shortage.

Between the allotment of licenses and spectrum, the recession factor kicked in much to the dismay of Raja. Once the new players were starting to receive spectrum they were promised, players like Unitech and Swan duly sold stakes in the to Telenor & Etisalat which eventually valued their companies 7-8 times the price they paid for the license 6 to 8 months ago without even commissioning a single tower. It would have been double those valuations, if credit was much easily available. Considering the above valuations, a conservative estimate is that there is a loss of close to Rs.60000 cr to the exchequer. The figure is made to look even bigger by comparing it with India's current year fiscal deficit at Rs.130000 cr. But before accusing an outright scam one must understand what sort of a market structure are we looking at had it been a 2G auction scenario

With India's top business houses and world's largest mobile operator among the top 5 players in an Industry where scale economies are the order of the day, an auction for 2G spectrum would never have been an attractive proposition for a new player. An under priced license along with free spectrum gave a new player some incentive to test the waters in unknown shores which in turn guaranteed government definite revenues through license sale. I'm thoroughly of the view that a reviewed license fee along with free spectrum should have been the way forward and that is where I repeat the government got it wrong by selling license at 2002 prices and deciding that allotment will be on a First come First served basis. A reviewed license fee would have covered much of the losses that are being projected today and with more competition during 3G & BWA auction, government would have realized much better value. But with a recessionary market scenario, the spectrum may never meet its correct valuations - yet another case of noble intentions falling by the way side (remember the BSNL tender sale). The Ministry has now proposed measures like one time fee on operators holding more than 4.4 Mhz of spectrum, higher revenue share, definite lock-in before stake sale, disengagement fee for majority stake sale etc. some of which can be challenged legally because contracts cannot be changed retrospectively.

Raja's assertions of a better valuation for 3G spectrum due to 2G license sale will be thoroughly tested in the future. One wonders how would the scenario have been had the Ministry revalued the 2G license fee, had the TRAI been more clear in its recommendations about first come first serve basis, had the market not slumped - all these would have stood testimony to "noble" intentions of Raja. Maran learned it before, and Raja is learning it the hard way now, that good intentions do not always mean good outcomes.