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Competition is never kind to incumbents. The entry of new entities, hungry for growth, changes the rules of the game. By the time the older ones ready themselves for the new game, the goalpost has moved.
This is what happened to state-owned Bharat Sanchar Nigam (BSNL) and Mahanagar Telephone Nigam (MTNL) in early 2000, when mobile telephony began to boom in the country. They failed to capitalise on this generational shift and now run the risk of becoming irrelevant to consumers. Predictably, both are struggling with mounting losses.
In FY14, MTNL reported a loss of Rs 3,575 crore (adjusted for exceptional gains) on net sales of Rs 3,391 crore. BSNL reported a loss of Rs 7,933 crore on net sales of Rs 25,655 crore during FY13, the latest year for which its numbers are available. The biggest problem for these companies is high employee cost and the legacy of their local fixed line businesses. BSNL has 25 times more employees than Bharti Airtel, the top telecom operator, with half the revenue. MTNL has three and a half times more employees, with barely a tenth of Bharti’s revenue. (INTERRUPTION IN LINE)
Note that till FY08, both BSNL and MTNL were among India’s most cash-rich companies, with combined cash and equivalents of nearly Rs 45,000 crore.
The incumbents have managed to maintain their leadership in the local fixed line and broadband business but have failed to catch consumer attention in fast-growing mobile telephony. This is proving costly as more and more consumers choose the convenience of mobile devices over the rigidity of fixed lines.
At the end of March this year, BSNL was India’s fifth largest mobile operator, with around 95 million subscribers, less than half of Bharti Airtel’s 200.4 mn subscribers. And, while private sector operators continue to add customers, BSNL is seeing a decline. In 2013-14, around seven mn subscribers left its network, despite the segment adding 36.7 mn. Market leader Bharti, for example, added around 18 mn customers to its network during the year ending March this year.
BSNL is also facing heat from smaller private sector operators such as Aircel and Uninor. Experts say the public sector company is certain to lose more market share.
Initially, BSNL had seen rapid growth in its mobile services. It was the country’s second largest mobile operator by March 2006, within five years of launching these operations. It failed to consolidate the position and has continuously lost market share since 2008.
Things are slightly better on revenue. With gross mobile revenue (excluding the government’s share) of Rs 7,214 crore during the quarter ending June this year, BSNL is the fourth largest operator, with revenue market share (RMS) of 11.7 per cent. But, this is down from a high 14.6 per cent share in the September 2011 quarter.
Things are worse for its smaller cousin, MTNL, that has operations in Mumbai and Delhi only. The operator's current mobile subscriber base is less than what it had in March 2007. And, has become one of the most indebted telecom operators. It now accounts for 0.4 per cent of the entire sectors' subscribers and 1.7 per cent of total gross revenue. This is not enough to pay its bills.
What didn’t happen
Experts say the companies failed to build a brand and market themselves. “In telecom, there is little product differentiation between various operators. The industry is more or less commoditised and this makes branding and promotion key to grab customers’ attention. BSNL and MTNL failed to get this right and have nearly lost customers’ mind-share,” says Shobhit Khare, telecom analyst at Motilal Oswal Securities.
Others say the two public sector undertakings face structural problems that can’t be resolved purely through smart branding and marketing. “The government didn’t infuse new skills in the companies, even as the industry was rapidly transforming in the 1990s and 2000s. The result was that their employees were not skilled enough to operate in an environment that required agility over systems and processes,” says Mohammed Chowdhary, executive director at PricewaterhouseCoopers (PwC).
The government should have allowed these companies to partner with a foreign mobile operator, either through direct equity stake or a joint venture. “This would have brought in new skills and work culture, besides technology and necessary capital. It would have allowed them to compete more effectively with new private sector entrants, most of whom started with a strong foreign partner,” he adds.
This is what many governments in emerging markets did. In Indonesia, for instance, government-owned operators saw equity investments by a clutch of global operators, including BT, AT&T and France Telecom. In Ghana, the incumbent was acquired by Vodafone. Brazil and Venezuela sold stake in their erstwhile monopoly operators to Telefonica of Spain and MTN took an equity stake in Iranian Telecom.
Experts predict a dim future for both operators, unless the government takes some tough decisions without more delay. “With mounting losses, both BSNL and MTNL are now losing capacity to make further investment in their network and risk losing more customers and businesses to competitors. This raises a question mark over their survival,” says a telecom analyst on condition of anonymity.
Chowdhary says the way out is to restructure the companies and separate the profitable divisions from loss-making ones. The former can then be privatised, either through listing on stock exchanges or outright sale to private or foreign operators. “The losses are largely due to local fixed line services, that are saddled with high employee cost and stagnant revenues. The mobile business and national long-distance would still be profitable. Investors would be interested in these and they should be spun off from the parent company,” he says.
The alternative is to wait for slow death of these companies, as they are pushed to the margins and customers are wooed away by hungry and agile private sector competitors.
