On eve of 2G judgment, telecom sector looks to 5G

How the fifth generation mobile telephony pans out will be determined by the revenue model the government offers the industry

Special CBI judge O P Saini has asked all accused in the 2G spectrum case to be present in court on Tuesday when he will declare the date for his judgment. The case, at one stage, competed for attention with the coal scam. It is, however, unlikely to grab attention now, as the telecom industry is way more interested in 5G, even as the most tumultuous year for it draws to a close.

A key element of how 5G pans out would be the revenue model the telecom ministry offers the industry. 

Lack of investment to seize the 4G ecosystem is a major concern for industry players now. It is this gap that has been exploited by RJio after entering the market in September last year.

The telecom ministry’s thoughts on how severe the bleeding was would be evident in a White Paper it plans to issue in December as a precursor to the National Telecom Policy. It has held several rounds of discussions with all segments of the industry to create a model for a viable rate of return. 

Indications are the telecom ministry is convinced the industry would recover soon; so it is likely to pitch for a high price for the auction of 5G spectrum, likely in FY19. 

What the ministry expects can be worked out like this: Traffic from mobile devices contributes 70 per cent to the overall e-commerce traffic; the e-commerce market is expected to grow 2.8 times by 2021 to $125 billion (Rs 8.07 lakh crore at current exchange rate). So, the telecom sector, riding on its back, and others should clock Rs 6.6 lakh crore in revenue by 2020 from Rs 2.5 lakh crore in FY17.

This is serious news for the telecom operators. 

For instance, for the latest reported quarter, Bharti Airtel stated it faced a “cash burn of Rs 1,897 crore as compared to a positive cash flow of Rs 2,572 crore in the corresponding quarter (of) last year”. It pins the blame for this on government decisions such as a cut in interconnect charges (IUC). The “mobile market continues to experience value erosion and financial stress which is likely to increase further by the recent reduction in IUC rates from 14p to 6p”. Vodafone-Idea has a similar grouse.

Mritunjay Kapur, national head of markets and strategy at KPMG heading the telecom sector business for the firm, was not sanguine about the government projections. He said he was worried as the revenue model for 5G was not clear. 

He agreed that 2017 was the standout year for the sector, with a number of mergers and acquisitions. 

“The wherewithal to survive was diminishing for smaller telcos ever since RJio entered the telecom landscape. The exit of smaller telcos is good for industry structure in the long term but painful for the stakeholders including lenders,” said Tanu Sharma, of India Ratings and Research, in a note on the sector.

Lack of investment to seize the 4G ecosystem is a major concern for industry players now. It is this gap that has been exploited by RJio after entering the market in September last year

Mergers have been big, but even bigger is the way companies have finally acknowledged the role of data and consequently the importance of 4G spectrum to ferry it. 

Sector regulator the Telecom Regulatory Authority of India nudged them when it more than halved the interconnect charges for voice calls. Those charges will be nil by January 2020. 

It hurts older players while it will add at least 8 per cent to RJio’s consolidated earnings per share from FY18 to FY20, noted investment banking firm CLSA. It has spurred the incumbent operators to massively raise their capital investment. 

To counter the challenge, Bharti has raised its capex by 42 per cent year on year, moving aggressively to roll-out 4G services, again this year. It is offering cheapest smartphones to its customers to make them use data profusely. 

Telecom analyst Mahesh Uppal said, “RJio did not have any brand per se to attract customers. It played on prices and promise of more data.” 

The next year, with its promise of 5G, could be as huge as this one. 

Uppal doesn’t think so. “There isn’t that much of an unmet demand that 5G would satisfy. Till the companies invested in 4G, the underlying state of the network was a limitation. It doesn’t change much from here.” 

The government is way more optimistic: 5G makes possible the internet of things. This means people will be connected not only to internet utilities also but also billions of machines and appliances such as wearables, cars, homes, industrial equipment, and white goods. 

And, what of the 2G verdict in this environment? The Indian telecom landscape moved far ahead this year to bother. Its challenges are brand new to expect them and their consumers to bother about a spat over voice telephony that had allegedly cost the exchequer Rs 1.76 lakh crore of missed revenues.

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