Mission impossible? Blame it on Jio

When Reliance Communications (RCom) launched with its "Monsoon Offer" prices in 2002, mobile call rates -- and therefore customer bills, or the average revenue per user, a key metric in the telecommunications industry – fell drastically for the first time. Since then, India has ridden an expanding mobile telephony wave, with telecom companies hyper-competing with each other by offering ever lower call rates to gain hundreds of millions of customers.

With over a billion mobile phone connections, India is now the second biggest mobile telephony market by subscriber numbers. These subscribers enjoy the lowest call rates, and now even among the lowest data rates, in the world. Meanwhile, RCom, the company that started the rush, clearly trying to win with a predatory pricing strategy, is struggling under debt – close to Rs 50,000 crore – and will have shut down its 2G services by the end of November, with plans to continue its 3G and 4G services "as long as they remain profitable".

Anil Ambani's RCom, of course, is not the only telecom company reeling under debt. Airtel, the country's biggest telco, has a debt of over Rs 1 lakh crore; Vodafone's debt is at over Rs 80,000 crore and Tata Teleservices, which is merging its telecom business with Airtel, has over Rs 30,000 crore on its books.  

But there's no sight of an end to the hyper-competition by pricing in the sector, what with Anil's elder brother Mukesh Ambani's Reliance Jio launching an even more ambitious bid last year to blow the competition out of the water, this time with the lowest data rates in the world.    

Of course, predatory pricing, and the attendant reaction to it by competitors, is not the only reason why telecom companies have driven themselves into debt. There is the government's constant need to rake in trillions of rupees through spectrum sales. The collective debt of the telecom industry is around Rs 5 lakh crore currently and rising – while revenues are under Rs 2 lakh crore and falling. That is also about the amount telecom companies have spent to grab precious spectrum over successive auctions in just the last seven years.

Now, the Modi government is in a hurry to launch 5G services as it makes a bid to hit several birds with one stone – it wants to show India at the forefront of the telecommunication revolution; it wants India to be able to participate in the international standards war over 5G; it wants to give a fillip to telecoms research and manufacturing in the country; it wants 5G to spur its Digital India, Make in India, Start-up India initiatives; and, of course, it wants to rake in the trillions of rupees that 5G spectrum auction would fetch.        

High-speed 5G needs spectrum within three key frequency ranges -- Sub-1 GHz, 1-6 GHz and above 6 GHz -- to deliver widespread coverage and support all use cases.

But the telecom companies are in no mood to shell out the huge sums of money that the government is salivating at the prospects of. Such is the fatigue over spectrum auctions that when the government put up a large chunk of the much-coveted 700 MHz band spectrum for sale in 2016, no one even made a bid for it. The government wanted to collect a cool Rs 4 lakh crore from it!

Now, telecom companies have made it known that they would be in no position to participate in any spectrum auction for 5G until at least 2019.  

If they did, their capital expenditure would shoot out of the roof at a time when all the telecom companies have collectively seen a decline of 25.49% in their revenues in the first quarter of FY2018 over the same period last year. The adjusted gross revenues for India's telecom sector declined to Rs 39,778 crore for the quarter ended June 2017, down from Rs 53,383 crore in the corresponding quarter last year. Talk about the Jio effect.

No wonder RCom chairman Anil Ambani recently said, "Telecom is in the ICU. Paracetamol and aspirin won't work". Experts suggest that financials should be the priority for telcos for now, not rolling out 5G. "Clearly, the road ahead for the sector needs to focus on financial metrics, especially around spectrum costs, pricing to customers, newer service offerings and reducing delivery costs, etc., to enhance profitability and suitable dialogue between government and other stakeholders are need of the hour to ensure sustainable and profitable growth of the sector," says Raja Lahiri, Partner, Grant Thornton India LLP.

State Bank of India's former chairperson Arundhati Bhattacharya, too, warned in September that telecom was the "next distress sector". Although of the total debt overhang of about Rs 5 lakh crore on the industry, only Rs 2,335 crore has been declared as NPA so far, there is clearly much more money set to go in that direction.

Not surprisingly, then, banks are not too keen on seeing 5G spectrum go on auction either. They are in no mood to lend to the telcos. Caution, thus, has become its byword. "We will examine (any proposal for loans to buy 5G spectrum) solely on merits, based on our belief that the sector has the potential to offer viable business opportunities provided risk allocation amongst stakeholders is done more judiciously," said Sunil Srivastava - Deputy Managing Director (Corporate Accounts Group), SBI.

Where that leaves the government's ambition to roll out 5G by 2020 is anybody's guess.