Close down, pay premium or lose everything: three point telecom strategy in India

Telecom companies in India have three options---close down shutters, pay premiums or lose everything. Loop Mobile had chosen the first option. The foreign companies that have exited business after Supreme Court cancelled licences in 2012.

The rest of the companies which have chosen to carry on have chosen the second option. As much of the spectrum that is being sold is reclaimed, these companies have to compete with each other just to stay in business. The irony of this auction is what has driven all others to these three narrow roads—uncertainty.

Some of the companies which have taken part in this very auction are now currently fighting a legal battle in the Supreme Court against various clauses in their licences. One of them is the possibility of companies to renew it, instead of engaging in a bidding war. 

The bidding war is scarier for telecom companies as there is a new entrant -- Reliance Jio -- and hence the auction. A telecom operator might be ready to pay any price to keep its spectrum, but might get hammered down in the intricately designed auction.

Large investments in technology and operations and longer wait for profits are common in the sector across the world. What isn’t common is the still-emerging regulation in the area of this matured industry in India.

The Department of Telecommunications (DoT) does not have a loophole-free process in place for a company to sell-out to another. This is how the acquisition of bounty Mumbai business of Loop Mobile vanished into thick spectrum fog as the buyout deal with Airtel did not go through. Nor is it clear about companies surrendering excess spectrum like Idea which had been entangled in with the department, after its merger with its Spice Telecom, in 2008.

That makes telecom operators the only such companies to run a business with no assets or spectrum which can be bought with no riders.

Without spectrum sharing or spectrum trading, the asset in itself makes no sense if there is no business that goes with it. While there is ownership over the investments made on technology and infrastructure to keep the business running, it would become moot if the standard base is taken away.

The customers and the brand too can go away without the base. While operators all over the world are playing catch-up with ever changing technology, Indian operators are playing catch-up buying back and keeping their spectrum or ensuring what they call ‘business continuity’. That is poor performance for a country with operators which boasted an LTE-ready infrastructure taking India on the 4G highway.

The only thing sure in this business is the regular debts that one would run up if they stayed here long enough (Companies like MTS (Sistema) have received Russian Federation aid a few years back to keep the business going). If investments keep up the pace, some of the banks might hit sectoral limits of lending like they did, with the power sector a few years back. If it comes to it, telecom companies have no assets to pledge either.  

The paradox of the legal side of the latest auction is that if the operators lose the Supreme Court case against DoT, they will pay hefty premiums which they themselves bid for. If they win, they can renew their spectrum for another ten years, at market prices.

If the last few experiences are to go by, the latest auction price sets the market price. They will have to pay up anyway, now legal costs added. The one way to survival in the sector is keeping purse strings loose.

Even the elastic can be stretched only upto a point after which it is sure to break. 

Katya B Naidu has been working as a business journalist for the last nine years, and has covered beats across pharma, healthcare, telecom, technology, power, infrastructure, shipping and commodities.