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Government should not pick winners and losers, says COAI director general Rajan Mathews

Rajan Mathews told Praveena Sharma that he hoped players realise that bleeding one another would bleed the sector.

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Rajan Mathews
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For long, the three big players in the telecom industry – Bharti Airtel, Vodafone and Idea – who are also the early players and have an unshakable might in the voice segment, ruled the roost. That's being threatened for the first time by Mukesh Ambani, who is known to mercilessly crush competition and is launching his 4G long-term evolution (LTE) data and voice services at rock-bottom prices.

Rajan Mathews, director general of Cellular Operators Association of India (COAI), who spoke on behalf of incumbent telcos, told Praveena Sharma that he hoped players realise that bleeding one another would bleed the sector.

Q. Are Reliance Jio's tariff plans and offers on expected lines or were the incumbent telecom operators taken aback?

A. I don't think that level of comprehensiveness was anticipated. We thought he (Reliance Industries Limited chairman Mukesh Ambani) would re-price data and maybe offer some freebies and other such things but this package is compelling. At the same time, voice is an already non-event in the same way as no international call charges. Nobody pays for long distance calls now.

Q. Do you think incumbents will be able to counter what RJio has offered?

A. Ambani has highlighted five points. First, differentiated network, which is crucial for the quality of network, coverage to limit call drops and give fourth-generation (4G) speed. Second, ease-of-doing-business. Third was about affordability with bundled offers and free voice. Fourth had to do with bundled app package. Finally, fifth was about devices and handsets. Let's take them one by one. Handsets are not particularly a problem. It's an issue for him because his company has 4G and 2300 megahertz (MH) spectrum so they have to get phones that work in that band. It's not a major issue for other players. Network issue is a call to the incumbents to start accelerating migration from second generation (2G) to third generation (3G) to 4G since voice is not going to command a premium anymore. But there are 2G customers on the incumbent networks, who cannot be turned off suddenly. They cannot disenfranchise 300-400 million customers.

That's going to be an area that incumbents can meet but some of them will have immediate challenges because not everybody has 4G spectrum pan-India like RIL does. Airtel comes closest to it. So, overall it is going to force incumbents to make investments in upgrades in their network to start competing (with Rel Jio). Ease-of-doing-business is not so much of a differentiator because most operators have already put in place optimisation of e-KYC. Affordability is going to be the biggest area of focus for incumbents. They will have to recalibrate the whole offering to position themselves in terms of what RIL is offering. And, there is nothing that RIL has which cannot be duplicated, with some cost, over time. The question would be - is your cost structure better or worse off than RIL? Clearly, smaller operators are going to find themselves at a disadvantage because of the amount of money that will be required to be spent on upgrading network, customer care system and billing system.

Q. Will we see some of the small operators folding up their business?

A. That is already happening. Videocon is out. MTS is sold out to Reliance Communication (RCom). Aircel is merging with RCom. So these three operators are out. Telenor is a regional player. They will make some arrangement to compete on a pan-India basis with these price points on 4G network when they have limited 4G spectrum. Bundling of apps package is not so compelling. So, clearly, the issue is going to be network quality and pricing of the product. These two are going to be the principal drivers of the response that RJio is going to have on the industry. It's been for some years that RJio has been preparing to launch its nation-wide 4G services. Then why are incumbents caught unawares? Were they in so comfortable a space that it made them too complacent for foreseeing this kind of aggression from the new entrant? I don't think so. First of all, you (incumbents) had regular business to run, RJio did not.

All RJio had to focus on is preparing for launch. These guys had to prepare to meet RJio's entry as well as run the present business when there were challenges on call drops and spectrum auction. To say that they were not expecting it is not true because why would they have paid money for additional spectrum? All this meant they were getting ready and positioning themselves. Part of the issue is that when Reliance starts, it begins with a blank slate while incumbents couldn't have ignored existing customers, of whom 80%-90% have feature phones.

So, tomorrow if they say they are going to offer services that are available only on smartphones, 80% of their base will cry murder. Clearly, they have a migration challenge on their hand, you can't ignore them (existing customers) you have to carry them into the new world. RIL does not have to carry a single customer. Could the incumbents have gone faster? Perhaps yes, but they were burdened with the substantial amount of costs due to spectrum acquisition.

Q. How much will the incumbents have to spend to counter the threat from RJio?

A. The core part of the incumbents' network has already been upgraded, where RJio and incumbents will have the same cost issues. The issue is in the radio access part of the network where legacy stuff has to be changed in incumbents' network. Most of the Rs 8-9 lakh crore being spent is principally on putting up these towers.

Q. COAI had raised the issue of Telecom Regulatory Authority of India (Trai) acting in the interest of new entrants and the nature of RJio's testing to the highest authority in the government. But there is still no clarity on what constitutes testing and what is commercial launch. Have you lost the battle there?

A. Battles wax and wane. The battle of Mahabharata was not fought in a day. The point of contention is when you give away free stuff, under what category do you do that? There may be a period of time that you may be allowed to do promotion. The question is when is giving away a service free allowed, especially for a service which has a cost associated with it? By the way, we did not ask the PMO (Prime Minister's Office) to get involved in this. We just informed it because after the 2G scam, the PMO had said it didn't know. It had said if it had known it would have done something.

Incumbent operators, even before RIL went into service, gave it interconnect but because of its continuing freebies, the volume of traffic from its network to the incumbent's network started increasing and congested on that interface. That's when they refused any more interconnect. RIL complained and incumbents said we would be happy to provide additional capacity but tell us under what guise are you doing the promos. We said it's a commercial offer. Promotion for a month because you are testing is fine. All of us have gone through test periods but none of us took six to nine months or gave freebies to 2-3 million users. The scope and scale that RIL was doing with freebies under the umbrella of testing was the crux of the issue. This is where the whole matter resides at the moment.

Q. Ambani made an appeal at RIL's annual general meeting (AGM) for co-operation on the issue, will the incumbents comply?

A. We are telling him to tell us what the rules are, tell us is this commercial launch or trial? Otherwise, what is the difference between September 5 (date on which free service offer to all starts) and December 31 (when it ends)? We are saying bring clarity to this central issue. That way, you will be an excellent competitor and the incumbents will know how to respond to your request. You are entitled to additional capacity when you are in full commercial service. We are saying get to the point where the law is very clear.

Q. So, it will continue to December 31?

A. RIL could go to court and say force these guys to give it (interconnection points) to us. RIL is known to be very pushy.


Q. Have the COAI members reconciled to the fact that they will have to work with a bully?

A. (RIL is) no more pushy than Tata or Telenor or Etisalat. But there is a perception that Ambani is very close to some of the heads of the current government. That is why we are saying the government should not be in a position to pick winners and losers. Let the marketplace do that. That's what Mr Ambani said (at the AGM). He said good and competitive marketplace will drive innovation and customer satisfaction. As for us, we always shy away from trying to litigate in any matter. Either the market will sort the thing out or hopefully discussion between both parties can sort it. The court is only the last resort when, for whatever reason, things break so disastrously that courts will have to step in.

Q. How will all this impact the spectrum auction next month?

A. They (telecom companies) will not bid any more aggressively (than they would have done) because Airtel, through its trading and sharing, has got enough spectrum to compete with RIL for the next two years or more. Idea and Vodafone might need a few fill-in areas where they don't have 3G and 4G pan-India.

Q. Do you see the intense price war that will ensue to deteriorate the health of an already highly-leveraged industry?

A. The health of the industry has been impacted for the last 2-3 years. Tata came in with Docomo and then other new operators came and started cutting prices. None of it worked. Docomo lost tonnes of money. Of the five operators that came in, the only one left is Tata. What does that imply? It implies that these folks have found that financially they were getting less and less viable. So, consolidation happened because of spectrum trading and sharing. Now, after consolidation, you have 4+1 (state-owned BSNL and MTNL) players. If you look at private players, you have RIL, RCom, MTS and Aircel as one and Airtel, Vodafone and Idea. Now, if this continues even these four players are going to be under extreme pressure. They are all deep-pocketed at this time.

Vodafone is not going anywhere anytime soon, Bharti certainly is not nor is Idea. So yes, there will be some pain going forward as they all recalibrate but we are hoping just like it happened for voice, that people, especially because of the maturity of the players, will recognise that if they continue to bleed one another it is going to bleed everybody. Gone are the days when somebody was so big and powerful that they could squash everybody else.

The question is will these folks understand that it is not in their interest to beat one another in their head because at the end of the Mahabharata both sides lost. We expect initial skirmish because when a new entrant comes they want a certain part of the market and want to make an impact especially after having spent $20 billion. They also have to show their investors that they have the ability to ramp up. All telecom stocks on the exchanges took a hit, including Reliance, after RIL's AGM. So, what is the market signalling? It is signalling that we don't think these a sustainable price points.

Q. Are these price points sustainable in the long run?

A. See, if one gets stuck on sugar he wouldn't care what its price is. A person, who earns Rs 100 a day or even less, is willing to spend 30%-50% of that on calls because he finds it so essential to his livelihood. Tomorrow, everything (gadgets and devices) will be talking to your handset and data service will become an essential commodity. Then, you will be willing to pay whatever the price. Today, a customer gives me Rs 180 on an average. If that moves up to close to Rs 500 - that is the level of price point Reliance hopes you to get to – then that's not bad for the industry. That's what we are hoping will happen. So, in spite of the present pain, in the long term, we are hoping that the phenomenon that occurred in the car market to kick in the telecom market and people will spend more because the user experience is great. That's why we want Reliance to succeed.

Q. What does Prime Minister Narendra Modi's vision of Digital India mean for the sector and what's in it for the telcos?

A. There is always a national sovereign imperative that cannot be ignored. Because the government has given us license to fulfil social obligation as well, we don't ignore social responsibility but commercial reality drives us. Pure charity is not sustainable. When the government says connect the 1.2 billion Indians, it believes, and it is true, that a 10% increase in teledensity leads to 1.4%-1.5% increase in GDP. That's an established fact. So, we see that pull factor.

The only issue is that between the vision and reality, the problem continues to be that the industry is taxed so heavily that the resources available to fulfil the dream gets taken away. Almost 30% of the income we earn goes back to the government. We are saying that is not sustainable. If you want us to meet these socially desirable outcomes then don't tax us as much. It's like an angel industry being taxed like the devil industry such as cigarettes and alcohol. We fully buy into the national policy agenda. That's exactly what was done in voice. Now, it's on the data side. We are all, including Reliance, very keen to realise that.

Q. How responsive has the government been to the tax rationalisation demand?

A. They would like to be responsive but the problem is current account deficit. You can't blow that.

Q. Going by the past history, Ambani is known to be ruthless when it comes to competition, how prepared are incumbents to fight that off?

A. Hopefully, we have a regulatory mechanism, a competition commission, Trai, courts, and a well-heeled competition that knows how to respond when these kinds of threats come up. In the past too, they (RIL) have tried to come through backdoors but they were not always successful. But whatever their way of doing business is, as long as they abide by the rules and regulations, we welcome them. Even Prime Minister is keen that there is transparency and there is no corruption or scam.

 

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