Bigger is better

There is little to surprise in the ongoing consolidation moves in the telecom industry, the latest of which is the proposed merger of Vodafone with Idea. Increasing pressure on profitability, high cost of spectrum, cut-throat competition and lax regulation have combined to force telecom operators to look inwards in order to survive. Yet, the consolidation wave augurs well for an industry which until recently had as many as 12 operators jostling for a share of the world’s second largest telecommunications market. Over the past few months, at least four M&A deals have been announced in the sector, which will eventually reduce the number of players to five. These mergers and the exit of some players seem to be counter-intuitive when you consider that the telecom market is on the cusp of a huge data revolution. The average data consumption per user has more than doubled to 753 MB/month from 338 MB/month two years ago. Between FY13 and FY16, mobile banking transaction volume and value increased at a CAGR of 90 per cent and 306 per cent, respectively, and about 400 million new users are expected to take data connections in the next two years alone.

While consolidation will bring regulatory challenges with it, the hard truth is that this growth may not translate into any meaningful increase in revenue for telecom operators due to tariff wars. Alongside, the cost of acquiring spectrum, the basic raw material needed to provide data services, has been going up. Since 2010, the industry has bid ₹3.5 lakh crore to buy spectrum, which is much higher than its annual revenue of ₹2.6 lakh crore. The options for telecom companies are clear: either they dig deep into their pockets to survive or exit from the business.

The recent move by the telecom department to merge BSNL and MTNL has to be seen in this context. The once dominant public sector companies have been reduced to marginal players thanks to years of political interference and typical bureaucratic style of functioning. Even as the private players grew rapidly, the two PSUs languished without clear direction from the Government. The Centre’s view was never clear as to whether it considered the two companies as systemically important players. The proposal to find synergies between the two was first mooted in 2002 but put on the back-burner due to huge bottlenecks, especially in dealing with the employee unions and complexities around de-listing MTNL. Given that these issues continue to exist it’s not clear how the Centre will push the merger through now. The Centre has to recognise that the time of reckoning is at hand for BSNL and MTNL. The options are clear: if these companies are considered important, then the Centre has to unshackle their managements and provide the resources, financial and otherwise, to compete with the private players. Else it should sell them off when it can still get a good price. Either way, the ambiguity has to end.