Spectrum auction fallout: M&As, virtual telcos, and a white elephant called BSNL

India’s most successful spectrum auction – which ended roughly two weeks ago – is likely to have a major impact on the telecom sector. And we don’t mean just tariffs - which are bound to rise anyway. The success of the auction will make the industry both expand and shrink. The big players may bet bigger, but the small will have to rethink their business models. Riches may be found in niches, not necessarily size. A look at the crystal ball gives us a glimpse of what could happen in the foreseeable future. [caption id=“attachment_2142007” align=“alignleft” width=“380”]  Thinkstock images[/caption] #1: The industry is likely to have a maximum of five-six big players with 90 percent market share between them. #2: Once spectrum sharing is enabled through a sensible policy framework, “virtual” telecom operators can enter the picture to offer higher-value (or area-specific) specialised services. #3: The public sector telecom industry (BSNL and MTNL) will become a white elephant like Air India - unless privatised quickly or broken up. #4: M&As can be expected to gather pace once the rules get friendlier. In the interest of a healthy industry, the government should make M&A easier, and spectrum tradeable and assignable to banks. Future auctions of spectrum should also be done by lenders. #5: As data becomes a crucial driver of revenues, voice calls may at some point go cheap - if not free, especially in off-peak times. Even though the impact of the auction in terms of immediate tariff hikes is variously estimated between 2 paise per minute and seven paise, after the initial impact is absorbed, call rates will start dropping over the remaining life of a telecom licence. Here’s why all this is visible in the crystal ball. The government earned nearly Rs 1,10,000 crore, which is well above the previous record of Rs 1,06,000 crore registered in 2010 for the 3G and broadband auctions which formed the basis for former CAG Vinod Rai’s Rs 1,76,000 crore loss calculation. But what is interesting about the latest auction is not the high revenue figure, but the narrow base it came from. Some 77 percent of the bids came from just the three top players – Bharti Airtel, Vodafone and Idea Cellular. Add one more potential big player – Mukesh Ambani’s Reliance Jio – and the total earnings from four players will be over 86 percent of the revenues. When just four players are willing to pay so much for spectrum, it means two things: one, only the strongest will survive at the broad end of the market, and, two, the business will see new kinds of competitors as the weaker players bow out of the game sooner or later. During the auction, Reliance Communications (RCom) lost the bidding in some of its circles, while Idea lost in some circles, while making up for it in other bands. Airtel and Vodafone appear to have retained most of the core spectrum in the prized 900 Mhz band, which is good for both voice and data. Tata Teleservices and Aircel, owned by Malaysia’s Maxis Group, won a few circles – but they are not major players in terms of market share even now. Going forward, we are likely to see sales of parts, or even the whole, of the businesses of the weaker players. If they don’t sell wholesale, they may be reduced to niche players (like doing only data services or servicing only some circles). The auction demonstrated that the Big Three – Sunil Mittal-owned Airtel, MNC-owned Vodafone, and Birla-owned Idea – will consolidate their market shares, and a fourth major player could emerge in cash-rich Reliance Jio. However, it is unlikely that RCom (run by Anil Ambani), Tata Teleservices and Aircel will be able to remain full-service telecom players with a national footprint indefinitely. They will have to sell parts of the business – or merge with the stronger players. Big ticket telecom is only for deep-pocketed, well-capitalised players. At some point, even the Tatas will have have to take a double or quits call: without substantially increasing their investments, they cannot gain market share. Their Japanese partner DoCoMo has already called its quits. Since most of the money must have come from the banks, which themselves are nursing a huge bad loan portfolio, the chances are they will force the weaker players to sell even if the promoters do not want to. The banking business itself is about to change as government is unwilling to pump endless amounts of capital, and bank managements will start forcing promoters to pay up or get out. However, the high prices paid at the auction will allow the entry of new kinds of players – for example, pure data carriers or virtual telecom companies. Companies like Russia’s Sistema, which operates the MTS brand name, are likely to focus on data, as voice call prices become low or unremunerative in the age of Skype and the entry of big players like Reliance Jio, who may offer free or cheap calls to gain market share. The big players who have already bought huge amounts of spectrum will have to try and make money by sharing it for a fee. This will allow telecom companies to lease spectrum from those who have spectrum and serve their own customers. But before this happens, the government and the Telecom Regulatory Authority of India will have to evolve guidelines for spectrum sharing. If the rules are flexible, ‘virtual’ telecom operators – those who have customers but own no spectrum - will mushroom. They will entice customers by offering specialised services. Large companies may run their own services by leasing lines. The latest auction will change the industry forever. The biggest impact will be consolidation. Three years from now, the industry may be dominated by four-six big players – Airtel, Vodafone, Idea, and Jio – apart from the loss-making government-owned BSNL-MTNL duo. The rest will be small, niche players. The government should privatise these white elephants while there is still time. Or BSNL will become the next Air India. (Disclosure: Firstpost is published by Network18, which is owned by Reliance Group, which plans to launch telecom services later this year).