Indian telecom sector: When has a duopoly been good?     

Whether Vodafone Idea Ltd will survive the latest blow it has been dealt or will be the next company to bow out of the Indian telecom market is still not certain

Vodafone and Idea (Photo courtesy: social media)
Vodafone and Idea (Photo courtesy: social media)
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Prosenjit Datta

Whether Voda Idea Ltd will survive the latest blow it has been dealt or will be the next company to bow out of the Indian telecom market is still not certain. The company does not have the cash to fork out the Rs 50,000 crore plus of adjusted gross revenues (AGR) it immediately needs to pay after the Supreme Court judgment. Unless that is, its two promoters – the Vodafone group and the Aditya Birla group – decide to put in fresh money, something which neither seem inclined to do.

Voda Idea may still survive but if it closes shop, it will only be only the latest casualty in the long list of investors who put in billions into the Indian telecom market but exited after racking up enormous losses. The list includes Telenor, Sistema, Docomo and Maxis. Many Indian promoters including the Tata group, the AV Birla group, Anil Ambani and sundry other players have not had much luck either. Sunil Bharti Mittal who built a telecom empire from scratch has started losing money on his domestic telecom operations. Perhaps only Mukesh Ambani’s Reliance Jio can be considered a winner but even it has spent money freely and piled up debt to reach this point.

So how did a promising sector end up in this sort of a mess? The blame can be equally apportioned among clueless and self-serving policy makers, a righteous Supreme Court, regulators who kept changing rules, and businessmen who got too greedy.

Let’s take the government’s role first. The story began in 1994 when it decided to give a set of cellular licences to private companies after charging steep licence and spectrum fees. Of course, those fees did not deter businessmen, some of whom didn’t even have money to make the initial upfront payments, but that is another story. So, for the next five years, you had mobile phones as an instrument that could only be afforded by the very rich – it cost Rs 16 per minute to make a call... and an equal amount to receive it.

In 1999, someone in the then government saw the light and proposed a revenue sharing model. This would make it easier for companies and would also help the government. The AGR model was born. The other policy decision was to increase the competition in telecom, which in turn would help lower prices and make telecom services more accessible and deepen penetration in the country.

For some time, the new policy seemed to be working perfectly as it was designed. There were of course hiccups – and new players would come in while others would go out. But even then, the government had already got into a dispute with companies as to what exactly constituted AGR. The telecom firms wanted it to mean only telecom service revenues. The government wanted it to be calculated on the entire pie – including things like asset sales as well treasury operations. This dispute would drag on for years, first going one way and then another, before it ended up in the Supreme Court, and the final judgment in favour of the government came in.


Meanwhile, telecom companies were making plenty of money and investors were getting great returns. Some businessmen were making a fortune by grabbing a licence for a couple of circles and then selling it off to someone with all India ambitions.

But there was also a technology confusion taking place in the background. Unlike most other countries which plumped for either GSM or CDMA but not both, policy makers in India in their infinite wisdom allowed both. So, Tata and Reliance Com (a pet project of Mukesh Ambani in the then undivided Reliance empire) got into CDMA while Bharti and others chose GSM. Finally, GSM would become the standard, and CDMA players lost a big chunk of their investments.

Licensing rules never kept up with technology advances, and therefore voice and data would be treated differently till 4G came in, when the regulations changed again. This would lead to investments in specific areas, which would need to be upgraded as technology or policies changed.

But because the telecom sector was booming, everyone got a bit greedy. An early player, Hutchison had sold its India operations to Vodafone which had come in late. The deal was structured in a manner that was tax-efficient as far as the companies were concerned (Hutchison’s India operations were owned by an entity in a low-tax country and Vodafone picked up that entity getting control of India operations, but without either company becoming liable for Indian capital gains taxes).

The tax department first tried to get Hutchison to cough up the capital gains tax it had calculated, and when it couldn’t, it chose to make the demand from Vodafone. Vodafone appealed and won in the SC after years of litigation. But Pranab Mukherjee, the then FM, would have none of this and promptly amended the tax laws with retrospective effect.

Meanwhile, in UPA2, the telecom ministry was headed by A Raja who decided that more players and more licences would mean even more money for the government. So, he opened the floodgates, giving new licences without especially bothering about the process. Each circle ended up with 16 players, some of whom had obviously gamed the system. Since Indian telecom was booming, ambitious businessmen jumped in to pick the new licences. Never mind they were construction barons and other players who had no experience in telecom. They picked up the licences and promptly sold a part to foreign partners who wanted a pie of the Indian telecom market. This saw players like Telenor, Sistema and Docomo come in.

An ambitious CAG, Vinod Rai, decided to make a name by pointing out how the government was losing money by indiscriminate handing out of licences. He calculated an absurd amount as notional loss. The SC got into the act, and it decided to cancel all the licences. Suddenly, foreign investors and Indian businessmen found that despite the licences being handed out by the Union Telecom Ministry, they had no sanctity. If they needed to stay back in the market, they would have to pay even more to buy spectrum in auctions. Bankers who had lent money in good faith based on valid licences were also caught short. Meanwhile, technology was also becoming better – and 2G was giving way to 3G and would soon give way to 4G which meant more investments and therefore more debt to stay in the game.


At this time, Mukesh Ambani got into the act once again. In the division of the Reliance empire following his father’s demise, younger brother Anil Ambani had walked away with Reliance’s telecom operations. Now Mukesh Ambani decided to come roaring back into the market with Jio, which picked up all India 4G spectrum, and then rolled out an almost free service designed to bring all other players to their knees.

That happened and one by one every other player exited or closed shop. Finally, only four were left – Jio, Airtel, Vodafone and Idea. As Vodafone and Idea were both bleeding, they combined in the hope of better operational efficiencies and market share. But in telecom, big is not always better. For Voda Idea, it has meant bigger debt pile and bigger losses.

The SC’s judgment that AGR would mean all revenues, and not merely telecom service revenues is the final blow. At the moment the telecom market seems headed back for a duopoly if Voda Idea closes shop.

A two or three player market has never been good for anyone – not the government nor consumers. And this game is definitely going to end badly.

(The writer is former editor of Business Today and Business World magazines)

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