The telecom shakeout

Cellular phones on display at a shop in Chennai. - SHAJU JOHN

A major restructuring of the telecom industry, which looks inevitable, may prove to be good for competition and the consumer but is unlikely to make the objective of universal service provision a reality.

WILL the shift to a unified licence regime redress the mess that conflicting objectives and contradictory policy shifts have made of India's telecom policy? Not if the Cellular Operators' Association of India (COAI) has its way, since it has already declared its intention of turning to the court to overturn the decision, which it claims has distorted the playing field.

Theoretically, unification implies that the holder of a licence to provide a particular form of telecom service can, subject to certain conditions regarding payment of penalties and special entry fees, offer the full range of fixed, mobile and value-added services. However, for the moment, unification involves the fixed, Wireless-in-local-Loop (WiLL) and cellular areas, though the claim is that in subsequent stages it would cover national and international long distance and other value added services (such as Internet provision) as well.

In fact, given the current state of roll-out of telecom services, the immediate beneficiaries of the government's decision are Reliance Infocomm, with a basic services licence in 17 telecom circles, and Tata Teleservices. Reliance is expected to pay a total of Rs.1,581 crores (including an entry fee of Rs.1,096 crores and a penalty of Rs.485 crores), while the Tatas will have to put out Rs.545 crores in order to convert their basic licences to unified licences. Cellular operators, on the other hand, do not have to pay any entry fees for this migration.

There are three grounds, not always explicit, on which the COAI opposes the decision. To start with, in its view, the decision endorses the violation of licence conditions by certain basic service licensees, who won themselves the right to provide "limited mobility" services and used that right to stage a back-door entry into the cellular area. Second, even though this entry occurs after the migration from a licence fee to a revenue-sharing regime, the entry fee and penalties being imposed on players like Reliance Infocomm and Tata Teleservices to extend "limited mobility" into full cellular service provision is extremely low, providing them with a competitive advantage. And, third, the decision involves a mid-process retraction of an implicit promise by the government to limit competition in different telecom sectors in order to ensure the viability of relatively new private entrants.

The irritation expressed by the cellular operators is partly understandable. When the policy of promoting private entry into the telecom sector was initiated in the early 1990s, the telecom sector was segmented, for policy purposes, into fixed (basic) services, mobile services, national and international long distance telephony, and various value-added services such as Internet service provision. Rules and regulations that were initially framed and subsequently modified, related to the terms on which entry was permitted. Among those terms were of course the part (or `circle') of the country to which a licensee had access, the number of entrants that would be considered for each circle, the duration for which a licence would be granted and the framework to determine the fees that an operator would be charged for entering an area and the restrictions, if any, on the tariffs that consumers would be required to pay.

The first dilution of the segmentation principle occurred partly because of technological reasons and partly because the government wanted to make the best of what was a bad policy from the point of view "universal service provision" or providing population-wide and geographically widespread access to telephony. A telecom network consists of a network of exchanges and a set of "local loops" or connections between the switch in an exchange and the end-use equipment at the premises of the subscriber. Conventionally, all these connections are ensured by a combination of optical fibre and copper cables laid underground or overhead. Needless to say, the cost of the cables themselves and of laying them made network expansion expensive and even unviable in areas with low telephone and call densities.

These constraints notwithstanding, the earlier public sector monopolies did manage to move substantially towards universal service provision, even if that meant delaying the realisation of the objective of providing telephones on demand and of sacrificing some additional profit. Even when framing the rules for private entry, the government retained universal service provision as a goal and even laid down explicit targets as part of the licensing conditions. However, once the process of privatisation began it was clear that it would be too much to expect the private sector to be committed to the goal of universal service provision. And since public sector firms (awaiting privatisation) were expected to compete with new private operators, it would be unfair to expect them to stick to their past commitment to such provision.

To partly deal with these problems, the government decided to encourage technologies that reduced the cost of network expansion, especially in areas with low telephone and call densities, with the hope that this would help support the goal of universal service provision. The technology which came in handy here was that offering wireless connectivity in the local loop or WiLL. The switch in the exchange could be connected via cable to a central wireless access point which can then service a number of wireless connections within an area of, say, 25 sq. km. That was the range that was associated with the technology that was offered by Qualcomm Inc. of the United States to Indian Telephone Industries (ITI) and has been adopted by many providers in preference to a cheaper indigenous technology developed at the Indian Institute of Technology, Chennai which, however, had a smaller range.

Obviously, once WiLL technology is put in place, those connected through this means would be able to utilise their end-user equipment anywhere within the specified range relative to the access point. Since in addition, technological developments delivered portable end-user equipment, subscribers to the service could benefit from mobility within the area defined by the range. Thus permitting a basic provider to use WiLL technology amounted to allowing him to provide "limited mobility" as well. This is precisely what happened, through a recommendation of the Telecom Regulatory Authority of India (TRAI) and an end-2002 ruling by the Telecom Disputes Settlement and Apellate Tribunal (TDSAT). This forced the cellular operators to challenge the decision in the Supreme Court on the ground that WiLL was not just a technical extension of basic service provision, but a separate value-added service that overlapped with the service reserved for provision by cellular operators.

Technological developments had actually gone further. It was soon clear that a WiLL service provider could hand over a consumer to another access point within or outside a short-distance charging area (SDCA), allowing it to offer full-fledged cellular type services with national roaming. From a technological point of view "limited mobility" was a misnomer. In an audacious move, Reliance made a public offer of such services for a fee to its potential subscribers.

This encouraged the COAI to voice its opposition more strongly. However, in a second decision - necessitated by a Supreme Court direction to reconsider the matter keeping in mind the question of a level playing field - the TDSAT ruled that the Basic Telecom Operators who were offering limited mobility services should be allowed to continue doing so, subject to the conditions that: (i) a distinction must be maintained between "limited mobility" and cellular service provision, by ensuring that calls were not handed over when a subscriber moved out of the SDCA; and (ii) the playing field should be levelled by levying an additional entry fee on basic operators providing the value-added service.

Conceptually, the TDSAT was demanding a ban on something which was technologically feasible and worth exploiting from the point of view of the consumer. Seen in that light the subsequent decision to push for a unified licence for telephony that breaks down the technologically obsolete segmentation implicit in the policy of the government does make sense. The only issue was whether the disadvantage faced by the original cellular providers because of the higher entry fee paid by them is redressed.

In an effort to level the playing field the government has required basic operators wanting to offer cellular services to pay an amount equal to the difference between the licence fee paid by the fourth (and, thus far, the last) entrant into a particular circle and the fee paid to provide limited mobility services. Since a late entrant faced with established incumbents may not have been willing to pay a high licence fee and since the position of a basic operator in a circle is stronger than a later-entrant cellular service provider this may not have been the best compromise. This has angered the COAI and fuelled allegations that the basic operators, especially Reliance Infocomm with a presence in 17 circles, are being favoured.

While this may be true, sympathy for the cellular operators is waning given their own track record. Cellular operators have always exploited the fact that private entry did not mean state withdrawal or absence, but was to be accompanied by state protection (of private oligopoly, through restricted entry) and state regulation of the nature of services provided and levels of tariffs charged. Their strategy has been to win entry by making irrational bids that rendered the business unviable, protect their oligopolistic position by lobbying the state against permitting new entrants, and improve their viability by initially charging exorbitant tariffs and subsequently forcing the government to drop the licence fee regime and allow operators to migrate to a revenue-sharing principle. That is, profiteering based on government protection was at the core of their business plan.

Unfortunately for them, pressured from different sides and by circumstances, the government has over time not only permitted the original public sector units to serve as a third operator in each circle but provided for a fourth private operator as well. Now it has permitted basic providers to turn cellular operators. This has increased competition quite irreversibly, given the fact that the decision was backed by the TRAI, the TDSAT and the Group of Ministers on Telecom, before being approved by the cabinet. The cellular operators seem to have no option but that of resigning themselves to the new competitive environment, despite their threat of turning to the Supreme Court once again. A major restructuring of the industry is inevitable. This will possibly be good for competition and the consumer. But the objective of universal service provision is unlikely to be served.