Mood coloured by near-term uncertainty

Hemant Maganlal Joshi, Technology, Media and Telecom Leader, Deloitte Haskins & Sells, feels that despite the near-term sluggish outlook for the telecom industry, innovation will help it come out of the woods.

Is the Department of Telecom´s decision to allow telecom carriers to mortgage spectrum as collateral to raise funds from banks and other financial institutions enough to provide an effective cushion to the debt-laden sector?
The cumulative debt of telcos is over `3,50,000 crore. Servicing both the principal amount and interest is a huge burden on their profitability and cash flows. When you are already stretched, allowing you to mortgage and borrow more doesn´t help. What has helped is the facility for paying in instalments for spectrum. Looking at the near-term, staring at a highly competitive pricing scenario, the outlook for telcos is very dull. You saw that in the last spectrum auction.

During the recently concluded airwaves auction, the government was unable to sell any of the lucrative 700 MHz frequency.

Do you think that the industry apprehensions over its exorbitant pricing and lack of ready-to-use infrastructure have been vindicated?
The results of the auction perhaps reflect the mood of the industry, which is sort of coloured by the near-term uncertainty due to competitive pricing and falling average revenue per user (ARPU). The near-term outlook for the sector is not very exciting. Secondly, though the 700 MHz is supposed to be a very efficient band for data and helps in optimising capex, nobody touched it for the simple reason that there is an overhang of debt and uncertainty, which is impacting telcos´ ability to think long-term.

Reliance Jio´s entry strategy of offering a lifetime of free calling is expected to hurt the operational cash flows of the Indian telecom sector in the near future. The debt burden of leading telecom players will go up with the increase in spectrum and non-spectrum debt capex. Your view?
There is a paradigm shift which has happened in the industry because of the ¨free voice for life¨ offer. Having said that, I think one must look at three things. Firstly, all players have access to the same technology. To the extent of access to and deployment of technology, it´s a level playing field. Secondly, the Indian telecom industry has been very innovative. For example, the market leader was the first one to innovate the whole concept of ´minutes factory´. That helped it to scale up rapidly. It outsourced the network and IT management while keeping customer acquisition and servicing as its core business. Then another big innovation that happened in India was in telecom towers. The telcos came together to put up towers so as to optimise their capex. There is no reason to believe that the Indian telecom industry won´t continue to be innovative in the future. Thirdly, two things will matter for everyone: customer experience and economics.

With the conclusion of the spectrum auction, do you see revenues improving again for the telecom gear firms?
In the last few years, lakhs of crores have gone into funding spectrum auctions. As it was a do or die situation, telcos had to buy spectrum in order to remain in business. This time it was more of top-off and balancing spectrum that was bought. Then there was the issue of the Supreme Court cancelling licences. In the last few years, lakhs of crores have gone to the government through auctions. Therefore, the cash flow available with the industry has reduced significantly.

That has constrained its ability to deploy new technologies and increase footprint. This will definitely impact the demand for equipment in the near-term.

So, to what extent has the ongoing consolidation impacted players in the telecom gear segment?
Consolidation will not impact them directly because a pent-up demand will still be there for equipment. Whether company ´A´ buys it or company ´B´ buys it, or an amalgam of both buy it, I don´t think that really has an impact. But what does impact is the near-term outlook, stress on cash flows and reduction in profitability. The other thing to which we aren´t paying attention is the whole evolution of software-defined networks that is creating huge efficiencies and throughput. Therefore, the demand for hardware is constrained. For instance, in the US alone the capex on hardware has gone down significantly because of the software-defined network development.

The recently concluded 2016 spectrum auction witnessed the country´s largest telcos committing investment in the 2,500 MHz band to provide high-quality 4G services. However, experts such as you have said that this could slow down tower tenancy growth in the near term….
Tower tenancy is a function of footprint and deployment of newer technologies. If you see 2G, we are covered; 3G took off a bit late, but it´s sort of getting there. With the deployment of 4G, you will need an increasing number of micro-cell sites. But these micro-cell sites won´t work by themselves. You will also need a very strong fibre backhaul to support high bandwidth and speed. Therefore, it´s a multi-function and multi-variable dynamic equation.

Following Reliance Jio´s entry in early September, telecom carriers such as Bharti Airtel, Vodafone India and Idea Cellular have reportedly renegotiated rental agreements with tower companies such as Indus Towers and Bharti Infratel. To what extent is this likely to affect their bottom-line?
We don´t comment on specifics but look at it from the industry perspective. When the industry is severely constrained on the profitability and cash flow front, an ecosystem player cannot have it otherwise. Tower companies are part of the ecosystem. If the industry is impacted, they will be impacted.

In your latest report, Broadband Infrastructure for Transforming India , you have pointed out that China earmarks 3 per cent of its GDP for the expansion of broadband infrastructure. Would you recommend a similar allocation by the Indian government?
I have raised three issues. First, what is the definition of broadband? If you are a $2.9 trillion economy and are aspiring to be a knowledge-based economy that empowers citizens and brings inclusiveness, then 512 kpbs is appropriate. Look at the world. The developed world has a minimum definition of 20 mbps and is looking at 50 and 100 mbps in a few years. Therefore, depending on your aspiration, you must set up an appropriate definition because that will determine technology choices and costs. And that will help to define an architecture for the play of various technologies. Therefore, it´s very important to get the definition right. Maybe you can define rural and urban India differently, but then again it will lead to some incremental things. But then there is definitely a need to define what is broadband. That´s very critical. Secondly, where is the money going to come from? Allocations will have to be made by Central, state and local governments as well as the private sector. The private sector will participate if there is an enabling policy framework, ensuring predictability and stability. We need a very clear overhaul of policy, which will enable ecosystem players to both contribute investment and benefit from the policy.

– Manish Pant