Finance

Making sense of the telecom tariff rise

Vodafone Idea, however, has a lot to celebrate before dealing with these and other challenges.

On November 23, Airtel, one of India’s three private mobile operators, announced a nearly 25% hike in its retail prices. Vodafone Idea followed suit, and Reliance Jio has since announced a similar tariff hike.

What are the implications for consumers, operators and competition in the market? How will the government and the Trai view this step?

The tariff hike was imminent. Airtel and Vodafone have repeatedly claimed that current prices were commercially unsustainable. There were fears that operators’ poor finances would hurt bids in the forthcoming auction for the 5G spectrum, due next year. Till recently, the sector was Rs 3.85 trillion in debt, which is substantially more than its annual revenues. Companies had sought relief from the government as well as the Trai.

Vodafone Idea, facing a combined liability of roughly Rs 1.8 trillion, is perhaps the happiest about the Airtel move. The company is struggling with a lower ARPU (average revenue per user) than its private competitors and a falling market share. Raising its tariffs unilaterally could have risked losing subscribers to competitors.

Jio could, in theory, have thwarted the move to raise prices. It is financially better placed and, arguably, able to sustain lower prices for longer. If it had held out, its competitors would be forced to match those prices to hold on to their subscribers, as had happened when Jio entered the market five years ago.

Consumers will resent that all private players are raising prices, as the affordability of mobile services is still a concern for many. Companies would hope that higher prices will not hurt subscriptions or usage. With the means to buy smartphones, most active internet users can probably absorb the extra price burden.

But India’s roughly 400 million 2G subscribers are arguably more price-sensitive, and 2G still counts for significant revenues of Airtel, Vodafone Idea and BSNL (a recent Ericsson report suggests 2G in South Asia could continue till 2030). These subscribers will be doubly disadvantaged if increased revenues from the price rise are not, at least partly, used to upgrade their measly data services.

Ironically, the government might welcome the tariff hike. It had faced pressure to ease the burden on private companies, especially the financially precarious Vodafone Idea. But the government faced two unenviable risks. One, Vodafone Idea’s exit would hurt investor confidence, besides further reducing competition in the telecom market. Two, the perception that the government was bailing out a private telecom company when public companies BSNL and MTNL were struggling.

The pandemic reform package it offered to the telecom industry reflected these two concerns. It allowed a moratorium on dues to help operators with their poor cash flow but did not reduce their liabilities. The communications minister took pains to point out that his package would not impact the government’s revenues. He would be pleased that companies are augmenting theirs through tariff hike.

I believe the Trai would be relieved rather than concerned. Mobile operators, claiming that rates were below cost, wanted the Trai to set price floors, i.e. a lower limit on tariffs. Had it been agreed, the unpleasant task of announcing higher prices would have fallen on the Trai!

The Trai currently refrains (forbears) from exercising its exclusive powers to fix tariffs, leaving operators free to set almost all prices. The approach has worked. Thanks to a competitive market, India’s telecom rates are among the lowest globally (even after the price rise). The Trai did not need to set price floors. It is also not obliged to continue with forbearance. It could regulate prices if it sees signs of market abuse, of which there are occasional allegations. A case in point is Jio’s recent complaint to the Trai that, post the tariff hike, Vodafone Idea has made it harder for subscribers of its lowest Rs 149 plan to move to another operator. Jio alleges that to send the mandatory SMS to port the number, the subscriber would need to buy the next higher plan costing Rs 179. Fortunately, the Trai can deal with this in several ways without resorting to detailed analysis or abandoning its forbearance. For example, it could make the porting number 1909 toll-free.

In a market where technology and business models change continually, fixing prices is complex, costly and contentious; regulators should do so in exceptional circumstances of imminent harm.

The Trai can simplify its task substantially by helping expand de facto competition. It can ensure that no player, technology or business model faces any barrier to entry. That alone will mitigate many downsides of currently reduced competition among telecom operators.

The excessive regulatory focus on telecom operators is outdated. The approach was relevant when telecom services comprised phone calls and SMS, which generated most revenues. Not anymore. Those services are a tiny subset of versatile internet apps like WhatsApp, Skype, Zoom, etc. Many other players can now set up telecom networks and services. They need regulatory support, much like telecom operators.

But telecom operators face tough challenges, too. They struggle with high fees, expensive spectrum, and daunting costs and delays in obtaining rights of way. Their first-mover advantage is eroding. Revenues from the once exorbitant long-distance calls or interconnection charges have evaporated. Changing operators is cheap and easy (except, of course, if you have the Rs 149 prepaid plan from Vodafone Idea!).

Vodafone Idea, however, has a lot to celebrate before dealing with these and other challenges. Thanks to the voluntary price hike, the government and the Trai did not have to intervene to boost operator revenues directly. They can be grateful that customers are pitching in.

 

The author has advised diverse players on regulatory issues relating to telecom and the internet

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