Telecom Engineering
The Spectacular Growth and Deathly Descent of Telephone Companies
Dt: 21/2/13
The Spectacular Growth and Deathly Descent of Telephone Companies
Dr T.H.Chowdary*
From 10 mln in 1994, almost all of them wired ones to over 900 mln telephones by 2012 , their affordability to the poor and coverage of the entire territory of India testify to the thumping success of liberalization of the Indian economy and introduction of competition from private companies in the sector, all due to the great vision of the late Sri P,.V. Narasimha Rao Prime Minister from 1991 to ‘96. The euphoria of growth and affordability seem to be coming to an end mostly because of the government using the telecom sector to mobilize financial resources for itself by auctioning the radio frequency spectrum. By now, more than Rs. 200,000 cr have been realised by the sale of spectrum and much more is going to be realised by further sales. Besides, spectrum revenue, revenue shares, service tax, spectrum usage charge and universal fund levy, contribute about Rs. 50,000 cr per year to the Union government. The addiction to auction of the spectrum that is going to depress the telecom growth and affordability. It is well to recall a little bit of history of telecoms across the world.
2. 10 years ago in the year 2003 the telecom boom halted the bubble burst in the USA and Europe with serious consequences. There were then 1.2 bln mobile phones compared to 1.1 bln land lines, the former growing and latter declining in numbers. Between 1999 and 2001 Internet was growing furiously. The growing traffic would require huge bandwidth between cities in the country and in between countries and continents across Oceans . Since 1997 Internet traffic roughly doubled every year but the gambling optimists fancied that the traffic would double every100 days. This phantasy originated at WorldCom (USA). The growing Internet traffic would produce revenues ; it would need huge bandwidth to connect cities, towns and homes. That could be provided only by Optical Fiber cables . The amount of fiber in the ground
increased five-fold. Advances in technology of feeding signals into fibers at one end and extracting them at the other increased the transmission capacity of each strand of fiber hundred fold; so total transmission capacity increased 500 fold but over this period of four years since 1998, the demand for transmission capacity just quadrupled. But a dozen new fiber backbones were built in the US . This tremendous infrastructure required huge amount of investment . Since the traffic did not double every 100 days, with excess capacity prices fell. Companies financed the infrastructure by debt. The burden of debt killed the companies such as Global Crossing . The equipment manufacturers like Nortel had their revenues crashing. Some companies like WorldCom resorted to creative accounting to show non-existent profits. But truth over took them. The market crashed . For eg. Nortel equipment maker for Telcos whose market capitalization was $400 bln in the summer of 2000, fell to just $ 3 bln in 2002 . The WorldCom set a new record for accounting fraud misclassifying capital expenditure as operating cost and over stating profits by $ 11 bln. When it was found it crashed spectacularly and the bosses went to jail; some of them died. Those who touted broadband came to be called “broad bandits”. More than a trillion dollars (Rs. 50,00,000 crores) simply evaporated.
3. India escaped the disaster because the telecom companies were just then (y 2000) were recovering from the capital burn to pay licence fees for services ad revenues that did not exist. The telecoms were mired in the huge upfront licence fee payment problem. With the NDA migrating the Telcos to revenue -sharing, the mobile telephony picked up from the year 2001 onwards. The government was not greedy for money and did not look to telecoms to make it. Its progressive thought was that the telecoms are an essential part of the infrastructure and Internet and services that the telecom infrastructure could support would facilitate economic growth and human resource development by making information and knowledge inexpensively available to all who are fitted with a cell phone. Progressive regulation and facilitated competition boosted the telephone growth. Many lessons learned enabled wise regulation like the removal of called party also paying and monopoly over interstate and international telephony.
4. With the advent of the UPA government in Y 2004, the permit-licence-quota raj resurfaced, this time too to make illegal money. While by 2004, we had healthy competition and cell phones added per month touched double digit million figures, an autonomous coalition partners of the UPA devised schemes of making money by giving more licence when they were not warranted but in the name of intensifying competition . As nowhere in the world, 10 to 12 companies were let in to compete with one another. In Europe as well as in Amerces, 85% of the market is between two to three companies and the rest between a few more in niche markets in contrast to over 10 companies in India. More spectrum was needed and it is in making this spectrum available that money is made. Finally, this bubble of spectrum allocations collapsed with the Supreme Court setting aside 122 licences given with wrong motives and in an illegal fashion.
5. Because there are so many companies, each company is getting a limited amount of spectrum and because it is being auctioned, the price for the spectrum is sky rocketing. In Europe, when the 3G spectrum was auctioned the amounts bid were $125 bln or Rs. 6,25,000cr. 3G is to deliver broadband services like video telephony, and high speed data. Voice would not produce the money to justify the $ 125 bln bid for the spectrum alone. Banks did not give loans and investors did not put their money. Some companies surrendered their licenses and the remaining ones bargained for sharing the network, without every one building the network and thus saving on investments. This history could have been a lesson for the DOT the TRAI and the companies but it did not. The result is that even to the biggest cell phone company Bharati Airtel has been seeing a reduction in its profits for the last 12 quarters in a row. The position of other companies is no better. The debt of the Indian telephone companies is more than Rs.200,000 cr. One of them as much as Rs. 70,000 cr debt. And another company is having a debt of Rs. 36,000 cr. The once Navaratnas MTNL & BSNL, the state-owned companies have been sinking in losses for the last four years continuously. The MTNL’s losses are more than its revenues. These companies petitioned the government either to let them surrender the spectrum or waive the spectrum fees they have to pay !
6. Now the latest threat is coming from Reliance InfoCom which paid a huge amount for the all India foot print for 4G spectrum. Government has decided to permit internet companies and 4G companies to offer telephony also. The competition will intensify . Companies will not find revenues unless they develop many applications which should be taken up by ever increasing number of users, willing to pay the prices that are necessary for the companies not to go into further red.
7. There is terrible turbulence in the telecom companies which now carry IT services. The broadband permits every type of service on the Internet. Devices in the hands of people are becoming more and more multi –purpose. Smart phones like I-Pad are developed not by telephone companies but by IT companies like Microsoft, Apple and Google. These smart phones are computers themselves. They are becoming less in weight and size and requiring less power (that is battery capacity). IT companies like Microsoft and Apple and Google are putting the software into the hardwares of subscriber devices like smart phones. What is happening to Nokia, the world’s first company which produced the first cell phones in 1982 is illustrative. Its first cell phone branded Mobira Senator weighted 9.8 kgs with a brick size battery. Over time, Nokia, became the leader with 40% of the world market for cell phones. It is now tottering because it is not having prowess in IT which it should build into its telephones. It has sought an alliance with Microsoft. In the process, Nokia itself may be digested by Microsoft because the smart cell phones are IT -intensive and not hardware intensive. They are super PCs .
8. In the early years of this millennium investments were in the inter-city fiber optic transmission systems. There is so much of it in the ground by and under the seas; little more investment is required. It is the access system using wireless where market is. How to use a given bandwidth for carrying the utmost amount of information with the highest speed is the challenge. Software covering compression, encoding and prioritizing the traffic to be carried are all software -dependent. The device is a computer, is a radio, is a camera and Internet connected. Computing itself is moving away from stationary PCs into hand held devices of mobile telephony. The convergence of telecoms & IT is disrupting their traditional modes of business. Every service from bill payments to learning and trading is transacted while on the move, round the clock. Cloud-computing cuts costs. The wireless access system to connect moving devices to the national/global network require radio-base stations; cell towers. There are 400,000 of them in India and a 100,000 more required as 3G/4G flourish. Scare of radiation hazards to health and the local authorities’ greed to tax the cell towers are additional costs, detracting from the affordability to lower strata of people.
9. In the 1960s Kappel the Chairman of the AT&T the then world’s largest telephone company foresaw that , “in the future there would be no need for any names; every person born will be given telephone number , if that number is called and if there is no answer it means that the person is dead”. We are about to see his vision becoming a reality what with the 80-120 % penetration of the mobile telephones. Great wisdom and sense of history and a vision for the future are required to steer the telephone companies into the disruptive situation we are plunging into. Governments will have to give up their greed for money but view this new system as an enabler of humanities evolution into knowledge society. (1,733 words)
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