Telecom travails: Disinvestment delayed is justice denied !

In any sector or any business, where policies allow competition, then either it must empower management to act decisively or sell out as fast as possible

June 01, 2010 7:21 IST | India Infoline News Service

One of the biggest successes India has witnessed in the last two decades of reform has been in the telecom sector. Recent 3G bids from the telecom companies where the government has raised close to Rs70,000 crore -  twice the original estimate - is an indicator of the optimism, which the players have for the industry. 

The first round of bidding for different circles happened in the mid to late 90’s and the entire bidding was a messed up affair. Contrastingly, the recent 3G auction, has been relatively smooth. In the 90’s, HFCL emerged as the biggest bidder for many circles and everybody thought that HFCL had gone mad. But now in retrospection, it looks as if they were quite visionary in guessing or estimating the size of the market. 

The Indian telecom market is one of the fastest growing markets in the world. It is also one of the most competitive where new entrants are coming in and reducing rates. Our penetration has increased post the entry of the pre-paid cards as well as the falling rates. 

Now thanks to the telecom revolution, Nokia has become the largest mobile device company in the country and we are seeing spin of effects in everything. Twenty years ago, among the crucial bottlenecks to start any business was the ability to get a telephone connection. People used to wait for 20 years to get a connection. Those were the days when the government was in-charge of policymaking and provision of services in the telecom sector. One of the many other items in such demand was a LPG connection and I remember clearly that my parents had applied for a LPG connection for both me and my sister the moment we crossed 18. I hope that getting a LPG connection has also become simpler. 

In my father’s working years, we had a telephone connection provided by his company. He had to time his telephone application in such a manner so as to ensure that by the time he retired and returned his company phone, he would have a prestigious telephone connection for himself. This matter got further complicated when the application had to shift from Ranchi circle to then Madras (now Chennai) circle. He was literally made to go round in circles till finally the line happened. 

Nowadays you have telephone lines and companies falling all over each other troubling you to make sure that you get a telephone connection. It is no longer a luxury but a kind of necessity. In our colony, when we got a telephone line, junta was impressed because we were one of the very few people in the community to have a telephone line. When STD was launched we were so happy because suddenly we thought that instead of making trunk calls we could call directly. Lightning telephone trunk calls are things which the new generation may not be aware of – the calls were almost eight times more expensive and could taken even half an hour to get connected! 

Following the opening up of the telecom sector, those most affected were the incumbent market leaders - MTNL and BSNL. Year after year, month after month they are losing market share. 

One of the first research reports written by J P Morgan was titled ‘Value Rings out in Mumbai’ – Buy MTNL . Every analyst had a buy report on MTNL because the incumbent had many advantages - customer’s base as well as his inaction to shift. Apart from the standard argument of last mile connectivity to customer – how analysts explained to fund managers the difficulty of laying cables and prime locations owned by MTNL for its junction boxes. These are all strong barriers to entry in a business which is so network depended. Thanks to technology, the network effect changed; the ability to own prime spots in Mumbai to put telephone towers was no longer a USP. 

If you look back, wireless technology advances coupled with a more customer friendly approach resulted in private sector taking away so much of market share. All telecom companies realized that they are offering a retail product and went all out to woo the customer. Recently, we got a phone call from a MTNL Manager asking for feedback on service. We actually wondered if it was a hoax call or a genuine call. The other segment MTNL lost out is institutional or corporate segment because of lack of pricing flexibility. It is so strange that the market leader is now struggling for survival and its cash flows and reserves are depleting. BSNL is also going down the same route. Given rural prosperity, I am sure sooner or later, private sector will attack that market also searching for the fortune at the bottom of the pyramid. USP of BSNL that it provides telephone connections at all remote locations would go away. 

Is it that MTNL was a badly managed company with poor manpower  – No, of course not. In early days of telecom privatization, it, along with VSNL, Department of Telecom, provided the bulk of manpower to the private sector. It is simply not equipped to handle the pressures of the market place because it is very difficult to change the mindset of a resource allocator to a competitor in a market. The bureaucratic set up of MTNL will just not empower its people to decide across the table without paperwork and CYA mentality.  

The telecom sector has undergone a complete re rating, which explains why Bharti has also corrected in recent months. MTNL of course continues to languish for over the last two years and is still falling. The current price wars will ensure that for the next 2-3 years BSNL divestment will not generate ‘good’ revenues because it will not fetch the price it could have got earlier.  

In it lies a very big lesson for the government. In any sector or any business, where policies allow competition, then either it must empower management to act decisively or sell out as fast as possible. Putting companies on liquid oxygen is the biggest destroyer of share holder value. 

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