Risks Involved in Telecom Industry Probable Political & Economic Implications

Telecom Industry as we know is one of the fastest growing industries in world, it has its own Strengths & Challenges.

Technological advancements, user demands & stiff competition has opened up a new gamut to operators wherein they are supposing to provide the services and to maintain already pressurized Revenue Margins.

An operator needs to be always on Alert mode to survive by understanding needs of customers and design products offering accordingly.

Telecom industry itself is very dynamic and vulnerable industry, hence its “Misuse” is quite easily possible and today almost every mobile phone is an entry point to internet.

Telecommunication Industry has following risk:

Use of Internet on Mobile

A common method to communicate safely is for the Radical Element to save a draft of a message on a free e-mail service which is read by someone in another part of the world. Because the draft was never sent, the ISP does not retain a copy of it and there is no record of it traveling the internet.

This feature initially was difficult as a Radical Element was suppose to visit a Cyber Café where Govt. has inculcated stringent norms for identification, but through internet on mobile this has become one of the best options to transfer messages from one Radical Element to another Radical Element.

Telecommunication Fraudsters

It’s very difficult to define role of Telecom fraudster Governments and Regulatory authorities across world are very sensitive on this kind of issues and hence many of them are trying to bring new measure in addition to strengthening the existing norms prevailing in their respective countries.

Identity Theft for Prepaid Mobile

Most Radical Elements would not like to coordinate their work from a home or cell phone they obtained using their own name, driver’s license, address and other identifiers.

Identity theft is one way a Radical Element can establish an anonymous phone service to use for their Radical Element activities. With a new identity backed by a phone number, route for credit-card fraud also opens up for him.

Telecommunication Fraudsters

It’s very difficult to define role of Telecom fraudster, It can be a Hired Hacker who can penetrate in to secured data systems of telecom companies and fetch out confidential details like calling card numbers. This happened in Italy where Radical Element used this stolen calling card to complete their criminal activities.

Regulatory Measures:

Official / Govt. Authorized Identification to be taken prior to issuing Prepaid SIM Cards, Address and customer verification to be done prior to activation of prepaid SIM.

Still many countries like Indonesia and Middle East are to implement this as a regulatory norm. Many analysts predict that it will also help telecom operators to know their customers better and with accurate and valid database they will be able to segment their market better.

However some operators also criticize this move by stating reasons like false identity, Stolen SIM and stolen Phones can also be used for terrorist activities. Some operators also argue that call tracing can only lead to approximate location mapping rather than actual.

Some other advanced countries also propose keeping records of phone calls and emails for at least an year. This communication logs can be very helpful to police and intelligence agencies as this records reveals phone numbers called and geographical location of the caller.

Focusing on telecom fraud is important for organizations and regulators. If industry can stop telecom fraud, many criminals would find their anonymous communications severely restricted.

Telecom regulatory authorities have to do a proper scrutiny on the standing of parties before according any approvals. Furthermore, know your employee controls are an important aspect of preventing corruption in the ranks of telecom companies.

Telecom companies shall become more stringent while scrutinizing KYC document. They need to review each customer acquisition.

Slumdog millionaire Telecom

Using the “Slumdog” title in the Telecom story is not to just attract attention. It’s really a great title for the Telecom Industry in India, which has been a great story for 18 plus years now, and continues to get bigger and bigger in the Telecom success stories of the world.

Despite the extraordinary growth with the market (with over 850 million subscribers) there is continued debate amongst the network operators, policy makers, politicians and technologists. All the commotion is not all that bad with the Indian Telecom market and it for sure makes great reading. There were endless delays with new spectrum auctions, allocation of spectrum to the already approved operators, debates on value of the 3 G spectrum, more committees to decide on future, BSNL and MTNL continuing to get preferential deals, bickering amongst the CDMA and GSM operators, TRAI and DOT differences and whatever that can be remotely controversial is all on the table.

While the world has gone through a peak period of valuations and now working through a recession and perhaps back into an upswing, the value of more people connected in India will help with the overall economic growth. India has been thriving even the worst years of global economic slowdown. New opportunities for expanded role of more Indians to add to the GDP growth of the country will keep this momentum in positive indices while the world will work its way back into overall positive growth.

The 30 paisa per minute termination of a call rate that is being debated between old and new network operators also should be dealt with quickly.

Incumbent’s verses new entrants should not be dealt as an adversarial situation, rather than combining the strengths to offer the best value for customers. The market should drive the pricing rather than regulation.

The early entrants have enjoyed the benefits of lower pricing on their license fees, albeit they also risked the uncertainty of the markets. But the unchanged policies which are older than 6 years and over 500 million users ago should be dealt with the reality of today. People have recovered their initial outlay of capital and the new entrants have a bigger outlay today with lower revenue per user, and by trying to impose mechanics established many years ago in today’s environment may not be the most positive way for serving the current needs.

Twelve years have passed since National Telecom Policy NTP'99 and many changes have taken place thereafter. Action have been initiated to formulate a comprehensive NTP 2011. NTP 2011 will cover issues pertaining to licensing, spectrum allocation, tariffs/pricing, linkage with rollout obligations, and flexibility within licences, spectrum sharing, spectrum trading, mobile virtual network operators, unlicensed bands as well as mergers and acquisitions.

As part of the new policy, telecom would get infrastructure sector status, heralding tax breaks for companies and helping the domestic telecom equipment manufacturing industry.

Rural education, mobile banking, video and voice transmission and many other areas of communications will become more prominent with higher speed wireless networks. More mobile value added services will be introduced with the new networks and will create more opportunity for developers.

It is time for all agencies and individuals to stop poking at the process and let the market define itself. There is a need to grow employments and new networks will bring in hordes of opportunities in engineering, sales, development, towers and a whole slew of new VAS development.

The Indian Telecom market is ready for continued success. Success despite the bureaucratic shenanigans and technology lobbying is simply a matter of fact. Just imagine the economic and intrinsic benefits when the subscriber count crosses 1000 million in a couple of years? The benefits of well connected India with people communicating with the world will yield untold benefits to the overall economy of the country. Let the market have access to all available spectrum and let the users have the choice of technology. Let the users choose from a variety of choices of networks. Let everyone in India get connected and prosper.

Should We Bet Now? If Yes, On Whom??

The whole country is currently talking about the ICC Cricket World Cup 2011.

With exorbitant prices at which the 3G spectrum bandwidth has been sold to the telecom players in India we are waiting to see the World cup on mobile.

The big boys (Airtel, Vodafone, Reliance, Idea, TATA etc) have accepted to shell out thousands of crores of rupees to get their share of the apple. USA or any other developed country is already muttering, 3G is the baseline standard there and people are talking about moving to 4G right now. Unfortunately, the spectrum allocations took a very long time to get completed for 3G and it will take years of effort and millions of dollars before which the telecom players would be fully prepared/able to move forward to the next step which is 4G.

Coming back to the topic, with telecos spending so much of money for the 3G spectrum, many of the investors are thinking,

Is this the right time to enter telecom stocks?

Or

Is it good enough to bet in cricket in the upcoming world cup?

The valuations are pretty low and a mobile phone has become a bare minimum necessity for everyone, shouldn’t we be entering telecom stocks to make some good buck right now?

I don’t want to give a straight answer right away. Let’s dig deeper in the whole situation and as smart investors we must be able to come to a conclusion at the end of this blog.

Below are the points we are going to consider:
1. Competition
2. Government rules
3. Cost of 3G spectrum
4. Cost of 3G infrastructure

Competition:
India is the one country where we have more than 10 telecom operators in major cities. We have Airtel, Aircell, Vodafone, Idea, Uninor, TATA Indicom, Virgin Mobile, TATA DOCOMO, Videocon Mobile, Reliance Mobile and so on. I intentionally left out BSNL because it is a government entity and immaterial of the profit or loss it makes, it’s going to survive and hence I feel there is no need to discuss about it at this moment.

With 10 people fighting it out, a customer who wants a new mobile connection would want the best deal for every single penny he is going to spend. With this competition comes cut throat pricing. As every operator comes up with an innovative/cost effective plan to attract prospective customers, his competitor would go one up and offer even better schemes. This game of one-upmanship is going to go on.

In developed nations usually we have only 2 or 3 major operators who hold more than 75% share in the market and we also have 2 or 3 smaller boys fighting for the remaining 25% share. But in India we have 10 or more guys fighting it out and hence this super stiff competition.

As a Customer: This is extremely good for us because we get a good value for our money
As an Investor:  This is really bad because companies would be going at leaner profit margins and hence the amount of profit we can make out of them may be limited.

Government Rules:
The Indian government came up with radical measures a decade ago to promote the usage of mobile phones and the telecos grew at a breathtaking speed. But now, with the new regulations with respect to sharing of the 3G spectrum and other telecommunication bandwidths, operators are going to find it harder and harder to cost effectively utilize their networks. Irrespective of the size of the operator and his customer base, the government has an upper limit on the max bandwidth an operator can use and hence it is going to be even tricky. The bandwidth is distributed proportionately among all the 10+ operators and hence the extra large players like Airtel or Vodafone do not get a bigger piece of the pie.

Every operator would want to retain its most profitable customers who form nearly 20% of its revenues. These are high end users (usually businessmen and other influential people) who use their mobiles extensively. With increasing number of users, the network is bound to get clogged and such customers may opt to choose a different provider thereby shifting the revenue to a different operator. At the same time, if operators reserve bandwidth for these guys, the remaining 75% or more customers are going to move off due to clogged networks because of bandwidth reservations for the big men. It’s a tough trade off for the operators which they must handle efficiently in order to maintain their profits.

As a Customer: Even if the networks of the big boys get clogged due to extensive utilization, we can shift to the smaller boys to continue our mobile usage.
As Investors: Big boys are listed in the stock market and if they start losing their customers it is going to reflect badly on their balance sheets and in turn going to affect our profits.

Cost of 3G Spectrum:
The government has made thousands of crores of money as part of this spectrum sale and the telecos are shelling out Rs. 10,000 crores or more (the big boys) for their share of the spectrum. That is a lot of money. Operators would want to pass on this cost to the customers who want to use 3G and many of us would not be willing to pay up such money and may opt to remain in 2G system, which means operators, may find it difficult to break even on the cost they incur in this spectrum purchase.

As a Customer: We have a choice, we can either pay up and start using the superior 3G technology or remain with the 2G option and opt to move on to 3G a few months down the lane when the price of 3G would come down. But, live mobile TV with 3G is coming like a lolly pop at us at the time of world cup and IPL.
As Investors: This multi-thousand crore expense is a liability in the balance sheet which will severely affect the company’s earnings which in turn is going to affect our earnings as share holders.

Cost of 3G Infrastructure: 
Just by getting the spectrum, operators cannot start using the 3G system. They are upgrading their existing technologies to work with 3G capabilities which means a further few hundred crores of expenditure to support the 3G network. Again this cost would be passed on to the customers who want to use 3G system.

As Customers: This cost would in turn be passed on to us; hence 3G may be an unreachable grape.

As Investors: Further expenditure in the balance sheet is definitely not going to do any good for the company’s profit. Companies are taking loans to meet this expenditure which is increasing their debt to equity ratio which effectively is going to directly affect our profits by holding the shares of that company.

Conclusion:
As I said in each of the sub sections, this upgrade to 3G may not be so profitable/rewarding for investors. Many wealth managers are exercising/advising caution to their customers who wish to enter teleco stocks.
If one is a new or small investor it is better to wait and watch and gain exposure to these stocks after a few months based on their performance. For seasoned investors, one can exercise his judgement and decide to buy/sell/hold these shares.

Finally to wrap up, a buy or sell suggestion is very easy but as always our Indian stock market has been giving its share of surprises to the Indian investor population. Why not try betting in the upcoming world cup, no one knows it might fetch you more than in teleco stocks.

Happy Investing!!! Enjoy World Cup!!!. Cheers!!!...

Rs.1,76,000,00,00,000 Amount is more or the Zeros?

Every year India has been hit by some or the other trouble, may it be terrorists attack, may it be a tsunami or an earthquake, and may it be some epidemic. Year 2010 has been hit by a tsunami of the scams. While mid year marked the shameless abuse of public money in the commonwealth games scam, the sheer size and scale of scam in 2G spectrum allocation has left the country dumb struck. The audacity of the former Telecom Minister in brazenly throwing all rules to winds, presiding over the allocation to spectrum – country‘s precious resources – to dubious companies – who then went on to make crores of profits by simply reselling these licenses to their foreign companies allies.

The telecom sector has always been notorious for its scams — with ministers like Sukhram, Pramod Mahajan and now A Raja. It’s been a sector where dubious decisions and brazen corruption have always ruled. 

There are several aspects in the 2G scam, but I will address two things that are bothering the citizens of India the most. One, how do we recover the money swindled in the 2G scam and two, what needs to be done to ensure such a scam will not happen in the future.

The background to this crime is pretty simple to understand.  It is calculated that loss to government suffered due to the fault ridden First Come, First Served basis for 2G spectrum allocation was Rs. 1,76,000 crores. In simple words, this money Rs. 1, 76,000 crores belongs to the people of India but went into the pockets of colluders in the swindle that includes the Minister, officers, regulators and the beneficiaries who connived in this crime against nation. 

The big question that now needs to be answered is – How did the 2G cellular licenses sold from 2004 to 2007 onwards get the government only Rs 1500 crores each? Is it because the government chose not to tender these and opt for a more dubious route? 

What is the loss to the Government? Assuming that these 2G licenses were to be valued at marginally less than 2G licenses at Rs 10000 crores each (there’s no evidence pointing to a need to assume 2G as cheaper than 3G licenses and using the secondary transactions of Unitech and Swan as benchmarks), the loss to the government is in the region of Rs 50,000 Crores. That’s a realistic estimate and doesn’t include the spectrum given as follow-on spectrum to existing telecom companies. As the International economy was booming in 2007 the proceeds and value would’ve been higher.

Coming to the point of how to recover this swindled money and how to prevent such loot in the future, there are three options:

• Government should not only order forfeiture of the licenses of the erring companies besides making the existing players with excess spectrum pay up at market rates. 
• Government must impose a windfall tax on companies who have made money. 
• Government can cancel all the licenses, take back the spectrum, and sell it at market rates and recover the entire value that was lost.

Now, what needs to be done to prevent such scams in the future?

Scams of such magnitude and scale cannot happen without the active collusion and connivance of ministers, bureaucrats, regulators and the beneficiaries.

• There must be an independent funding of the regulators. Rather them funding them from the union budget there must be a separate source of income, like Universal Service Obligation Fund (USOF), fees from licences, spectrum etc.
• There is a much needed review about the institution of the independent regulators. The practice of stuffing them with retired or serving bureaucrats has made them a second bureaucracy, with little or no will to establish and affirm their independence from politics. 
• The focus must now be to treat this as a crime and investigation launched under the supervision of the Supreme Court to identify all the perpetrators and prosecute them under the law. 
• The institution of independent regulators must be reviewed so that they don’t become passive onlookers to crimes being committed and third, abolishing of all discretionary powers of the ministers that allows them to indulge in corrupt practices.

Can we see Dr. Manmohan Singh, who as the Finance Minister in the 90s, initiated bold economic reforms that unshackled India and paved way for progress to the same and reform the Telecom sector? Do the Prime Minister and the government have the courage to take action against the perpetrators of this white collar crime committed against one billion Indians?

That is a Rs. 17,60,00,00,00,000 question!

Mingle and Jingle

Telecom is staring down the abyss, and faces the prospect of rapidly turning from a sunrise sector to an inviable business proposition. Its the time to call for mingle.

Inevitability finally catches up with the new entrants in the Indian Telecom industry. It is a no brainer to see that a market with 15 players will not have space for the bottom rankers. With 14-15 players jostling for share of the consumer kitty, consolidation is now setting into the Indian telecom markets. In most circles, only about 6 players continue to sustain market momentum. The top 6 players account for 90% of the market shares by subscriptions and higher shares by value.

India has of course been through this before. In the late 1990s and early 2000s, today's leading operators, led by Bharti, consolidated many smaller operators which existed after the original 2G licence auctions in the mid 1990s.

The main difference between the first consolidation process and the one we are about to enter concerns the fundamental drivers of consolidation.

In the first process the likes of Bharti and Tata were building a geographic footprint. Operators were expanding their original few circles via a series of acquisitions of similarly small operators. Most of the operators today have a presence in many if not all 22 circles, so the current consolidation process will not be driven by a desire for wider geographic presence.

The first wave of consolidation was also driven by the need to acquire subscribers. Back in 2003, India had 13 million subscribers or a 1 percent penetration rate. Mobile telephony was still a luxury commodity. Today's consolidation process will be about providing a merged entity with a better chance of improving variables such as average revenue per user (ARPU) and more importantly average revenue per minute (ARPM).

The earlier process also involved a willing number of international investors keen to exit India. Major international operators such as AT&T, Telecom Italia, Telia, Telstra and Swisscom were all happy to sell up after years of growth which failed to live up to original expectations. This time around we have committed international investors who seem intent on staying, albeit going forward possibly as smaller shareholders in a larger entity.

Finally the earlier consolidation process involved many risk hungry investors, desperate to build market share and take risks on acquisitions. 

So what lessons can we draw from the earlier consolidation process and also from other markets in Europe and Asia where the consolidation process is well underway?

It is interesting to observe some of the recent consolidation moves in the mature mobile markets of Europe and Asia and their relevance to India and forthcoming consolidation. During the past few years we have seen mergers in mature markets such as Australia (Vodafone-Hutchison), Netherlands (TMobile-Orange) and UK (Orange-TMobile). Large international operators such as Deutsche Telekom, France Telecom, Hutch and Vodafone saw a better future as part of a merged entity rather than battling on stand-alone.

Critics claim telecom consolidation reduces competition and promote monopoly. 

But I think this new mingle process is likely to be a little more “defensive” driven, finding the right partner to team up with to diversify future financial and operational risks. The mergers are a part of a healthy competitive process and would foster innovation and bring benefits to consumers. They will improve the competence of the operator also increasing diffusion of different cultures coming from different merging entities. Finally, the success of a merger hinges on how well the post-merged entity positions itself to achieve cost and profit efficiencies. Careful valuation and disciplined negotiation are vital to successful acquisition, but in business as in life, it is sometimes more important to be lucky than smart.

Currently, there are a number of restrictions on M&As in the telecom sector. Consolidation is not allowed for three years after the grant of a licence, and there is a lock-in period of three years for the promoters’ stake. The combined market share of a merged entity cannot exceed 40 per cent in terms of both subscribers and revenues in any circle, and no consolidation will be allowed if it leaves less than four operators in a circle. These restrictions were viable when the market was having 6-8 operators and were placed to create a healthy competition in interest of consumers. But now the number has drastically increased to double defeating the purpose, as it is not making a viable business model to toil on.

Consolidation will result in synergies in the areas of infrastructure, human resources, spectrum and other areas. This can bring down costs, improve quality of services due to the availability of sufficient spectrum and increase investment. This would lead to a win-win situation for everyone involved, and ensure that the amazing growth story of Indian telecom remains on track.

The Date With The Hate

With lots of ruffle going in telecommunication arena following 2G scandal,3G rollouts, launch of Mobile number portability, price wars, I wonder where is the telecom business moving towards. There are lots of articles and debates I am witnessing about consolidation, evolution of MVNOs, formation of cartels, interconnect/roaming agreements.

The industry is buzzing with talks, round table meetings, frank chats, dinner parties, dates among various stakeholders in telecom ecosystem.

Months of discreet lunch or dinner dates in Mumbai and Delhi restaurants or in private dinner parties are now being arranged. Some operators are sending out their investment banking advisers on a "pre-date" to see how receptive their planned future partner would be to a tie-up.

Telecom Minister Kapil Sibal hold frank chats with telecom elephants’ mahouts including Ratan Tata, Anil Ambani, Sunil Bharti Mittal and Kumarmangalam Birla to get their views on what ails the telecom sector and how the problems can be resolved.

With the 3G and broadband wireless access (BWA) auctions now out, no operator bagging pan-India 3G spectrum, which enables services such as video calling, interactive gaming and high-speed internet on phones, the dating game amongst India's thirteen private sector mobile operators has now started.

Some of the corporate dates in news are:

•   Aircel & Tata Tele are in talks for an alliance to use each other's 3G airwaves ,they may get to share MTNL’s 3G network in Delhi & Mumbai 

•   Airtel, Vodafone Essar and Idea Cellular are in last lap of finalising their alliance 

•   RCOM is in talks with three operators for a 3G roaming alliance 

•   Tata Teles is eyeing a 3G roaming deal with state-owned BSNL

Revenue sharing, interconnect, roaming agreements need a facelift now. Revenue models will witness new streams of business giving roaming services through competitors’ networks working as allies. TRAI has already come up with guideline papers clearing the roaming issues in providing 3G services.

We may also see birth of Mobile virtual network operators (MVNOs) and would not be surprised to see them enjoying pan India presence using networks of different mobile operators present in different circles.

India is soon set to evolve from simple connectivity providers to those offering value-added solutions.

Organisations and industry can jointly help with Social Responsibility by delivering services to both rural and urban with applications that will make a difference to everyday life of people across the country.

Do laws in India make it easy for Government to spy on its own citizens?

This has been a moral debate in India. I've seen many articles and debates on this and there has been no clear conclusion whether it is appropriate to do this or not. Many people think that phone tapping is a violation of basic citizen rights but it is a way to know before-hand about any criminal activities being planned on a certain country.

Phone Tapping by the Government need not be made much Fuss, since it does prevent lot of criminal acts on our soil as well as catch hold of traitors of the country. At last, what we all need is a safe and secure place, with honest leaders ruling us. 

So, why not use this medium of phone tapping to identify culprits and punish them?

An Honest person, who lives for the country, need not be afraid of phone tapping, as it is just an act of protection to the citizens. But, if you are a wrong-doer, yes, there is a lot of room to be scared of. This is what I feel and most of the intellects do agree to it.

The Indian laws do provide for phone tapping of suspicious citizens against whom there is prima facie evidence of indulging in corrupt and nefarious activities endangering the national security.

Unfortunately, these provisions are being put to abuse at the behest of some selfish political elements at the helm of affairs. In the present scenario of our democratic set up, phone tapping is an indispensable evil in the interest of justice and nation.

I don't think the current laws are lax that the Govt. can use the phone tapping on Opposition.

A recent statement by the Department of Telecom stated about the power of interception of telegraph messages in the interest of the sovereignty and integrity of India.

The acts of persons, companies, including Public Sector Undertakings, private vendors and private detective agencies establishing, maintaining or operating unauthorized communications network, including wireless network for unauthorized monitoring, intercepting and surveillance of communications violate the Indian Telegraph Act, 1885 and Indian Wireless Telegraphy Act, 1933 and persons or companies involved in such types of acts are liable to punishment as per provision of Indian Telegraph Act, 1885 and Indian Wireless Telegraphy Act, 1933.

While phone tapping is very essential we should also disallow the Govt. to use this as a tool against its political opponents.

Probably, what we need is a constitutionally constituted regulatory body, on the lines of N.C.C., N.W.C., N.H.R.C., etc., which would accord permission to tap a person or a group, after satisfying itself of the need, prima facie and also monitor the tapping progress and would be able to revoke the permission once it is satisfied that no such need exists anymore.

Let there be sincere and honest approach in resorting to such a lethal weapon.