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Now, roaming service to become free?

business Updated: Oct 12, 2011 10:32 IST
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India's new telecoms policy is a mixed bag for operators. The scandal-ridden sector is crying out for consolidation. Delhi's new policy will allow spectrum trading and, theoretically, free up M&A too. But costs will rise and takeovers are unlikely until the corruption investigations are complete.

Almost everyone agrees that the sector has too many players, and that margins have been driven too low to be sustainable. There are 15 firms in India. Reliance Communication's average revenue per user fell to $2.26 per month in the first quarter of 2011 from $7.63 in 2008.

But the industry's costs may actually rise as a result of the new policy. Part of the reason is because the government will now charge market prices for all spectrum. Given that Delhi lost an estimated $39 billion in 2009 as a result of selling 2G spectrum at 2001 prices, this is understandable. But it will still be a burden for the industry. The new policy also requires firms to provide free roaming across the vast country. That, too, will raise costs.

The most positive development is the ability to pool, share and trade spectrum. Vodafone and Bharti , which are making some of the highest returns in the sector, will be able to buy radio waves from the poor performers. The average spectrum available per user is 5.5 MHz, compared to an international average of about 22 MHz. Increasing spectrum allows higher traffic-handling at a lower cost.

The policy is vague on M&A, although it appears that the government is going to relax the currently prohibitive rules. The question then is who will be buying or selling? If spectrum can be traded between the firms, M&A becomes less of an imperative. What's more, while the risk of litigation in the 2G case drags on, stronger rivals may be unwilling to risk taking over a rival. In sum, the industry has secured a few things it wanted but not enough to engineer a sea-change in its fortunes. Mind you, given the scandal, it could not have expected much better.