Indian telecom operators miss few opportunities to press for regulation and policy-related reforms in India. But if all regulatory and policy reforms were undertaken, will it imply the beginning of a golden era for Indian telecom operators? If the data for eighteen countries across the globe were any evidence, the answer would be a clear no!

Why do operators ask for regulations; what are the varying stages of evolution of regulatory regimes; and what are the effects of those regimes on the financial health of telecom operators in the long run?

Key Regulatory Issues
Heavy capital expenditure and rapid pace of technological evolution, coupled with long gestation periods, restrict the number of players that can enter the industry. For these reasons, incumbent telecom operators have an inherent advantage over the new operators, and the industry is largely dependent on an efficient regulatory and policy framework to ensure a level-playing field for new telecom operators.

Global Regulatory Regimes, 2001

Country Standard Interconnection Offer Cost Based Interconnection Number Portability Unbundling Evolved Australia Yes Yes Yes Yes UK Yes Yes Yes Yes USA Yes Yes Yes Yes Portugal Yes Yes Yes Yes Spain Yes Yes Yes Yes Canada Yes Yes Yes Yes Denmark Yes Yes Yes Yes France Yes Yes Yes Initiated Italy Yes Yes Yes Yes Evolving Finland Yes No Yes No Hungary Yes No Yes No Switzerland Yes Yes Yes No Primitive Israel No No No No India Yes No No No Sri Lanka No No No No Pakistan No No No No Bahrain No No No No Egypt No No No No Source: Interconnection and Local Competition, OECD, 2001; Website of European Radio-communications Office, Denmark; Websites of regulators of respective countries

Resolution or implementation of the following key regulatory issues indicates the efficacy of a regulatory regime.

n Standard interconnection offer: Operators are required to publish a standard interconnection offer. The standard interconnection offer ensures that for a given traffic volume, incumbent operators do not charge discriminatory rates from competing carriers.

n Cost-based interconnection: The interconnection charges are based on cost of the network elements utilized in provisioning of interconnection service. This regulation makes the process of determining interconnection charges transparent and also ensures that the incumbent operators do not charge monopolistic prices to drive out the competition.

n Number portability: Number portability allows the subscriber to keep the same phone number (telephone/mobile) even if he/she changes the service provider. This regulation allows the subscriber to freely choose the service provider as well as promote competition.

n Unbundling of the local loop: It allows access to the local loop of the incumbent operator, thus obviating the need for duplication of access infrastructure.

Stages of Regulation
An indicator of the efficacy of the regulatory regime could be the resolution of the four regulatory issues listed above. On the basis of these parameters, regulatory regimes across the world can be broadly divided into three categories:

n Evolved: The regulatory regimes that have effectively implemented the four key regulatory initiatives

n Evolving: The regulatory regimes that have either implemented or initiated two or more of the four key regulatory initiatives

n Primitive: The regulatory regimes that have either implemented or initiated one of the four key regulatory initiatives

It should be noted that this classification goes beyond promoting competition by merely allowing entry in the market. It is based on the premise that the country has also implemented the regulatory and policy constructs that foster a sustainable competitive environment by checking the dominant operator.

Expectedly, the set of evolved regulatory regimes largely consists of developed countries whereas the third world countries dominate the primitive set.

Although the Indian government has allowed competition in the Indian telecom industry, certain important constructs for sustaining competition like cost-based interconnection, number portability, etc, have not yet been formulated. Hence India, despite having a competitive telecom landscape, falls under the set of primitive regulatory regimes.

Operators in Different Regimes
The classification of countries into the three above-mentioned buckets is juxtaposed with the financial performance of the telecom operators and industry in the respective countries.

The financial performance of the telecom operators can be gauged by the average profitability ratio (PBT/revenue) of the top 25 percent of the telecom service operators of the country, for the year 2000-01. It must be emphasized that this figure represents the average profitability ratio of each individual operator instead of aggregate PBT and revenue ratio for the top 25 percent of the operators. This helps to represent the operator’s perspective in the analysis instead of portraying the industry perspective.

The data is only for the public-limited telecom service organizations.
The average profitability has shown a declining trend for the primitive, evolving, and evolved countries. This trend indicates that with the progress of regulatory reforms, the average profitability of the operators decreases.

This trend is further substantiated by the treatment of telecom firms by the market in the evolved regimes.

Industry in Evolved Regimes
In debt markets, the telecommunications firms have suffered an erosion of their credit profile. Ratings on telecom bond issues have declined from less than 1 percent in the ‘B’ category about a decade ago to more than 50 percent in 2002. Even more important is the fact that more than two-thirds of these ratings are in the mid- to low-‘B’ range, implying high likelihood of defaults for the industry.

An overview of debt defaults in the telecom industry shows that this downfall in rating is due to the following reasons. Some of the leading telecom organizations have defaulted on their debt in the last financial year. Most of these telecom firms have been operating in the US and European markets.

Following are the reasons for the failure of telecom operators in the evolved regimes:

n Significant market powers (SMPs) getting aggressive: In the wake of competition, SMPs in the fixed and mobile services have started offering innovative services, and this has resulted in the growth of the total market in a large proportion. In certain countries like France, Denmark, Canada, and the UK, close to 70 percent or more of the market growth has been cornered by the SMPs. As a result, new operators burdened with high capital cost for setting up new networks, face stifling financial cash flows.

n Internecine price cuts: The introduction of competing services has led to a significant decline in prices. The pricing of telecom services has been driven by the market prices rather than the cost of providing services, resulting in poor realizations and increased pressure on the bottomline.

n Over capacity: Advent of new players has resulted in a significant addition of capacity. The demand, on the other hand, has not risen proportionately. This has resulted in lower capacity utilization.

Lessons for Indian Operators
n Happy consumers doesn’t necessarily mean healthy operators: Largely, due to the competition, these benefits get passed on to the consumers and the operators have to work on thin margins. An evolved regulatory regime would thus, further consumer interests more than the operator interests.

n Performance improvement as the enabling tool: Due to thinner spreads, operator would need to focus on the performance improvement as the enabler for survival. This would imply that operators would need to design and implement structured performance enhancement initiatives, which ensure enhancement of revenue streams while controlling operational expenses and capital expenditures.

n Innovative cost reduction avenues: As bottomlines get impacted with the improved regulatory environment, operators will need to actively explore innovative cost reduction avenues, such as sharing of network elements, joint marketing exercises, co-branding with complimentary products, etc, to reduce up front investment in the business, thereby ensuring a better return on investment.

n Control on customer acquisition costs: Regulations like carrier pre-selection and number portability will ensure that consumers get the requisite tools to exercise their choice in selecting telecom service providers. Also, the emergence of SMPs (MTNL and BSNL) as formidable rivals of the new operators, will exacerbate the churn levels in the industry.

Telecom operators will thus need to learn to live with higher churn levels and will need to control their customer acquisition costs, as customer loyalty will fall. Even in a growing market, operators will need to shift their focus from customer acquisition to performance improvement.

Sameer Wadhwa consultant (telecom policy and regulation), KPMG India