What caused the slowdown? Will India be affected?

What caused the slowdown?

Will India be affected?

Paranjoy Guha Thakurta

Good evening ladies and gentleman. I welcome you all to this VOICE&DATA panel discussion on Global Telecom Slowdown: Its Causes and Impact on India. The basic question that I would like to request all panelists to answer is, why has the slowdown that we are seeing in telecom service providers market actually happened and how serious is it. Then, we will move to the India scenario: Will it affect India. Why or why not?

But first, what caused the slowdown… Over to Mr Chugh.

Manoj Chugh

Thanks very much. This topic definitely assumes a lot of significance as it has affected the fortunes of all of us. One thing is for a fact. There is a slowdown. It is not like the Vajpayee-Musharraf summit, where the question was whether Kashmir is an issue or not. The telecom slowdown is there. I think all of us would agree to that.

The reasons for the slowdown are several. I believe much of the reason is to do with the nature of business cycle itself. For almost one decade at very furious pace, we found networks getting deployed all over the world. We also saw deregulation encouraging a whole lot of new operators—competitive local exchange carriers as well as long distance carriers—coming and challenging the incumbents. What did we find: they were coming and creating huge capacities. And perhaps, the consumption patterns did not quite match the capacity that was being created. That created excess capacity and an overheated market.

I also feel, there were not too many differentiated services that would have utilised this capacity. (But) it is a matter of time, before players come out with new kinds of services. Also, consolidation is bound to happen. A fair bit of that has started happening. Also, for the sake of survival, players will come out with differentiated services.

The consolidation and introduction of differentiated services will make the market swing back the other way round. The key question is—Will it swing like a V or like a U? Is it going to be flat for a long period of time and then gradually come up or will the market drop dramatically and then go up dramatically? I do not think it will happen dramatically.

As far networks are concerned, players will no more create bigger and fatter networks but will focus on the edge. These terabits of capacity that have been created will have to be utilized. And that will only be utilized if services are created. So the edge will see a lot of activity. Also, on the access front, we will see newer devices that will help people access networks more conveniently, very differently.

To summarize, newer services have to be created, the edge has to be improved, and new access devices have to come up that will make access easier.

Paranjoy Guha Thakurta

Thanks a lot. I would now like to request Mr Rao, the other representative in our panel from the equipment industry, to add to this, what he thinks about the issue.

CS Rao

Yes, there is an agreement that there has been a slowdown. As Manoj rightly said, it has primarily to do with a large number of players coming in the wake of major deregulations the world over. In the US, for example, it happened after the Telecommunications Act of 1996.

However, I would like to add a point to that. Apart from the large number of operators, what also contributed to the present state is that all these operators were getting easy capital. This easy capital fueled large initial network build-outs. The operators failed to introduce new services, at affordable rates. Sure, there was a lot of hype about broadband and broadband services. But the actual implementation was low. And even where broadband access became available, it was just more capacity and the same old services.

Why? Because applications to serve the actual need of the user did not come. It is applications that result in services. With no application, services did not get introduced.

The equipment vendors also had their roles in this game. Many of these network rollouts were also heavily influenced by the equipment vendors. It was business for them.

To summarize, excessive network rollout, fueled by easy capital and vendor influence and lack of innovative application, is what drove the telecom services business to the present slowdown.

Paranjoy Guha Thakurta

Can I now request Mr Dutta to bring in his perspectives of a consultant?

Kaushik Dutta

Since 1995-96, we have been witnessing a deregulation wave in telecom, not just in the US, but in other parts as well, where the governments have been privatizing the state owned PTT. Added to that was the IT boom, which actually created new means and new forms of communication. This lowered the entry barrier and a large number of players entered the business.

Even vendors were riding high. There was a great feel good factor. As Mr Rao mentioned, capital was easy. Just to quote some figures, $ 160 billion were raised in six months. Since capital was easy, everyone went for huge expansions.

Unfortunately, on the market front, new players like CLECs were primarily challenging the old set of players, like Baby Bells, on pricing. It was not a sustainable model. That actually started the slowdown. When you do not have revenue, and you keep cutting down prices, what you head towards is bankruptcy. In the last six months, eleven CLECs have applied for Chapter 11 Bankruptcy. It is really getting worse.

The other trend was of larger companies picking up smaller companies at significant high prices, in the process also picking up large amounts of debt. With revenue not matching, the servicing of debt becomes another problem. That is what is hitting the larger companies today.

If you move from the US to Europe, the 3G licenses were bid for huge amounts. In Europe, the telecom operators put together have offered $160 billion as 3G license. When such a huge amount of debt is picked up, and the revenue from 3G not expected before the next two-three years, the impact of that shows on your financial statement today.

And it is a chain reaction. If the operators are not doing well, it affects the equipment vendors and then the component manufacturers and other tertiary suppliers as well.

Paranjoy Guha Thakurta

Thank you Mr Dutta. I now request Mr Mehra, whose company has relationships with many service providers worldwide. Mr Mehra, last but not the least…

Pran Mehra

Well, it is always a privilege to speak at the end.

I think most of the important issues have been raised and discussed by other panellists. Bloodbath, massacre, complete wipe-out of the tier II carriers are something we have been hearing a lot about, these days.

From the company perspective, they have been able to raise money at high valuations. They have not been able to have a lot of revenue. From the competitive point of view, everybody entered the market at the same time. Everybody wanted to provide every possible service under the sun. Everybody wanted to get into everybody else’s business. So there was no real core competence. Because the time was limited, the speed to the market was very critical. Not many tried to differentiate themselves. There was no difference between one player and another.

Then, looking from the customer perspective, the main reason for this slowdown—why the actual usage did not match the expectation—is the lack of communication between the buyer and the seller. The buyer was totally isolated. The service providers were rolling out the networks without understanding what the buyer was looking forward to. The consumption did not match the forecast that the network operators had in mind—the forecast on which their valuations were based. Ironically, the forecast which brought the operators the money they used to build the networks was not based on any actual feedback of the buyer.

As the buyer did not complement the seller, there was enough capacity, which is unused. If you look at TransAtlantic, there is still about 250 Gigabits of capacity that is lying idle. With Tycom coming in, it will offer another 2.5 terabits. Whether that actually happens or not, this 250 gigabits is there today, unused, idle.

Only thing that the international carriers sell, is the network capacity. Beyond that, they do not know what the buyer wants. This is quite ironic that the network operator does not know what the customer really wants.

So we have more competition, higher fiber capacity, and the quality of that bit is becoming critical as well. That is a new set of rules. A total new economics.

From the core network operators’ point of view, quality of capacity is becoming critical. From the buyers’ side, with revenue not coming in as expected, the one thing that becomes imperative is cost management. Also, better traffic management, resulting in lower cost per user.

It is too early to say when things will swing back. Till then, one has to be a little conservative.

Paranjoy Guha Thakurta

Thank you all, before we move into the possibility of the slowdown affecting India, let me have any comment, any issue that is left out….

Manoj Chugh

Quickly, one thing that all of us missed is the dotcom bust. Many of these fat pipes were being created to carry a lot of content. With that content provision business seeing a lot of questions, issues, and readjustments, had its impact on the telecom slowdown.

Paranjoy Guha Thakurta

Thanks. Let us come back to India.

There is concern over the Indian economy. The slowdown it is experiencing, is cutting across sectors. It is not confined to one sector. Also, the realization has dawned that as the Indian economy gets integrated with the rest of the world, international developments will increasingly affect the situation back home. IT services export to the US is now substantial. So, the slowdown in the US will definitely affect our economy in some manner.

And unlike Japan and Italy, where political instability does not have an impact on the economy, the situation here is different. Political instability has a very direct impact on economic decision- making. I see the political situation continuing to be very very fragile. After the UP elections slated early next year, if the ruling BJP does not do well—and it is expected that it won’t—it will have a direct impact on the stability of the government.

I am concerned about a few things. A budget that was hailed as a dream budget by many turned to be a nightmare within days, following the stock market scams. Two, I see uncanny similarity between the scam nine years ago and this scam that happened in March. I can give you fifteen parallels that are exactly similar. Does that mean that as a society, we do not learn anything from our experiences? I am raising this as a question.

Because of a lack of clarity in regulation, we continue to see many issues cropping up, every now and then. Recently, we saw this fight between cellular and basic operators on the issue of limited mobility.

Also, the growth in the new millennium has not been as expected. We had a growth rate of just 5.2 percent. This year is likely to be slightly better. As agriculture, which contributes to 25-30 percent of the GDP is likely to be better. Also, it has a spin-off effect.

But the core issue remains, can we really remain isolated from the slowdown…