Telecom Benchmarks: Successes, pitfalls and the way forward for the telecom industry

The mid-1990s saw the emergence of the first set of private telecom service companies following liberalisation reforms. But almost immediately came the realisation that achieving economies of scale would be hard. Soon after, the first policy changes – calling party pays and revenue sharing – were introduced, providing the industry with much-needed breathing space. Achieving business viability still remained a tall task. The high capital requirement coupled with low ARPUs created a challenging equation that the strategic partners, primarily from developed markets, were neither accustomed to nor able to resolve for their shareholders.

The majority of the foreign strategic telco partners, started losing interest in the Indian market. In hindsight, this event was positive, as it gave the Indian promoters greater agility and control over decision-making for capital structuring, fundraising and investing. Most importantly, they understood that while scale was imminent, low ARPU was also a reality, and they needed to operate within these circumstances to build a viable business. At the same time, the interest of original equipment manufacturers in India was rising, helping bring down the per unit capex.

This was also the phase in which business model innovations of frugal scaling started to take shape – the pay-as-you-grow capex model and outsourcing of network services and IT – which helped ease capital requirements. One of the operators, for example, doubled its tower sites annually from 5,000 in 2003 over the next three to four years. Another big innovation was the sharing of passive infrastructure, such as towers and energy, at scale. Under the model, probably the first in the world, top operators, despite being intense competitors, pooled their passive assets to form a joint venture tower company. This increased capital productivity, and enhanced coverage, capacity, scale and affordability.

At the time, fixed line, fibre, Wi-Fi, content, over-the-top applications were not in the picture, but were round the corner, with high throughput, spectrally efficient 4G ready for commercial deployment.

While the industry was scaling up, several challenges continued to hold it down. These included low ARPUs, high taxes, fees and spectrum costs, a heavy statutory compliance burden, and 3G failing to deliver the expected change. Till date, this situation has not changed much, except for the steady increase in ARPUs (though it is still not where it should be) and usage.

In the late 2000s, a policy decision fragmented the industry again. Globally, there were typically two to four players: two strong, one relatively weak and a state-run operator in some countries. Meanwhile, India had 10 operators. The new operators, except one, had poor capital structure. These new operators had only one way to gain share, which was to reduce prices. This further impacted their financial viability.

In my interaction with a chief executive officer (CEO) of a leading operator on the possibility of acquiring some of these companies, I received an insightful response that has stayed with me. He explained, “Firstly, about 86 per cent of the new subscriber additions are coming to the three of us top players, so in market perception, consolidation has already happened. Secondly, financial consolidation does not serve the purpose as each of these new operators has $5 billion in debt. Their debt service-to-EBIDTA ratio is poor. Therefore, they will fold up sooner than later.”

Meanwhile, another CEO was making strategic calls on strengthening the company’s capital structure, fibre infrastructure, network and customer experience, automation, digitalisation and spectrum assets to effectively handle the upcoming competition. This is probably one of the best examples of strategy and execution in the Indian telecom landscape.

Eventually, the well-capitalised new operator catalysed the sector’s consolidation as weaker operators folded up and the sole remaining foreign telco also exited.

India now has two robust and one currently weaker player, aligning with global trends. We still have to see how successful the government operator is going to be, considering it has to do some heavy lifting in technology, project management, channel development and branding. It would be ideal to have a robust government player to keep the competitive vibrancy alive.

In parallel, the well-capitalised new operator planned and did achieve scale from day one of its launch, converted the country’s telecom from “carriage” to “carriage and content” and from voice-centric services to data-centric services. It continues to take the driving seat by vertically integrating the telecom value chain, setting a new paradigm for the industry.

Going forward, the industry will continue to require sustained capex to densify mobile coverage and expand fibre-to-the-home penetration, fibre-to-the-tower coverage and core/metro/edge data centres. Studies indicate that a significant share of data is consumed indoors and this is expected to increase. India still has a couple of hundred million 2G users who are expected to migrate to more advanced technologies at a certain pace, depending on how the broad economic parameters pan out. As this transition happens, demand for data is projected to further increase along with network-related capex.

Data sovereignty, security, privacy and policies such as the Digital Personal Data Protection Act, 2023, combined with the ability to process exponentially large amounts of data to create insights, will augment demand for compute and storage, creating an unprecedented demand for data centres (DCs) and the cloud.

Fibre will take centre stage, with residential and commercial buildings being fiberised to cater to in-building data consumption, use case-specific fibre connectivity such as DC-to-DC, and connections between disaggregated (cloud) compute and storage. Further, cable landing stations are expected to move inland. Currently, only 44 per cent of telecom towers are connected through fibre. This share has to reach almost 100 per cent to meet the data demand.

Further, the rapidly maturing generative AI (GenAI) ecosystem has the potential to drive productivity and efficiency. I see AI having an impact on internal business processes, enabling organisations to sweat their assets intelligently, gain access to bespoke market segmentation to customise tariff packages and service levels, accelerate the roll-out of value-added services, undertake call centre sizing and predictive maintenance of infrastructure, etc.

Today, telecom operators have rich data on Indian citizens. The advent of near-unlimited compute, storage and GenAI capabilities will create opportunities to acquire higher wallet shares of consumers, of course within the legal and statutory frameworks.

There are still newer services that India will see. For example, satellite Air2Ground scaled IoT adoption in everyday life, government-to-citizen services and enterprise-to-customer solutions. While these technologies are in their early stages, they are expected to grow by orders of magnitude in the future.

That said, policy frameworks, along with tax and levy alignment, will play a critical role in maintaining the industry’s attractiveness. The key challenge is to increase ARPUs without passing the cost burden on to subscribers, which may impact digital inclusion, and balancing the business requirement with digital inclusion.

On the environmental, social, governance front, the absolute energy consumption by industry is increasing, with diesel generators still producing a substantial share. There is an urgent need to make alternative green energy easily available at viable prices.

The industry assets are quite scattered. The networks must remain operational 24x7x365. This requires staff to remain constantly on the move in all weathers, work on electrical systems, at heights, exposing them to on-the-job risks. Safeguarding colleagues from injuries and fatalities is paramount.

I am proud to have been a part of the industry since the first mobile call was made. I have witnessed first-hand India’s telecom journey from the initial launch of mobile services in several states to the addition of tens of millions of users every month, and today, when telecom services are available across the country. The industry has set benchmarks in frugal scaling, business model innovations and making profits with the lowest ARPUs.

I am looking forward to the next decade of the industry, marked by significant government-to-citizen and enterprise-to-customer use cases, IoT, private networks, deeper digital inclusion and advancements that will raise citizens’ quality of life. I expect our industry will continue to play a stellar role in coming years.