Intense competition amongst operators during the past year has resulted in the emergence of a new competitive structure and driven up prices to unsustainable levels. The telecom infrastructure industry is also facing the repercussions of this. While operator consolidation has happened, the benefits will accrue only over the long term. Akhil Gupta, Chairman, Bharti Infratel and Vice-Chairman, Bharti Enterprises, shares his views on the changing dynamics in the sector, the key concerns and future outlook. Excerpts….
The telecom sector witnessed a lot of changes and a lot of consolidation last year. How do you see it shaping up in 2018?
Telecom has since its inception been a very dynamic sector, but what has happened in the past year has been absolutely unprecedented. We could have never imagined the level of consolidation that took place last year, which was driven solely by the entry of Reliance Jio Infocomm Limited (RJIL). This consolidation is a very positive long-term development for the sector. The pricing pressures, again created by RJIL, were totally unprecedented and were a catalyst for this kind of consolidation. I don’t think we could have expected Vodafone India and Idea to consolidate had it not been for these pressures. And it is not yet over; this pressure will continue for some time. But what is more important is that the basic structure of the industry has now been corrected.
If the pricing pressure continues, what would it mean for the existing players?
The battle in the next one year will not be a profit-and-loss battle but a balance sheet battle. So, whichever company manages to maintain a strong balance sheet, would not only survive, but also thrive.
How is Bharti Airtel placed in the context of balance sheet and debt?
We are in a strong position as we have a very strong balance sheet and our debt is well within reasonable levels. We have also been divesting and raising cash.
What are the key regulatory issues that have still not been resolved?
There are two major issues to my mind. The first relates to the need for a transformation of the entire concept of licence fee and the way it is charged. The key aspects here are as follows:
- To do away with the existing duplication of licence fee, the regulation should specify that the licence fee regime would henceforth be governed on the principles of GST, whereby the licence fee paid on input services must be set off against the licence fee payable on output services.
- The licence fee quantum has to be reduced significantly. Firstly, there is no need for a USO levy of 5 per cent anymore and secondly, the recurring charge on spectrum that has been acquired by an operator in an auction needs to be done away with as the operator has already paid for that spectrum upfront.
- Income from unlicensed activities, for example, interest income, dividend, capital gains or other unlicensed businesses must not be liable for licence fees.
The other major issue that the regulator must address pertains to the need to strike a balance between consumer interest and the industry’s financial health. If the industry is not financially healthy, it will ultimately adversely impact digitalisation as there would be no investment forthcoming. Accordingly, there is an urgent need to introduce safeguards, for example, on predatory pricing. This should be done without waiting for NTP 2018 and under the consultation paper that has already been floated by TRAI.
What is your outlook for infrastructure firms like Indus Towers and Bharti Infratel?
In the short term, with all this consolidation, some tenancies are bound to be lost. We have already seen some of that happening in the previous quarter, and some could happen in the next one or two quarters. But, I have always believed that an infrastructure industry does not benefit with 12 players. Instead, it will benefit from three very strong players that have the passion, the capability and the resources to spread their networks across the country. So, fortunately, with some temporary loss of tenancies and revenue, the industry is heading into a very healthy zone. One thing is clear, in order to compete, players will have to share infrastructure. On the demand front, with the impending roll-out of 4G networks, followed by 5G a year or two later, and the fact that operators would not find it feasible to build their own sites due to capital constraints, infrastructure firms will not face any dearth of demand going forward.
How much of a negative impact have pricing pressures had on capex?
The poor financial health of the telecom industry is bound to have a major negative impact on capex going forward since the lack of return on capital employed will deter further investments. That would indeed be sad for the industry as the full benefit of the telecom and data revolution will not reach the common man.
ARPUs have been declining consistently. What is your expectation in this regard?
I think it is a temporary phenomenon. Ultimately, with so much of consumption, average revenues are bound to go up. Will it happen in the next couple of quarters, my feeling is no. I feel the hyper competition in tariffs will continue for a year but, ultimately, ARPUs have to go up.
What is the time horizon for 5G?
The time frame for the introduction of 5G is shrinking rapidly. Just a few months back, or maybe a year back, we were talking of at least 2021. AT&T has now announced that it will introduce 5G by end-2018. Once that happens, countries like India should be looking at 2020 at the latest. So, 5G is going to come in globally much faster than anticipated.
Where will the next big growth come from?
If you remember the time when voice was introduced, we believed that it would be a supply-led demand. You supply and demand will come. Today, we are in the same position with data. You supply it and there will be demand. You could, of course, prioritise the roll-out, but one should not over-analyse where demand will come from. We should just go and provide networks.
“The battle in the next one year will not be a P&L battle but a balance sheet battle. Whichever company manages to maintain a strong balance sheet, will not only survive, but also thrive.”
One area that has not seen much growth is fibre. Do any opportunities exist in this space?
Fibre networks offer a huge opportunity, for one simple reason. The human requirement for data speed is insatiable. The faster you make it, the more they need it. Earlier, speed used to be talked of in terms of 2 Mbps, then 20 Mbps and now it is 2 Gbps. The growing speed requirement can only be met through FTTH. However, it will always be a challenge to provide horizontal coverage as the cost of providing fibre is astronomical. Wherever it is vertical, it will be an easier. The other reason why fibre networks will see big growth would be that progressively more and more towers will have to be connected to fibre to cope with the increasing traffic, which microwave-based solutions will not be able to handle. In addition, since the bulk of data is consumed indoors, there would have to be a massive thrust on the provision of Wi-Fi in buildings, which again would need to be backhauled via optic fibre.
What is the company’s stance on content creation and promotion?
Content creation is split amongst millions of content developers. Some of them are really big, such as Netflix and Amazon Prime on the entertainment side and Google on the search and maps side. But there are millions of other small and medium-level content providers that function through apps. So, content is something that is there in plenty and it will keep coming in plenty. I feel that a job of an operator would be to provide the much-needed platform, or middleware, where all developers on every operating system, whether it is iOS or Android, or anything else, can come and do a plug and play.
Earlier, many operators wanted to be a part of the content game, but their stance has changed now. What are your views on this?
It is still a very debatable point. I think what operators need is the ability to seamlessly disperse content among their customers. If you want to create content, you have to first choose in which areas. Content creation is possible in every area, from weather to temperature to maps, healthcare and education. The kind of applications that exist are unimaginable. Second, is it necessary for an operator? I don’t think so. I really don’t think that unless an operator makes its own content, it cannot survive. If you can provide the content available in the market to your customer seamlessly, you are fine.
What are you most excited about with respect to what Bharti will do in the next few months?
I am most excited about the fact that we finally have an industry structure that is good, both on the service and infrastructure sides. On the service side, it is abundantly clear that the demand for data will keep growing and it is just a matter of supply to capture that potential. Clearly, the demand for 4G is increasing and by the time it is rolled out, it would be time for 5G. The other area that has tremendous potential is FTTH with demand for high speeds that cannot be provided on wireless. I also foresee big growth in the DTH and enterprise segments. As far as revenue is concerned, with the correct industry structure, this is bound to grow over time once the current hyper-activities on pricing are over. On the infrastructure side, I have no doubt that a very large number of new sites will be needed in the next few years for both 4G and thereafter for 5G. It is also clear that operators will need to share this infrastructure to be competitive and to preserve capital. In addition, infrastructure companies would have the potential to step into associated areas like optic fibre, Wi-Fi and smart cities. At Bharti Infratel and Indus Towers, we intend to be ready to capture the potential of this exciting future.
What is the update on Bharti’s global business? Is it looking at other countries as well?
Africa, after a long time and clearly some mistakes and missed opportunities, is finally on a good wicket. We are now profitable in Africa in terms of net profit as well as free cash flow. We expect steady growth in Africa and look forward to consolidating our position and increasing profitability and fund flows. For now, we are not looking to expand into other countries. There is still so much to be done in India and Africa.