Wednesday, March 05, 2008

Can Value Addition Be Reality In Indian Telecom Market?

Vasu Reddy from Chicago
vasureddy@aol.com
On March 2, 2008 Virgin announced its entry into the ballooning Indian mobile market via value added services targeting youth segment with a franchise agreement with Tata Teleservices. Virgin provides value added services in various mobile markets around the world. Virgin doesn’t actually hold any wireless licenses. It simply brands its services in partnership with mobile operators as value added. It is quite a common practice across the globe to buy bulk airtime, add new features and resell with custom branding.
On March 4, 2008 the DOT asked for clarifications from Tata Teleservices on this agreement and asked to stop any services under the arrangement with Virgin until the agreements are reviewed and in accordance with the license issued by the DOT.
The COAI also has been asking for clarity on this agreement and has written multiple letters to the DOT, and has clearly articulated that the Virgin-Tata value added services agreement was illegal under the current license agreement. By the time the review and approval or disapproval of this agreement for value added services is completed, there will be many arguments about the wording of the license agreement and multiple interpretations of the same. When Mr. Tata went public about the deal with Virgin on the value added services there was global coverage of Virgin’s entry into the Indian market, and just 2 days after the announcements it became contentious.
The two major contentions against the deal are:
1. Is Virgin branding the mobile services under Tata name and marketing them to customers as per prescribed guidelines in the license agreement.
2. Virgin in its own way has made presentations that did not mention Tata name in promotions, and thereby ignored or simply was arrogant in assuming there will be no objections to the promotional strategies in entering into the highly competitive and extraordinarily difficult Indian market
In the already contentious Indian market where GSM and CDMA operators are at odds, the demand for new spectrum is greater than what is conceivable, every major industrial house interested in a piece of the market and all above and beyond the demand form the growing subscriber base, it will be impossible to practice dynamics of an open market where market rules will be interpreted to serve the best interests of the consumer.
Both Tata and Virgin will make every effort to point out that this value added services through Tata Teleservices is a legal arrangement that is allowed by the license and the others will make sure that the agreement and the license are at odds, while the DOT will scrutinize this and eventually provide their take on it. There is no guessing what will transpire at the end, but it does show that the Indian market is contentious, which is a fact since the beginning of privatization and it continues to be and will be, and both Virgin and Tata were not as smart in presenting the value added services in such a way the agreement would comply to the letter of the law. The law is by rule ambiguous and will cause continuous ambiguity with interpretation.
In any case, this latest instance of providing services in the Indian mobile market is challenging. It will certainly help to framing the industry rules and regulations to fit every conceivable value addition and what is, or make value addition a preference of the operator.
If the Indian Telecom market has to look at value addition seriously, the technology challenges are minimal whereas the legal implications become onerous.

In reality many services are simple:

· A wireless operator can use a combination of technologies to expand services.
· An ISP can essentially provide conference facilities to all its broadband users.
· A village within a cellular tower can become a WIFI point.
· An individual mobile user in a village can start a small mobile enterprise to serve to the village folks in meeting their in-coming or out-going call needs.
· An Internet cafĂ© can become a conference point for both Voice and Video.

These are some of the many instances in the mobile world which can be simply replicated to the growing needs of network and coverage. The existing strict guidelines may not allow for such massive changes in operations with our licenses today.

Simplification of existing guidelines and developing better revenue management will be prudent. In both spectrum auctions and revenue sharing, it is essential to make the market a level playing field for all aspirants, big and small while the ultimate benefit of progressive revisions to the telecom operating guidelines will be to both the GOI and the consumer.

The first place to start is the already propagated for auctions for scarce spectrum, and it has the highest value revenue for GOI and DOT, and also attracting serious bidders who have deep pockets for paying for both the spectrum and infrastructure. It is absolutely necessary to get serious about spectrum allocations as there are many global operators willing to invest long term and would like to participate in the Indian market. It is fallacy to believe that the new operators will be more susceptible to longer periods on ROI. When the number portability is adapted across the networks the user will simply go to where the value for his money is and will never be tied to an old or new operator. Presuming that the newer technologies and value additions will be common place, the more choice the better the consumer. Only the fittest of the operators who provide value and quality will get the subscribers. All the global markets have demonstrated this formula, and the old operators in India should be vigilant to this dynamic of the mobile market. Open the licensing process for honest bids and let the players spend freely on both the acquisition of spectrum and building the network.

Revenue sharing between the operators and GOI can be implemented through a simplified tax structure without much debate if it is across the board for all communications services. The current taxes and revenue sharing models were put in place for operations implemented in 1990s and did provide adequate return for the GOI while parting with a monopoly and valuable spectrum. In today’s environment they are outdated and contentious. Now that the market has been maturing (may be less than 50% of what it can eventually be) and continues to grow beyond anyone’s reasonable expectations, it can be a wise idea to have a blanket Universal Communications Tax on all purchases made a communications user. It can be one fee for all use of communications, and every time a purchase is made by an individual, groups, business or any type of person or entity, charge a fixed percentage of the sale that is collected at the point of sale and paid to the GOI. That should eliminate the imbalances of fees collected on each type of service and eliminate the bias that exists. Regular phone service, Value added services, new innovations, VOIP, broadband, mobile, satellite, WIFI, WIMAX and everything else will be taxed at the same rate and GOI gets exactly same percentage of the sale on all communications use.

Simple mathematics can be applicable for licensing, auction and uniform percentage of the sales as GOI revenue. When someone bids and acquires spectrum or a license, they will have no value by just holding it. The spectrum or license has to be operated at the highest sales that it can generate, essentially requiring infrastructure to promote sales, and with sales revenue for GOI.

By Simplifying licensing process and revenue management it will further allow for more innovative partnerships and investment into the communications industry. The positive changes will not hurt the incumbents as they already have a great deal of value with their spectrum and installed user base. The newer entrants will have a level playing field with uniform rules and clarity with operating guidelines. Both the old and new operators will benefit from a single type of revenue sharing or tax on the sales, and GOI with a lot more revenue because of the innovations with additional revenue sources.

India is unique in its own corporate structure. It has started to selectively shed the monopolies and licensed industries (“for sure not completely done”). India already has created new heavyweights in Telecom who don’t have roots or dynasties. It was possible because of the quick transformation on Telecom industry from a monopoly to a competitive market. Even today majority of the Telecom services belong to big names in the Industry, with some consolidation already completed. Foreign players such as Vodaphone have already priced the Indian market to global standards, and Hutchinson’s exit from India is not surprising. But the Indian grown Telecom Majors are a model of wealth creation in rapid time which probably was not seen in any market forecasts. The market values derived by the Telecom companies are from Indian consumer’s adaptation to utility of communications, and clearly reflects the possibilities of such vast growth in value creation. By simplifying the rules of engagement it will only encourage more of such value creation, along with innovation, technology and value addition.

If Tata and Virgin, both global brands and formidable global corporations are having difficulty with the regulations to operate value added services, it is inconceivable for a smaller player to operate in the same environment. It is however possible to simplify the guidelines and generate more revenues for GOI, while making sure the consumers get value, quality and choice. We just have to pick the best practices available in the global market to make value addition a reality in the Indian Telecom market.

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