The Vodafone-Idea merger announced on March 20 is a major step towards a consolidation trend that has been evident for some time in the telecommunications industry. Reliance Jio’s bold slashing of 4G prices and impressive suite of free services in September – bankrolled by Reliance’s profits in petroleum refining and petrochemical products – was the last straw for an industry that has been repeatedly battered by internecine price warfare and irrationally priced spectrum.
In these dire circumstances, acquisition by the market leaders and market exit for the laggards remain the most rational reactions. Besides the Vodafone-Idea merger, significant steps in this direction are evident in Bharti Airtel buying Telenor India’s operations, the Mahanagar Telephone Nigam Limited’s proposed merger with Bharat Sanchar Nigam Limited, and Reliance Communication’s proposed merger with Aircel. In the medium term, it is clear that the industry is heading to an oligopoly of three to four players who will collectively control over 90% of the market.
The essential purpose of mergers of firms providing identical products or services (Vodafone and Idea fundamentally provide a similar suite of services, which is internet data and voice call service over radio spectrum frequency) is to gain greater pricing power through higher service-capacity and customer base. Post-2019, when the merger is expected to be over, Vodafone and Idea would collectively own 750 megahertz in 3G and 4G spectrum bands. They would also have the largest market share by user-base to the tune of 390 million subscribers, greater than current market leader Bharti Airtel and its approximately 250 million subscribers.
These developments suggest good times in the future for the Indian consumer.
Too much of a good thing
The cardinal problem with the telecom industry in India over the past decade has been its hyper-competitiveness. It has led to low prices but at the cost of the long-term health of the industry – most evident through a pummelled bottom line and the general poor quality of services.
Over the past decade and a half, three major multinational telecom operators have entered and exited the Indian market, the industry has built an unprecedented debt of over Rs 4 lakh crores, and thanks to Jio’s aggressive pricing, other operators’ profits have dropped or vanished altogether.
The sodden state of Indian telecom, however, hits the consumer most profoundly through the persistence of call drops. Today in a metro, it is close to impossible to have a mobile voice call of a reasonable length without it dropping.
But isn’t higher competition innate to capitalism and always a good thing – providing consumers with cheaper services with constant pressure on quality? As in the case of platitudes on the benefits of free trade and deregulation, the reality of competition in a capitalist economy is far more complex. Competition amongst firms yields fruitful outcomes but only if it is of a certain kind.
A successful capitalist industry is almost never served by a free market in the textbook sense. The kind where products are identical and the number of producers large with fierce competition amongst all. Such markets truly exist in the agricultural sectors of the poorest African and Asian countries. The reality of these markets is underscored in the exposure of the market participants, who often are the poorest of farmers in the world, to the ruthless but inevitable global boom and bust cycle of commodities and crops.
The kind of competition that really works in a modern economy is of the oligopolistic variety, where the firms are few, the prices stable and the competition is over branding, flavour, geography and quality. The most financially healthy, stable and often innovative industries of a capitalist economy would reflect such a market structure. For instance, the premium segments of the smartphone market – the iPhone, the Samsung Galaxy phones and the Google Pixel – are similarly priced with the competition being about the ecosystem the consumer wishes to be a part of, and the hardware nuances the consumer prefers. One may say the same thing about the soft drink and fast-moving consumer goods markets.
Sophistication, technological advance and high capital investment in an industry require scale and institutional growth – all of which necessitate the creation of a few large corporations wielding gigantic market power as opposed to multitudes of small firms pursuing cutthroat competition. Oligopolistic competition, as Lenin never quite said it, becomes the finest stage of capitalism in such scenarios.
Future: Freedom from call drops
In this respect, the creation of an oligopoly of three to four major players in the telecom market would be greatly beneficial to the long-term health of the Indian telecom industry and, yes, the consumer herself.
If the major players – Airtel, the Idea-Vodafone merged entity and Reliance Jio – were to end up with a market share between 20% and 35% each, then the relentless price wars of the industry may gradually subside. Mainly because it is in no party’s interest to drop the price – any gains shall be negated when other parties follow suit. The competition is likely to be over quality of voice calls and data provision, and over product differentiation strategies (promotion deals, advertisements, brand ambassador choice among others).
The stability of returns provided by what an economist would call the stickiness of price will allow the industry to raise greater finance and recover the high capital expenditure forgone in spectrum purchases. This in turn should be invested in improving the utilisation of existing spectrum owned by the operators, buying more spectrum to keep up with future demand and invest more in supporting infrastructure.
Moreover, the creation of an oligopoly of three or four major players would also allow the regulator, the Telecom Regulatory Authority of India, and other governmental bodies to exercise their writ and enforce better quality throughout the industry. Few large players in a soon-to-mature industry usually means the industry is organised. Organisation allows easier enforcement of new regulations. Also, with assured prices and returns, the leading operators would find it easier to guarantee a degree of quality.
The Indian consumer may not get amongst the lowest data and voice call rates in the future. But if this means freedom from call drops, then chances are that the Indian consumer won’t feel nostalgic about the days of hyper competition.
Akshat Khandelwal is a writer and entrepreneur based out of Delhi. His Twitter handle is @akshat_khan.
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