Thomas K. Thomas
T. C. A. Srinivasa-Raghavan
What’s the similarity between Indian agriculture and Indian telecoms?
Simple: First, both have raised output to levels that no one would have thought possible when output boosting began (1969 for agriculture, 1996 for telecoms); second, relatively speaking, firms (farmers) have low start-up costs but high operating cost s; third, both have an extraordinarily high degree of competition (or, in economics jargon, producers are price takers in both sectors); fourth, both have a fairly high degree of flexibility in output mix; and, crucially, fifth, both compete for one scarce resource — land in the case of agriculture and spectrum in the case of telecoms.
Competition, key driverYet, no one talks of limiting entry into farming but when it comes to telecoms, serious thought is being given to capping the number of firms. This is despite the fact that the key driver of growth of telecom has been competition.
Post-2000, a substantial drop in tariffs and subsequent increase in the number of subscribers has happened each time new players entered the market.
For instance, the entry of CDMA players in 2003 doubled the mobile subscriber base to 33.60 million in 2004. Similar trends have been recorded with the entry of fourth cellular operators, BSNL/MTNL and, most recently, launch of GSM services by Tata DoCoMo, which introduced per second tariffs into the market.
Today, there are 10 players, of which two came in 2008 and two in 2009. At least three more are all set to launch their services by the end of this year. The full impact of new players will be felt next year as consumers will get lower prices (each mobile call now costs only 50 paise against the Rs 16 a decade ago and a handset as little as Rs 1000).
Output factorHowever, just as small pieces of land held by many farmers reduces agricultural output compared to the output from a large tract of land owned by a single farmer, dividing spectrum among 13-14 players has resulted in operators having an average of about 7 Mhz. In contrast the global norm is to give above 20 MHz per operator.
The lower availability of spectrum also means higher capex because more cell sites have to be put up and to increase spectrum re-use, leading to inter-site interference and resultant constraints on quality of service. In economics this is called a negative externality.
From this, it is easy to conclude that allowing more operators will only worsen the situation given that there is only limited bandwidth available in the frequency bands currently under use.
Unlimited competition could also make it financially difficult for everyone in the market as newer operators, desperate to get a share of a shrinking addressable market, will keep bringing down the tariff levels, which may not always be backed by a viable business case, leading to bankruptcy. We have seen this happen in the case of airlines.
Spectrum allocationHowever, easy but counter-productive solutions is what the Government excels in. It must, therefore, be resisted. There is another solution to the problem of scarce spectrum: Undertake spectrum reforms to identify newer bands. This is analogous to land reform to boost agricultural productivity.
Apart from getting the Defence Ministry to vacate some more spectrum in the frequency bands currently used for mobile services, standards should be developed for using new bands such as 700MHz and 450 MHz. To bring in more transparency in spectrum allocation, it should be auctioned so that everyone, new or old player, gets an equal chance to buy radio waves at market price.
Deploying newer technologies will also enable existing players to use spectrum more efficiently. If global operators got 20 MHz spectrum in the 1980s it was because the technology available in those days were bandwidth guzzlers. But the networks today are becoming smarter.
For example, 5 MHz bandwidth using third generation technologies can not only accommodate an existing player’s entire voice subscribers but also enable high speed data services. Even existing 2G operators who were grumbling about the lack of adequate spectrum have packed in double the number of subscribers through some innovative sharing of resources and better network planning. The question of whether the market has the appetite for more players should be answered by the market itself. If any player believes that there is room for more, then regulation should not stop it.
ContestabilityThe current thinking which is veering towards creating an oligopolistic market structure must be discouraged. Any number of studies have shown that in such market structures, it is not the number of incumbent players that is important but what William Baumol called the ‘contestability’ of a market.
Otherwise, collusive pricing and restrictive trade practices will always creep in. In a contestable market, entry is free and this is what keeps the incumbents from colluding. Is that what the Government wants?
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