Bubbles and Pricing

By Ramesh Akkineni

excerpts from an interview with Sanjeev Aga on CNBC-TV18


I think you need to go back a couple of years. You need to go back to 2007 when there were all kinds of — if I may say so — funny things happening with licencing. But even funnier things were happening with people applying for licences, 2007 was a bubble. It was as big a bubble as they come. So many licences were taken. My guess is that if the government had given out 10 more licences that would have been taken. So, there was a belief that, take a licence and you'll become a billionaire. So, all that overcapacity has been built up, the cross-over licences, new GSM licences and now that overcapacity has to work itself out of the system. I don't think anyone is in control of tariffs or prices.


If you look at the bottom 40-50% of the revenue base of the telecom sector, the behaviour is not that of individual subscribers. The behaviour is like commodity, it is like that of traffic, because you have one human being having multiple SIM cards, which he uses for different legs of telephony. It is extremely price sensitive. Then the company thinks that you have made an entry price and you've got a body of subscribers and you can grow them over a period of time. It doesn't happen that way any longer, because this is just like traffic and if someone comes with 1% lower it just flows the other way.


So, to answer your question I think it is really a question of long-term cost structures of different companies. The cost structures in our sector are very disparate. I am not talking of just right now but I am even talking of post gestation. The consequence of the scale you have, the brand strengths you have, the kind of spectrum you have and my guess is that it is going to require – size will matter, credibility will matter, spectrum will matter and economic strength will matter. Eventually, my expectation is this is not going to last as long as people think. The fall of tariffs have been very rapid and I feel the settling out or the writing on the wall will also emerge pretty quickly.


To begin with, I've never been a great admirer of the way policy was conducted in terms of so many licences and inadequate spectrum. But I think the big story that people have missed out is the role that has been played by corporate greed and human greed in 2007. That is why I refer to it as a bubble. Therefore you have overcapacity and when there is overcapacity everyone pays a price. But my expectation is that, and this is based on the cost structure of different companies. My expectation is that this period of shakeout will be much quicker than people anticipate. I don't think it will last more than another 12 months. I think the companies that have their inherent cost structure and the strengths to not only work out this period but to do much better after that would look forward to very sunny days ahead.



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