Consolidation and Capitalisation

By Ramesh Akkineni

excerpts from an interview with Rajeev Chandrasekhar on CNBC-TV18


I don't know the stock market dynamics of telecom but as per the observation, there is fundamental shift in the dynamics of the sector itself. We are going from a model where there were two or three well capitalised strong players in this market – the Bhartis and the Vodafones – to a market where now we will have most likely 6-7 players all very well capitalised, all very strongly positioned to take high market shares in the incremental market. So the dynamics are against the incumbents in a way because what Bharti – this is my hypothesis. I am not standing by this as a prediction – but what Bharti did to BSNL 10-years ago, what Vodafone did to BSNL in the last 5-10 years – the new players like Reliance, Tata Docomo, Telenor which were all well capitalised, they're coming in with a very low cost structure – will potentially do to these existing incumbents and with number portability around the corner these are all factors and moving parts in a completely new equation that has redefined the telecom sector.


We have today about 80% of the customer base is really prepaid and by the very nature of a prepaid customer, they are not operator loyal. They are not very sticky to any operator, so clearly they will bounce around to where the best deals are and to that extent the new operators are always going to be more aggressive and more capable of managing these new price points and new tariff structures which you're seeing now from Reliance, from Tata Docomo and I suspect Telenor – don't count Telenor out as they have a track record of doing very well in the emerging markets.

They will come in here and they are coming in with a very low cost structure as well. They will come and do some interesting dynamics to this market.


Consolidation really is driven by differential levels of capitalisation, need for capital and some times those are the dynamics that drive consolidations. Currently, we have a situation where most of these 10-11 players per circle or per market are all reasonably well-capitalised. So you have Telenor, Unitech who are coming in with some big amounts of money. Then you have Tatas, Reliances, Vodafone, Idea, Airtel and BSNL – none of them are right now screaming for capital and that clearly will not be the reason for them to consolidate. So I think one more round of consolidation is inevitable but I wouldn't bet on that happening around the corner overnight. Most of these companies like Airtel for example, will be required to look for opportunities for growth outside India because here the operators are reasonably well capitalised and reasonably well positioned for growth.


I have argued this case for a while that the best days for incumbents like Bharti, Vodafone, BSNL and Idea are kind of behind them – this is my take. Because they are going to be confronted with a market structure, which they themselves experienced to their advantage 5-7 year's ago they will be facing the Docomos, the Reliances, the Unitechs and Telenors of the world who are aggressive, who will come in here with low cost structures and with number portability as a tailwind behind them be in a position to grab market share from the incumbents. So I would argue that the best days in terms of margins, cost of acquisitions – those may be over but that does not to say that the markets still will not grow. The market is only about 470-450 million subscribers and it is expected to be about 800 million subscribers by 2013. So there is considerable headroom for growth in the market but it will be smaller pieces of the pie for each one of these operators and more expensive pieces of the pie.


It all depends on how aggressive a business strategy the new GSM operator pursues to gain market share. There is an incremental piece of the market – let us argue for a minute that there is 400 million more subscribers that need to be added in the next 4-5 years and in those 400 million subscribers if these new operators say, "We want aggregate 50-70% of that." Then they will obviously have to pursue a pricing strategy to gain that market share and inherently today it is because the very nature of the customer base which is 80-85% prepaid, price is the acquisition driver. Price points are reason companies do better than others – of course there is this whole argument of customer service, network quality and coverage but those are all pretty much becoming standardized and I don't think there is an argument that 'A' is better than 'B' while companies would make that argument. But given that prepaid nature of the incremental customer base price points and lower and lower price points in my opinion will be the driver. One other last point – upto this time and I have raised this in Parliament many times – there has been almost a cooperative pricing model because they were only 3-4 GSM operators. With 10-11 operators all providing GSM services, it becomes very difficult for even operators to manage the unofficial cartel on pricing. So there going to be in my opinion a pricing pressure in the market.

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