MacroScan (Printable Version) - Telecom Licensing: An End to the Mess?

Will the shift to a unified licence regime sort out the mess that has been made of India's telecom policy, by conflicting objectives and contradictory policy shifts? Not if the Cellular Operators' Association of India (COAI) has its way, for it has already declared its intention of turning to the courts to overturn the decision, which, it claims, has distorted the playing field.

Theoretically, unification implies that the holder of a licence to provide a particular form of telecom service can, subject to certain conditions regarding the payment of penalties and special entry fees, offer the full range of fixed, mobile and value-added services. However, for now, unification involves only the fixed, wireless-in-local-loop (WiLL) and cellular sectors, though the claim is that in subsequent stages it will cover national and international long distance and other value-added services (such as internet provision) as well.

Given the current state of roll-out of telecom services, the immediate beneficiaries of the government's decision are Reliance Infocomm, with a basic services licence in seventeen telecom circles, and Tata Teleservices. Reliance is expected to pay a total of Rs 1,581 crore (including an entry fee of Rs 1,096 crore and a penalty of Rs 485 crore), while the Tatas will have to put out Rs 545 crore in order to convert their basic licences to unified licences. Cellular operators, on the other hand, do not have to pay any entry fee for such migration.

There are three grounds, not always made explicit, on which the COAI opposes a unified license regime. First in its view, the government's decision endorses the violation of license conditions by some of the basic service licensees, who won themselves the right to provide 'limited mobility' services and used that right to stage a back-door entry into the cellular area. Second, even though this entry occurs after migration from a license fee to a revenue-sharing regime, the entry fee and penalties being imposed on players like Reliance Infocomm and Tata Teleservices to extend 'limited mobility' into full cellular service provision are extremely low, providing them with a competitive advantage. And, third, the decision involves a mid-process retraction of an implicit promise made by the government to limit competition in different telecom sectors in order to ensure the viability of relatively new private entrants.

The irritation expressed by cellular operators is partly understandable. When the policy of promoting private entry into the telecom sector was initiated in the early 1990s, the telecom sector was segmented, for policy purposes, into fixed (basic) services, mobile services, national and international long-distance telephony, and various value-added services such as internet service provision. The rules and regulations that were initially framed, and subsequently modified, related to the terms on which entry was permitted. Among these terms were of course the part (or 'circle') of the country to which a licensee had access, the number of entrants that would be considered for each circle, the duration for which a license would be granted, and the framework to determine the fees that an operator would be charged for entering an area and the restrictions, if any, on the tariffs that consumers would be required to pay.

The first dilution of the segmentation principle occurred partly for technological reasons and partly because the government wanted to make the best of what was a bad policy from the point of view of 'universal service provision', or providing population-wide and geographically widespread access to telephony. A telecom network consists of a network of exchanges and a set of 'local loops' or connections between the switch in an exchange and the end-use equipment at the premises of the subscriber. Conventionally, all these connections are ensured by a combination of optical fibre and copper cables laid underground or overhead. Needless to say, the cost of the cables themselves and of laying them made network expansion expensive and even unviable, in areas with low telephone and call densities.

These constraints notwithstanding, the earlier public sector monopolies did manage to move substantially towards universal service provision, even if it meant delaying the realization of the objective of providing telephones on demand and of sacrificing some additional profit. When framing the rules for private entry, the government retained universal service provision as a goal, and even laid down explicit targets as part of the licensing conditions. However, once the process of privatization began, it was clear that it would be too much to expect the private sector to be committed to this goal of universal service provision. And since public sector firms (awaiting privatization) were expected to compete with new private operators, it would be unfair to expect them to stick to their past commitment to such provision.

To partly deal with these problems, the government decided to encourage technologies that reduced the cost of network expansion, especially in areas with low telephone and call densities, in the hope that this would help universal service provision. The technology that came in handy here was that offering wireless connectivity in the local loop, or wireless-in-local-loop (WiLL). The switch in the exchange could be connected via cable to a central wireless access point, which could then service a number of wireless connections within an area of, say, 25 kilometres. That was the range associated with the technology that was offered by Qualcomm Inc. of the US to Indian Telephone Industries (ITI), and has been adopted by many providers in preference to an indigenous technology developed at the Indian Institute of Technology, Chennai, which, though cheaper, had a smaller range.

Obviously, once WiLL technology is put in place, those connected through this means will be able to utilize their end-user equipment anywhere within the specified range relative to the access point. Since, in addition, technological developments have delivered portable end-user equipment, subscribers to the service can benefit from mobility within the area defined by the range. Thus, permitting a basic provider to use WiLL technology amounted to allowing him to provide 'limited mobility' as well. This is precisely what happened, through a recommendation of the TRAI and an end-2002 ruling by the Telecom Disputes Settlement and Apellate Tribunal (TDSAT). Cellular operators were forced to challenge the decision in the Supreme Court on the ground that WiLL is not just a technical extension of basic service provision but a separate value-added service that overlaps with the service reserved for provision by cellular operators.

Technological developments had actually gone further. It was soon clear that a WiLL service provider could hand over a consumer to another access point within or outside a short-distance charging area (SDCA), allowing it to offer full-fledged cellular-type services with national roaming. From a technological point of view, therefore, 'limited mobility' was a misnomer. In an audacious move, Reliance made a public offer of such services, for a fee, to its potential subscribers.

This induced the COAI to voice its opposition more strongly. However, in a second decision—necessitated by a Supreme Court direction to reconsider the matter, keeping in mind the question of a level playing field—the TDSAT ruled that the basic telecom operators who were offering limited mobility services should be allowed to continue doing so, subject to the conditions that: (i) a distinction is maintained between 'limited mobility' and cellular service provision, by ensuring that calls were not handed over when a subscriber moved out of the SDCA; and (ii) the playing field is levelled by levying an additional entry fee on basic operators providing the value added service.

Conceptually, the TDSAT was demanding a ban on something that was technologically feasible and worth exploiting from the point of view of the consumer. Seen in this light, the subsequent decision to push for a unified licence for telephony that breaks down the technologically obsolete segmentation implicit in the policy of the government, does make sense. The only remaining issue was whether the disadvantage faced by the original cellular provider because of the higher entry fee paid by it, is redressed.

In an effort to level the playing field, the government has made it incumbent for basic operators wanting to offer cellular services to pay an amount equal to the difference between the licence fee paid by the fourth (and, thus far, the last) entrant into a particular circle, and the fee paid to provide limited mobility services. Since a late entrant faced with established incumbents may not be willing to pay a high licence fee, and since the position of a basic operator in a circle is stronger than a cellular service provider who is a later entrant, this may not be the best compromise. This has angered the COAI and fuelled allegations that basic operators, especially Reliance Infocomm with a presence in seventeen circles, are being favoured.

While this may be true, sympathy for the cellular operators is waning, given their own track record. Cellular operators have always exploited the fact that private entry not mean state withdrawal or absence, but was to be accompanied by state protection (of private oligopoly, through restricted entry) and state regulation of the nature of services provided and levels of tariffs charged. Their strategy has been to win entry by making irrational bids that render the business unviable, protect their oligopolistic position by lobbying the state against permitting new entrants, and improve their viability by initially charging exorbitant tariffs and subsequently forcing the government to drop the license fee regime and allow operators to migrate to a revenue-sharing principle. In short, profiteering based on government protection was at the core of their business plan.

Unfortunately for them, pressured from different sides and by circumstances, the government has over time not only permitted the original public sector units to serve as a third operator in each circle but provided for a fourth private operator as well. Now it has permitted basic providers to turn into cellular operators. This has increased competition quite irreversibly, given the fact that the decision was backed by the TRAI, the TDSAT and the Group of Ministers on Telecom, before being approved by the cabinet. The cellular operators seem to have no option but to resign themselves to the new competitive environment, despite their threat of turning to the Supreme Court once again. A major restructuring of the industry is inevitable. This will possibly be good for competition and for the consumers. But the objective of universal service provision is unlikely to be served.



Themes > Current Issues	12.11.2003


Telecom Licensing: An End to the Mess?

C.P. Chandrasekhar

Will the shift to a unified licence regime sort out the mess that has been made of India's telecom policy, by conflicting objectives and contradictory policy shifts? Not if the Cellular Operators' Association of India (COAI) has its way, for it has already declared its intention of turning to the courts to overturn the decision, which, it claims, has distorted the playing field. Theoretically, unification implies that the holder of a licence to provide a particular form of telecom service can, subject to certain conditions regarding the payment of penalties and special entry fees, offer the full range of fixed, mobile and value-added services. However, for now, unification involves only the fixed, wireless-in-local-loop (WiLL) and cellular sectors, though the claim is that in subsequent stages it will cover national and international long distance and other value-added services (such as internet provision) as well. Given the current state of roll-out of telecom services, the immediate beneficiaries of the government's decision are Reliance Infocomm, with a basic services licence in seventeen telecom circles, and Tata Teleservices. Reliance is expected to pay a total of Rs 1,581 crore (including an entry fee of Rs 1,096 crore and a penalty of Rs 485 crore), while the Tatas will have to put out Rs 545 crore in order to convert their basic licences to unified licences. Cellular operators, on the other hand, do not have to pay any entry fee for such migration. There are three grounds, not always made explicit, on which the COAI opposes a unified license regime. First in its view, the government's decision endorses the violation of license conditions by some of the basic service licensees, who won themselves the right to provide 'limited mobility' services and used that right to stage a back-door entry into the cellular area. Second, even though this entry occurs after migration from a license fee to a revenue-sharing regime, the entry fee and penalties being imposed on players like Reliance Infocomm and Tata Teleservices to extend 'limited mobility' into full cellular service provision are extremely low, providing them with a competitive advantage. And, third, the decision involves a mid-process retraction of an implicit promise made by the government to limit competition in different telecom sectors in order to ensure the viability of relatively new private entrants. The irritation expressed by cellular operators is partly understandable. When the policy of promoting private entry into the telecom sector was initiated in the early 1990s, the telecom sector was segmented, for policy purposes, into fixed (basic) services, mobile services, national and international long-distance telephony, and various value-added services such as internet service provision. The rules and regulations that were initially framed, and subsequently modified, related to the terms on which entry was permitted. Among these terms were of course the part (or 'circle') of the country to which a licensee had access, the number of entrants that would be considered for each circle, the duration for which a license would be granted, and the framework to determine the fees that an operator would be charged for entering an area and the restrictions, if any, on the tariffs that consumers would be required to pay. The first dilution of the segmentation principle occurred partly for technological reasons and partly because the government wanted to make the best of what was a bad policy from the point of view of 'universal service provision', or providing population-wide and geographically widespread access to telephony. A telecom network consists of a network of exchanges and a set of 'local loops' or connections between the switch in an exchange and the end-use equipment at the premises of the subscriber. Conventionally, all these connections are ensured by a combination of optical fibre and copper cables laid underground or overhead. Needless to say, the cost of the cables themselves and of laying them made network expansion expensive and even unviable, in areas with low telephone and call densities. These constraints notwithstanding, the earlier public sector monopolies did manage to move substantially towards universal service provision, even if it meant delaying the realization of the objective of providing telephones on demand and of sacrificing some additional profit. When framing the rules for private entry, the government retained universal service provision as a goal, and even laid down explicit targets as part of the licensing conditions. However, once the process of privatization began, it was clear that it would be too much to expect the private sector to be committed to this goal of universal service provision. And since public sector firms (awaiting privatization) were expected to compete with new private operators, it would be unfair to expect them to stick to their past commitment to such provision. To partly deal with these problems, the government decided to encourage technologies that reduced the cost of network expansion, especially in areas with low telephone and call densities, in the hope that this would help universal service provision. The technology that came in handy here was that offering wireless connectivity in the local loop, or wireless-in-local-loop (WiLL). The switch in the exchange could be connected via cable to a central wireless access point, which could then service a number of wireless connections within an area of, say, 25 kilometres. That was the range associated with the technology that was offered by Qualcomm Inc. of the US to Indian Telephone Industries (ITI), and has been adopted by many providers in preference to an indigenous technology developed at the Indian Institute of Technology, Chennai, which, though cheaper, had a smaller range. Obviously, once WiLL technology is put in place, those connected through this means will be able to utilize their end-user equipment anywhere within the specified range relative to the access point. Since, in addition, technological developments have delivered portable end-user equipment, subscribers to the service can benefit from mobility within the area defined by the range. Thus, permitting a basic provider to use WiLL technology amounted to allowing him to provide 'limited mobility' as well. This is precisely what happened, through a recommendation of the TRAI and an end-2002 ruling by the Telecom Disputes Settlement and Apellate Tribunal (TDSAT). Cellular operators were forced to challenge the decision in the Supreme Court on the ground that WiLL is not just a technical extension of basic service provision but a separate value-added service that overlaps with the service reserved for provision by cellular operators. Technological developments had actually gone further. It was soon clear that a WiLL service provider could hand over a consumer to another access point within or outside a short-distance charging area (SDCA), allowing it to offer full-fledged cellular-type services with national roaming. From a technological point of view, therefore, 'limited mobility' was a misnomer. In an audacious move, Reliance made a public offer of such services, for a fee, to its potential subscribers. This induced the COAI to voice its opposition more strongly. However, in a second decision—necessitated by a Supreme Court direction to reconsider the matter, keeping in mind the question of a level playing field—the TDSAT ruled that the basic telecom operators who were offering limited mobility services should be allowed to continue doing so, subject to the conditions that: (i) a distinction is maintained between 'limited mobility' and cellular service provision, by ensuring that calls were not handed over when a subscriber moved out of the SDCA; and (ii) the playing field is levelled by levying an additional entry fee on basic operators providing the value added service. Conceptually, the TDSAT was demanding a ban on something that was technologically feasible and worth exploiting from the point of view of the consumer. Seen in this light, the subsequent decision to push for a unified licence for telephony that breaks down the technologically obsolete segmentation implicit in the policy of the government, does make sense. The only remaining issue was whether the disadvantage faced by the original cellular provider because of the higher entry fee paid by it, is redressed. In an effort to level the playing field, the government has made it incumbent for basic operators wanting to offer cellular services to pay an amount equal to the difference between the licence fee paid by the fourth (and, thus far, the last) entrant into a particular circle, and the fee paid to provide limited mobility services. Since a late entrant faced with established incumbents may not be willing to pay a high licence fee, and since the position of a basic operator in a circle is stronger than a cellular service provider who is a later entrant, this may not be the best compromise. This has angered the COAI and fuelled allegations that basic operators, especially Reliance Infocomm with a presence in seventeen circles, are being favoured. While this may be true, sympathy for the cellular operators is waning, given their own track record. Cellular operators have always exploited the fact that private entry not mean state withdrawal or absence, but was to be accompanied by state protection (of private oligopoly, through restricted entry) and state regulation of the nature of services provided and levels of tariffs charged. Their strategy has been to win entry by making irrational bids that render the business unviable, protect their oligopolistic position by lobbying the state against permitting new entrants, and improve their viability by initially charging exorbitant tariffs and subsequently forcing the government to drop the license fee regime and allow operators to migrate to a revenue-sharing principle. In short, profiteering based on government protection was at the core of their business plan. Unfortunately for them, pressured from different sides and by circumstances, the government has over time not only permitted the original public sector units to serve as a third operator in each circle but provided for a fourth private operator as well. Now it has permitted basic providers to turn into cellular operators. This has increased competition quite irreversibly, given the fact that the decision was backed by the TRAI, the TDSAT and the Group of Ministers on Telecom, before being approved by the cabinet. The cellular operators seem to have no option but to resign themselves to the new competitive environment, despite their threat of turning to the Supreme Court once again. A major restructuring of the industry is inevitable. This will possibly be good for competition and for the consumers. But the objective of universal service provision is unlikely to be served.



© MACROSCAN 2003