THE OneIndia plan, which the minister for Communications, Dayanidhi Maran has thrust down the throat of reluctant BSNL and TRAI, has serious repercussions for the telecom sector. If the problems of the sector is growing rural urban imbalance and slowing down of landline penetration, this scheme can only make matters worse. It also has gone back to the old days where the minister and the government decided everything including tariffs. In this case, after some initial resistance, TRAI has fallen in line with the minister and produced a new ADC regime, which essentially complements the OneIndia tariff plan. The drop in incomes of the two telecom PSUs – BSNL and MTNL --- due to lower long distance revenue and reduction of ADC transfer is likely to be of the order of Rs 5-7 thousand crore. This could completely erode their profit base. As it is clearly BSNL that is providing any rural telephony today, such a scenario would hurt the rural consumers the most, even though the justification for the OneIndia scheme is its supposed benefit to such subscribers.

BASIC THRUST OF THE ONEINDIA SCHEME 

The basic thrust of the OneIndia scheme is to bring down the costs of long distance calls within India to Re 1 per minute from the earlier one of Rs 2.40. For those availing of the OneIndia tariff plan, the rental has been raised to Rs 299 per month and all free calls slashed. While the OneIndia plan lowers the tariff for the well-off consumers, the tariff of the PCOs, the primary instrument used by the less well-off consumer for long distance calls, have been left untouched: it is still Rs 2.70 per minute or 170 per cent more than the OneIndia tariff.

As those that do not wish to avail of the OneIndia facility would stay with the current rentals and free calls, the drop in long distance revenue would have to be made up by greater call volumes that might be generated by the lower call rate. Such a high surge in volume to compensate for this large drop is unlikely. Therefore, slashing long distance tariffs by a whopping 58 per cent --- a possible loss of Rs 3,000 to 4,000 crore --- can only affect BSNL adversely.

The second attack on BSNL’s revenue is lowering of the Access Deficit Charge that BSNL gets from other telecom operators. In order to reduce the long distance calls to Re 1 per minute, the Access Deficit Charge (ADC), which was a substantial portion of every long distance call, had to be brought down substantially. Earlier, 30 paise per call was an ADC levy, which resulted in an annual transfer of about Rs 5,000 crore to BSNL for subsidising its rural operations. TRAI finally has changed the ADC regime from a call based one to revenue sharing and reduced this transfer by about Rs 1,800 crore. It has provided for a revenue share of only 1.5 per cent of the total revenue of all operators to go to the ADC account and also reduced international ADC rates by more than 50 per cent: Rs 1.60 for incoming and Re 0.80 for outgoing calls.

The net result of all this is that BSNL and MTNL are likely to lose Rs 3,000-4,000 crore of their long distance revenue even after higher landline rentals are taken into account. With the additional loss of Rs 1,800 crore from the lower ADC levy, at one stroke, Maran has converted what were still thriving PSUs, even under a strong competitive regime, to possible basket cases. Effectively, BSNL, which is the only company providing rural telephony, is being asked to take a major hit in its revenue, while companies that are wilfully flouting the terms of their license of providing 10 per cent rural telephones get away scot-free.

It is not that Maran’s idea of long distance tariff being based on a flat rate rather than distance is without any merit. There is little doubt that the model of telephony is changing from the earlier distance based circuit-switching network (Point Switching Telecom Network or PSTN) to the current data based packet switching networks. The Internet model and the earlier voice based telephone models are quite distinct. In the earlier predominantly voice networks, the distance was the basis for charges: the longer the distance, the more you had to pay. However, the data networks do not care what is the distance travelled: the Internet does not bother about either the route or the distance that the data packets travel. As Internet and broadband increasingly dominate the telecom scenario, with even voice calls being transmitted over the Internet, the Internet model with its death of distance will emerge as the dominant revenue model.

THE BASIC ISSUE

The issue here is not that revenue models have to change from a distance based one to a data based model but the timing and extent of this change. In all telecom networks, the long distance revenue has always been used to keep the cost of telecom access low. The simple argument for doing this is that unless the telecom network expands, the call rates and consequently, the revenue cannot grow. Only the rich calling each other does not generate enough traffic; they also need to call a whole range of other people who may not be willing to pay for high cost connections. So if we want increased telecom penetration and high teledensity, we need to keep the costs of connecting to the network low. Once we have achieved high teledensity, we can then afford to raise the costs of telecom access. But if it is done before this, it is likely to deter a number of people from going in for installing telephones. So instituting a telecom regime where the long distance calls do not provide any surplus for the local network can only force the local call rates and access charges to rise and would work against the immediate goal of increased teledensity.

It is not that the long distance call rates in India are high. They have come down dramatically in the last few years and are well below most countries today. It costs less for a mobile subscriber in Germany to call India than to make a local call there. Therefore, the argument of needing to lower long distance rates here and now makes very little sense. It is true that that as we go forward with Voice Over Internet Protocol (VOIP) etc., a model free of distance would need to be implemented. The question here is when should do this be done and after making the tariff distance free, what should it actually be? Maran’s decision of imposing a 1-rupee tariff without addressing how to pay for the low cost access required to increase teledensity, could cost the country dear. And if it also means bankrupting BSNL, the only ones providing rural telephony, this would be a double disaster.

RURAL URBAN GAP

If we look at the telecom scenario currently, we will see that the telecom boom has not only passed the rural subscribers by, it has widened sharply the rural urban gap. As TRAI itself has noted “the large differential between rural (1.94 per cent) and urban teledensity (31.1 per cent) cannot be sustainable. The authority recognizes that without focus on rural areas, sizeable growth in telecom sector would not be possible.” (TRAI Press Release, October 3, 2005). The second disquieting trend in telecom is the virtual stagnation of landlines while the mobile sector is still maintaining its rapid growth. Of the 32 million new connections between April 2005 and January 2006, 31 million were mobile phones. Obviously, the structure of voice telephony market is shifting rapidly.

TRAI has also noted in its Consultation Paper on Interconnection Usage Charge Review, March 17, 2005 that the installation of Village Public Telephones has come down from around 60,000 in 2001-02 to about 15,000 in 2004 and rural lines added in the same period have also dropped by about 40 per cent. In the same period, the mobile “revolution” has passed over the rural areas and the smaller towns. As the table below shows, the rural areas have virtually no coverage and only cellular networks cover about 1700 towns out of 5,200 towns in the country

Table 1

Present Coverage of Mobile Networks

(Population Coverage 20 per cent)
 
 By area
 Population Coverage
 
Towns
 ~1700 out of 5200
 ~200 Million
 
Rural areas
 Negligible 
 Negligible
 
Source: TRAI Consultation Paper No. 4/2005 Interconnection Usage Charge Review, March 17, 2005

RURAL TELECOM GROWTH PATTERNS 

Let us look at the rural telecom growth patterns. It is obvious that rural telephones are more costly to install and generate lower revenue. Unless there are either penal provisions or other incentives, telecom service providers would not readily install rural telephones. TRAI Consultation Paper No. 4/2005 Interconnection Usage Charge Review, March 17, 2005 shows that not only have the private Basic Service Operators not provided rural telephones, bigger the player, the smaller the rural telephone lines they have provided. Major players like Reliance and Tatas have not even provided fixed lines. They have preferred to use the Wireless route in order to keep their capital costs low and attack the high–end market. As against less than 1 per cent rural telephones being provided by private Basic Operators, fully 35 per cent of state-owned BSNL lines are in rural areas. Obviously, without BSNL, we would not have any rural phones in the country.

The private players have willingly paid a penalty, pegged more as a rap on the knuckles than a serious one, than fulfil their license terms and conditions of 10 per cent rural lines. Both TRAI and DoT have preferred to wink at this continued violation by private players while bemoaning about poor rural teledensity.

While the issue of flat rate and ADC are important as they pertain to the current evolution of the network, there are larger structural changes taking place that also needs to be addressed. It is now obvious that voice traffic will increasingly shift to the mobile networks. So how do the PSUs with their huge legacy investments in copper cables compete in the market? It is time the PSUs realise that what they view as their sunk costs – the copper cable network – is precisely their strength. They need to think that in the future, data networks will largely be the land based while the voice network will be wireless. The focus for their landline operations has to therefore shift to Internet and Internet based services. Here again, MTNL and BSNL are concentrating on only numbers and leaving the high value segment to be gathered up by the private players. Unless they can generate a business model that takes into account the emerging structure of the telecom market, just a defensive battle is not going to be enough. They have to learn that business as usual does not work when the usual business is changing.