Consolidation in Telecom

There is little to surprise in the ongoing consolidation moves in the telecom industry, the latest of which is the proposed merger of Vodafone with Idea. Increasing pressure on profitability, high cost of spectrum, cut-throat competition and slow regulation have combined to force telecom operators to look inwards in order to survive.

These mergers and the exit of some players seem to be confusing when you consider that the telecom market is on the verge of a huge data revolution.

While consolidation will bring regulatory challenges with it, the hard truth is that this growth may not translate into any meaningful increase in revenue for telecom operators due to tariff wars. Alongside, the cost of acquiring spectrum, the basic raw material needed to provide data services, has been going up. The options for telecom companies are clear: either they dig deep into their pockets to survive or exit from the business.

The recent move by the telecom department to merge BSNL and MTNL has to be seen in this context. The once dominant public sector companies have been reduced to marginal players thanks to years of political interference and typical bureaucratic style of functioning. Even as the private players grew rapidly, the two PSUs suffered without clear direction from the Government. The Centre’s view was never clear as to whether it considered the two companies as systemically important players.

It’s not clear how the Centre will push the merger through now. The Centre has to recognise that the time of reckoning is at hand for BSNL and MTNL.

The proposed merger between state-owned BSNL (Bharat Sanchar Nigam Ltd) and  MTNL (Mahanagar Telephone Nigam Ltd) will have to overcome a number of regulatory and operational issues, including bringing parity between the pay scales of the employees of the two companies. The Centre will also have to address the complexities around de-listing of MTNL shares.

The options are clear: if these companies are considered important, then the Centre has to unshackle their managements and provide the resources, financial and otherwise, to compete with the private players. Else it should sell them off when it can still get a good price. Either way, the ambiguity has to end.

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