Mergers On The Cards In Indian Telecom Sector

From an international point of view, when you think about India, one of the things that strike you is quality products and services at cheap prices. One of the pristine examples is the current scenario of the telecom sector in the country. With call rates touching rock bottom due to the increased competition in this already saturated sector, the future is grim if it continues in the same way as it is now. Due to this reason, things are going to change in the near future.

We have around 14 operators sweating it out in an epic battle to woo customers by providing the cheapest calling rates in the world and gain market share. The statistics are very tempting – a staggering 16 to 20 million subscribers are being added every month. Behemoth figures like every 55 Indians have a mobile phone out of 100 have been reached compared to only 3 per 100 in the year 2000.

Recently, the 3 G auctions were held for all the 22 circles in India and it fetched a whooping Rs. 67710 crore, almost double of what the government expected. Add to that, the telecom companies have to invest in upgrading their network to be 3 G compatible and also buy new equipment that caters to 3 G services like faster internet browsing and movie downloads. All this has put the telecom companies in debt and has tightened the string on their purses. If they continue to offer the same services, then they are bound to go under.

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The number of players is unsustainable in this economy. Hence, the most viable option right now is merger. One of the reasons why this is on everyone’s cards is that the 3 G auctions were not won by big companies but by new entrants in the Indian market. A merger between an already existing big company and a new entrant seems like a good deal, benefitting both parties.

The stock market is also not optimistic about the future of the telecom sector and hence, share prices have also plummeted. Bharati Airtel and Reliance Communications have slid by around 40 per cent.

The subscriber base will continue to increase, no doubt about that, but the price war is affecting the industry. Earlier, you had very less number of players in the market with Airtel and Hutch dominating. Thereafter a player like Tata Docomo came up with the one paise per second scheme. As it became quite popular, other companies also followed suit. A fresh round of price cut is expected in October when the government will announce number portability, allowing users to keep the same number while swapping operators.

Most of the global markets have about five or six players with countries like China having three. 14 is a humungous number for the number of players in India, with new companies like Uninor entering at this late stage too! On the other hand, 3 G is touted to transform the mobile landscape in India in the long term. Mergers and acquisitions are being worked out by the companies because even they know that it is one of the only ways out of this mess.

The next couple of years will make the telecom companies go through a litmus test. With margins under severe pressure, companies have to accept that it is not possible for all of them to operate and hence resort to mergers and acquisitions. This battle is turning out to be very interesting and is waited by baited breath by quite a few. We will keep you posted on the latest development.

What are your thoughts on the future of the telecom sector?

2 Responses to “Mergers On The Cards In Indian Telecom Sector”

  1. nikhilesh tiwari
    July 13, 2010 at 5:19 pm #

    Mergers & acquisitions have already started in the Indian telecom market with the Tata infra and quippo, then aircel selling its tower arm to GTL and now Reliance infra and GTL. Now we have to just wait and watch when the same will start for operators even though lock in period of 3 years is proving to be a big hindrance on this path.

  2. aseem
    July 13, 2010 at 11:57 pm #

    Unless cartelization takes place (which seems highly unlikely with TataTele withdrawal from COAI )

    Here is my Paul prediction for the shakedown …
    Critical user ARPU and mass will decide who stays and who goes … which will depend primarily on MNP offers … 3G will be the second differentiator after price

    Unlimited 3G upload and download while roaming on own national network @ 300/- per month, with 200 GB ‘fair usage’ per month is the sweet spot … the cellular company that reaches that First will be the new leader in the numbers game

    Revenues will come through advertising … not subscriptions

    Unless you want to follow the Steve Jobs / Amex niche models

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