Alliances and M&As
The number of players is still not at sustainably healthy level, the situation continues to be in a need for correction.
How many operators in any given telecom service area are sustainable? That’s a question to which there is no clear answer. In fact, the industry has survived a phase where there were 13-14 licenses in a given service area.
Of course, the number of players in a market is guided by factors such as the size of the addressable market, pricing power of the players, availability and cost of employees, investors’ relative preference for that market, regulatory environment, and so on. So if we look at mature telecom markets within the Asia Pacific region, like Singapore, Australia and Hong Kong then there are a maximum of three to four mobile network operators (MNOs). Even China, which is an emerging but much bigger market than India has just state-owned mobile service providers. (The mention of MNOs is to exclude the MVNOs — mobile virtual network operators from the discussion. Australia, which has close to 40 MVNO operations, has just three MNOs namely Telstra, Optus and Vodafone. All MVNOs ride the networks of the three host MNOs.)
By comparison, India still has up to seven active service providers in various telecom service areas, with Reliance Jio Infocomm yet to enter the fray. Further, mobile tariffs being among the lowest in the world, operators also have to live with average revenues per user (ARPUs) that also are among the lowest. However, the cost of spectrum remains high, the procurement of which has led to huge piles of debts for most of the telcos.
Given that the number of players is still not at sustainably healthy level, the situation continues to be in a need for correction. Not surprisingly, merger and acquisition discussions keep surfacing in the media, even though they are often denied by the companies themselves. A problem is that potential sellers have already invested so heavily that the cost of an acquisition has become unrealistic in the prevailing market conditions. The regulatory cap on how much of the combined spectrum could a merged entity hold makes big-ticket buyouts even less attractive.
But then why should the industry revolve its M&A thoughts around the telecom service providers only? How about cross-industry acquisitions of relatively small but high-potential companies that could bring new capabilities into the fold of telcos’ offerings? Examples could be vertical-specific capabilities or those in emerging areas such as analytics, smart cities or internet of things (IoT). Globally, there are successful examples of telcos carrying out acquisitions with this approach. While Australian major Telstra has done a series of acquisitions that have helped it build vertical strengths in sectors such as healthcare, AT&T had forayed into home automation solutions and services through its acquisition of Xanboo earlier.
As far as intra-industry possibilities are concerned, strategic alliances and partnerships could offer better opportunities for value creation and growth for the industry. While a number of infrastructure sharing arrangements are already in place, the recent Telecom Commission nod to allow spectrum sharing among operators would open new possibilities for partnerships.