Aircel bankruptcy proves a point: Spectrum is a horrible burden, content is the emerging king

Madhavan Narayanan 

Firstpost1 March 2018

With a customer base of 5.6 crore and a debt burden of Rs 15,500 crore, Aircel, the beleaguered telecom operator filing for bankruptcy, is far from a picture of financial or entrepreneurial perfection. In effect, the south-based company that nurtured national ambitions amid an explosion in technological developments has fallen a victim to three Ps: Politics, Policy and Presumptions.

India's telecom policy and licensing regulations have gone regular revisions ever since liberalisation began tentatively in 1994: from basic voice services and the SMS-era to the one of an always-on 4G mobile Internet, the industry has come a long way, jumping over technological battles between GSM and CDMA telephony to LTE. The only things that have remained certain over the decades are regulatory uncertainty and policy manipulations.

Let us look at the 3Ps that led to its downfall, and the bitter irony of the fact that in trying to help the Indian taxpayer gain spectrum revenues through auctions to rectify the policy errors of the UPA government, the NDA government may have simply transferred a big burden to public sector banks gasping for capital, bringing back the load indirectly to the taxpayer.

Politics: Aircel's story is one of a car that seems to have read many signals wrong on the road, compounded by machinations that smack of politics involving former ministers from Tamil Nadu, P Chidambaram, Dayanidhi Maran and later, A. Raja in which a controversial stake sale to Maxis, controlled by Malaysian tycoon Ananda Krishnan, acquired shares controlled by tycoon C Sivasankaran. "Siva", Aircel's founder, is now understandably sad at what is happening to the company.

At the heart of it all lies the 2G spectrum scandal

Policy: For anyone following telecom regulation, it was evident that sooner or later, the industry would consolidate, and the weaker players will sell out to the stronger ones or merge or sell out. The problem is that everyone seemed driven by a greed to store up spectrum, drive valuations based on that and borrow from banks at lower costs due to the UPA's dubious first-come, first-served spectrum regime. This fairy-tale scenario exploded when the Comptroller and Auditor General (CAG) blew the whistle with an estimated revenue loss figure or Rs 176,000 crore, pushing the matter to the Supreme Court that pushed in turn for auctions after which telecom companies were stuck with a huge pile of debt.

Presumptions: When politics and policy are murky, things get worse when corporate bets based on presumptions go awry. Last year, Anil Ambani-controlled Reliance Communications (RCom) and Aircel called off a planned merger, a year after separately bidding for spectrum. It was a marriage of convenience between two indebted players, and the timing could not have been worse because Mukesh Ambani, the elder brother who originally started RCom before a family division of assets, had launched his Reliance Jio in the Digital Age. Jio is being blamed by Aircel for its woes, which in turn were based on presumptions that it would face no problems from regulators or bankers.

You could call Aircel's bankruptcy the chronicle of a death foretold -- or at least acute sickness as it fights to survive, moving from regulators to banks to bankruptcy court, even as RCom desperately sheds  wireless assets to elder brother Mukesh's Jio and be a humble player in an exploding industry.

It is poetic justice that the elder sibling in a family took control by launching a younger sibling in the industry to get back what he started in the first place.

Idea and Vodafone have meanwhile walked into a sensible merger.

Looking back, three things are clear: 

1)  With data services driven by Internet penetration, early movers took too many regulatory risks, and smaller ones like Aircel were bound to be crushed

2) Bankers who lent to them were guided by poor perspective on industry details. Banks that have no clue on regulation or technology curves treat money as a commodity, just the way early telcos bet on spectrum as a commodity. Jio stole their thunder with an asset-light (spectrum-light) strategy that focused on excellent timing. India's smartphone penetration  is at roughly 35 percent with mobile phone connections having crossed one billion last year. Jio is focusing on services including content and a range of services and apps.

3) The NDA government only converted a revenue problem into a bad debt problem. Ihave argued  that rough estimates show that telcos borrowing to pay for spectrum only get stuck with repayment problems that create problems for state-controlled banks.

What now? It is quite clear that Aircel seems to be walking into the arms of an eager Sunil Mittal's Bharti Airtel. What is emerging is a clash of three giants: Idea-Vodafone, Reliance Jio and Airtel.

The government may have gained socially as India's telecom penetration nearly equals its number of citizens, and government services based on Aadhar identification becomes easier. But the price it has to pay is the money that will be pumped into banks so that they can write-off or take "haircuts" to help troubled telecom companies.

For private telecom players, the future lies in how they turn spectrum into really useful data services for customers.

Content, not commodity, may be the king. What Airtel and Idea-Vodafone do on this front to take on Jio will be worth watching. With two-thirds of mobile-toting Indians still without smartphones, the game is an open one, but is a long-term play.

(The author is a senior journalist. He tweets as @madversity)