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From UASL to USL - Issues in migrating to a unified licence regime

February 15, 2005
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The latest set of recommendations from the Telecom Regulatory Authority of India (TRAI) ushers in a unified service licence (USL) regime, the second phase of the process that began with the unified access service licence (UASL). While the recommendations were much awaited, there is little doubt that some concerns will be raised. Telecom experts share their views...

Do you think the two-step procedure from UASL to USL is flawed in the sense that operators will need to pay twice –­ once to get UASL and then again to get USL?

S.C. Khanna: There is no flaw in this recommendation. In its recommendations in October 2003, TRAI itself sought to introduce a twostep unified licensing regime. The first was the UASL. After concluding its consultative process, TRAI has now recommended the second phase of complete unified licensing. Existing UASLs need not pay any additional amount for migrating to a unified licence, provided they do not want national long distance (NLD) and international long distance (ILD) rights. Migration of the existing UASLs to USL is optional for a maximum period of five years, after which it would be mandatory. Along with the unified licensing regime, service-specific licences as available today for a maximum period of two years would be allowed, after which these will not be available and only a unified licence would be given. If any new entrant wants a unified licence (with NLD and ILD rights), it must pay the requisite fee of Rs 1.07 billion plus registration charges for access business plus spectrum charges for mobile access. Therefore, the payment of additional fee is specifically for NLD/ILD rights, which cannot be got free of cost. It is only after the expiry of five years that this unified licence will be available for a nominal fee of Rs 3 million.

Rajat Sharma: USL seems to have immediately solved the long-standing dispute that persisted between WLL versus GSM. After this resolution, we have seen tremendous growth in this industry. Since WLL players had anyway paid much less than the initial hefty fees shelled out by GSM operators, they need to pay extra to get regularised to acquire full mobility. If you look at the existing big players, they are already unified (they have an all-India presence). Small players would not opt for USL since Rs 1.07 billion is a very high cost for NLD/ILD, where the return on investment is not justified. Hence, the current recommendation of USL is neither an enabler nor a disabler when it comes to spending money to acquire USL.

Manish Srivastava: No. That is an incorrect representation of TRAI's recommendations. Operators who already have a UASL for a particular service area/service need not pay any extra licence fee for that service/service area. And the recommendation suggests reducing the registration fee to a nominal Rs 3 million at the end of five years.

Mahesh Uppal: The two-step process was wasteful. In theory, if the features or scope of the two licences are different, as in this case, it is reasonable to price them appropriately. The real issue is that some fees are absurd.A case in point is the fee for two-way internet telephony or for intercircle connectivity. Both require you to get a unified licence for all services and the whole country, and the fee for this is over $25 million.

Would it make better sense to compensate the existing NLD and ILD operators to create a level playing field rather than stipulating a high registration fee of Rs 1.07 billion for providing these services?

S.C. Khanna: Existing long distance operators have procured these rights after payment of high entry fees of Rs 1.25 billion. Even in the case of access business, when BSOs were allowed unified access, that is, right to offer mobile telephony, these operators had to pay an entry fee equivalent to the fourth operator's entry fee for each circle which was used as a benchmark. The recommendations have fairly addressed other issues keeping in mind the concessions in terms of reduction in bank guarantees, rollout obligations or licence fee reduction already available or being recommended by TRAI. Five years later, the recommendations do provide for a unified licence at Rs 3 million.

Mohit Saraf: Compensating existing NLD and ILD operators, and thereby immediately opening up the path to a unified licensing regime, would certainly have constituted a desirable policy option for the government. In such a situation, however, there exists the possibility that the NLD and ILD operators would have demanded as compensation something more than a mere refund of the entry fees paid by them. Given the tight fiscal situation and the pressure on the government to exhibit greater fiscal responsibility, the government would not have been in a position to pay any such amount demanded by operators as adequate compensation. It appears that, mindful of these constraints, the regulator has advised the government to choose the more affordable path of a sunset period of five years to terminate the present licensing regime, rather than the immediate introduction of a unified licensing regime by compensating the existing NLD and ILD operators.

Rajat Sharma: Yes, it would definitely be better. The government would have needed to pay back only two-three operators and the financial impact would not have been large. Or else the government could compensate the amount through future payments. The licence fees could have been reduced to create a level playing field for other smaller players to enter. Also, NLD/ILD licences should be circle-wise and not national, as local players can benefit from the licence only then.

Manish Srivastava: Real retail-level competition in long distance telephony would arise only when we see implementation of the CAC (carrier access code), which seems to be some distance away. Till then, very few access providers, with relatively larger access footprints are likely to get into the NLD telephony business. For them, Rs 1.07 billion is not a material amount. In any case, this amount has been recommended to come down to Rs 3 million over a five-year timeframe. Bickering over this amount is really nit-picking and is unnecessary at this stage of telecom development in our country.

As far as the ILD business is concerned, the TRAI recommendation has a provision for new ILD licences to be acquired under the existing terms (that is, an upfront registration fee of just Rs 250 million) for at least the first two years of the transition period. And, in any case, we already have quite a lot of competition in the ILD transmission business –­ some of it unscrupulous. The problem in terms of retail pricing relates to CAC rather than competition –­ BSNL/ MTNL's ILD rates are so much lower than those of mobile operators.

Mahesh Uppal: Absolutely. India's legacy licensing regime is the biggest hindrance to growth, especially in the rural areas. There must be a one-time reconciliation of licence fees after which any size, any type of operations must be allowed subject to safeguards related to security, competition, interconnection, spectrum scarcity, etc.

Will arbitrage opportunities crop up in IP telephony given the fact that it can be allowed in a restricted manner without paying any annual licence fee?

S.C. Khanna: Yes, arbitrage opportunities do exist. However, this can be checked through adequate checks and balances to ensure that unrestricted internet telephony is not allowed to standalone ISPs who do not have access licences which the recommendations have provided. Further, for VPN services provided by ISPs, the licence fee has already been levied recently.

Mohit Saraf: IP telephony in India is definitely going through an exciting phase. Currently, due to the lack of adequate bandwidth, the quality of voice over IP telephony provided by ISPs is quite inferior and therefore they operate in a different "market" as compared to other licensees. ISPs, thus, do not stand to benefit from their discounted licences in the short term. Even in the longer term, with the introduction of USL, a USL operator would be able to provide IP telephony, but without the restrictions that currently apply to ISPs (namely, termination of calls on the PSTN network, restrictions on computer-tophone calls in India, etc.). In such a scenario, the greater freedom available to USL players in deploying VoIP may overcome the edge conferred on the ISPs by the discounted licence fees.

Rajat Sharma: IP telephony has not been a success till now. If one looks at the revenues of the ISPs from such a model, this fact comes out clearly. Unless the quality offered is the same as that offered by BSNL, VSNL, etc., there is not much scope. International bandwidth is very expensive and most of the players are small. Also, till the time ISPs are not allowed to connect freely to the PSTN network, we cannot witness a situation that will truly generate arbitrage opportunities in the future.

Manish Srivastava: IP telephony will require a USL under the recommended licensing structure. In any case, licence fees are recommended at just 6 per cent of the net revenue –­ and that too is envisaged to decline in the longer term. I do not see how this sort of fee would create any material arbitrage opportunities in the market.

Mahesh Uppal: I assume we are talking about internetbased IP telephony, not pure (managed) IP telephony. There is no restriction on the latter since it is simply an available technology to transport your calls/data and is in use by operators, including BSNL. Internet telephony does theoretically allow some arbitrage opportunity but it does not have to be that way. Remember that anyone can provide these services and the bigger players, with facilities already in place, can provide the services at fractional additional costs and undercut the new players if they want to. They could even set up their own separate subsidiaries. However, the price of international calls will be forced further down with margins under greater pressure.

Will the concept of "niche operators" actually provide incentives to initiate rollouts in the rural areas?

S.C. Khanna: The concept of "niche operators" is not very clear. Since the next phase of growth for all existing operators is anyway going to be the rural markets, with teledensities lower than 1 per cent, it would be better for the government to encourage rural rollout by the existing operators. Presently, all operators have embarked upon extensive network expansion activities to bring large areas under their footprint, which will certainly include rural areas. It is strongly felt that the incentives given to niche operators should also be passed on to the existing operators. Apart from this, niche operators and existing players should be treated equally by the incumbent for interconnection purposes so that rollout is actually facilitated and teledensity can be increased. Without this guarantee, the concept of niche operators may become a non-starter.

Mohit Saraf: In the words of Ogden Nash, "Someone invented the telephone, and interrupted a nation's slumbers, ringing wrong but similar numbers." Nash, while penning "Look What You Did, Christopher", would probably never have imagined that decades later TRAI would seek to use niche operators to wake up the slumberous Indian countryside. In trying to promote teledensity in rural areas through the concept of niche operators, it seems that TRAI has got hold of a wrong though similar number. TRAI's niche operator concept seems to have overlooked one crucial point –­ commercial logic. While the idea of improving connectivity in rural areas is laudable, industry dynamics cannot be forgotten. In an industry driven by volumes, the rural segment, which is typically ridden by low payment capacity and treacherous topography, would be unable to attract players in the absence of clear financial incentives. The mere removal of entry fees and spectrum fees is definitely not incentive enough to allow large entrepreneurs, leave alone small entrepreneurs, to provide services in rural areas. TRAI may thus need to consider providing additional financial incentives, such as permitting niche operators to bid for USO funds and reducing the licence fees payable by niche operators.

Rajat Sharma: On paper, the recommendations with such incentives might look very ambitious and realistic, but to achieve such a vision of penetrating the rural markets, deeper issues need to be resolved; issues such as that of interconnection. Even if there are some local niche operators, their subscribers will need to dial into some other network. Also, such incentives may not achieve the desired goal due to the stiff competition the niche operators might have to face from giant telecom companies in the market. The government will need to play a very strong role to ensure that such operators face no difficulties in their operations.

Manish Srivastava: I believe competitive bidding-based USO funding is the best way to incentivise rural rollouts. Sub-scale smaller networks would be severely challenged in terms of economics. TRAI's approach on niche operators focuses on tapping local entrepreneurs to expand rural teledensity and the regulator has pointed that one should avoid prejudging economics. It is worth giving it a shot.

Mahesh Uppal: To a degree, yes. The limitation on fixed line services, the need to share revenues and having to work in areas with less than 1 per cent teledensity, rather than any rural area, will considerably dampen the incentives. In any case, interconnection and spectrum fees are still not fully worked out.

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