If you aren't strong enough to adapt or compete with your rivals, you might as well bow out. Or else, like in the extremely popular book and movie series – The Hunger Games – the other players will have to eliminate you by death.
Competing in the telecom industry in India is nearly a blood sport. First, it hounded out smaller players such as Tata Docomo, Aircel and Reliance Communications. Next, Vodafone and Idea thought it would be better to join forces against the still relatively new entrant Reliance Jio, which seems to power every smartphone in sight. The combined Voda-Idea entity is still reeling under a hefty debt that runs into tens of billions.
In the midst of this crushing battle stand Bharat Sanchar Nigam (BSNL) and Mahanagar Telephone Nigam (MTNL), the government owned telecom companies. Remember when you had no other option besides these two, at least when it came to landline? They reigned as Navratnas till 2012 and 2009, respectively, but today, they are direly short of cash, and have not paid their employees for months. The worse affected of the two is BSNL.
The state-owned telecom behemoth delayed salaries to its bloated 160,000 workforce first this February and again in August. The employees are livid, and the company’s financial situation is far from comforting. In FY18 alone, Bharat Sanchar Nigam registered a loss of nearly Rs.80 billion on revenue of Rs.226 billion. The decline had begun nearly a decade ago and little was done to arrest it. Within five years of garnering profit of over Rs.100 billion, the PSU telecom slipped into the red for the first time in 2010.
An inflated workforce has definitely been a drag, but what has done more harm is an indifferent and inconsistent government. The sad part is that this was once a promising company with valuable assets, but successive governments failed to effectively monetise them, even while delaying its adoption of latest technology and blatantly favouring private players. Any turnaround now won’t be easy and will need Rs.50 billion just to meet opex and capex requirements.
Apart from the aforementioned opex and capex cost, an upgrade to 4G will cost them another Rs.140 billion and the proposed VRS, another Rs.63 billion. The telecom company does have assets in vast land banks and its wide-reaching fibre network, and these are worth Rs.700 billion. But, buyers aren’t easy to come by.
So, is BSNL another lost cause?
Too little, too late
At every step of this story, one will find that there is no dearth of irony. Carved out of the operations wing of the Department of Telecommunications in 2000, the company aimed to be 'market-savvy', and launched its cellular services in 2002. This was seven years after mobile telephony came to the country, when people were warming fast to the idea. However, the public-sector hangover remained and BSNL lost whatever little edge it had in the market. “Competition obviously hurts the monopolist’s market share, but also causes a massive increase in market size like in the case of BT and AT&T,” says Mahesh Uppal, director, Com First (India). The market expanded but BSNL, the leader, failed to make the best of it. In fact, Uppal adds, the state-owned company even yielded ground to private players in its core business of landlines.
It’s funny that the creator of infrastructure for the telecom sector is the one crumbling. It may be hard to believe that BSNL's optic fibre cable network is 800,000 kilometre long, nearly 3x that of Jio at 300,000 kilometre and Airtel's 250,000 kilometre. The work on this started over 15 years ago, when fibre was still in its infancy in India. But BSNL lost that advantage along the way.
“The smart thing for BSNL to do would have been to make this infrastructure available to private players right from the beginning,” says Uppal. The company is now leasing it out, but only to a small extent and its contribution to revenue is just 12%. Leasing the fibre network out early in the game would have made private players heavily dependent on BSNL – a huge strategic advantage.
Larger countries have been doing this for decades. For example, Australia built fibre networks with National Broadband Network and the UK with British Telecom, and both leased them to private players. BK Syngal, a telecom sector veteran and former head of VSNL, says, “The collective mindset of the government here was of protectionism… a disaster in the open era.”
Private players are not waiting around. They have set up their own networks or banded together. For instance, Airtel and Vodafone Idea are in talks to combine 400,000 kilometre optic fibre network. Meanwhile, the government's decade-long work is suffering from bad maintenance. Industry experts believe more than 30% of its fibre could be damaged.
Rajiv Sharma, head, institutional research at SBICaps Securities, says incumbents, particularly Airtel may find value in BSNL's fibre network, since they are in the early stages of fibre deployment, but mostly in rural areas. “However, leasing out will eventually make BSNL heavily dependent on Airtel if the private company plans to monetise its fibre assets anytime soon. The other option is to bring in a strategic investor (who will own the asset), for which BSNL (as the anchor tenant) may have to pay rent (for its own operations). That will be tricky in its current financial situation as it will add to the opex,” says Sharma.
Just as BSNL had an enviable fibre network, it has an admirable history in building transmission towers, being the first company to have them in rural markets. But this lead was lost too – the government failed to monetise it, typically done by sharing it with other operators or bringing in an investor. SBICaps’ Sharma says, “If BSNL had entered the tower space early, the early towers could have been rented out to incumbents and new entrants in 2008-09. It would have deleveraged the balance sheet and added a new revenue stream.”
Today the private players are better equipped. The 67,300 towers owned by BSNL pales in comparison to the 163,000 that the Bharti Infratel-Indus Towers merged entity will have, or the 170,000 that Jio has.
Even as the government failed to make the best of BSNL’s assets, it seems to have systematically undermined the telecom company’s technological advancement. As the industry is gearing up for a 5G world, BSNL hasn’t adopted 4G fully yet! Naturally, that has severely limited its subscriber growth – with a user base of around 120 million, while four-year-old Jio has 340 million.
The spectrum saga of BSNL goes back to 2008 during 3G spectrum auctions as the data boom was just taking off. First, the government said BSNL could select the circles where it needed spectrum. The company sought spectrum at lower rate since it had to spread across the rural parts of India, where revenue was bound to be low. The government, thus, gave BSNL and MTNL spectrum in the 2.5 Ghz band. Two years later, the government released auction for the more efficient 2.3 Ghz band for private players.
A BSNL official, who was closely involved with the process, says it was just the beginning of a story where the company would be saddled with inferior technology. According to him, the decision to go with WiMax (or Worldwide Interoperability for Microwave Access) for long distance WiFi was only after much debate. “It was said to be appropriate for the ecosystem then,” he says. But once again, BSNL was left behind and cheated in terms of technology since LTE (Long Term Evolution) was already gaining ground globally. “We realised much later that WiMax was thrust upon us with the intention of setting us back. All the large private players opted for LTE and we were stuck,” he says.
The setbacks didn’t end there. The company thought they had won big when they received 3G spectrum much before the auction in 2010. Services were launched much ahead of competition and the objective was to capitalise on that headstart. No price was finalised for the spectrum, but BSNL ‘hoped’ it would be ‘reasonable’. But despite earning Rs.677 billion through spectrum auction, the government asked BSNL to pay up, at market price. The final amount of Rs.185 billion stunned the management. “We were not in any position to bargain and the option was to buy it at that price or not have it at all,” points out the official. It led to first ever loss reported by the company in FY10; since then, BSNL has not seen a single year of profit.
After the recent wake-up call in the form of massive loss and inability to pay employees, BSNL is trying to fix some of the many wrongs. The company announced a voluntary retirement scheme for nearly half its workforce with Pravin Kumar Purwar in the hot seat. He took over as BSNL’s CMD in mid-July, straight from Mahanagar Telephone Nigam, where he had held the top job as well.
When contacted by Outlook Business, the reticent Purwar clearly said the VRS was completely left to the discretion of the staff. “The management is of the view that 70,000 of our workforce will opt for it,” he said. It is not hard to understand why reducing wage cost is top priority at BSNL. According to Purwar, employee cost is 75% of revenue today (37% in 2009). That figure is shocking because it never exceeds 6-7% for any private player.
A large chunk, estimated to be at least 80%, of the 70,000 employees, are from the basic/landline business, which is deep in the red. On revenue of Rs.33.8 billion, this traditional vertical has an operating loss of a whopping Rs.144.76 billion, according to the FY18 annual report. It’s cellular business is doing well – out of BSNL’s 124.75 million connections, cellular accounts for 111.11 million. This business brought in revenue of Rs.105.9 billion in FY18 and an operating profit of Rs.37.9 billion or a margin of 36%. Its ARPU is Rs 50-55. Like cellular, the broadband and enterprise businesses are profit making – they have much healthier operating margin at 86% and 66% respectively.
Ravi Sharma, who was earlier CEO, Alcatel Lucent (South Asia) and one who worked very closely with BSNL on its GSM expansion, believes that the state-owned company has always had good assets. “Where they fell short was relevant manpower. With the emergence of mobile telephony, the average revenue per user from fixed lines has dropped but BSNL had to carry that manpower without appropriate revenues,” he explains.
While a reduction in wage bill through VRS would bring relief, what Purwar is really hoping for is 4G spectrum. “Nothing is more important right now,” he says, adding that it should be given at market price. Operating with newer technology will reduce costs by 25-30% in terms of power consumed or the number of base stations required. AK Sinha who was BSNL’s chairman between 2004-07, agrees with Purwar. “The company has to get 4G spectrum before anything else,” he says, adding that the company also has to focus on marketing and gaining more customers.
Uppal believes the need of the hour is sufficient autonomy in the company’s functioning – from hiring and firing to procurement and pricing. Sharma, too, says that the company should be allowed to function on its own. “They were asked to compete in a race with their legs tied,” he says.
Sceptics like BK Syngal, a telecom sector veteran and ex-CMD, VSNL (now Tata Communications) believe that the company needs more than VRS or a capital infusion. He cites the example of Air India in which government’s equity infusion increased from Rs.1.45 billion in 2009 to Rs.286.9 billion the last fiscal, but the national carrier has remained in the red for over a dozen years. “BSNL has to get it right on key issues such as governance and quality of service,” he says. According to him, government complacency is to blame too, particularly in 2003-04. That was when subscriber growth across operators took off and therefore was the best time to get the company listed. “Valuation was high and the money could have been used to implement a VRS and restructure the organisation,” he says.
By any yardstick, BSNL’s survival hangs on a thread and Srinivasan Sethumadhavan, a telecom industry veteran who has worked with both MTNL and BSNL on broadband projects, thinks the latter’s biggest challenge is in competing in a different battleground. “As the new business value resides on specific content demanded by users and its experience thereof, operators need to work on technology and hence partnerships that would drive such new value on the network. This asks for a significant change in the strategy and mindset,” he says. It involves alliances with the likes of Microsoft and Google, something that even the large operators struggle with, since the value addition on the network needs to be immense for a meaningful collaboration.