Robert Crandall, the eccentric CEO of American Airlines, credited with bringing the world frequent flier points, was once asked how he would rate airline stocks. Crandall responded with his usual deadpan, “I am not so stupid as to own airlines — I only run them”.
Investors interested in the world’s telecom companies may want to heed Crandall’s advice, as this is an industry in which retail prices seem to be falling so rapidly that there appears to be no bottom. In some sectors, the bottom has already reached the lowest level possible — zero.
A client of mine bid a tearful farewell to her son as he left home for the first time to study in the UK. An anxious and overprotective parent, she was wondering how she and her extended family could keep in touch with her son 4,500 miles away.
When the boy returned home for Christmas break it seemed to the family that they had not missed him much at all. In fact, they probably communicated even more with the boy than they had when he had been around physically. Did it border on over-communication? The family didn’t want to sound disrespectful of each other but judging by the silence and nervous laughter, I concluded as much.
Every mode of communication during the past three months had been of extremely high quality — and free. Skype calls, in real-time and high definition, brought the son’s dorm room in full colour to Bangalore. The family performed a religious ceremony at home which was beamed to their son on Google Hangout. The university campus in the UK is fully Wi-Fi enabled, so the son could steal a quick five-minute WhatsApp call between classes, on the way to the gym, and once even when he was running on the treadmill. Facebook posts of videos and photos, messages on WhatsApp for silly jokes and emails to do the real heavy lifting were all instantaneous and free.
For the telecoms, this is a problem of gigantic proportions. Structured around the old we-build-it-then-they-come model, telecoms sink billions of dollars in new capital expenditure (capex) each year to bring services to hungry Indian consumers in the hope that they will recover their investment through fixed and variable tariffs over a period. A significant part of their investment amounts to transfer payments from the private economy to the government as they bid up the price of valuable spectrum. In 2015, the treasury amassed a total of ₹109,874 crore ($16 billion) during the spectrum auction. In 2012, this amount was just $1.4 billion.
Reliance, Airtel, Vodafone and Tata are also quietly upgrading their voice calling, SMS and video calling infrastructure. All of these will be for nought because they cannot compete with what is already available for free — Skype, Google Hangouts and WhatsApp. The argument that ultimately all services are nothing more than bits of information and run on the same digital infrastructure omits an important point — we are talking of missed revenue opportunities here.
Inexpensive Wi-Fi in homes and data plans are changing the way we communicate. This is especially true in the US where a revolution is in the making. New York City announced that it will replace nearly 7,500 pay phones with “Super Fast Free Wi-Fi”.
Google, which wired up both Austin, Texas, and Kansas City, Missouri, says there are so many hotspots, that residents have near ubiquitous, high speed internet in both cities. If you are a traditional customer of the Time Warner Cable subscribing to its internet plans at home, you are automatically entitled to enjoy super fast Wi-Fi at more than 100,000 hotspots in the US — for no extra charge. Wi-Fi hotspots have become the new super fast cell towers. Google claims that speeds in Austin reach 1,000 Mbps, compared to about 6 Mbps on a 4G signal. Most PCs or laptops cannot process such speeds, limited by the capacity of their wireless cards.
For businesses, there are Voice over IP solutions, which now include the cloud. Vonage, a pioneer in this field, is offering small business customers more than 40 built-in calling features for both landlines and mobiles, and customers don’t need to install any equipment in the office. Everything operates on the internet in the cloud. What about the poor telecoms who were dependent upon small businesses to pay big tariffs for proprietary voice and data networks?
The India situation
Even in India, the situation for consumers is improving each year. Google’s announcement that it plans to provide free and high-speed Wi-Fi access at 400 railway stations is a welcome relief for millions of passengers who choose not to surf the internet on their phones while waiting for delayed trains for fear of running up high data bills.
Google’s good faith effort is a direct hit at the telecoms’ revenue. Last week, Airtel was pushing 500 MB of 3G data for ₹150 on a 21 day plan — about $2.23 — with free nationwide roaming. How in the world can Airtel make money on its bread-and-butter voice calls if customers use the same near-zero cost 3G plan to make zero cost WhatsApp calls worldwide?
And then there are phones. The Indian 3G smartphone market is so hyper competitive with huge discounts underwritten by the Big Three online retailers that one can buy a new phone for under ₹8,000 and unbranded phones for even less. No mobile manufacturer can make profits with sub-$100 phones.
The telecom industry is getting as commoditised as the oil industry, with near-zero loyalty for phones or service providers even as prices race to the bottom. One wonders how the CFOs of these companies ever get to sleep at night.
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