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Merger gameplan

THE MERGER BETWEEN Birla-AT&T-Tata combine and BPL Communications signals a new milestone in the `consolidation' process in the telecommunications sector which began some 18 months ago in the cellular arena.

With this mega merger, the number of key players in the cellular arena has shrunk from over 20 to four -- Hutchison Whampoa, Birla-AT&T-Tata-BPL, Bharti and Reliance. Obviously, this merger (for the time being restricted to the cellular activities) had b ecome imperative because `scale' and `size' have become critical in the capital-intensive telephony projects in which returns typically start flowing in only beyond the fifth or sixth year. Besides, with multinationals withdrawing from most telecom allia nces, capital investments are drying up, making consolidation inevitable.

But going by the lukewarm response to the pre-qualification bidding for the fourth operator, there seems to behind this merger a gameplan that goes beyond the cellular business. Probably, it is in preparation for the next big battle -- the domestic long- distance services. The merged Batata-BPL combine is expected to cover 38 per cent of the population and 51 per cent of all fixed-line telephone users. This obviously makes strategic sense for the combine to move into long-distance telephony as its contro l of the western and southern regions will account for sizeable revenues in this service segment. The basic economics of long-distance telephony hinges upon high capital investment, economies of scale and elasticity of demand. According to a TRAI consult ation paper on ``Long Distance Telephony'', compared to a return on investment of 3 per cent for a three-city market and 13 per cent for an eight-city market, the ROI for a 40-city market jumps to 34 per cent, clearly highlighting the advantages of a big ger footprint. Apart from the larger footprint, the biggest advantage for the combine is contiguity of circles held by its constituents. And once interconnection is allowed, the combine will be able to carry calls from one circle to the next, bypassing t he BSNL network altogether. Thus, if the interconnection terms are relaxed, the combine may well eat up a significant chunk of BSNL's considerable long-distance revenues from both intra- and inter-circle calls.

The important signal from this merger is that the onus of stimulating competition in the cellular and other telecommunication services once again rests with the Government. If indeed consumer interest is paramount for the Government, rather than protecti on of BSNL and MTNL revenues, two moves assume great significance: One, the Government must abandon its sector-specific policies which mean repeated changes and, till now, enormous loss of investor confidence. Setting the interest on BSNL and MTNL aside, the Government must progress, at least in phases, towards broadbanding the licence regime, that allows players to provide cellular, fixed-service and long-distance telephony, all under a single licence. Unless that is done, the process of consolidation may turn out to be counterproductive to the interest of the consumers in the long run.

Second, to protect the interests of the consumers and infuse greater competition, it may be imperative for the Government to consider relaxing the sectoral cap on foreign direct investment, now at 49 per cent, to 75 per cent plus or even 100 per cent to make the Indian market attractive. Unless the Government is able to stem the exodus of MNCs, given the huge capital investments involved in telecommunications and the exposure to newer and innovative technologies, it is a moot point if the Government wil l be able to meet the teledensity targets set in the New Telecom Policy 1999, and players be able to provide competitive and cost-efficient telecom services nationwide.