'Certain government departments hardly understand the dynamics of the telecom industry. They get it wrong all the time'

In this Idea Exchange, Marten Pieters, MD and CEO, Vodafone India, speaks about the challenges facing the telecom sector, the 3G auctions and why the government needs to get its policy right soon. This session was moderated by Managing Editor, Financial Express, Sunil Jain

Sunil Jain: How has the 2G case changed things for the telecom sector?

India has had this licence system for very long. So a lot of entrepreneurs have this feeling that once you get a licence, that's the way to make money. So a lot of investors and entrepreneurs thought that they need to get this licence. If anyone has studied the model in the rest of the world, you would realise that it is not true. Even in the most affluent countries in the world, there are typically no more than four or five operators and typically number five doesn't even survive. In India, when this opportunity came in 2008 or 2007, based on this drive of 'get me a licence and I will make money', all of them jumped onto it. But then, of course, everyone started to discover very quickly that this is a tough game to be in. It is typically a long-term capital investment. And since it is a sunk cost, you would have to generate some revenue. So pricing is not based on long-term cost recovery, it is based on the need to generate some cash flow, based on 'I need to pay my salaries next month'. So in the first few years, you saw these new operators really driving topline, very hard, at the cost of results. This simply doesn't work because these operators get customers only because tariffs are very low. And because they dropped the prices so low, it had a huge impact on the results of the telecom sector since everyone else also had to cut prices to compete. So profit-and-loss was destroyed by this wave of new licences. Then came the 3G auctions. All serious operators realised that you need 3G if you want to have a future in the business. But there were only three 3G slots available in most circles and that led to very intense competition and crazy pricing. The 1 paise-per-second type of tariff rates destroyed the profit-and-loss of operators and then 3G auction and BWA (broadband wireless auction) destroyed the balance sheet.

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