The Telecom Regulatory Authority of India (TRAI) recently recommended the unbundling of layers of telecom services through a system of differential licensing. The recommendations aim to “catalyse Investments and Innovation and promote Ease of Doing Business”. While the said recommendations have been welcomed by a cross-section of stakeholders, concerns were raised regarding the application of license fee as a percentage of the Adjusted Gross Revenue (AGR) at different levels. Even though the recommendations of the TRAI are not binding on the licensor (Department of Telecommunications (DoT)), they represent a significant shift in TRAI’s approach to the issuance of licenses in the telecom sector and possibly attracting new service providers.
The service providers in the telecom sector can be broadly categorised into Telecom Service Providers (TSP) and Virtual Network Operators (VNO) [also known as Service Delivery Operators (SDO)]. Unlike TSPs, VNOs are not permitted to own, install or maintain the active infrastructure (infrastructure that requires operational coordination between one or more network operators). VNOs are treated as an extension of the TSPs, whose infrastructure they use to provide services to the end customer. The Unified License (UL) regime (extant since 2013) prescribed grant of a single unified license for various telecom services. The UL(VNO) was introduced in 2016 with the aim to delink the “licensing of networks from the delivery of services.” Since the UL regime (of 2013) did not segregate the layers of services, the introduction of UL(VNO) was seen as the first step towards the unbundling of layers through differential licensing.
The TRAI’s recommendations suggest the creation of a network layer in addition to the service layer. Consequently, an Access Network Provider (ANP) who operates at the network layer will provide services on a wholesale basis to a TSP/VNO who offers services to the end customer. The ANP will build core/active infrastructure and team up with a TSP/VNO for provision of services. The ANP is restricted from providing services directly to the end customer. For the purposes of implementation, TRAI has recommended the creation of an UL for ANPs. The recommendations inter alia propose: (a) allowing the existing TSPs to move from the extant regime to the recommended unbundled regime; (b) roles and responsibilities of the ANPs and (c) to permit ANPs to acquire spectrum.
The recommendations prescribe a framework within which the ANP/TSP and VNOs must engage. This includes the ANPs/TSPs to follow a fair, transparent and non-discriminatory process in the acceptance/rejection of the proposals by the VNOs. Further, in the case of a rejection, the ANPs/TSPs must provide reasons for the same. The recommendations also require that the VNOs as well as the Network Providers update the licensor, i.e., DoT and the regulator, i.e., TRAI, regarding the agreements they enter into.
The recommendations have, however, refrained from mandating ANPs or TSPs from providing services to VNOs and have not accepted the proposal that TRAI must regulate the prices paid by VNOs to Network Providers.
With the creation of this additional layer, and given the current players, there is likely to be three sets of operators in the telecom industry, namely: (a) ANP, who establishes/maintains core infrastructure and sells its services on a wholesale basis to TSPs as well as VNOs; (b) VNO, who sells services to the customers directly (retail) by utilising the infrastructure it needs for this from either an ANP or TSP and (c) the TSP who establishes/maintains core infrastructure as well as sells services directly to the customer. The TSP can sell its own infrastructure to VNOs, procure infrastructure from the ANP and sell services to the end customer.
The recommendations, in theory, go in the right direction in facilitating TRAI’s aim of fostering competition and bringing in new players. Not only would they encourage competition among players at different layers but also forge partnerships between players of different layers (for instance a VNO and an ANP). This is especially so in the context of the introduction of 5G services where a VNO is unlikely to have the infrastructure or an ANP may not necessarily be interested in service delivery. There may also be a positive impact on customers if these recommendations result in more players entering the market and offering competing services. Given that the prospective operator will only provide services to customers (VNOs) or maintain infrastructure (ANP), capex is expected to be lower making entry barriers comparatively economical. However, given that the minimum rollout obligations of ANPs have not been waived, we expect entry barriers would remain. This will also allow an opportunity to the existing TSPs an option of selling their infrastructure to prospective ANPs in order to monetise their assets in the face of a financially stressed industry.
One of the concerns raised pursuant to the recommendations is the issue of dual payment of license fee as a percentage of AGR. This is due to infrastructural costs and access charges incurred by a service provider not being allowed to fully pass through for the purposes of reduction from the calculation of the AGR, which meant that a player at each level would have to pay the license fee. Such requirement results in a cascading tax-on-tax scenario, in turn increasing the overall costs, the burden of which will be passed on to the end-customer. Although the Telecom Reforms 2021 issued by the DoT attempted to reduce the burden on service providers by relaxing regulatory requirements and allowing certain exclusions in the calculation of AGR, it seems to have failed to address the issue of such double payment of license fee. It is imperative that this issue is addressed if the creation of the ANPs is to succeed.
Given the capital-intensive nature of the sector and high entry barriers, the DoT might do well to make further reforms to address the specific issues in order to attract more players into the new layers envisaged in the recommendations. During the consultations, some stakeholders had suggested measures like the waiver/reduction in license fees, spectrum charges and entry fees in response to TRAI’s question on suggestions on incentives. The recommendations, however, steer clear of making any such concessions for prospective entrants.
If the recommendations are accepted and implemented by the DoT (and if done in a manner that is timed with the rollout of 5G), the telecom industry may witness disruptions. The effectiveness of the implementation of these recommendations when assessed in the backdrop of its aim to foster competition and bring in new players would largely depend on TRAI and DoT addressing the larger structural issues faced by the telecom sector, such as entry barriers and high costs of operation (compounded by several kind of fees levied on TSPs). The recent reforms implemented by the Government of India are a positive step to ease the financial burden on the telecom industry and could propel the recommendations of the TRAI to be accepted and implemented.