Pricing it right

It isn't often that markets respond enthusiastically when companies in the services sector raise the price of their products. On Wednesday, however, the stock prices of telecom companies shot up. Especially over the last three years, telecom companies have bled profusely in pursuing a price war. From above Rs 200 in December 2008, the average revenue per user had dipped to near Rs 150 by September 2012. While this was supposed to be made good by the rise in the number of telecom subscribers, and it did rise from about 250 million to 800 million in the same period, the figures have declined since then. Moreover, despite the rise, the gross revenue for the sector, adjusted for inflation, has dipped to about Rs 32,000 crore, from close to Rs 40,000 crore when the undercutting of prices had begun.

Extraneous factors, like the high price of spectrum the government demanded in the 3G auction, have added to the costs. Already weakened by the price war, companies ran up huge debt bills to finance the purchases. Since they did not have the money to finance the expenditure on the subsequent roll-out of services, the costly spectrum won by them is lying unused. So, government policies, aided by a misdirected auditor report, have led to a hoarding of spectrum, making it difficult for new entrants to provide competition in value-added services, and have offered no incentive to maximise the use of spectrum. One of the reasons for companies to shun the auction of the airwaves in November was that few banks were willing to finance them any further.

As a result, while value-added services like data over the telecom lines have gained impressive traction globally, the Indian telecom market, despite ratcheting up early gains, has begun to falter. In this context, the move by Bharti to cut free time on some of its premium prepaid services, which may be duplicated by Idea and Vodafone, looks like the signal of an end to the downturn. The companies will also need to begin rationalising their use of spectrum, which can yield impressive gains, instead of pushing for higher tariffs alone. While this, too, will require more investment, it is essential to bring their return on assets back to positive regions. The government can, meanwhile, restore sanity to the pricing of spectrum to ensure that the economy's need for this critical infrastructure is not left inadequately addressed.

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