Rafiq Dossani on the Indian Telecommunications Market

Rafiq Dossani is director of the RAND Center for Asia Pacific Policy, a senior economist at the RAND Corporation, and a professor at the Pardee RAND Graduate School. He works on education, regional development, security, finance, and technology issues. Recent projects include addressing the digital divide in early childhood education, blended delivery models in higher education, smart city development in China, India’s service sector, and the use of artificial intelligence in elder home health care in Taiwan.

Previously, Dossani was director of Stanford University's Center for South Asia, and a senior research scholar at Stanford University's Institute for International Studies. He holds a Ph.D. in finance from Northwestern University, an M.B.A. from the Indian Institute of Management, Calcutta, and a B.A. in economics from St. Stephen's College, Delhi.

In 2017, Dossani received the Exemplary Performance award from the South Asian Studies Association for lifetime scholastic contributions to South Asian studies. 

Hank Snowdon CMC '21 interviewed Rafiq Dossani on Oct. 4, 2018. 

In the early 2000s you worked for the Indian government, serving as an advisor to the Indian Department of Telecommunications. What reforms were you able to help enact, and in what ways did these reforms impact the telecom industry in India?

Prior to the efforts by the Indian government to liberalize the telecommunications sector in the late 1990s, there was just one state-owned provider of landlines. Most of those landlines were in large cities, and there was no cell phone system. In order to liberalize the sector, the government was advised to open it up by asking for bids. They broke up the country into telecom circles that still exist today, and for each circle the government asked for bids for cellular services. This was a very good time for the world economy as a whole, before the Asian financial crisis. So they received huge bids, as much as 25 billion dollars for a circle. Large multinational firms were bidding for these telecom circles, and it was something that would have generated a lot of revenue for government. The government accepted these bids, but after the 1998 financial crash, several of  these bidders started backing out. They refused to fulfill their commitments and using various legal pretexts, such as delays on the part of the government.  In reality, they entered into litigation in many cases because they didn't have the funds that they had promised to pay.

Around 2000 the government was trying to figure out what to do, as this had been stuck for three or four years in the courts with no sign of any progress. It began to look for advisory help, and I got involved on behalf of Stanford University. I led this advisory effort, and we signed a memorandum with the Prime Minister of India, under which we offered to help the Ministry of Communications and Information Technology revamp its approach to telecom reform.

Once we looked at the situation, we realized first that many of the large litigating companies were not going to pay up, because they had enough legal cover to protest forever. Second, we decided that it was a bad idea from the beginning to go for bids. The government did it because it was told that open bidding was the most transparent method, with the highest bidder winning. However, what Indian officials didn't consider is that if a company pays 25 billion dollars for a long-term license, it has to recover that 25 billion.  It is not money gifted to the Indian government for no return. So, it would increase the cost of telephone services to the public.

We proposed to the government that they do away with the bidding system, to forgive and let the bidders go, and not penalize them in any way. However, in return, the bidders needed to give up their claim to the licenses. Of course, they gladly did this, to avoid being on the hook for billions of dollars of fines. So they gave up their licenses, and those licenses were given out by the government on a revenue sharing basis. There was no upfront fee for them, but if you earned a dollar, you had to pay between 5 and 10 cents based on the density of population in that circle. This 5 to 10 percent would be paid into a pool that would be used for different purposes by the government. This included providing universal service obligations for underprivileged people, general revenue, and more. The government agreed to this proposal and implemented it.

The second part of our proposal was that India should no longer restrict the number of licenses. We noticed that in a bid system, bidders want to make sure no one else is in the game except those who are known to be bidders, just one or two bidders per circle. We decided that this would to lead to monopolies and advised that the government instead open up the sector, and give out many licenses: 20, 30, 40 licenses per circle. Because there was no fee, firms would come in quickly, and with more licenses, there would be much quicker rollout than in a restricted system. The government agreed to this as well.

These changes were fundamental and led to a complete revolution in rollout. At the time that this was adopted, India had 23 million phone lines, of which 21 million were landlines and 2 million were mobile lines. From that point on, India started adding six new cell phone users every second of the day, the highest rate ever seen, higher even than in China’s peak cellphone rollout some years earlier. Within a year and a half, the number of cell phone users exceeded the previous base of landline and cell phone users combined. Teledensity soared, and it is now over 100 percent.  The reforms had tremendous impact.

More recent developments in India, like Mukesh Ambani’s new national 4G network for Reliance Jio, has more people connected to cellular data than ever before. In what ways is India’s recent growth similar to the telecom growth seen in the early 2000s, and in what ways is it changing?

To clarify, these are not new users, these are users who are moving from one provider to a cheaper one. The growth is in their usage of the services, like the Internet.

When we planned the reforms, we recognized that our idea to give out many licenses was only designed to lead to higher rollout. We knew that over a period of time there would be consolidation, and India might end up with three or four players in the industry.

Now, many are arguing that what Reliance could be trying to do is a form of predatory pricing (though more inquiry is needed). This is when, if you are deep-pocketed, you price yourself at a loss in the short term, so that you can cause every other provider to exit the industry. Eventually only you remain, and once all the other users leave, you start raising prices. If this is what is happening, it would be an illegal practice. But, for whatever reason, the government has not really investigated the predatory nature of this strategy.  Instead, its view seems to be “This is great cheap cell phone service. It will let the poor find value-added services even more affordably, so let’s promote it.” This is what is happening now, and it's quite a bloody war, because the other big incumbents are losing a lot of money as a result of this pricing.

This price war cut industry-wide revenue per user to an average of $1.53 per month, down from $2.50 in 2016. How will this affect the telecommunications market in India?

We are heading towards an industry that is going to be either monopolized or oligopolized; it will not be a truly competitive industry. It’s going to look more like the US, Japan, or Singapore, which have very high prices for good quality services, and the poor lose out. In the long term these developments are bad for the people, as India is still a desperately poor country. Once whatever end result occurs, there will be two or three players standing. They'll divide up the market between them and prices will go up.

Samsung recently built its biggest store worldwide in Bengaluru, and opened the world's biggest smartphone plant outside New Delhi in July. With so many users entering the smartphone market for the first time, are other major phone companies likely to follow Samsung and build in India?

There is plenty of room for companies to follow Samsung. What has held India back as a manufacturer is that India is not as competitive as Vietnam, China and some other countries. So as it slowly gets its manufacturing act in order, its huge market will be an immense attraction to manufacturers. At the end of the day, you want to be close to your market. Mobile phone companies are not selling underground plumbing, where no one sees it, and which can be standardized around the world. Mobile phones are still very customizable and very customer specific, so the needs of Indians will determine what they produce.

This move by Samsung indicates that it is shifting its focus from the high-end phone market in China and the United States, to the more inexpensive smartphone market in India. Is there enough opportunity in India for Samsung to prosper, given these lower profit margins per phone?

Absolutely. In India Samsung will focus more on this medium to low-end strategy, and then it can also cater to similar markets like Bangladesh, Pakistan and Nepal.  These are large markets with flourishing cell phone sectors, which are as poor as India. However, this does not mean that Samsung is shifting its focus, just that it is entering new markets.

India surpassed the U.S. in smartphone app downloads last year, due to inexpensive data and high levels of data access. In what ways are social media and messaging companies trying to capitalize in India?

My sense is that they are already capitalizing in a big way. Whenever I need to contact people in India I call them on WhatsApp; they all use it. There are no restrictions in India, unlike in China or Japan, on using WhatsApp. Likewise with other firms, Google and other American companies have over 90 percent share of the search engines. Facebook and Twitter dominate social media. India’s profile of value-added mobile services is largely run by U.S. companies. I see that as only continuing to grow.

In contrast to China, India has shown a willingness to allow Western technology corporations to enter the country and thrive. What is the likelihood that India’s openness will continue as the cellular and online markets grow?

I think it will certainly continue in India. India has structurally opened up its economy and recognizes the importance of foreign service provision to learn from and build off, in order to develop its own technology sector. It's a different approach from China, which is a communist country. For China to be completely open to this kind of technology would pose risks to its system. India doesn’t face those risks being a democracy. I see India’s openness as growing, not reducing in any way.

Hank Snowdon CMC '21Student Journalist

Image by Vineeshkoomully, “Chennai Skyline,” via Wikimedia Commons.

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