Telcos: more uncertainty

The ongoing macroeconomic crisis has exacerbated the challenges that were previously faced by the telecom operators in Pakistan. While much has been written about how telco’s are not fond of the regulatory issues (especially concerning timing/pricing of spectrum auctions and process/pricing for renewal of licenses), what gets less attention is how the market has been becoming less attractive from the profitability and returns perspective, especially for operators that have foreign ownership.

For background, when the mobile broadband services were launched roughly eight years ago, the five mobile network operators (MNOs) were hoping to be rewarded profitably for the hundreds of millions of dollars in capital investments they were making in the 3G and 4G networks, after suffering years of stagnation. That hasn’t been the case, for most MNOs at least. One of them got absorbed by the biggest fish in the pond. And the average revenue per user (ARPU) has actually been declining in real terms.

With ARPU gradually eroding in this price-sensitive market despite the expanding 4G network footprint across Pakistan, the operators have had to rely much more on acquiring new data subscribers, in order to eke out some topline growth. That kind of organic growth has become harder to achieve in recent years, especially for MNOs that don’t have the kind of scale at Jazz (which acquired Warid about six years ago).

Things have been adding up, and not in a favorable way. First came the macroeconomic crisis of 2018-19, which reduced purchasing power and eroded rupee’s value. Later, during the pandemic, MNOs kept the networks up in some difficult circumstances due to change in demand patterns and uptick in data demand. This was the time when quality of service issuesbecame elevated. Fast-forward to current macroeconomic situation, challenges are more pronounced after two demanding years under Covid-19.

Whatever organic growth MNOs have been getting in rupee terms (and it is mostly single-digit revenue growth) has lately been consumed by sharp depreciation in rupee, dealing severe blow to foreign-currency-based growth rates and profit margins for MNOs’ HQs abroad. Meanwhile, the spectrum they buy (or decline to buy) is priced in dollars, the license-renewal fee is also priced in dollars, and the cost of providing services also includes imported bandwidth, equipment and components denominated in dollars.

Considering that the top-three MNOs were a no-show at the last spectrum auction held in September due to a complex set of issues including the ones identified above, the new government has an opportunity to respond constructively to the telecom industry’s main concerns. It needs to be appreciated that it is the MNOs (and their wholesale connectivity suppliers in upstream telecom market) that have played their role in development of digital economy in Pakistan, especially during the stressful days of the pandemic.

The level of macroeconomic urgency, however, militates against recent news reports suggesting the government may provide some much-needed respite to the industry during the budget. For instance, considering the growing fiscal crunch, there is little likelihood of the new government reducing or zeroing down taxes and duties on telecom services, data usage, mobile phones, gadgets and computing devices. It is also little likelihood of the government raising telecom taxes and duties, but anything can happen until budget announcement (and in the days after that, before approval).

If taxes don’t come down, there is an impression that MNOs can still be brought around with a cheap spectrum auction. But this also appears unlikely in the current political climate. The recent measure to ban finished mobile phones’ imports has further complicated the situation. This move, which would have made more sense if locally-assembled phones were at par on quality and after-sales service, may save critical forex reserves – but are the potential costs of that decision (e.g. impact on broadband uptake, reduced customer choice, less urgency for local assemblers now to up their game) worth the gains?

Still, let’s wait and see how the new finance team tackles the tough choice between the need to develop digital economy’s foundations and the continued short-term urgency to tax more in order to fund the government.