Can MTNL and BSNL be salvaged?

I happened to look at the websites of MTNL and BSNL for seeking out their annual reports and financials. Long ago, I don't remember exactly when I concluded that it is a waste to invest in public sector telecom companies - MTNL (BSNL is not listed). It was so far back in antiquity that I thought may be it is time to revisit the decision. After all MTNL is a nav-ratna company - meaning it is prized Government PSU. Alas I was horribly wrong.

Where are the financials?

MTNL or Mahanagar Telephone Nigam Limited is listed for 20 years at least. But I could find only 2 annual reports. No quarterly information was available on the site. The website links to some other mtnl sites but the links on the site did not work.

The first rule of getting investor interest is to make all financial and operational data available. I was expecting to look at ARPUs of land lines, mobile, their satellite network subscribers etc. 

Shameful numbers! 

The two annual reports reveal pathetic situation. MTNL has employee cost 76% of revenues. Yes 76% [Seventy-Six] - no it is not a typo. The report talks of legacy issues with the government employees who cannot be sacked and do not work. These numbers make BSNL cost structure of employee costs at 52% of revenue look respectable. 

As a comparable IDEA Cellular has employee expenditure of ~4% of Total revenue.

How to fix MTNL / BSNL?

So can these companies even be salvaged? I think we need radical reform.

1. Disclose all information - no matter how ugly. Go back and disclose everything. Let us have ARPUs, Segment-wise, detailed costs as much drill-down as possible. From these numbers someone may be able to gather the strengths of the companies.
2. Ground Realities - corruption and compromised staff: The sad reality is that the staff of MTNL works for private companies. They take bribes and ensure poor service quality thereby herding the customers in droves in the arms of private telecom service providers. I have also seen MTNL linesmen working for private land line operators in Mumbai. They take home dual incomes. 
3. Staff Costs are too high: MTNL costs at 76% of revenues and BSNL are at 53% wheresa idea cellular is at 4%. There cannot be any rational justification for this mess. More than MTNL, the government of India should take a decision and remove this staff. It will be difficult for MTNL to bear the burden of this. Let the staff be transferred to some other productive work - which they are incapable of. Just pay them and let them go. At least they won't damage the government elsewhere.
4. Asset sweating and location leverage: Both BSNL and MTNL have superb location from where they operate. These locations can work for telecom base stations, interconnection zones and network switches for all firms. Such operational asset sweating can release vital cash for operations.
5. Good Telco - Bad Telcos solution:  Create a new listed Telecom entity - say National Telecom and sell MTNL and BSNL assets to that entity and order closure of MTNL and BSNL under Companies Act. There is no reason to have two telecom companies in the same business with different geographic coverage.
6. Keep transparent pricing plans and decent customer service and customers will flock to PSUs. Those with customer service of private telcos will agree whole-heartedly. With complicated subscription plans and bill discrepancies private telcos are sitting ducks.
7. Telecom-Internet-TV Fibre bundles: The current landscape allows for one state-owned voice-focussed player. After 5 years there wont be any such opportunity. However the PSU Telco will have to quickly shift to data and preferably internet and TV offerings together. It will be easier for this entity to operationalise this than other private operators.

If you let me run these two, I can make them profitable in 3 years. 

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Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

Tele-density and MOU - changing Paradigms

A lot of telecom analyst base their growth forecast on tele-density figures. Tele-density refers to ratio of number of connections to population. It is usually expressed as a percentage. Tele-density determines the upper limit to subscriber growth.

MOU refers to minutes of usage or talk-time of subscribers. “Minutes of Usage” multiplied by Average Revenue per Minute (ARPM) to arrive at Average Revenue per User (ARPU). ARPM has shown a declining trend with respect to time. MOU, therefore, represents growth potential of current subscribers.

The growth potential of any telecom company is a function these two variables. Yet, the concept of teledensity and MOU have not been understood well. A few innovations in the past few years have added new life to both these variables in ways analysts have failed to grasp.

Era of bandwidth Node

The interpretation of teledensity as a cap is remnant of telephone as a voice call device era. This old era represented voice-based communication. We also discovered ways to send data over telephone lines. But this was inefficient. We were sending data over voice networks.

The era has changed and a new era is here. Today, telecom is essentially a provider of bandwidth node at a given location. The question of what to do with this bandwidth is entirely left to market forces. Market forces have deciphered one use of the node through “smart phone technology. Today our networks are essentially dual-mode networks. On the smart-phone or any 3G phone, we have access to a data network AND a voice network. We are no longer sending data over voice network.

So the correct way to look at MOU is in fact, to look at overall consumption of bandwidth. There is no doubt this is only going to go up!

Smart phones boosting data usage

The smart in smart phone is actually in usage of bandwidth tap. The smart phones have, through use of apps, created new uses of data. Further, the presence of 3G implies we are going to listen to move songs and watch more videos on the smart phone. Both these applications are bandwidth-hogging applications.

Overall data requirement of phone user has definitely gone up. And most of the time, data is served by a telecom company. Sometimes, it is your telephone cable connected to a wi-fi modem, other times it is your phones 3G network. As new apps spread, we will have increasing data requirements. So MOU, in terms of overall usage of telecom service will go up. Also, the more connected people are more are voice calls likely!

The upper limit on teledensity

Tele-density has another story. First, there is natural requirement for multiple phone connections per person. In developed countries the number is 2. So we can expect a natural phone penetration limit to twice the population. Further, simply put, there is a potential to connect all the laptops that are in use in the market currently. So the factor of 2 seems pretty understated. Thereafter, anything that is mobile and generates data is a target for embedding a phone connection.

Telecom can definitely cannibalize 50% of the GPS applications. Cars can share location data, engine performance and others. Trucks and delivery vehicles are already using telecom based location services.

Further, it does not take much imagination to foresee new applications. A door viewer that can send photo of visitors is pretty common. Telecom-equipped nanny cams are definitely well accepted. TV set-top boxes can have embedded connections transmitting viewing habits. Buses in Switzerland are already transmitting data about arrival times.

In sum, we can say that older paradigms of Tele-density need to be massively revamped.

It will happen within 5 years

The classical rebuke to these arguments is visibility. Analysts do not foresee such changes happening in near term. I think otherwise. All it needs is right pricing and little bit of imagination. The iPhone, is revolutionary in that sense. It has socialized the imagination part while retaining the basic bandwidth pipe control to itself! I am betting, we will see tremendous explosion in bandwidth consumption in next 5 years and most of this will enrich the telecom companies. That is why I have invested in Bharti Airtel (Bloomberg: Bharti IN).

Download the document in PDF format.Ideapaper - New Teledensity Paradigms

Telecom Companies growth models

I have added an ideapaper detailing how telecom companies find growth. The telecom service provider does not simply grow. These companies transform from voice telephony operators to bandwidth service operators and finally into a holding company for other telecom companies. The following IdeaPaper details those five phases of transformation. I have also given some key characteristics of each phase.

Bharti-MTN deal was example of how both companies were trying to move to phase V of the transformation. As of now France Telecom, Portugal Telecom, Vodafone, Singtel are this phase. I still believe it is too early for Bharti to move to phase V, particularly since there are ample avenues for growth still open to it. Bharti's eagerness to join the club was forced by the fact that telecom is developing globally and soon there won't be many opportunities to get access to subscribers and telecom assets. Anyways the interesting part is how telecom companies find growth.

Further, there are still ways and means to exploit current opportunity for telecom companies. But that is topic for further paper.

Disclaimer: I own Bharti stock.

Ideapaper - Growth Phases of Telecom Companies