After completing immigration at Colombo International Arrivals, the officer will hand you back your passport along with a welcome pack consisting of a Sri Lanka tourist guide and a free prepaid SIM card. In touch with this serendipitous island’s welcoming feel, the SIM card signals the promise of a telecom sector that must be vibrant, innovative and growing.
In November, on a visit to Colombo, where I met several telecom CEOs and the sector regulatory authority, I realised that this small but sophisticated emerging market punches well below its weight. This is despite Sri Lanka having knowledgeable and hungry customers, businesses crying out for better communications, operators with talented staff and a handful of highly experienced CEOs.
The lethargy in the market is due to market structure—with the industry being crowded with too many operators—and partly because of under-priced services. India is not alone in South Asia in having a need for better telecom sector policy, but in India there is hope because it still offers another few years of raw growth opportunity. In Sri Lanka the structural problems need addressing.
Here is a snapshot of my two-day hypothesis on Sri Lanka and how it compares to the India perspective:
1. The mobile market is not big enough for five players over the long term
- With over 100 percent penetration and a stable population of only 20 million, Sri Lanka’s telecom market is saturated and offers little prospect for growth, except in data. With not enough profit available for today’s five players, the result is market stagnation, underinvestment and a lack of exciting new services for customers and businesses.
- From 2008 onwards, India saw something similar with 8-12 players per circle fighting in the market for new customers. From 2011, we then suffered a lack of investment, as the industry became too laden with debt and investor uncertainty following the 3G auctions and the Supreme Court cancellation of licenses in 2012.
- For these countries, and Bangladesh too, sector overcrowding results from the lack of more thoughtful competition and licensing policy in the first place. Bangladesh has six operators, and arguably, should only have four. In all these markets, now that players are already in, it is M&A which will have to correct for market structure, which is why getting the M&A conditions right is so important.
2. Voice tariff rates are too low to support short-term profitability
In Sri Lanka, voice tariffs are too low to justify more investment in better quality services to customers, possibly the only way to differentiate voice services is to try and drive higher tariffs and more profitability. South Asia is a region beset with the lowest voice tariffs in the world. India has successfully managed to raise voice tariffs around 20-30 percent in the past two years without seeing any major fall in usage. It is less likely this will happen in Sri Lanka because the largest players might prefer to see low tariffs continue for a while to force consolidation.
3. There is too much pressure on data, which is already priced too low
Given the situation in voice, data is already burdened with having to be Sri Lanka’s saviour. However, data tariffs in Sri Lanka are among the lowest in the world too. With a data boom likely to hit soon as smartphones reach sub $40, this spells potential disaster for operators if data transmission costs sky rocket, while revenue grows only slowly.
As the data story develops, both India and Sri Lanka are seeing the emergence of alternative network strategies involving 3G, 4G, fibre and WiFi. Whilst voice strategy has been quite homogeneous, we should expect data strategies to differ significantly as each operator has different spectrum, different network partners and some also have fixed assets such as fiber. Sri Lankan operators do not experience the acute shortage of spectrum that Indian operators have to deal with. However, both countries lack a clear spectrum roadmap, and this doesn’t help investors’ ability to plan ahead.
4. Sri Lanka’s customers and economy stand to lose out in the long term
In Sri Lanka, a five-player market means smaller operators will always struggle to scale and the larger ones are likely to keep waiting for consolidation before they invest. This dynamic has created a stalemate in the industry. As a result, growth and competitiveness in Sri Lankan IT, technology, media and other industries touched by communications (eg health, finance, education) will be impacted and this will hamper economic growth, possibly resulting also in government revenue stagnation.
Even with poor policies, India can muddle back to superior growth rates in telecom due to the voice and data growth left in a large market. Renewed GDP growth may drive even more demand. But Sri Lanka doesn’t have these advantages to fall back on right now. So it has to grasp stagnation decisively through policies to kick-start growth in a saturated market. The government has to act through announcing a new sector vision and policy, take measures to encourage operator consolidation, drive infrastructure sharing harder and other measures to cut capital investment needs and encourage new services growth. A return to dynamism in telecoms could also start playing a supporting role in Sri Lanka’s desire to be a technology and innovation hub too.