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Illusory Markets

As India's mobile services tragedy (fiasco) enters a decisive phase, it's useful to step back and rethink some basics

Illusory Markets

As I write this column, there's news that the Vodafone CEO has said in London that the company may have to liquidate its Indian operations. It's pretty clear that unless something drastic changes, this would be the correct business decision for Vodafone. They should join the long line of names like AT&T, Tata, Telenor, Aircel, RCom, MTS, Docomo and many others and give up on the Indian mobile services market. After that, sooner or later, Airtel would probably shut down. Then, Jio will either hike up its prices sharply, or it would also shut down.

I'm serious. The enormously high taxation of telecom services in India has made the service unviable. Just a couple of weeks ago, I'd written in this column that the real source of India's telecom disaster is that the license and spectrum charges are taxes on the end-user. These are simply paid in advance by the operator. As long as we do not recognise that this is the real source of India's telecom disaster, the solution will not be visible. In fact, if the current theory of indirect taxation in India is to be faithfully followed, then the license fee should be subsumed into GST! Depending on the slab of user you are looking at and the future value of the license fee that is being paid, mobile telecom usage is subject to an effective sales tax of 50% to somewhere above 100%.

At the prices that are being charged today, and the effective tax rates that are being levied, most Indians cannot afford mobile services, period. Some part of this equation has to change. If the price part is changed by raising it to a viable level then the mobile phone market must shrink drastically, perhaps to a quarter of what it is. Alternatively, if everyone who has mobile service today must continue to be able to afford it, then the taxation must be cut drastically.

However, leaving the specific issue aside, this points to a fundamental problem with discovering market sizes of different products and services. Not just in telecom, but across a whole host of goods and services (mostly, tech-driven services), we seem to have forgotten that price is the most important determinant of market size. What is the market size of mobile services in India? Well, that depends entirely on whether it costs Rs 30 a month or Rs 500. How many midsize apartments can be sold each year in a city? Depends entirely on whether they cost Rs 1 crore or Rs 3 crore. When you move the price, the market size changes.

This is Economics 101, as Americans would say. Except that somehow, it no longer is. I actually think that some businesses have forgotten this. Here's a little experiment: I googled 'How to determine market size' and then read through all the results delivered on the first page. I am shocked to report to you that not a single one had any mention of pricing. There's all kinds of stuff about top-down and bottom-up and whatnot but no mention that price matters. What happened to the first principle that demand is determined by the willingness AND ABILITY to purchase something? Even high school economics teaches that.

I have a hunch that a certain type of modern business has discovered that price can be ignored because profits can be ignored. In the old days of the planned economy, market size was decided in government offices in cities like New Delhi and Moscow and then budgets allocated. Nowadays, market sizes are decided by venture capital and then budgets allocated. There's as little 'free market' in the decisions made by Softbank, Sequoia etc and their funded companies as there was in the decisions made by the Planning Commission in the 1970s. Really, think about it. If you distribute something far below cost, you can easily prove the existence of a huge market which is actually illusory.

What is the market size of food delivery, digital wallets, and cab services in India if consumers had to pay the true economic cost? The answer is that no one knows. There has been no market discovery in these areas yet. That will happen only when the money runs out.

For telecom companies, because the scale and the source of the money is different, it has already run out. However, the fundamental question is actually the same. How many Indians are WILLING AND ABLE to pay for mobile services in India if they have to be delivered at the full, sustainable economic cost plus the full tax burden? The surprising answer is that even today, a quarter of a century after the first 'New Telecom Policy' was first announced, no one knows.