Unfulfilled Promises: The Stunted Impact of Virtual Network Operators on India's Telecom Ambitions
Despite regulatory changes, Virtual Network Operators (VNOs) have failed to significantly impact India's telecom sector due to outdated policies and restrictive practices
Two days ago, i.e on 13th Sept 2024, the Telecom Regulatory Authority of India (TRAI) released new recommendations regarding Virtual Network Operators (VNOs) in India, specifically about permitting these operators to access connectivity services from multiple Network Service Operators (NSOs) under certain conditions. This move follows a request from the Department of Telecom (DoT) on July 7, 2023, which sought TRAI’s insights after receiving proposals from access VNOs advocating for expanded connectivity rights. Historically, VNOs were first sanctioned based on TRAI’s recommendation on May 1, 2015, leading to DoT’s initial guidelines issued on May 31, 2016. Subsequent amendments came on August 31, 2018, when DoT enhanced the guidelines to include Access Service Category “B” Authorization under the Unified License for VNOs, enabling them to provide wireline services within a confined geographical area—up to four districts per state or union territory. This article aims to assess whether the existing VNO guidelines have achieved DoT’s policy objectives, explore the shortcomings, and discuss necessary enhancements to improve the framework’s effectiveness.
Key Policy Objectives
The foundational rationale behind TRAI's initial endorsement of Virtual Network Operators (VNOs) can be traced to Clause 2.3 from its May 1, 2015, recommendation, which highlights a significant digital divide between urban and rural areas in India. As of February 2015, while urban tele-density had soared to approximately 149%, rural tele-density remained as low as 47%. Additionally, against a target of 175 million broadband connections by 2017, only 85.74 million had been achieved by December 2014, and that too at the modest broadband speed (download) of 512 kbps.
Further, in Clause 2.4 of the same document, TRAI aligns its recommendation with the National Telecom Policy (NTP) 2012, which aims for 100% rural tele-density by 2020, and queries whether the introduction of VNOs could potentially disrupt the Network Service Operators’ (NSOs) efforts toward this goal.
The response from NSOs was mixed. Some supported the introduction of VNOs, viewing it as a boost to service expansion and competition, while others resisted, arguing that VNOs might jeopardize the financial stability of the already competitive industry. They pointed out that achieving full rural tele-density by 2020 would require an incremental capital expenditure of Rs 80,000 to 90,000 crore—a feat beyond the financial and infrastructural capabilities of VNOs, which they believed could only be managed by existing Telecom Service Providers (TSPs), as mentioned in Clause 2.6, page 7.
Now, as we approach the end of 2024, the National Telecom Policy's (NTP) ambitious goal of achieving 100% rural tele-density by 2020 remains elusive. Despite regulatory changes and the introduction of VNOs, the latest TRAI performance report from March 2024 indicates that rural tele-density is currently at just 59.19%—a mere 12.19% increase over the decade since VNOs were first introduced. This shortfall prompts a critical question: Why has the gap remained so substantial, especially in a market that has evolved from being highly competitive in 2015 to significantly less competitive by the end of 2024?
Key Reasons for VNOs' Underperformance
The underperformance of Virtual Network Operators (VNOs) in India can be attributed to several straightforward factors that do not require extensive expertise in policy and regulation to understand. Introduced in a somewhat half-hearted and restrictive manner, VNOs faced an inflated cost structure that hindered their ability to extend mobile coverage in areas where traditional mobile operators were hesitant to invest due to their own cost considerations and general and administrative expenses. I had foreseen this looming issue as early as 2016, shortly after the release of the initial guidelines, and again in mid-2019. For those interested in a more detailed analysis, links to my previous articles are provided.
The primary issue lies with the existing licensing regime, which imposes both license fees and spectrum usage charges (SUCs) on VNOs, yet does not grant them direct access to spectrum. This is outlined on page 6, sub-clause (xxviii) of the 2018 DoT's VNO guidelines. This raises a significant question: If VNOs cannot access spectrum directly, why are they subject to SUCs, especially when the Network Service Operators (NSOs) already pay these charges for the same spectrum that VNOs utilize? Furthermore, why should VNOs pay the same licensing fees as NSOs if they do not deploy additional infrastructure and merely act as marketing agents to extend the NSOs' reach in areas lacking coverage? Although some revisions were made to the licensing documents on October 24, 2018, to alleviate certain pass-through costs for VNOs, these changes did not address the critical bottleneck concerning SUCs, which continues to restrict VNOs' ability to access services from multiple NSOs—a capability that TRAI has permitted for wireline VNOs, as will be discussed later in this article.
TRAI's Current Recommendation
A pivotal issue that has significantly constrained the operational flexibility of Virtual Network Operators (VNOs) in India is the regulation that initially prevented them from entering agreements with multiple Network Service Operators (NSOs) for access services, encompassing both wireline and wireless. This constraint is articulated in Clause 3.21 on page 21 of TRAI's recommendation dated May 1, 2015, which posits that VNOs should essentially function as extensions of the NSO for service delivery. The clause stipulates that VNOs are permitted to set up their own network equipment, such as BTS, BSC, MSC, RSU, DSLAMs, and LAN1 switches, where no interconnection with other NSOs is necessary. However, they are restricted from owning or installing equipment like GMSCs, Soft-switches, and TAX, which require interconnection with another NSO.
This regulation effectively limited VNOs to partnerships with a single NSO for providing access services. However, this restriction was partially lifted on August 31, 2018, when TRAI introduced Access Service Category “B” Authorization under the Unified License for VNOs, granting district-level authorization that expires upon reaching more than four districts in a single Licensed Service Area (LSA). While this modification is now extended to all VNOs (TRAI current recommendation) providing wireline services—with similar caveats as the August 2018 guidelines—it was not applied to wireless VNOs. The rationale given was that the calculation of Spectrum Usage Charges (SUC) would be complicated due to varying slab rates applicable to different operators. This decision may seem bizarre considering that VNOs, ideally, should not be required to pay SUC since these charges would already be covered by the NSOs through whom the revenues flow. Isn't that perplexing?
Negligible VNO Contribution
It is unequivocally evident that Virtual Network Operators (VNOs) in India have not made a significant impact on the growth of the telecommunications sector. Their revenue contributions are marginal when compared to the collective industry revenues of all operators. Notably, there are no VNOs actively paying Spectrum Usage Charges (SUC) in the wireless domain, which starkly contrasts with international norms where VNOs often play a more substantial role. This discrepancy is highlighted in TRAI's recommendation dated May 1, 2015 (Clause 2.14, page 10), indicating the negligible presence of wireless VNOs in India. The following chart underscores this point, showing that the maximum quarterly revenue contribution from all types of VNO licenses in India peaks at merely Rs. 38.45 crore, in stark contrast to the industry's quarterly Adjusted Gross Revenue (AGR) of over Rs. 66,000 crore, and rural teledensity continues to elude the NTP 2012 targets.
Conclusion
The examination of Virtual Network Operators (VNOs) in India reveals a pronounced disconnect between regulatory intentions and actual outcomes. Despite the ambitious targets set by the National Telecom Policy (NTP) 2012, VNOs have struggled to significantly impact the expansion of coverage and teledensity in rural areas. This shortfall can be traced back to a series of policy missteps and regulatory constraints that have not only curtailed the operational flexibility of VNOs but also stifled their potential as catalysts for broader sectoral growth.
Initially, resistance from Network Service Operators (NSOs) was rooted in concerns over intensified competition and the financial strain of achieving universal rural tele-density. These NSOs pledged to make the necessary investments themselves, promising to support the government's teledensity goals. However, a decade later, these commitments appear to have been largely forgotten, with little accountability for their realization. Meanwhile, TRAI's regulations have continued to impose outdated and restrictive Spectrum Usage Charges (SUCs), using them as a rationale to limit wireless VNOs from connecting with multiple NSOs—despite the dramatic reduction in SUC levels following recent telecom reforms which introduced zero SUCs in spectrum auctions.
Today, the competitive landscape within the telecom sector has deteriorated significantly, pushing many operators toward bankruptcy due to unsustainable license fees, spectrum costs, and auction charges. TRAI’s latest recommendations, though presented as a regulatory update, do little more than maintain the status quo, offering negligible improvements at a time when transformative change is desperately needed.
The current state of affairs indicates a missed opportunity to harness VNOs effectively, which in turn has impeded progress toward India's aspirations of becoming a developed nation. To rectify this, a radical overhaul of existing policies is imperative, one that not only addresses the legacy issues but also aligns future regulatory frameworks with the evolving needs of a dynamic telecommunications sector and the broader socio-economic objectives of the country.