THE merger of Warid and Mobilink announced on Thursday is only the first of a series of transformative steps about to sweep the world of the telecoms.

Telenor and Zong have announced a deal to share cellphone towers, and the industry is abuzz with talk that PTCL and UFONE which despite having common shareholders have operated as separate entities could be merged into one. The industry hit a plateau almost half a decade ago, and talk of large scale consolidation had begun back then. Telecom revenues tripled in the boom years between 2004 and 2010, but in the five years since then, they have barely increased by 50pc. Total investment in the sector also hit a peak in 2005, declining steadily since then to go steeply into the negative in 2011. A short spike in 2013 is mostly accounted for by the auction of 3G licences.

At least some of the challenges facing the industryare global in nature. Around the world, telecoms are finding revenues from voice and SMS traffic flattening out as numerous apps are stepping in that provide these services for free. The shift now is towards data, and nobody has yet figured out a way to make money out of data traffic.

Another set of challenges grows out of the trajectory taken by Pakistan`s telecoms. Instead of sharing cellphone towers, they have opted for proprietary towers, effectively duplicating each other`s infrastructure investments. `Each company has invested up to $600 million or thereabouts each in their proprietary tower networks` says Nadeem Hussain, who has pioneered one of the few ways to monetise data traffic with his work on mobile banking through Tameer Bank. He has since sold his shares of Tameer Bank to Telenor, which is now the sole owner of the largest mobile banking operation in the country.

Warid was not so lucky. They invested heavily inhigh speed internet with their 4GLTE network, the fastest in the industry, but could not find a way to monetise the resultant traffic.

The other problem that industry insiders point towards is more specifically Pakistani. `This market isn`t big enough for five operators` says Naveed Khalid Butt, head of regulatory affairs at Ufone, something one hears from industry players regularly. `This was set to happen, and further consolidation is going to happen too.

Pakistan has some of the lowest call rates in the world while it has the second highest levels of taxation in the world, he says. The squeeze on margins that comes with fierce competition and high levels of taxation means the game either shifts towards innovative value-added products or towards volumes.

Since the former is still in its nascent stage, consolidation to get high volume traffic will be the road that telecoms will pursue in the days to come. Nadeem Hussain feels much work can be done in creating value-added products in the industry. According to him, the telecoms are sitting on a vast gold mine of subscriber data, which if properly mined, can yield massive dividends.

`We did a pilot on an algorithm with 52 data points to determine credit-worthiness of a large number of users of mobile banking services,` he says by way of example. `Less than 2pc of Pakistanis have access to credit. If I can get even 10pc of Telenor`s customers, that is 3mn new borrowers I can create ` he adds.

Company agents can also be leveraged to do more than just sell mobile SIMs. `Data mining customer base, cross selling financial services, leveraging their agentnetwork are all things that can be done` to develop innovative products to bring to cellular subscribers and help monetise data traffic, he says.

But innovation is not cheap, and carries large risks which companies can be reluctant to take on given the ferocity of the competition in the field. Adding to the problem, says another industry source who did not wish to be named, is the fact that the government is treating smart phones as luxury products, and taxing them further, which inhibits their adoption by the mass market and serves as a brake on the dividends that innovative data-related products can yield.

`We are competing in paisas literally, says Butt, underlining the precarious margins upon which the industry is standing, in hopes of paying off investments in the hundreds of millions of dollars.The level of aversion in the industry to making further investments can be gauged from the response to the last auction for unsold 3G spectrum that government tried to undertake a few months ago. The government hoped to raise about $600m from the sale, but found no interest from the industry.

Telecoms are poised on the brink of revolutionary changes that will reshape the face of the industry in profound ways.

These pressures are forcing them to choose between innovation and volumes as the way to remain competitive in the new landscape. The policy mix that the government brings to bear upon the industry to guide its future evolution should encourage both, but place the emphasis on innovation as the way forward.

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