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Issues and Opportunities of the Indian Telecom Industry

The Indian telecom industry has come a long way since its liberalisation era. The industry has witnessed exponential growth especially in the wireless segment in the last few years. The plethora of telecom services evolved over the years, ranging from basic telephony to voice, video and data services, Wimax, WLAN and VPN, and bandwidth on demand to virtual private networks have catalysed revolutionary changes in the business operations for the service sector, i.e., IT, BPO and also the manufacturing sectors etc, besides providing millions of people access to new technology.

Even though the sector has reflected promising growth, the teledensity in India still remains at a very low level compared with international standards and thus providing tremendous opportunity for future growth. In the medium-term, the industry is expected to continue to record good subscriber growth as a result of low penetration levels, heightened competition; a sustained fall in minimum subscription cost and tariff that increase affordability for lower-income rural users, expansion of coverage area by mobile operators, and government support through schemes such as the rural infrastructure roll out funded by subsidies from the Universal Service Obligation (USO) Fund. The Indian telecom sector offers unprecedented opportunities in various areas, such as rural telephony, 3G, virtual private network, value-added services, et al. Nonetheless, the lack of telecom infrastructure in rural areas and falling ARPU of telecom service providers could inhibit the future growth of the industry.

Issues and Challenges Faced by the Industry

Rapidly Falling ARPU

The competitive intensity in the telecom industry in India is one of the highest in the world and has lead to sustained fall in realisation for the service providers. Intense competitive pressure and cut throat pricing has resulted in declining ARPUs. With increasing number of new entrants in the telecom space the competitive intensity is likely to continue, putting further downward pressures on the telecom tariffs. Thus, the telecom companies might have to grapple with further decline in ARPUs, going forward.

Further, with the telecom companies moving their focus to the rural areas for driving the future subscriber growth they might not witness a commensurate increase in revenues. In fact, the risk of steep decline in ARPUs will increase going forward as the telecom companies penetrate rural markets that are characterised by higher concentration of lowincome, low-usage customers. A higher-than-expected decline in ARPU poses a risk of reduction in margins of service providers. Alternatively, telecom operators are turning their focus to steadily increasing the minutes of usage (MoU) to counter the sustained fall in ARPUs. Likewise, the growth of the VAS is also crucial for some improvement in the ARPUs of operators.

Lack of Telecom Infrastructure

Lack of telecom infrastructure in semi-rural and rural areas could be one of the major hindrances in tapping the huge rural potential market, going forward. The service providers have to incur a huge initial fixed cost to enter rural service areas. Further, as many rural areas in India lack basic infrastructure such as road and power, developing telecom infrastructure in these areas involve greater logistical risks and also extend the time taken to roll out telecom services. The lack of trained personnel in the rural area to operate and maintain the cellular infrastructure, especially passive infrastructure such as towers, is also seen as a hurdle for extending telecom services to the under penetrated rural areas.

Rural Areas Continue to Remain Under Penetrated

A rural teledensity of merely 15% point towards the fact that a majority of Indian population still do not have access to telecom services. The rural India seems to have remained untouched by the telecom revolution witnessed in the last few years. A huge 'digital divide', which is reflected by the enormous difference of 74% between the urban and rural teledensity, reiterates this fact.

However, with the urban markets reaching a saturation point, the telecom service providers are penetrating rural areas for driving future growth. Thus, the service providers entering new rural markets might witness substantial increase in subscriber base. The expansion in the rural areas, however, has increased the risk of further decline in the ARPUs. Nonetheless the revenue growth from these regions is unlikely to match the surge in the subscriber base.

Excessive Competition

Another major concern that has come to the forefront in the recent past has been heightened competitive intensity in the industry that has correspondingly fuelled the price war between industry players. The Indian wireless market is one of the world’s most competitive markets, with 12 operators across 23 wireless ‘circles’ and 6 to 8 competing operators in each circle. The auction of new 3G licences and the introduction of mobile number portability (MNP) are likely to heat up competition in the industry, going forward.

Spectrum is the most important resource that is required for providing mobile services. Given that spectrum is a finite resource, the availability of the same would be inversely proportional to the number of operators. Thus, larger the number of service providers smaller will be the amount of spectrum available to each of them.

Scarcity of spectrum leads to higher capex on deployment of mobile networks for the operators as they need more cell sites to improve service quality. Further the growing usage of spectrum and the resultant scarcity may lead to re-use of spectrum and increase chances of congestion in networks leading to constraints on service quality.

Evidently, the competition in the industry is expected to intensify further with the entry of new players, both domestic as well as foreign players. With the competitive intensity of the industry already at such high levels new operators might find it difficult to gather significant share in Indian telecom market. While the new players may benefit from a faster network rollout through tower sharing, they will face challenges in terms of high subscriber acquisition costs and lower ARPU customers.

Price War Between the Service Providers Putting Pressure on Margins

The ever-increasing competitive intensity in the sector, with licenses and spectrum in several circles allotted to newer operators, is also a concern and could lead to unrealistic pricing levels to grab subscribers. The pricing strategy of per second billing already has taken the price war between telecom operators to the next level. The intensifying price war could put significant downward pressure on the industry revenue growth. Further, the ongoing price war and the concomitant decline in telecom traffic could raise the entry barrier for new companies.

Spectrum Allocation

3G Spectrum availability is one of the major concerns for the industry. Lack of adequate spectrum which is the most integral part of the mobile telephony sector could hamper its growth severely. However, the spectrum allotment has been the most controversial issues in the Indian telecom sector.

The smooth process of scheduled 3G and BWA spectrum allocation is likely to be one of the key factors affecting the industry dynamics, going forward. Given the highly-competitive nature of the Indian telecom industry on one hand, and limited licenses in the 3G network on the other, the risk of excessive biding by the service providers has increased. Irrational bidding, especially in some circles, might render 3G services financially-unviable. Further, there exists a risk of delay in allotment of proposed spectrum to the service providers who have successfully bid for the 3G spectrum.

Regulatory Charges

The regulatory charges in the telecom sector have a complicated structure because multiple levies impede the smooth implementation of telecom projects in India. Given the continuously-declining ARPUs, and the extremely-low tariffs, sustianing the current growth rates of the industry requires urgent attention towards rationalising the convoluted tax structure in the sector.

TRAI has recommended to the DoT committee to phase out the multiple levies in this sector with a single levy in a phased manner. Further with regard to license fees, which currently stand at 6%-10% of total revenue, TRAI has suggested that it be reduced at a uniform rate of 6% across all licences.

Lower Broadband Penetration

The Indian economy remains highly underpenetrated in terms of broadband connections. High cost of devices (PC and laptop), high internet charges and lower wireline connections have been some of the major factors inhibiting broadband penetration. Broadband is one of the key catalysts for economic development and major initiatives by both the government and service providers are needed to increase its penetration.

Other Growth Inhabiting Factors

While the implementation of mobile number portability is likely to aid improvements in quality of service, it is also likely to increase the churn out ratio significantly. The service providers are likely to turn to the VAS as a service differentiator; however, widespread VAS deployment is restricted due to language and illiteracy.

The deployment of 3G services is likely to help the emergence of new VAS. Mass acceptance will be crucial for the success of 3G services in India. Comparatively higher cost of handsets required for accessing 3G services is likely to be one of the major roadblocks in mass 3G adoption in India.

Opportunities for the Industry

Rural Telephony – Connecting the Real India

With the urban markets fast reaching their saturation points for telecom services, especially the voice telephony services, the vast rural market holds a huge potential to drive the future growth of the telecom companies. In fact, the teledensity in rural areas is just about 15%, which reflects the extent of opportunity left untapped for telecom companies, going forward. Further, the government initiatives for increasing telecom connectivity in rural areas are also likely to aid the telecom service providers to extend their services in the unconnected rural areas. Initiatives such as USO Fund and infrastructure sharing would be instrumental in increasing the coverage of telecom services in the far-flung areas. Penetration in rural areas will not only support the growth of telecom service providers but also boost demand for equipment and telecom infrastructure.

3G Services – Potential Growth Driver

Currently the 3G deployment in India is at a very nascent stage. In fact, 3G services have been launched very recently (February 2009) in India. The 3G services will be instrumental in stimulating future growth of the telecom industry. The 3G services will not only facilitate business through provision of high-speed data and content rich services but also will play a pivotal role in bridging the urban-rural divide by facilitating faster mobile deployment in rural areas. Introduction of 3G will be beneficial to the Indian BPO industry by increasing their competitiveness. In India, where mobile cellular penetration is much higher than that of fixed telephone lines (nearly 30 mobile cellular subscriptions per 100 inhabitants as compared with less than 4 fixed telephone lines per 100 inhabitants in 2008), mobile broadband through 3G will drive broadband penetration. The inherent benefits of economies of scale and faster time to market of 3G services will benefit service providers. The high-end customers may get attracted to these services and provide a first-mover advantage to the initial entrants in the 3G space. The launch of 3G is also likely to facilitate introduction of various VAS such as video calling, gaming, high-speed Internet access and other data services, which in turn might provide some support to the falling ARPU.

The Indian government has planned to sell the spectrum for 3G services through an auction and thereby create a competitive environment that offers better services to consumers. Auction of 3G and broadband spectrum will be done through e-auctioning which shall be executed by a specialised agency to ensure transparency in the selection process. Bids would be invited from domestic, as well as foreign players. New players would also be allowed to bid which in turn is likely to usher technology innovation, increase competition, lead to prompt roll out of services and provide more choices to customers at competitive prices.

With the allotment of the 3G spectrum, the pressure on the 2G spectrum is likely to ease especially in the heavy traffic areas. Moreover, freeing 2G bandwidth might help the operators to cater to additional subscribers without significant additional investments. Given the comparatively high cost of handsets and 3G services, the deployment of 3G services is likely to be limited to high-end customers. Thus, initially the 3G spectrum is expected to be used for voice services, whereby the wireless subscribers might experience improvement in service quality. Going forward, the 3G spectrum is expected to attract major investments and open new growth avenues for the telecom sector.

Worldwide Interoperability for Microwave Access (WiMAX) – Reaching the Last Mile

In the wireless communication arena, WiMAX technology has emerged as one of the most significant developments. Deployment of WiMAX would not only enable the provision of high-speed internet services through high bandwidth spectrum but also prove to be a useful mode of communication in inaccessible terrains. WiMAX could be used as an alternative to cable and DSL for providing broadband access in rural areas and hence could be a major factor driving the growth of Indian telecom services, especially the wireless services. Moreover, it is likely to facilitate the propagation of the e-governance services such as telemedicine, e-learning et al through broadband, particularly in the rural areas. Given the fact that WiMax deployment does not require significant resources, it will also be an economically-feasible option to cater to rural communication needs.

Mobile Value Added Service (MVAS) – An Opportunity to Increase the ARPU

The value added services segment is rapidly emerging as a potential revenue generator for the telecom services industry. Given that a substantial part (around 60%) of the total VAS revenue goes into the kitty of the service providers, the development of this segment is likely to offer them an opportunity to support their falling ARPU. The increasing acceptance and usage of mobile commerce services is also likely to boost the VAS segment. Mobile banking is likely to emerge as a major growth driver in the near future given the issuance of M-banking guidelines (June 30, 2008) issued by the RBI and increasing demand for this service.

The demand for new VAS services is likely to surge given that increasing number of younger generation has started using mobile services and are more inclined to adopt the VAS services. With the implementation of mobile number portability, the service providers would be encouraged to constantly develop new VAS as a service differentiator and retain their existing customers and attract new ones. The introduction of the Next Generation Networks would help in bringing down the cost and roll out time of new MVAS and provide impetus to the growth of the VAS, going forward. Further, with reduction in prices of the feature rich handsets capable of accessing many of the VAS services the demand for the MVAS is set to increase in the future.

Infrastructure Sharing – A Profitable Proposition

The rapid expansion in subscriber base has brought to the fore the challenge of increasing and upgrading the telecom infrastructure to maintain quality of services. In the recent years, infrastructure sharing has emerged as a profitable proposition for both the parties involved, as for the tenant it lowers capex and opex, and for the owners, it is an additional source to earn revenue. It would lead to considerable reduction in initial set-up costs for new service providers and existing service providers planning to enter new service areas. Infrastructure sharing might assist the service providers to reduce their operating costs. The cost saving through infrastructure sharing could be passed on to the customers thereby augmenting their affordability. Further, with infrastructure sharing, the companies can reduce the time required to roll out the telecom services in the rural areas. The sharing of telecom infrastructure by companies could lead to optimum utilisation of these resources and thereby improve efficiency.

A step forward in infrastructure sharing is the proposal of TRAI to include those rural and remote areas in its purview that are not covered by wireless signals with assistance from the USO Fund.

Managed Service – Outsourcing in Telecom

Managed Services typically involve the outsourcing of a specific technical function or capability to a Managed Service Provider (MSP). It is an alternative to in-house management or traditional outsourcing since firms/enterprises do not have to transfer complete control over assets/operations to the MSP but rather can contract or outsource specific management challenges for a shorter period of time.

With the rapidly-growing subscriber base, managing infrastructure and networks is becoming increasingly difficult for the service providers. Therefore, many service providers have been outsourcing their infrastructure or network management operations completely or partially. Given the increasing demand for the managed services, the telecom equipment vendors could have an opportunity to take up more roles in the value chain by entering into managed service contracts.

Managed Services are fast-emerging as an attractive proposition for many enterprises that do not want to dedicate human resources and capital toward acquiring and administering technology infrastructure. It also allows the telecom service providers to focus on their core activities, to develop new and innovative products and services so as to distinguish themselves from other players in this highly-competitive market.

The service providers can gain significantly in terms of cost reduction and improved efficiency in operations from the economies of scale that an MSP can offer.

Opportunities in Other Service Segments

Investing in technologies such as NGN, 3G, WiMAX, is likely to open up new frontiers of business. Some services such as IPTV, VPN etc. are expected to gain some momentum in the medium to long run.

Virtual Private Network (VPN) – Create Your Community

Virtual Private Network, also known as closed user group (CUG), is a private data network that provides connectivity within closed user groups via public telecommunication infrastructure. The option is less expensive as it relies on sharing of public infrastructure. This service was first availed in India by corporate units that required VPN services to connect to their branch offices.

IPTV

Internet protocol television (IPTV) also referred as ‘triple play’ offers internet, television and telephone services on a single platform. IPTV provides the telecom service providers an opportunity to widen the gamut of existing services and is likely to be beneficial for large players in the telecom sector. Given the lower broadband penetration, the usage of IPTV is likely to be restricted to metros and some urban centres.

Way Forward

The Indian mobile subscriber base is likely to sustain the rapid growth recorded in the past few years. Presence of skilled labour pool, improving telecom infrastructure, favourable demographics, rising disposable incomes of consumers, declining tariffs, increasing demand, growing attraction for mobiles with new features and greater availability of handsets at lower prices, are expected to continue driving the growth of the telecom sector, going forward.

However, the companies are likely to encounter a more challenging business environment in the near future, given the sustained fall in ARPUs, rapidly increasing competition and consequent pressure on margins and regulatory risks. Companies with good rural coverage, better operational efficiency, and superior quality of service are likely to stay ahead of competitors.

The government has proposed to achieve a rural tele-density of 25% by deploying 200 mn-connections at the end of the Eleventh Five Year Plan, given that more than 70% of the population lives in villages. The optimum utilisation of USO fund and increase in mobile services might help the government attain this goal. The government’s thrust on welfare programmes such as community development, education and health and rural connectivity can also be facilitated through satellite communications, internet connections et al. Besides, broadband connections for all gram panchayats and public healthcare centres, secondary and higher secondary schools and provision of 3G services to all cities/towns with more than 0.1 mn population is also likely to be achieved during the Eleventh Five Year Plan. It is also visualised to link block headquarters and the nearest exchange through the State-Wide Area Networks (SWAN) connectivity. Major initiatives such as e-Agriculture, e-Health, e-Education, rural BPOs are slated to increase internet penetration as they set the base for increasing acceptance of the same.

During the Eleventh Five Year Plan period, Rs 2,670 bn worth of investments are projected to be made in the telecom industry and the public sector is expected to have a 33.50% share in the same, while the private sector is expected to contribute 66.50%. Further, a total of 650 mn connections (including 66 mn wired and 584 mn wireless connections) are expected to be achieved by the end of 2012. The growth process in this ever-evolving sector needs to be backed by a strong R&D support. The active participation of the private sector in R&D would ensure greater benefits for the sector. Further, the government also envisions making India a hub for telephone equipment manufacturing that is expected to be achieved through telecom specific special economic zones (SEZs) and by setting up Export Promotion Council to promote export of telephone equipment and services.