India 2012: Telecom growth continues       Confederation of Indian Industry
Unveiling India 2012:Telecom growth continuesNripendra Misra, Chairman, TRAI unveils CII- Ernst & Young report “India 2012...
Foreword    The Telecom sector in India has witnessed unparalleled growth by global standards. In    a little over a decad...
IntroductionWelcome to Ernst and Young - CII industry report “ India 2012: Telecom growthcontinues”. We are very excited t...
India 2012: Telecom                             growth continues                             We value special contribution...
India 2012: Telecom growth continues   5
Telecom growth continues    •	 In   perspective    •	 Mobility   for every other Indian    •	 New    growth areas for 2012...
India 2012: Telecom growth continues   7
India 2012:Telecom growth continues              In perspective              Telecom sector: the                          ...
charges, introduction of feature-rich low    of license fees and a lowering of thecost handsets and the roll out of micro-...
Key challenges impacting the growth of         going to be fuelled by 3G and WiMax.     the Telecom sector by 2012        ...
sector would help reduce costs and the    •	 Uncertainty in the global economic  benefits can eventually be passed on     ...
Mobility for every other                                          Indian in 2012                                          ...
It is to be noted that eight of the 10 most           It has been noted that the net wirelesspopulous countries9 -China, I...
ARPUs will stabilize;                                   pressure on ARPU becomes even more                                ...
Socio-economic characteristics that enable mobile banking      Economic      Characteristics               Detail         ...
As networks expand, big operators will aim            By then, the internet and mobile     to acquire the smaller players....
New growth areasfor 2012Data revolution to be                            new domestic entrants and                        ...
Key drivers for adoption of 3G and WiMax in India                                ►   Availability and contiguity (WiMax) o...
will otherwise churn to 3G operators.                                                                                  Mov...
allowing the virtual operators to decide                    agreement between the MVNO and     upon their business model o...
and the beauty of the model then           Full potential of Mobile   lies in the endless possibilities of   customer segm...
In India, as is elsewhere in the globe,               •	 Operators, for their part, must be                               ...
Broadband — a key driverIn October 2004, India’s wireless                          in demand for fixed broadband servicess...
Wireless Internet use on the rise                                       400                                               ...
Raising the stakes                                     India. The first sign of a rise in broadband                       ...
seems to have begun, India is still way                                                                               One ...
figure is expected to rise to 196 million                    divide among nations is apparent. Inin 2012.43 The share of w...
Telecom report final
Telecom report final
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Telecom report final
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Telecom report final

  1. 1. India 2012: Telecom growth continues Confederation of Indian Industry
  2. 2. Unveiling India 2012:Telecom growth continuesNripendra Misra, Chairman, TRAI unveils CII- Ernst & Young report “India 2012: Telecomgrowth continues,” at the CII Roundtable Conference—India Telecom Landscape 2012 on28 November 2008.From left - Ambrish Bakaya, Director, Corporate Affairs, Nokia India Pvt. Ltd., NripendraMisra, Chairman, TRAI, Rajat Mukarji, Chief Corporate Affairs Officer, IDEA Cellular Ltd,Prashant Singhal, Telecommunications Leader, Ernst & Young Pvt Ltd and Sujith Haridas,Director, ICT & Defence, Confederation of Indian Industry (CII). “The report by Ernst & Young on ‘India 2012: Telecom growth continues’ is based on very exhaustive research and rational analysis. The key challenges impacting the growth of the sector has also been very constructively identified. I am confident that this very valuable report would provide the gateway for understanding telecom in India.” Nripendra Misra Chairman, TRAI
  3. 3. Foreword The Telecom sector in India has witnessed unparalleled growth by global standards. In a little over a decade of wireless telephony, India has moved from a subscriber base of zero to becoming the second-largest market in the world after China. This growth would continue provided we have progressive policies that shall provide impetus to free flow of investment, ideas and technology that facilitate growth and evolution of this sector. The progress in the sector has been something to be proud of and it is often viewed as ample testimony to the India growth story. Several developments in the industry are afoot, which will be crucial to defining the state of this industry in times to come. Additional 2G spectrum has been recently allotted, allowing the entry of several new players — wherein a majority of them are also acquiring strategic international partners, commencing the globalization of Indian Telecom. The rollout of 3G, which could potentially transform the bouquet of services extended to consumers from vanilla voice and basic data to rich entertainment and far more, is poised for a take-off with the impending auction of the 3G spectrum. Broadband — conventional as well as wireless — is poised for a major leap. In the wake of such developments, a concerted effort must be made between the industry and the Government (as the prime mover and regulator on policies in Telecom) on ensuring that policies, regulations and laws are formulated in a manner that creates systematic growth and harnesses the full potential of this industry for the Indian consumer. CII, in collaboration with Ernst & Young, has put together this report, which brings out the current status of the industry with a brief perspective on how that growth has been achieved, and sets the context for the landscape in 2012. It focuses on current issues and the envisaged future concerns and potential points of debate, which would need to be jointly addressed by the industry and the Government in order to enable this industry to continue on its already-impressive growth trajectory, and become the cynosure of the Telecom world. Anil Sardana Chairman National Committee on Telecom & Broadband Confederation of Indian Industry2 India 2012: Telecom growth continues
  4. 4. IntroductionWelcome to Ernst and Young - CII industry report “ India 2012: Telecom growthcontinues”. We are very excited to release this report in association with theConfederation of Indian Industry (CII) for its Roundtable Conference on “IndiaTelecom Landscape 2012.”This report aims to capture the developments witnessed in the Telecom sectorover the last few years and analyze historical performance to estimate growthover the next four years. It is targeted at stakeholders in the Telecom industry,including operators, industry practitioners, the Government, content providers,infrastructure builders and equipment vendors. In the report, we examine andevaluate the buoyancy of the Indian Telecom sector through to 2008 and mapthe key variables that will be the primary drivers for India’s Telecom growthstory in 2012.Only change seems to be constant in the Indian Telecom sector. Fixed lineswere the main stay till 2004 – which were substituted by wireless servicesthat led to steep growth in urban areas. From 2008 to 2012, we will witnesswireless expansion in the rural areas. We are also going to see a data revolutiontriggered by 3G and WiMax and supported by content, towards the latter half ofthis period.We have endeavored to present a holistic view of the growth that the sectoris likely to witness in the next four years. To meet this objective, we haveundertaken primary and secondary research and have also incorporated inputsfrom key opinion leaders in the Indian Telecom sector ranging from vendors andoperators to industry bodies and the Government.We hope you find the report interesting and informative. We would like toextend our gratitude to the industry leaders who participated in the report andthe CII for giving us the opportunity to present the evolving perspectives inthe sector.Prashant SinghalTelecommunications LeaderErnst & Young Pvt. Ltd. India 2012: Telecom growth continues 3
  5. 5. India 2012: Telecom growth continues We value special contribution of: Association of Unified Telecom Nokia Siemens Networks India Service Providers of India Private Limited S. C. Khanna ► Sandeep Bhargava Secretary General Head - Corporate FinanceTo give a first-handperspective, we aredelighted that senior Bharat Sanchar Nigam Limited Tata Communications Limitedexecutives from a range S. D. Saxena ► Srinivasa Addepalli ►of Telecom companies Director - Finance Senior Vice President—participated in the study. Corporate StrategyThis includes industryanalysts, Telecom companyexecutives and members Bharti Airtel Limited Tata Teleservices Limitedof telecom Manoj Kohli ► Anil Sardana ►industry bodies. Chief Executive Officer and Managing Director Joint Managing DirectorWe conducted in-depthinterviews with all theparticipants, supported Cellular Operators Tata Teleservicesby research, analysis Association of India Maharashtra Limitedand insights from our T. V. Ramachandran ► Madhav Joshi ►global team and industry Director General Chief Regulatory Officerprofessionals. Ericsson India Private Limited Telecom Equipment Manufacturers P. Balaji Association of India Vice President Bharat Bhatia Marketing and Strategy President International Telecommunication Union Pawan K. Garg Member - Radio Regulations Board4 India 2012: Telecom growth continues
  6. 6. India 2012: Telecom growth continues 5
  7. 7. Telecom growth continues • In perspective • Mobility for every other Indian • New growth areas for 2012 • Broadband — a key driver • Operators to target for larger “share of the wallet” • Telecom sector — resilient or impacted by economic slowdown? • In conclusion6 India 2012: Telecom growth continues
  8. 8. India 2012: Telecom growth continues 7
  9. 9. India 2012:Telecom growth continues In perspective Telecom sector: the In the last few years, robust growth in the sector has been driven by power performer in the several factors: Indian economy • In India, the reduction in average  revenue per user (ARPU) is mitigated Telecommunications continues to be by an increase in the subscriber base one of India’s biggest success stories. In that contributes to healthy revenue recent years, the Telecom sector has been growth. In addition, declining tariffs are delivering strong returns on investments made up by an increase in the minutes and steady subscriber additions. of usage. This growth has been built on the wireless • Operators are reducing operating costs  revolution. The sector has charted an and hiving off infrastructure elements impressive growth trajectory, adding such as towers into separate entities, nearly 9 million subscribers per month. thus inviting significant investment. Despite this, the overall tele-density was Passive infrastructure sharing has recorded at 31.5% at the end of October benefited the Indian mobile industry 2008. The current wireless subscriber and its customers, reducing the cost base of over 325 million is expected to burden of each operator and speeding exceed the half billion mark by 2010. Even the rollout of mobile services. at this growth, India has one of the world’s lowest mobile penetration levels at about • In the last three to five years, initiatives such as network cost optimization, 28% and one of the highest minutes of outsourcing of non-core activities, as usage (MOU) per subscriber per month, well as low-cost business models have at more than 400 minutes. improved operator returns at Multiple factors — planned and unplanned, low ARPUs. anticipated and unanticipated — have On the regulatory front, the nodal body coalesced to produce a remarkable decade — the Telecom Regulatory Authority of continued success. These include of India (TRAI) — mandated National low tariffs, low handset prices, effective Long Distance operators (NLD) to Government regulation, higher incomes discontinue charging a monthly roaming and changes in customer behavior. rental fee and to cut roaming tariffs by The Indian economy has recorded GDP over 50% in February 2007 — a move growth of over 8% for 12 successive that led to tariff reduction, increased quarters since 2005. The Telecom sector competitiveness and transparency as well is expected to perform even better: as rationalization of excessive roaming its contribution to the nation’s GDP is costs. The spread of Telecom services in expected to increase from 2% in 2006 to India between 2006 and 2008 was aided an estimated 3.6% in 2010.* by a significant decrease in international call charges, reduction in interconnect * From Emerging to Surging - India Telecom: 2010, Ernst & Young report, page 228 India 2012: Telecom growth continues
  10. 10. charges, introduction of feature-rich low of license fees and a lowering of thecost handsets and the roll out of micro- Universal Service Obligation (USO) fundprepaid and lifetime validity schemes. The contribution by operators areAccess Deficit Charge is being phased also expected.out in 2008, while a further reductionThere are positive enablers for • In 2012, the total Telecom penetration to USD5 billion by 2012. WiMax onthe sector is expected to reach 58% to 60%. the other hand, could attract about Approximately 40% of rural users are 8 to 10 million subscribers and couldThe addition of each new subscriber estimated to own a phone. Nearly account for about USD1 to USD1.5lowers average revenues. Despite everyone in the urban constituencies in billion by 2012. This is based on thethis, Indian Telecom companies India will have a Telecom connection. assumption that low cost devices andcontinue to post better results Circle B and C would experience the data cards are available and servicesthan investor estimates. Indian highest growth and would contribute are affordable. These numbers couldTelecom market will continue to to about 60% of the total mobile see a further upside if the operatorsgrow till 2012 at a robust pace. subscribers. innovate to offer more attractive andTelecom landscape in 2012, refined value added will it look? • In 2012, India’s Telecom services industry revenues are projected to • MNP is essential for the Indian• In 2012, the total Telecom  reach USD54 billion, as compared with Telecom Industry. It would provide subscriber base is expected to USD31 billion in 2008. (Conversion ease of switching to the subscriber. reach approximately 690 to 700 rate used USD1 = INR40) To create an impact, MNP will need million to include about 640 to to be spread across the country and 650 million wireless users and • The blended ARPU is expected to  there should be easy and affordable approximately 45 to 50 million stabilize at approximately INR150 porting. Globally, number portability fixed line users, driven by a rise to INR155 by 2010, while MOU per has not induced much churn, however, in communications demand from subscriber per month is projected to depending upon aforementioned semi-urban and rural India. stabilize at approximately 520 to 530 factors, MNP could lead to some minutes in 2012.• In 2012, the internet subscriber impact in the Indian telecom market. base is expected to rise to • From early to mid part of 2009 to 2012, most of the Telecom circles are • The entry of MVNOs will help achieve approximately 45 million. Despite expected to have approximately 12 growth faster by targeting niche 25 to 30 million broadband operators(based on state boundaries customer segments. Between 2008 subscriptions, the broadband and socio-economic parameters). and 2012, entry of MVNO is expected penetration is still likely to reach However, by the latter half of this in a 12 operator telecom market. approximately 2.3%. However period, consolidation activity is With almost 4 to 5 operators being broadband could see a 30% to 40% imminent and would reduce the new, entry of MVNOs would help increase from the said projections potential players to five to achieving growth faster. Globally, if WiMax services gain traction seven operators. successful MVNOs are those which and entry barriers for customers already have a distribution network are significantly lowered through • 3G and WiMax are likely to be auctioned and brand image and India would be cheaper devices and services. The in early part of calendar 2009, initially no exception. We could also witness wireless internet base is estimated concentrating on top 20 cities in India. some existing brands with customer to rise to approximately 196 Based on this, 3G subscriber base could reach launching into this space – million from the current 76 million. reach 25 to 30 million by 2012 and 3G which would fuel further growth in revenues would reach around USD4 the sector. India 2012: Telecom growth continues 9
  11. 11. Key challenges impacting the growth of going to be fuelled by 3G and WiMax. the Telecom sector by 2012 However, for the expansion of data services and for it to gain scale and Even as, positive trends in the Telecom momentum, customized and vernacular sector and the economy reinforced each content catering to the diverse masses other in a virtuous cycle and caused a needs to be developed coupled with sharp acceleration in the demand for low device costs. Better upload/ Telecom services, there are significant download speed for data services challenges for growth in 2012. Most of backed by customized content and the significant global Telecom players lower voice prices should augur well are either present in the Indian Telecom for subscribers. The growth of 3G and market or are seeking entry through WiMax would be the key for telecom a partnership with an existing or start companies to maintain growth and/ or up Telecom operator. They have been enhance profitability in the low tariff attracted to the strong growth potential regime especially when significant part of the sector. But there are some focus of subscriber additions would emerge areas that will need attention in order to from rural areas in India. maintain a positive outlook for 2012: • Focus on strategy to lower operators’ • Rural Telecom will be the new growth capital expenditure: To achieve a constituency: Rural market will be the subscriber base of approximately 700 next growth driver for operators with million by 2012, Telecom industry the near saturation of urban markets. in India will need capex investment To capitalize on the growing population of approximately USD18 billion to and disposable income of rural India, USD20 billion in this period. Sharing Telecom operators will have to explore of passive and active infrastructure and expand into hitherto “uncovered” and intra-circle roaming, would be geographies. By 2012, we see the some ways to bring down the capex rural base accounting for nearly half requirements. Most importantly, to the total subscribers who will have attract further capital into the country, access to communications services. it is very important for the Government The Government can capitalize on rural to provide a stable regulatory regime Telecom growth to boost economic to maintain the confidence of the development across rural India which key stakeholders and investors in the could also help the growth of the Telecom sector. country’s gross domestic product. The next engine of Telecom growth is • Need to revisit the high levies on the clearly rural India and there will need Telecom sector: The Indian Telecom to be strong partnership between the sector is one of the highest taxed Government and the private operators sectors in the developing world. This as well as an effective and optimum is through levies, which comprise utilization of investments from of service tax, revenue share, spectrum the USO fund to ensure that India cess and value added tax totaling to surpasses 55% to 60% penetration approximately 25% of the total levies by 2012. payable by operators apart from income tax on their profits, which • Emphasis on data revenues to ranges from 10% to 33% of profits provide additional “buffer”: The depending on the eligibility of tax launch of 3G services will drive data concession for some of the operators. revenues. India’s data revolution is Revisiting high duties and levies in the10 India 2012: Telecom growth continues
  12. 12. sector would help reduce costs and the • Uncertainty in the global economic benefits can eventually be passed on scenario: The current financial crisis to the customers by further lowering of could have a low-to-medium impact tariffs. on the Telecom sector in terms of rising cost of capital and reduction• Most importantly, an urgent need for clear roadmap vis-à-vis telecom in discretionary spending on the regulations: There is an urgent need part of customers, among other for stable policies and a conducive and determinants. A range of factors consultative regulatory environment – decline in average revenue per to improve investor optimism in the minute, stabilizing minutes-of-use, sector. A clear roadmap for future peaking subscriber adds, spiraling spectrum allocation has to be drawn, network expansion costs, large whether it is a 2G or 3G platform. The deployment in the untapped rural allocation of adequate spectrum is areas — could also result in an urgent requirement for new and margin pressure. existing operators. Operators should Looking ahead, in order to be careful in bidding for spectrum and ensure strong growth rates, the should not end up overpaying. While Government and the regulator there is significant interest between will need to put in place the incumbents and the new players, comprehensive directions interest from new international and companies will need entrants may be muted, in part by the to consistently innovate to global economic outlook. The prospect effectively manage revenues of paying the Universal Access Service and costs. License (UASL) fee without any guarantee on the timeline for getting the 2G spectrum, coupled with the advantages that incumbents enjoy with an established infrastructure, may act as a deterrent for the entry.• Enhance the skill - sets of personnel for employment in the Telecom sector: This sector will require specialist resources to support and sustain growth over the next four to five years. The pressure on talent is expected to increase with the rollout and deployment of 3G and WiMax services. The private sector will need to reorient its focus on talent development through training schools and facilitation programs that cater to the needs of the Telecom industry for 2012. 11
  13. 13. Mobility for every other Indian in 2012 India’s wireless base increased from 1.6 By end 2012, there are expected to million1 at the beginning of 2000 to over be about 640 to 650 million wireless 325 million2 in October 2008. It has subscribers, accounting for about 90% of been achieved with successive years of the total Telecom base. By then, wireless sharp subscriber growth — 69% in 2004, penetration would have exceeded the 50% mark.8 We do not see any major slowdown 58% in 2005, 97% in 2006 and 57% in in growth in the immediate future due to 2007.3 Since wireless penetration is the global economic slowdown. India’s approximately 28% in 2008,4 there is still operators have still not exhausted the large potential for future growth. full potential of the domestic Telecom The rising wireless base is reflected in market. Large parts of rural India will the growing share of mobility of the have the need and will be able to affordWe see some trends in mobility total Telecom base. From just 5% of the Telecom services. Operators will need toover the next few years: country’s Telecom base of 32 million5 in significantly invest in network expansion March 20006, it has increased to 87% of for 2G services till 2010 to 2011. Towards• The growth of the wireless the 300 million Telecom subscribers in latter part of this period, a large part subscriber base will continue at March 2008.7 of the capital expenditure will also be a robust pace. However, this will required for the launch of 3G services. be primarily driven by Wireless on a roll rural subscribers. 800 697• We expect another round 639 648 575 594 of mergers and acquisitions 533 600 (M&A) in the market. As 485 Subs (Mns) 445 new operators roll-out 384 400 345 networks, there could be 10 272 to 12 operators in each circle. 233 However, by end 2012, 200 M&A activity will result in 39 39 40 42 45 49 about five to seven large 0 wireless operators. 2007 2008F 2009F 2010F 2011F 2012F Mobile Fixed Total F = Forecast• In 2012, 3G services will have Source: COAI, AUSPI, CII-Ernst & Young analysis just begun to spread in India and mobile entertainment and mobile banking are likely to become popular services. 1 2 TRAI press release No. 89/2008, 24 November 2008 3 TRAI press release No. 6/2007,15 January 2007 and TRAI press release No. 11/2008, 22 Jan 2008 4 TRAI press release No. 86/2008, 24 October 2008 5 International Telecommunications Union: World Telecommunications/ICT Indicators Database, December 2000 6 7 TRAI press release No. 43/2008, 25 April 2008, Page 2 8 CII-Ernst & Young analysis12 India 2012: Telecom growth continues
  14. 14. It is to be noted that eight of the 10 most It has been noted that the net wirelesspopulous countries9 -China, India, the US, addition in Circle C has begun toIndonesia, Brazil, Pakistan, Russia, and exceed metropolitan cities. In the firstJapan— are among the top 10 wireless nine months of 2008, while the fourmarkets.10 Similarly, in India, the most metros added 10.3 million subscribers,populous states are expected to have the Circle C had an addition to 11.3 millionmaximum wireless subscribers. subscribers.12 This trend is expected to continue till 2012. Next wave of growth from Circle B andRising rural spread Circle CWe expect wireless growth to increasinglyemerge from rural India. In December In 2012, the majority of new wireless2007, tele-density in metropolitan circles subscribers will emerge from Circle Bwas close to 75%, rural tele-density was and Circle C.13 Based on analysis, Circlestill below 10%. In 2012, rural subscribers C will garner approximately 102 millionwill account for almost half the total subscribers and will exceed metros,wireless base.11 which will have approximately 62 million subscribers.Projected circle wise wireless subscribers (in millions) Service area December2007 2012 F Growth (%) No. of states Metros 41 62 8.6 4 A 83 207 20.1 5 B 83 276 27.2 8 C 23 102 35.2 6 Total 230 648 23.0 23Source: CII-Ernst & Young Analysis F = Forecast9 Wireless Intelligence, Subscriber Statistics, December 200711 CII-Ernst & Young analysis12 TRAI press release No. 11/2008, 22 January 2008 and TRAI press release No. 86/2008, 24 October 200813 CII-Ernst & Young analysis India 2012: Telecom growth continues 13
  15. 15. ARPUs will stabilize; pressure on ARPU becomes even more significant. Operators will have to work data services to have a on the twin front of increasing ARPUs positive impact through data and value-added services as well as by lowering costs through As the subscriber base continues to innovative business models. increase in India, operator ARPUs have Data, driven by 3G and WiMax services, steadily declined. However, there is likely will exert a positive impact on ARPUs. to be a level of stabilization in the average Mobile internet, mobile entertainment revenues per subscriber for the Indian and mobile banking are expected to gain operator over the next couple of years. significant traction with the introduction Blended ARPU is likely to stabilize at INR of 3G and WiMax services. 150 to155 by 2012,14 while MOU per subscriber per month would stabilize Wireless phones: the emerging conduit at approximately 520 to 530 minutes for banking per subscriber. As mobile operators are looking to Even though declining ARPUs have been introduce mobile banking, the Reserve a concern to operators, they have been Bank of India (RBI) has come up with offset by increasing MOU and staggering guidelines for implementing it.15 While subscriber growth. When subscriber security is definitely an issue, today there growth starts slowing, and when MOUs are more wireless phones than savings start becoming inelastic, the downward bank accounts in India.16 ARPUs and MOU to stabilize 500 800 400 511 522 527 600 473 496 300 442 Minutes INR 400 200 236 209 188 169 160 152 200 100 - 0 2007 2008F 2009F 2010F 2011F 2012F Blended ARPU (INR) Blended MOU F = Forecast Source: CII-Ernst & Young analysis, TRAI Performance Indicators December 2007, AUSPI-CDMA Statistics 2007 14 CII-Ernst & Young analysis 15 16 India 2012: Telecom growth continues
  16. 16. Socio-economic characteristics that enable mobile banking Economic Characteristics Detail Standard of living • High cost of the access to the banking services/  (Rural economy) High transaction costs • Banks are mainly in big cities, hence difficult  to access Poorly developed • Geographies like hills and deserts ► transport and financial • Limited transport services ► sector • Weak and not very accessible banking ► environment for the population Telecom Infrastructure: • Domination of mobile phones ► strong penetration rate of • Very low fixed line penetration between 1% to 2% ► the mobile compared to • Less expensive to develop a mobile network ► fixed telephone • Dwellings unsuitable for the fixed line ► Joint families • Family gathers in a single place ► • India: concept of the “joint family” relates to 70% ► of population Illiteracy • Average rate of illiteracy varies between Sociological 50% and 80%The wireless phone will emerge as a new Operators are already sharing their “The growth in mobilitymeans for banks to tap the “un-banked” passive infrastructure such as towers, is not driven just by lowmasses. This would enable banks to get diesel generating sets, battery back-up, prices. It also includesmore business from users who do not fuel, air-conditioning and all civil support deeper network coverage,approach a bank today. This is clearly a and partners share all costs related to better distribution network,multi-faceted opportunity to be tapped. acquiring a site. This results in fewer and affordable handsets.” sites and less equipment to maintain.Macro-economic and social conditions Senior executive, Subsequently, operators will engage incoupled with the status of infrastructure in active infrastructure sharing that could leading TelecomIndia can provide an excellent eco-system include network sharing. There the operator in Indiafor the growth of mobile banking. spectrum would be owned separately and capital and operating savings would be available even in the Radio AccessNetwork sharing is a new Network (RAN)components.18 Sharingfrontier of growth parts of the networks with competitors helps operators to reduce capital expensesOn the cost front, the first step is network as well as lower their operating expenses.sharing. Network costs account for It is estimated that by sharing, operators60% to 80% of the capital expenses and can reduce a third of all 3G network costsabout 20% of the operating expenses.17 and a fourth of 2G network costs.1917 “The Rise of Network Sharing”, Oliver Wyman,, Page 218 Grivolas, J., “Sharing to Save”, Ovum Research, 8 September, 200819 “The Rise of Network Sharing”, Oliver Wyman,, Page 2 India 2012: Telecom growth continues 15
  17. 17. As networks expand, big operators will aim By then, the internet and mobile to acquire the smaller players. Currently, entertainment will also begin to make there are seven or eight wireless operators an impact. As of June 2008, there were (four to five GSM and three CDMA about 76 million subscribers who accessed operators) in each of the Telecom circles. the internet over their wireless phones.20 But with five more operators rolling out This is likely to rise to approximately their networks, customers will be able to 196 million21 by 2012 - positioning India choose among 12 or more operators by among the leading wireless internet early 2010. However, M&A activity could markets. This is, in part, likely to be aided lower the number of operators to five to by rollout of 3G and WiMax services. seven by 2012. Telecom Services Performance Indicators, April-June 2008, TRAI, 7 October 2008, Page 23 20 CII-Ernst & Young analysis 2116 India 2012: Telecom growth continues
  18. 18. New growth areasfor 2012Data revolution to be new domestic entrants and international entrants.fuelled by 3G and WiMax • Spectrum remains a key issue in the In August 2008, the government auctions. There are a few Circles likeannounced the auction guidelines for West Bengal, Delhi, Gujarat that haveboth 3G and WiMax. In September between 2 and 3 slots of spectrum2008, it followed up with amendments including one reserved for BSNL/MTNL.on certain issues based on queries and Only these slots will be auctioned inrequests from the industry. As per latest the first round. Vacating of spectrumindustry information, the WiMax auction by the Indian Armed Forces, is a keyis expected to occur on 10 January determinant to when operators can2009 and 3G auction will take place on 9 start rolling out services in theseFebruary 2009. The detailed information circles. Globally, 10MHz to 15MHz, i.e.memorandum is expected on 8 December 2 to 3 carriers have been awarded in2008. 3G and WiMax services are 3G auctions, in India, it will be a singleexpected to commence by latter half 5 MHz carrier. In the case of WiMax,of 2009. there are concerns on the contiguity and interference levels of theKey focus areas relating to 3G spectrum bands.and WiMax • Clarity on spectrum charges, i.e., • While there is significant interest whether it is to be calculated on total between the incumbents and the new versus incremental AGR, or if it is players, interest from new international different rates for incumbents and entrants may be muted, in part because the new entrants will also have to be of the global economic outlook. The resolved before the auction. prospect of paying the UAS license fee without any guarantee on the timeline • WiMax spectrum in the 2.3 and 2.5  for getting the 2G spectrum, coupled GHz (four slots of 20MHz)is likely to with the advantages that incumbents be auctioned before 3G. The reserve enjoy with an established infrastructure price, which was initially 25% of the 3G may act as a deterrent for the entry. reserve price in each circle category, Metros and Circle A are likely to be was doubled to 50%. The removal of keenly contested in the auction “data only” from the services, implicitly and have chances of witnessing gives successful bidders the option aggressive bidding. to provide voice services on WiMax. However, the business case for mobility• Regulatory clarity is one key step in  based voice on WiMax remains to be ensuring competitive interest in the proven globally. bidding process, from incumbents, India 2012: Telecom growth continues 17
  19. 19. Key drivers for adoption of 3G and WiMax in India ► Availability and contiguity (WiMax) of spectrum ► �Spectrum fee for 3G (incremental vs. total), Regulatory clarity Broadband Wireless Access (BWA)for existing players ► Foreign players timing of joint venture formation ► �Improved data speeds providing enhanced Improved data user experience speeds backed by ► �Customized, vernacular and compelling content superior content catering to the interest of the diverse masses ► �Affordable data and voice pricing plans leading to Affordable services higher adoption levels ► �Affordable content Affordable ► �Affordable 3G handsets handsets/customer ► �Affordable PC/laptops, other customer premise equipment premise equipment Critical factors that will enable a data the price sensitive nature of the Indian revolution in India market, operators will have to combine global experience with the Indian 3G and WiMax should provide enhanced 2G experience. services through high speed data backed by compelling content. In the case of • Handset and end use equipment 3G, ability to offer a full suite of high affordability would also be critical to bandwidth multimedia applications may drive penetration. 3G services would be hampered by the availability of a single require cost effective phones and data 5MHz carrier. cards, while WiMax will require low cost PC/laptops and customer premise India’s data revolution is going to be equipment. This is especially true in the fuelled by 3G and WiMax. However, for case of WiMax where the eco-system is the data revolution to gain scale and not as developed as compared to 3G. momentum, customized and vernacular content catering to the diverse masses • 3G and WiMax will, in our view, are  needs to be developed. In our view, complementary technologies serving entertainment and banking are likely to different markets. 3G will cater to full be the biggest drivers of data services. mobility voice and data while WiMax Several operators in India have experience will cater to fixed or limited mobility of running 3G and WiMax services globally. broadband and voice services. This They are going to significantly use this could change once the business case experience to retain their customers and for mobility based WiMax is proven capture a greater share of their wallets. across the globe and there is significant development of eco-system around it. • Services would have to be affordable  However, it could take a minimum of 2 to drive penetration. Global experience to 3 years for this to happen. has shown that expensive data pricing contributes to poor user experience The incumbents will have to ensure their and adoption levels. Flat rate plans with presence on the 3G front in order to unlimited data usage has resulted in retain their high ARPU 2G subscribers significant data volume. However, given (the primary target group for 3G), who18 India 2012: Telecom growth continues
  20. 20. will otherwise churn to 3G operators. Moving towards MVNO Operators would have to incorporate this value erosion due to subscriber churn in There is renewed interest in virtual play their 3G bid pricing. In spectrum starved in the country as the Indian regulator circles, 3G will also be used by the released recommendation to allow MVNOs incumbents to provide better quality voice (Mobile Virtual Network Operator) in services. On the flip side, the new entrants India, soon after the release of 3G and would try to capture a good part of this BWA policy. TRAI defines MVNO as a churn. Incumbents, who do not manage to “licensee in any service area that does get 3G spectrum will have to think of ways not have spectrum of its own for access to reduce this churn. Providing enhanced service, but can provide wireless services Enhanced Data for Global Evaluation to its customers through an agreement (EDGE) based data services could be one with the existing providers”. Around the such strategy. world, MVNOs begin operations when Auctions of WiMax and 3G are likely to 3G services are launched. As subscribers happen in January 2009 and February migrate to 3G services, capacity is 2009 respectively. Rollout of services is available on the 2G network. This is likely to commence by latter part of 2009 when operators begin to host MVNOs as and will be limited to top 20 cities in India. it helps monetize the investment made Initially data services are likely to take off. to launch 3G services. The MVNO allows As services become further customized operators to utilize their infrastructure and network coverage becomes wider, effectively. If, on the one hand, this could we anticipate nearly 25 to 30 million lead to increased collaboration between subscribers adopting 3G by 2012. 3G players, then on the other hand, there revenues will touch USD 4 billion to are questions around sustainability of USD5 billion. WiMax, on the other hand, the MVNO business case in a highly could attract about 8 million to 10 milion competitive 6 to 7 player, low tariff, subscribers and account for about USD1 emerging Telecom market. billion to USD1.5 billion by 2012. (These projections will be dependent on the kind TRAI has also identified MVNOs as a of services offered, the availability of distinct service provider with its own handsets and network coverage). licensing and regulatory framework, while Dynamic MVNO activities in mature mobile markets, December 2007 150% MVNO No MVNOMobile Penetration % 100% 50% 0% Singapore Hong Kong New Zealand Australia Taiwan South Korea Malaysia Japan Thailand Philippines China Indonesia Vietnam India Source: International Telecommunications Union: World Telecommunications/ICT Indicators Database, December 2007 India 2012: Telecom growth continues 19
  21. 21. allowing the virtual operators to decide agreement between the MVNO and upon their business model on the basis of MNO needs to be submitted at the time strategies and capabilities. In summary, of the license issue the key TRAI recommendations relating to • Foreign Direct Investment (FDI), M&A MVNOs are: restrictions shall be the same as that of • License service area of MVNO shall be the MNO same as that of parent MNO and their There are two ways in which MVNOs could mutual agreement would be driven by attempt targeting the Indian market: market forces 1. MVNOs that follow the budget • Entry fee would be 10% of that of the approach: MVNOs that could MNOs, subject to a maximum of INR specifically aim to serve the needs of 5 Crore (USD1.2 Million) for Metro/ niche segment, competing solely on Category A, INR3 Crore (USD0.7 voice and SMS pricing would reduce Million) for Category B and INR1 ARPUs and focus on volumes-play. The Crore (USD0.2 Million) for Category C appeal could be limited to a portion of service areas the market, leading to diversifying into • No spectrum charges and roll-out  value-added services. obligations would be applicable to the 2. MVNOs that serve the needs of a MVNOs; annual license fees shall be niche segment: On the other hand, same as that of MNO in the particular niche MVNOs have the ability to service area increase ARPUs by creating appealing • No limit on the number of MVNOs  differentiation in terms of content, attached to a MNO; however an customer service, information services and promotional offers Prospective MVNO groups Industry group Strength/competency Examples in Asia Retailers Strong brands; extensive and efficient 7-Eleven, FamilyMart distribution network (Taiwan) Media/content providers Well-recognized brands and Virgin Mobile (Australia) ownership of multimedia contents Mobile resellers and Knowledge of local mobile markets; Aurora, Arcoa (Taiwan) distributors existing customer base Mobile network operators Excellent communication service PLDT (Philippines), China brands; strong customer and network Unicom (Hong Kong) control; customer care and billing experience Cable operators Entertainment and communication Jupiter (Japan), MiTV service integration; bundling (Malaysia) capability Fixed operators Fixed mobile convergence; bundling AAPT (Australia) capability Banks and financial Large customer base, emergence of Merchantrade (Malaysia), services electronic credit card; wallet and cash KFTCI (Korea) applications Private equity Strong financial position Tune Talk (Malaysia) Source: Ernst & Young analysis and Yankee Group20 India 2012: Telecom growth continues
  22. 22. and the beauty of the model then Full potential of Mobile lies in the endless possibilities of customer segmentation where the Number Portability targeted segments can go beyond guidelines yet to the obvious break-down of youth, enterprises, sports fans, low-spending be realized groups and regional communities. While most countries implemented the Mobile Number PortabilityCritical success factors for an MVNO (MNP) guidelines at a mature stageplayer in the India market of penetration, Indian policymakers formulated them at a time when the•  MVNO operator will need to have a industry is still seeking a solution to strong distribution network, effective some key regulatory hurdles. MNP is customer service channel and strong essential for the Indian Telecom Industry. financial fundamentals. It would provide ease of switching to the•  Leading business houses could be subscriber. To create an impact, MNP will better enabled with their spread across need to be spread across the country retail sector, financial services, media, and there should be easy and affordable aviation, handset distribution and the porting. Globally, number portability hospitality sector. Globally, there has has not induced much churn, however, been an emergence of non-telcos as depending upon aforementioned factors, significant players in this space. They MNP could lead to some impact in the are best positioned to leverage upon Indian telecom market. their existing strengths of customer know-how and reach.•  New players will need to leverage their existing strengths to create a Country wise penetration at the time of MNP implementation (in %) niche through content tie ups and/ or • France (68) through customer segmentation. • Finland (97) • Australia (61)•  Foreign Telecom operators could • Portugal (101) leverage this opportunity to becoming a • Denmark (72) • South Korea (72) part of the India Telecom growth story. • Italy (85) However success would largely be United Kingdom (15) • USA (56) • Norway (80) dependent on their ability to combine with the overall strengths of an 1998 2000 2002 2004 Indian enterprise. 1999 2001 2003•  Finally, the long-run triumph of the concept at large would rest upon clear Hong Kong (48) • Spain (31) • Belgium (74) • Brazil (37) definitions of licensing, spectrum and • Sweden (55) • Germany (72) • Japan (68) regulatory restrictions. • Switzerland (36) Source: CII - Ernst & Young analysis India 2012: Telecom growth continues 21
  23. 23. In India, as is elsewhere in the globe, • Operators, for their part, must be  the biggest gainers from portability will prepared to factor in various porting be end customers. Indian customers and non-porting costs. Porting will be able to change service providers, costs may constitute the set-up, while retaining their mobile numbers management, administration and — something akin to an individual’s transport costs. Non-porting identification these days. But there are costs may include the cost of some issues that need to be addressed promotions, customer service and before India is ready to embrace MNP. value-added services. India at its 28%22 plus mobile penetration  While MNP may promise a significant level could be considered relatively upside for some operators (those with young for this phenomenon. At the same lower market share), it could also pose time, it is important to consider the full serious challenges for others if the risks implementation of number portability for involving regulatory, operational and all service areas. revenue assurance are not carefully managed. MNP also has a potential for There are some potential risks and increasing customer acquisition and challenges that will need to be overcome retention costs. for the launch of MNP: Hence, in order to ensure the successful • Cost-conscious customers could be  implementation of this regime, various deterred by the porting charge that stakeholders of the industry, including the could be applied when a customer licensor, regulator, operators and industry switches to another operator. associations, would need to work closely • Switching between CDMA and GSM-  for an effective rollout of this service. based technologies may also result in an operational challenge of changing handsets. TRAI press release No. 89/2008, 24 November 2008 2222 India 2012: Telecom growth continues
  24. 24. Broadband — a key driverIn October 2004, India’s wireless in demand for fixed broadband servicessubscribers exceeded the fixed line base.23 among small and medium enterprises andFour years later, there are eight24 wireless home users. We estimate the fixed lineconnections for each fixed line. As the base to be approximately 45 million to 50wireless growth continues, the fixed line million in 2012.30base has been gradually declining. The Government has waived the licenseBy end-September 2008, the fixed line fee on rural fixed lines.31 The immediatebase declined to 38.4 million25 from an gainer will be BSNL, which has 36.6%all-time high of 41.5 million in March of its fixed line subscribers in rural2006.26 Yet, India’s fixed line network is areas.32 While this is a good beginning,the seventh-largest globally.27 it is not enough. To realize the fixed lineThe fall in fixed lines is not unique to India. growth, this waiver needs to be extendedChina’s fixed line base has declined by throughout the country.a substantial 11.6 million from January Broadband subscribers are expected2008 to August 2008 to 354.1 million to grow from approximately 3 millionsubscribers.28 But the difference is that subscribers in 2007 to 25 million to 30fixed tele-density in China is substantially million subscribers in 2012 whereashigher at 27% against India’s internet subscribers are expected totele-density of 3.4%. grow from 10 million subscribers inIn the first nine months of 2008, the 2007 to 45 million subscribers in 2012.fixed line base declined by 0.9 million in However broadband could see a 30% toIndia. While state-owned Bharat Sanchar 40% increase from the said projectionsNigam Limited (BSNL) and Mahanagar if WiMax services gain traction. ThoughTelephone Nigam Limited (MTNL) WiMax is unlikely to replace existingtogether lost 1.61 million fixed line wireline broadband, it is going tosubscribers, private operators managed to drive broadband subscriber additionsadd 0.7 million new lines.29 Starting 2010, especially in areas where quality last milewe see a rise in fixed lines due to a rise infrastructure is not available.23 TRAI press release No. 74/2004, 8 November 200424 TRAI press release No. 79/2008, 24 September 200825 Ibid.26 TRAI press release No. 89/2006, 12 September 200627 International Telecommunication Union; World Telecommunications Indicators/ ICT Indicators Database28 Ibid.29 TRAI press releases No. 86/2008; TRAI press release No. 11/200830 CII-Ernst & Young analysis31 “Amendment in license Agreement for Basic Telephone Services/UAS license agreements with respect to license fees”, Department of Telecommunication, Government of India, 29 August 200832 Telecom Services Performance Indicators April to June 2008, TRAI, 7 October 2008, Page 60 India 2012: Telecom growth continues 23
  25. 25. Wireless Internet use on the rise 400 800 Wireless Internet Subs (Mns) 648 Total Mobile Subs (Mns) 594 300 533 600 445 196 200 345 179 400 233 148 123 100 87 200 58 0 0 2007 2008F 2009F 2010F 2011F 2012F Wireless Internet Subs (Mns) Total Mobile Subs (Mns) F = Forecast Source: CII-Ernst & Young Analysis Broadband growth to pick up in India 50 45.4 45 40 34.8 35 Subs (Mns) 30 26.6 27.3 25 20.3 21 20 15.2 14.4 15 10.4 9.4 10 5.8 5 3.1 0 2007 2008F 2009F 2010F 2011F 2012F F= Forecast Internet subscribers Broadband subscribers Source: CII - Ernst & Young Analysis Note: Internet subsriber base is inclusive of broadband subscribers Compared to smaller countries such with 76 million broadband subscribers is as the Netherlands and Turkey, India is marginally behind the US that registers much behind in global ranking relating to 77 million broadband subscribers.33 broadband subscribers. In contrast, China 33 Vanier, F., Point Topic, World Broadband Statistics, September 2008, Page 2224 India 2012: Telecom growth continues
  26. 26. Raising the stakes India. The first sign of a rise in broadband subscriber base is visible. During the firstBroadband is defined as an “always on” nine months of 2008, the broadbanddata connection that is able to support base has grown by 1.8 million.34 This isinteractive services, including internet nearly three times than the 0.6 millionaccess and has the capability of minimum broadband subscribers added during thedownload speed of 256 kilo bits per same period of 2007 (designated thesecond (kbps) to an individual subscriber. “Year of Broadband”). Net broadbandThe surge in broadband penetration is additions this year rose by 56.5%, asexpected to be the driver for the next opposed to the 52.7% growth achievedphase of Telecommunications growth in in all of 2007.35 While broadband growthTable 4: Economic impact of broadband S. no. Area Benefits of broadband Quantification 1 Growth in national output (present Overall Approx USD90 billion value of estimated additional Labour productivity improvement of existing Approx USD49 billion growth in the 2010-2020 period) workforce due to ubiquitous broadband deployment in India Output growth due to e-literacy programs in Approx USD14 billion secondary schools Output growth due to e-education in Approx USD27 billion vocational / higher secondary schools 2 National Employment Opportunity Through increase in employment of rural 59 million full time equivalents (approximately 68 Creation by 2020 youth and improvement in labour participation million people including part-time teleworkers) of urban women through teleworking and distributed computing 3 Broadband as a new Industry Revenues of the entire industry value chain USD25 billion by 2020 Industry value chain - total employment 1.9 million potential 4 Education Improved accessibility, flexibility and quality 100% connected villages can have a virtual primary, for all secondary, adult literacy and distance education through the village kiosks 5 Health Real time professional medical attention / care Every village broadband kiosk can act as a available for all telemedicine centre 6 Governance and citizen Real time interface between every citizen and Every enterprise, home connection and urban/ empowerment the relevant government agency; virtual single rural kiosk can act as a single window government window service interfaceSource: CII India’s Broadband Economy: Vision 2010 TRAI press release No. 79/2008, 24 September 200834 Ibid.35 India 2012: Telecom growth continues 25
  27. 27. seems to have begun, India is still way One of the problems that broadband behind target. Against a target of providers face is the multiplicity of 20 million broadband subscribers approvals needed before laying an optic by 201036, we expect to close at fibre backbone. Indian states need to approximately 14 million.37 proactively look at providing a single window approach to Telecom operators to Though broadband additions are better gain the benefit of faster connectivity. than ever before, penetration is a marginal 0.3%38 against the global average of 6.1%.39 Wireless internet Despite the current challenges, India is expected to rise up in the ranks in subscriber base to post subscriber numbers over the next few strong growth months.40 It would feature among the top 10 broadband markets by subscribers in India is a unique market as far as the 2013.41 However, this may be a long haul internet subscriber base is concerned. As as far as penetration levels are concerned. of June 2008, there were 11.7 million The growth of broadband continues to be internet users. There were an additional hampered by inadequate last mile network 75.9 million users who accessed the coupled with low personal computer/ internet on their wireless phones.42 This laptop penetration. Broadband penetration continues to be very low 80 77 40 76 33 60 30 30 Penetration % Subs (Mns) 24 22 26 26 26 25 24 40 20 20 28 18 18 20 20 16 16 15 10 11 9 8 8 5 5 5 64 5 3 5 4 3 4 0 0 Netherlands Italy Japan India Germany Australia China Brazil Canada Spain Mexico Turkey UK S Korea Russia USA France Taiwan Broadband subs (Mns) Broadband population penetration (%) Source: World Broadband statistics June 2008, Point Topic 36 Broadband Policy 2004, Government of India; Ministry of Communication of Information Technology; Department of Telecommunications, Page 6 37 CII-Ernst & Young analysis 38 Ibid. 39 Ibid. 40 Ibid. 41 42 Telecom Services Performance Indicators April-June 2008, TRAI, 7 October 2008, Page 2326 India 2012: Telecom growth continues
  28. 28. figure is expected to rise to 196 million divide among nations is apparent. Inin 2012.43 The share of wireless internet Japan, South Korea and Hong Kong,users will rise from 26.5% to 30% of the the minimum advertised broadbandtotal mobile subscribers in June 2008 to speed is more than the maximum speed30% in 2012.44 in Cambodia, Bangladesh and Laos.46The arrival of 3G and WiMax will drive the • For broadband penetration touptake of wireless broadband. increase, tariffs need to reduce. In India, a subscriber is offered unlimitedIt is estimated that India and Japan will be downloads on a 256 kbps line forthe largest markets for WiMAX in the a minimum of INR999. However, aAsia-Pacific region by 2012, with an subscriber in Singapore gets unlimitedestimated 35.7%, and 16.9% share, 8mbps fixed broadband, 2 mbpsrespectively, of the total regional market, wireless broadband and access at somefollowed by Pakistan and China.45 On the 800 Wi-Fi hotspots for justWiMax front, India’s market leadership INR1,575 per month.47 This differentialwill be fostered by ambitious investment reflects the urgency to revise theplans by Telecom operators and the tariff structure to see a considerablereplacement of ageing or legacy fixed-line breakthrough in achieving optimumbroadband infrastructure. broadband penetration levels.Critical success factors forbroadband growth • There is a need to develop content that meets the need of the IndianThe Government needs to implement key consumer. While the immediateinitiatives for broadband on fixed lines to benefits of broadband will be fortake-off: business users, the real gains will be for rural India in applications such as• The local loop needs to be unbundled. telemedicine, e-commerce, e-education Although TRAI recommended local and e-governance. The prices have to loop unbundling (LLU) in 2004, it has be lowered to popularize broadband still not been implemented. It is time a services among the rural masses. The decision is taken and LLU is allowed. availability of content that caters to• There is a need to redefine the speed the needs of the rural population might of conventional fixed line broadband. It be as important as low tariffs for this should be hiked from the current 256 consumer group. kbps to at least 2 mbps. The broadband43 CII-Ernst & Young analysis44 Ibid.45 “Laying the Foundation: WiMAX in Asia/Pacific 2008”, Springboard Research, July 200846 Ibid. India 2012: Telecom growth continues 27