|Telecom development in India
|Executive Director and leader of the Infocom practice
Deepak Kapoor is the Executive Director and leader of the Infocom practice at PricewaterhouseCoopers. Mr Kapoor is a member of the ‘India Leadership Team’ at PwC, India, and has direct responsibility for the Transactions Practice. He has worked on a broad range of top tier financial and strategic engagements. His experience encompasses a broad range of industries, including consumer products, manufacturing, telecom, technology, healthcare and entertainment and media. Mr Kapoor is a fellow member of the Institute of Chartered Accountants, a fellow member of the Institute of Company Secretaries of India and a member of the Association of Certified Fraud Examiners. He is a regular contributor of articles to newspapers and business journals. Mr Kapoor is also a regular speaker at business forums and professional conferences.
Teledensity has tripled since 1999. Although growth has been explosive, 80 per cent of subscribers are pre-paid and, given falling prices, ARPU has dropped to US$7 per month. The challenge is to generate revenues to pay for expansion of the network. Telcos are reviewing alternative technologies such as WiMax, WiFi and broadband over power lines to increase broadband penetration. The increased foreign direct investment, FDI, limit of 74 per cent, and simplified long-distance licensing, have boosted telecom’s share of FDI to 12-15 per cent.
Telecom in India has come a long way since the ’90s, when country teledensity was less than five per cent. Today, our teledensity stands at about 17 subscribers per 100 people predominantly due to the cellular sector, the growth engine of the Indian telecom sector, which is now adding an impressive six million plus subscribers monthly. The business environment is bullish; operators are optimistic about the growth prospects as more than 80 per cent of India’s population of about 1,100 million people is still unconnected. The government of India has set a target of 500 million subscribers by 2010. Mobile – Indian telecom’s growth engine The cellular sector continues to be predominantly prepaid, with nearly 80 per cent of subscribers prepaid and almost 90 per cent of the incremental additions on this platform. This is also an indicator of the increasing addition of marginal subscribers as the network expands to increase its reach. According to estimates from the Cellular Operators Association of India, COAI, in the past year, the population coverage has doubled from 30 to 60 per cent and the geographical coverage has increased from 13 to 39 per cent. This increase in coverage is essential both to reduce teledensity disparities existing across various geographies and for maintaining the growth momentum of the sector. This growth has come as a result of a steep fall in tariffs with airtimes rates of between three to four cents per minute, amongst the lowest in the world. Consequently the industry ARPU, Average Revenue per User, has consistently fallen from US$29 per month in 1999 to about US$7 per month, per subscriber, currently. Voice still generates 87-90 per cent of revenue and value-added services, such as SMS, ringtones, wallpaper downloads, caller ring-back tones, CRBTs, text and voice-based information services (e.g. news, cricket and astrology information), offline and online games are now gaining in popularity. Operators view this as an excellent opportunity to increase revenues, and are part of India’s developing mobile ecosystem that also includes content providers, aggregators and technology providers. The EBITDA, earnings before interest, taxes, depreciation and amortization, margins of the operators range between 35-40 per cent, and the challenge for the operators is to generate sufficient funds to increase coverage and operate in the semi-urban and rural areas that are remote and spread out, and where the revenue per customer is expected to be even lower and the operational costs higher. Mounting infrastructure costs are hastening the entry of a new breed of players into the Indian telecom scene. These are tower management companies which build, own and operate network towers for various telcos. They are a given in mature telecom markets, but India is getting to see their advantages only now as telcos overcome the initial concerns of sharing tower infrastructure with competitors. It is estimated that by sharing infrastructure, telcos can slash operational costs by 50-60 per cent and, sure enough, a slew of national and international companies are making a beeline into this nascent market. The outsourcing of network infrastructure by telcos has developed rapidly in recent years, as they look to improve their financial performance, drive faster growth, reduce time to market, reduce complexity and focus on their core competencies in service creation and delivery. Innovative telcos such as Bharti and Hutchison have outsourced their network operations to equipment vendors such as Ericsson and Nokia. Bharti has also entered into a transformational initiative with IBM India, which includes consolidation, transformation and management of IT infrastructure and applications in terms of provision of IT services, hardware and software for its telecom requirements. Enterprise market In India, the year 2006 will be remembered for the interest shown by the wide array of domestic and international operators vying for the revamped national and international long-distance licences. A majority of the licences are intended for tapping the growing enterprise market for both voice and data connectivity. The enterprise market is primarily being led by the demand for connectivity from the IT, ITeS, IT enabled services, government and the financial service segments. Future growth is expected from the retail segment where a boom is expected in the coming years on account of large national and international players announcing their plans for entry into organized retailing. Voice over IP, VoIP, is considered one of the key applications that enterprise segments in India are reviewing to deploy as a means to lower their operating costs. It has provided impetus for increased demand for IP-based virtual private networks, IP-VPN, services in India. The IP-VPN market is currently estimated to be about US$110 million and is expected to double in the next three to four years. All the large Indian telcos and foreign players such as AT&T, Cable & Wireless, Equant, British Telecom etc. are setting up operations to cater to the communication requirements of their local and foreign customers. Internet and broadband Internet services were started in India in 1995 with a supportive government policy that led to the entry of a large number of private players, resulting in lowered Internet tariffs and a phenomenal surge in the subscriber base to three million. This growth slowed down in the early 2000s and the Internet subscriber base currently is nearly eight million with about two million broadband connections. The introduction of Internet telephony in 2002 did not provide the required boost as numerous restrictions were imposed on the technology and end devices that could be used under the new licence. Efforts are now underway to achieve India’s Broadband Policy target of 20 million broadband subscribers by 2010. Poor PC penetration, lack of relevant content and the poor availability of viable last mile access technologies still hinder its growth. The incumbent BSNL and MTNL together own about 80 per cent of the fixed lines in India and, in the absence of mandated local loop unbundling, the industry is struggling to meet the broadband targets set for it. Broadband over cable lines, another technology that has been successfully deployed in countries such as the USA, has not had a significant impact in India primarily because of our analogue cable infrastructure, which is in poor condition. Telcos are currently reviewing the technical and economic feasibility of alternative technologies such as WiMax, WiFi and broadband over power lines, BPL, to increase broadband penetration. Broadband on mobile, referred to as 3G, is also delayed because the spectrum is not available. Efforts are under way by the government of India to get defence and other government users to vacate the relevant spectrum. Impact of convergence Despite the buzz, there is still little telecommunications convergence in India. The real gains and services have not materialized on a large scale due to the lack of sufficient viable and scalable access to pipes ‘broad’ enough to carry voice, data and video to the masses affordably. The regulator and the industry are gradually resolving the related issues of access loop, transmission infrastructure, required spectrum, access devices, and content availability etc, needed to provide converged service offerings to retail customers. The new services that are expected to be rolled out commercially during this year are mobile TV, instant messaging solutions, push-to-talk services and IPTV. Key concerns One of the key concerns of the industry is that the falling ARPUs experienced by cellular operators could slow down their rollout plans to the remote and sparsely populated areas of India. This could also adversely impact the growth momentum that the whole sector is thriving on. The spectrum allocation and availability issues also need to be resolved shortly so the operators can firm up their business plans for the future. Several spectrum issues are also affecting the wireless broadband rollout. The frequencies India has allocated for WiMax are not the same as those which most of the rest of the world is using. This coupled with India’s failure, until now, to unbundle local loop access could cause it to fall short of its broadband targets and miss out on the GDP growth that countries such as Korea and China are experiencing due to their widespread access to broadband Internet services. Role of government Since liberalization, timely interventions by the government’s policy-makers and regulatory institutions, coupled with the operators’ initiative, has made India a leading member of the exclusive club of high telecom growth nations. The chart below shows the impact of the successive interventions – the National Telecom Policy 99, NTP 99, the introduction of newer cellular licensees, the introduction of the calling-party-pays, CPP, regime and the reduction of Access Deficit Charges, ADC, on the cellular tariffs by an unprecedented 90 per cent – over the past seven years that have been the drivers of India’s mobile boom. The increase in foreign direct investment, FDI, limit to 74 per cent, up from the previous cap of 49 per cent, coupled with the simplification of the long-distance licence conditions, resulted in a significant increase in foreign investments, wherein telecom’s share of FDI rose from 3-4 per cent to 12-15 per cent in the past 12 months alone. Going forward, more initiatives in the form of reduced regulatory and tax levies, and faster resolution of pending critical issues, such as spectrum and interconnection, are required to keep India’s telecom sector growth on course and to maintain its standing as the fastest in the world.