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A Tough Market: Issues and challenges in setting up rural networks

June 03, 2013

The Indian rural telecom market has witnessed impressive growth in the past few years. Its share in the industry has grown from 31 per cent in December 2009 to 37.8 per cent in December 2012. The wireless segment has contributed the most to subscriber additions in the rural market. Low tariffs, increased affordability of feature phones, easy-to-use services and the expansion of wireless networks have been the key growth drivers for the rural telecom market during this period.

That said, much of the rural market still remains underpenetrated with operators facing multiple challenges. Low ARPUs, modest returns on investment, weak financial health of operators, backhaul constraints, limited government support, inadequate availability of local content, poor grid connectivity and high customer acquisition costs have been the key impediments in augmenting the telecom network in rural areas.

tele.net takes a look at some of these issues and challenges…

One of the biggest issues facing operators in the rural telecom market is low ARPUs. Over the past few years, while the uptake of mobile services has increased significantly, revenues have witnessed only marginal growth. This is because minutes of usage (MoUs) have remained almost stagnant despite low tariffs. This is in contrast to the urban market, where the rise in MoUs is leading to an increase in ARPUs. Rural ARPUs have also been low due to limited adoption of data services as customers do not see the value in subscribing to such services at the prevailing tariffs.

In this scenario, it has become increasingly difficult for operators to recover their investments. In the past, most operators had been cross-subsidising their rural telecom services with revenues from the urban markets. This strategy has now become economically unviable as profits have been declining and operational costs are increasing. Moreover, several operators are highly leveraged, which has constrained their ability to finance wireless network expansion in rural areas. Operators have thus resorted to curtailing capex for the rural market and are focusing more on driving data service growth in the urban market, in order to generate higher returns.

Regulatory uncertainty related to spectrum sharing for providing 3G services has also prevented operators from expanding 3G networks in rural areas. Most operators failed to acquire spectrum in all 22 circles owing to the high reserve price and, therefore, entered into intra-circle roaming agreements to offer 3G services in circles where they did not hold spectrum. However, with the government opposing such agreements, operators have put their 3G service and network expansion plans on hold.

Inadequate financial support from the Universal Service Obligation (USO) Fund has also impacted the economic viability of rural operations. The fund was set up to provide financial assistance to operators for rolling out their network in rural areas. However, slow and inadequate disbursement of funds has led to operators limiting their investments. For 2012-13, the total allocation stood at only 10 per cent of the funds collected. According to the fund administration, the next couple of years will see higher disbursals on account of projects such as the National Optical Fibre Network (NOFN).

Another barrier in rural telecom growth has been high customer acquisition costs. As per industry estimates, the cost of acquiring a subscriber in rural areas is 50 per cent more than that in urban markets owing to high sales and distribution costs in the former. Moreover, operators have to incur additional expenses (about 25 per cent more) in providing services to a rural subscriber as against an urban customer. This increases the overall cost of operations in the rural market.

Meanwhile, poor infrastructure facilities have adversely impacted rural telecom expansion. The suboptimal road network in these areas increases logistics costs as well as the time to market. This results in increased opex, which hurts the overall profitability of operators. Further, erratic and non-availability of grid power in rural areas is a key concern. To provide telecom services, companies need to deploy base transceiver stations and other related equipment at the tower site, which require constant power supply for their operation. However, several remote areas are still deprived of a power transmission network. Further, areas connected to the grid do not receive electricity 24x7, which affects tower operations. In order to overcome this challenge, telecom companies deploy diesel generator sets to supplement grid power, which leads to a substantial increase in opex owing to high diesel prices. While some telecom companies have started replacing diesel generators with renewable energy-based power, the high capex for the latter has been a deterrent to mass adoption. Besides, most of these companies lack expertise in energy management and therefore prefer the renewable energy service company (resco) model. But with limited rescos and the model not yet fully developed, several telecom companies continue to use diesel as backup for electricity.

Insufficient backhaul capacity has also been a major hurdle in the expansion of rural telecom networks. At present, most operators use time division multiplexing or microwave-based backhaul networks to provide telecom services. These networks, however, suffer from capacity limitations and are not optimal for packet-based data services. While rolling out fibre network will address the bandwidth issue, the huge costs associated with such networks render them financially unviable given the revenues from the rural market. Operators are thus left with little choice but to continue with the existing backhaul networks.

Another impediment in the mass adoption of telecom services in rural areas pertains to low availability of local content. Despite several operators introducing rural-centric value-added services (VAS), the provision of localised content in certain regions has been modest at best. Moreover, most customers lack awareness of VAS and other internet services owing to limited knowledge of mobile and SIM card distributors. It is thus imperative for operators and VAS content producers to educate distributors and rural customers about the benefits of these services.

The road ahead

Despite these challenges, the rural market offers huge potential for the telecom industry. Analysts are of the view that a significant share of the rural market remains unserved, which will drive sector growth going forward. Although low ARPUs are still a concern, rising rural incomes will drive customers to increase their mobile usage.

Telecom services in the rural sector are also expected to receive a boost with the implementation of the NOFN project. The project will provide broadband connectivity to 250,000 gram panchayats across the country by 2014. The fund administration has asked three state-owned companies to roll out fibre cable till the gram panchayat level, access to which will be provided to all telecom companies. Sharing of this infrastructure will allow operators to penetrate remote areas while reducing the cost of providing services in the region. The project will provide rural subscribers easy access to services such as e-healthcare, e-education, weather alerts and updates on government schemes. In the future, implementation of such projects will play a key role in bridging the rural-urban divide.


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