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Mobile Subscribers Yearwise comparision

Headroom for Growth: Analysts foresee interesting times ahead

March 16, 2017
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The past year was an important one for the telecom industry. A key highlight was the entry of Reliance Jio Infocomm Limited (RJIL), which added a new dimension to the sector's competitive environment while giving a major fillip to 4G adoption. Moreover, several significant regulatory deliberations took place during the year. Looking ahead, the outlook for 2017 seems positive, with the sector likely to witness further market consolidation. Data, meanwhile, will continue to be the biggest growth driver for the sector. Industry analysts share their views on the sector's performance during 2016, the key developments and future outlook…

How would you rate the industry’s performance during 2016? What were the highs and lows?

Arpita Pal Agrawal

The key highlights of 2016 are as follows:

• RJIL has been an accelerating factor in the consolidation of the market, with announcements regarding intra-circle roaming and site-sharing agreements and intended exits being indicators of the expected level of sector consolidation.

• Operator efforts were focused largely on in-creasing coverage and building network capacity.

• During 2016, non-telecom operators [over-the-top (OTT) players] captured the lion’s share of customer spend in areas such as m-wallets, e-commerce and mobile entertainment.

• Several announcements were made by original equipment manufacturers regarding customer network usage-based analytics, packet probing and advertisement content-based offerings. However, on-the-ground materialisation is still in progress.

Benoy C.S.

The year 2016 was a challenging one for the telecom sector. However, it has performed reasonably well as compared to other global markets. While the average data consumption per user is increasing, it is not translating into overall revenue growth for operators.

The major highlight of the year was RJIL’s service launch. It added a new dimension to the competitive environment in the telecom sector.

With the government providing more clarity on spectrum trading and sharing guidelines, we also witnessed a movement towards the much-needed industry consolidation. While demonetisation has impacted operator revenues during the last-quarter, the government’s digitisation drive will help the sector in the long run.

Rohan Dhamija

The past year was an important one for the telecom industry. For telecom operators, the completion of the spectrum auctions (with the exception of the 700 MHz band), the entry of RJIL, and consolidation were the key highlights of 2016. Besides, the country moved towards a spectrum-surplus (or at least spectrum sufficiency) position from a spectrum-deficient one. However, the failure to sell spectrum in the 700 MHz band owing to the high price can be seen as a damp squib. On the telecom infrastructure front, consolidation and private equity investment were key trends.

Murtuza Kachwala

The telecom sector witnessed a change in usage pattern with significant increase in data uptake, as compared to voice owing to affordable 3G- and 4G-enabled smartphones. This led to India becoming the third highest country in the world in terms of total internet users as of 2016, with around 367.48 million internet subscriptions as of end-September 2016, of which 346.22 million were wireless internet subscribers. RJIL launched its services in September 2016, offering free voice calling and low-cost data to subscribers. This compelled other operators to come up with lower voice and data tariffs as well, which largely affected mobile data revenues.

India also emerged as a growing digital economy on the back of the government’s Digital India initiative and demonetisation drive, which led to an increase in the transactions via mobile banking and e-wallets. The increase in average data con-sumption per user, coupled with the decline in prices per GB of usage and the availability of affordable smartphones, will further help India in becoming a strong digital economy.

Inderpreet Kaur

While 2016 proved to be a challenging year for the industry amid the ongoing consolidation, multiple merger and acquisition announcements, the entry of a pan-Indian 4G operator, and price wars, the growth momentum continued during the first nine months with telecom revenues increasing and the subscriber base growing. According to Ovum research, the consolidated revenue for the industry (fixed and wireless) increased by around 6 per cent year on year for the nine-month period ended September 2016. Despite intense competition and declining prices in anticipation of RJIL’s launch, mobile operators reported an over 5 per cent year-on-year growth in consolidated revenues during the same period.

Incumbents Bharti Airtel and Idea Cellular led industry growth with an above-average yearly growth of 10 per cent and 9 per cent respectively in revenues for the nine month period ended September 2016. Net mobile subscriber additions stood at 55 million for the period, as compared to over 80 million during the same period in 2015.

The highlights of 2016 are as follows:

• Increase in operator capex for the nine-month period ended September 2016: Based on preliminary results of the quarter ended September 2016, Ovum estimates the operator capex to settle at around Rs 300 billion (excluding RJIL) for the nine months ended September 2016. This is up about 11 per cent on a year-on-year basis. RJIL made huge investments in the roll-out of its pan-Indian long term evolution (LTE) network. It ivested Rs 1,500 billion in developing a pan-Indian communications network, comprising over 100,000 cell sites and over 270,000 km of optic fibre cable (OFC). To stay ahead of the competition, Airtel has already committed an investment of Rs 600 billion to upgrade its legacy networks. The programme, called “Project Leap”, aims to deploy nearly 160,000 base stations across the country by end-2018. Meanwhile, Vodafone announced an investment of up to $7.2 billion to expand its LTE network in India, including the purchase of additional spectrum.

• RJIL’s impact on the LTE market: Within the first month of its operations, RJIL became the number one LTE operator based on subscriber numbers. As of end-September 2016, Ovum estimated over 27 million LTE subscriptions in India, of which 16 million were using RJIL’s services. Driven by RJIL, LTE penetration was expected to reach 7.5 per cent of the total mobile subscriber base by end-2016, increasing from 0.2 per cent as of end-2015. Voice over LTE (VoLTE) remained a key defining characteristic of the operator’s service, with voice being treated as data. To help seed the market for subscribers, RJIL worked with 18 different smartphone vendors to bundle its SIM cards with their devices.

• Broadband penetration continues to lag: The state of the fixed broadband segment remained dismal with a household penetration of 7 per cent. India continued to rank much lower than other emerging South and Central Asian markets in terms of fixed broadband penetration. Comparatively, countries such as Sri Lanka and Bhutan are making rapid progress, delivering fixed broadband services to around 15 per cent and 19 per cent of the total households respectively. While the government is trying to improve the state of fixed broadband infrastructure through the BharatNet project, a stronger contribution is being reported by cable multiple system operators (MSOs).

How has the policy and regulatory landscape changed over the past one year? What are your expectations from 2017?

Arpita Pal Agrawal

A lot of regulatory deliberation took place in 2016 on mandating specific call quality parameters. However, no mechanism has been agreed upon by the regulator and the industry to implement the same.

Benoy C.S.

With the increasing number of customer complaints regarding call drops, quality of service (QoS) started gaining more regulatory attention. In 2017, the Telecom Regulatory Authority of India (TRAI) is likely to push for a higher level of transparency and accountability to ensure better QoS. We are also likely to see some streamlining of interconnection policies and usage charges.

To promote VoIP, the regulatory authority may replace the old policy to have a logical separation between public switched telephone networks and the enterprise data networks. If that happens, it will be a remarkable change in the country’s enterprise communication market.

Rohan Dhamija

Allowing spectrum trading/sharing and India moving towards a situation of adequate spectrum availability were key policy-driven changes in the past year. Moreover, the debate around net neutrality was a key highlight. In 2017, we expect the re-auctioning of the 700 MHz band at lower reserve prices.

Murtuza Kachwala

Although the telecom sector is growing at a fast pace and adding millions of new subscribers every three months, call drops continue to be a major issue for subscribers. To this end, TRAI included an amendment to the Telecom Consumer Protection Regulation to make provision for compensation to consumers by mobile operators for call drops.

The foreign direct investment limit for the sector was increased to 100 per cent from 74 per cent. Further, TRAI directed all service providers to provide their prepaid and post-paid subscribers special roaming tariff plans, offering free national roaming facility. All these changes/amendments will result in increased investments by operators to improve their services. Rural teledensity is also likely to receive a fillip owing to the Digital India initiative. Mobile banking has already grown tremendously, thanks to the government’s demonetisation drive. Another significant change that is likely to take place is network expansion and greater investments in telecom infrastructure. Telecom companies will focus either on creating separate tower companies or will go for tower sharing in order to reduce opex costs.

What are the key challenges facing operators? What should the key operator strategies/focus areas be in the coming year?

Benoy C.S.

The biggest challenge faced by operators is their inability to monetise the increasing data consumption. OTT companies are increasing their presence in this market, especially for the value-added services (VAS) offered on the data network. Another key challenge is the increasing capex for technology upgradation and spectrum acquisition. While on the one hand, the business demands more capex to stay competitive, on the other, revenue growth is not substantial enough to justify this investment. In addition, declining voice revenues is a big concern. Telecom companies need to focus on enhancing their capabilities in big data analytics and start offering compelling value-added services to prevent revenue leakage to OTT companies.

Rohan Dhamija

A change in operators’ business models from voice to data, and within data, from a high-tariff, low-usage model to a low-tariff, high-usage model will be the key trend and challenge that operators will face in 2017 (given RJIL’s entry). Greater focus is needed on launching optimal bundled pricing plans to preserve ARPUs and achieve cost efficiencies.

Murtuza Kachwala

The biggest challenge faced by operators is revenue generation as there has been a significant decline in monthly ARPUs and minutes of usage per subscriber, even though the teledensity has increased significantly. Following RJIL’s entry, other operators have also reduced their voice and data tariffs and are coming up with innovative plans for subscribers. Further, customer acquisition costs will increase for operators with the increase in the competition. Subscriber retention will also be tough as customers have the easy option of mobile number portability, which allows them to shift to an operator that offers good deals at a lower price. Operators have been coming up with different marketing and pricing strategies to have a differentiating factor to woo customers to their networks.

What will be the key sector trends in 2017?

Arpita Pal Agrawal

The key trends for 2017 will be as follows:

• Data realisation per MB will continue to fall and will decline by 20-25 per cent in 2017: As a result of the price war unleashed by RJIL’s entry, operators will experience reduced data realisation in 2017 since the increase in data traffic will not compensate for the reduction in data revenues. Operators will have no choice but to move towards a low-cost per MB model, leading to cost-efficiency initiatives and optimisation of their 2G/3G/4G networks.

• Acceleration of fiberisation in 2017: Data price reduction and a consequent surge in data demand will increase the focus on fibre deployment. Poor fibre infrastructure is a bottleneck in providing affordable data services. With less than 20 per cent of towers fiberised, India has a lot of ground to cover.

• Market to witness affordable LTE- and VoLTE-compliant smartphones in 2017: RJIL’s LYF smartphones were a game changer, both in terms of reduced price points as well as LTE and VoLTE compliance. We expect that other players will follow suit and reduce prices so that LTE and VoLTE become default features. Such smartphones will also have a market demand pull on the back of reduced data prices expected in 2017.

• The impact of the goods and services tax (GST) on operators is expected to be minimal, but they might face significant compliance costs under the regime: Output tax will increase and will be offset, to a large extent, by input tax credits and supply chain efficiencies. However, GST compliance costs related to multiple state registrations will be a significant burden on operators.

• Mobile advertising will be the key talking point but traditional advertising will continue to get the lion’s share: The industry is predicting an over 30 per cent growth in mobile internet users from the existing base of about 370 million. As per a recent survey, these users spend nearly 70 per cent of their time online. This finding, coupled with predictions regarding smartphone growth and lower data charges, indicates that mobile advertising will gain traction. Nevertheless, the traditional advertising mediums of print and broadcast will continue to dominate, accounting for nearly 90 per cent of advertising spend.

Benoy C.S.

Increasing market consolidation will be one of the key trends in 2017. It is expected that by end-2017, only four to five operators will be present in every circle. There will be a tariff war to win 4G data business, which will result in innovative and customised tariffs for different sectors. We will also see a major shift from a traditional voice-driven economy to a data-driven one.

Rohan Dhamija

We expect four to five strong operators to emerge in the coming years, and a revenue model based on lower tariffs and higher volume dynamics. Consolidation is likely to result in a more optimal industry structure in terms of spectrum sharing/trading. We may also see active consolidation through full-blown mergers and acquisitions. With the emergence of RJIL, the related impact on tariffs and usage elasticity will play out in the next few years.

Murtuza Kachwala

One of the major trends that the telecom sector will witness is the expansion of the network in rural areas. The market will be the main target for telecom operators as 60 per cent of the population still dwells in rural India. With the onset of 4G and broadband wireless access services in the market, m-value-added services will grow on a large scale in the coming years and emerge as a tool for additional revenue and service differentiation for service providers. Further, in order to save the environment, telecom operators are shifting their focus towards “green” telecom technology, which will help reduce carbon emissions by 70 per cent by 2018. Further, diesel consumption for tower operations will reduce significantly with the use of solar plants on rooftops. Operators will undertake infrastructure sharing to reduce the need to set up additional towers, thus lowering power consumption and emissions.

Inderpreet Kaur

The key trends in 2017 will be as follows:

• Emergence of innovative tariff plans: The commercial launch of services by RJIL disrupted the telecom market and marked the emergence of data-centric tariff plans for both prepaid and post-paid subscribers. Following RJIL’s launch, integrated service plans, offering bundled voice, data, SMS and Wi-Fi services, became the norm, with the incumbents too launching similar plans to match RJIL’s offerings. The expected slowdown in data revenue will mean that operators will make an effort to offset the decline in revenues from core services by pushing value-added services such as mobile entertainment and mobile wallets. Successful operators will be able to integrate these non-core offerings with their plain vanilla tariff plans.

• Intense competition will continue to have a negative impact on data and voice realisation rates: Voice and data realisation rates will continue to decline amid rock-bottom pricing and increasing competition. India has among the most affordable mobile data plans and with the introduction of RJIL’s 4G services, there will be more pressure on data pricing. Operators managed to grow their data ARPUs during the first nine months of 2016, and the increase in data volumes has balanced the decline in data pricing. The recent surge in free data offers will result in a downward pressure on data ARPU growth during 2017. As per Ovum estimates, growth in non-voice revenues will decline to around 15 per cent during 2017 as compared to 26 per cent for 2016.

• Technology migration will gather pace, driven by the availability of low-cost LTE smartphones: India lags behind in mobile broadband (LTE and wideband code division multiple access penetration. We expect 2017 to be a defining year for mobile broadband uptake, with operators pushing subscribers to migrate to higher technologies with lucrative offers. The incumbents and the new entrant RJIL are targeting customers early on by offering 4G data plans on the purchase of new 4G handsets. India will have over 400 million mobile broadband subscribers by end-2017, increasing from 255 million in 2016. While smartphone costs have been declining over the past few years, 2017 will see a surge in the availability of LTE- and VoLTE-enabled phones. In fact, smartphone vendors such as HTC, Oppo and Samsung have announced their decision to discontinue the production of 3G-only handsets by March 2017.

• Consolidation among smaller players while top three focus on increasing the proportion of high-ARPU subscribers: A 12-player market is not sustainable as operators have to recoup the huge investments made by them in spectrum and network. Smaller players are likely to exit (be acquired or merge with) or find niche markets that they can serve profitably. Amid this transformation, the incumbents are expected to focus on data-led business and increase the number of high-ARPU subscribers in the mix.

• Some movement in the fixed broadband segment: While cable MSOs are upgrading their networks to offer ultra-fast broadband, delivering speeds of up to 1 Gbps, there are a few other developments that will help shape the fixed broadband segment over the coming years. The first is the growing interest of utilities in laying OFC to offer better capacity and coverage. Bombay Gas, for instance, is utilising its existing network of gas pipelines to deploy an OFC network throughout the city.

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