With urban teledensity at over 50 per cent, these areas are fast reaching saturation point. The rural areas, meanwhile, have been lagging far behind. Moreover, even though the mobile subscriber base has risen sharply in the past two years, both Wi-Max deployment and broadband uptake have been slow. Telecom experts believe that with the entry of new players, competition will increase sharply, further bringing down tariffs. tele.net presents the views of various analysts on the likely telecom scenario, future growth, and other developments…
How will the entry of new companies affect the telecom sector? Do you expect any further consolidation?
Kunal Bajaj: There are two ways in which new players will enter the Indian telecom market. One is through the expansion of the existing companies which currently do not have a pan-Indian presence but are serious players nevertheless. The others would be new entrants attempting to start greenfield networks. For example, Vodafone Essar and Idea Cellular want to expand to the rest of the country and acquire a panIndian presence. As they enter new circles, such operators will give competition to the ones that are already there.
In this context, it would be interesting to see whether and when number portability is deployed. If deployed, number portability would help new operators to provide effective services for both highand lowend customers. But without number portability, the new players would primarily be restricted to the middle and lower ends of the market with tariff competition and handset bundling as the only tools.
Consolidation also makes sense.Everyone has been expecting it for a long time now. There has not been much consolidation in the past couple of years, especially compared to the initial years of this decade. Consolidation will also depend on the way 2G and 3G spectrum is allocated in the future. A pan-Indian operator is likely to buy a regional operator in circles where the latter is a big competitor. For instance, operators like Spice and Aircel have a big share of the market in their home state and thus pose major competition to the big players, who, as a result, would want to buy the regional operators in order to expand their subscriber base and achieve economies of scale.
For the smaller regional operators, a good option is to tie up with operators like Idea Cellular for setting up greenfield networks. The companies may either work together or formally consolidate their operations. All the non-telecom companies entering the industry will look for partnerships as they will not want to do it all on their own, and by the time they are actually operational, they would have missed much of the market growth. Therefore, whether these companies are making telecom forays just to acquire customers so that they can sell themselves off to an existing operator six months or a year down the line is a question that remains unanswered.
T.R. Madan Mohan: In the short term, there would be competition in the mobile and data services segments. Enterprises would consolidate their services to a single or dominant vendor, thereby forcing consolidation.
Usha Rajeev: The total number of players per circle will not go below where it is. However, this does not imply that the number of operators per circle will total up to the existing and new players. I would expect several global players to enter the market through the acquisition of these new licensees.Also, there are a couple of fringe players in the Indian telecom space who may get picked up by the new entrants.
In terms of overall dynamics of the market, there will be some amount of segmentation in the existing saturated market as well as in the new market. In the new market, it will be more of a land-grab kind of scenario (where the first to offer lower tariffs will capture the market). In the more mature markets, the focus will mainly be on customer retention. Therefore, better customer service and marketing activities, etc. will be used by companies to retain their customers.
Romal Shetty: The entry of new telecom players will definitely intensify competition, bring down revenues and lead to innovation and radical thinking. With more companies competing for market share, the prices will definitely come down.
However, company margins, though impacted by the reduction in tariffs, will continue to be high. An operator like Bharti currently has an earnings before interest, taxes, depreciation and amortisation (EBITDA) margin of 47 to 48 per cent. So even if the average revenue per user comes down further, it is highly unlikely that the margins will fall to, say, 5 per cent.
The new operators, in a bid to grab market share, might offer ridiculously low tariffs. While this may help in getting market share, quality of service (QoS) might suffer. Judging QoS will take people at least one or two years. In the meantime, there will be a huge increase in competition.
The market will witness consolidation.Some of the new players will definitely consider alliances with either foreign or existing players. But consolidation activity will probably begin three years down the line. The number of operators in each circle will come down from nine or ten to five or six again.
With large scale Wi-Max deployments expected in 2008, how will the technological landscape change?
Kunal Bajaj: With innovations in technology, there has been a decline in prices of base station and terminal equipment. This, coupled with some of the recent announcements as well as announcements that are expected from major telecom companies and equipment vendors, makes 2008 the year in which fixed Wi-Max will take off. India is just waiting for something like WiMax, with small and medium businesses and high-end residences constantly looking for broadband access. I really hope that Wi-Max 802.16d can overcome this problem in a substantial way.
Telecom companies will not just deploy Wi-Max to meet the needs of high-end consumers (wealthier companies or highincome group people), but will also start going after small and medium enterprises and mid-end residences, thus improving coverage so that people who don’t have access to fixed infrastructure can nevertheless access broadband networks.
T.R. Madan Mohan: On the technology front, we will probably see the coexistence of multiple last mile technologies such as Wi-Fi. Churn among enterprise customers is another likely trend.
Usha Rajeev: It would be slightly different in the rural areas as opposed to the high-density urban areas. In the rural areas, the focus, at least for some more time, will be on voice. In the mature markets, more cutting-edge technologies like 3G will be deployed; this will bring in higher-value service offerings.
Romal Shetty: Wi-Max is a new technology and needs to be tested. Though Wi-Max will definitely be useful for requirements like last mile connectivity, predicting how the technology will affect telecom technology is difficult because there is no precedent.
Where do you see the rural telecom market a few years from now? What will be its contribution to the growth of the sector?
Kunal Bajaj: Market contribution from Tier II and Tier III cities to overall growth today is significant. But considering that we need to get to the 500 million mobile subscriber mark by end-2010, the rural population will have to make a huge contribution. The activities of the USO Fund in the past year, and its plans for future phases of rollout and further promotion of infrastructure sharing will help telecom operators penetrate the rural areas. With no cost of infrastructure, tariffs will further decrease.
However, after a point, the market will saturate and growth will taper off. This will probably happen when the teledensity reaches, say, 60 to 65 per cent. Once we get close to the 500 million mark, growth will be much slower than what it is today.But between now and then, the market is definitely going to cross 10 million net additions a month.
T.R. Madan Mohan: The telecom industry currently contributes about 2.6 per cent to the gross domestic product (GDP). If more emphasis is laid on rural teledensity, the industry can contribute an additional 1 per cent to GDP by 2012. From a sectoral perspective, the rural telecom sector would account for about 8.7 per cent of the 26 per cent growth that is expected from the telecom industry by 2010.
Usha Rajeev: Growth will come in from the rural markets. The conventional thinking is that this sector will not be profitable. But I think, within rural there are two segments. One, which is going to be high-value customers and second, low-value, subsistence kind of customers. Within rural, there are going to be deep pockets. This segment is just waiting for mobile and more advanced services.The rural market will, therefore, drive volumes as well as add to the bottomline.
Romal Shetty: The teledensity in cities like Mumbai, Delhi or Bangalore is already 70 to 80 per cent. Therefore, in terms of mobile subscriber additions, not a lot is going to happen there. Instead, Category C circles will witness significant subscriber additions, which is happening even now. The teledensity is about 50 per cent in urban areas and about 6 per cent in rural areas. It is this 6 per cent that is going to increase dramatically. The rural areas and Tier II and III circles like Bihar and Jharkhand are going to drive growth.
With CDMA operators including RCOM and TTSL entering the GSM arena, what is the future of CDMA in India? Will these operators have an edge over the existing GSM players?
Kunal Bajaj: Even if Reliance Communications (RCOM) has a full fledged, pan-Indian GSM strategy, it doesn’t make sense to abandon the CDMA network altogether.Looking at the company’s performance in circles where it has both CDMA and GSM operations, RCOM is performing well on both platforms. By using slightly different brands and styles to market CDMA and GSM services, it is possible for the company to garner different types of customers who are looking for different services and experience. Therefore, in the future, while the number of CDMA subscribers and CDMA networks may decrease, they will not disappear completely.
The path to 3G is yet not clear, and it also remains to be seen whether both GSM and CDMA operators will be able to use 3G technology. For CDMA operators, the upgrade to 3G CDMA (which is essentially EV-DO) is a relatively low-cost operation, requiring only a minimal improvement to the base station. However, for GSM operators, moving to high speed data packet access or WCDMA requires a much more substantial upgrade in terms of infrastructure deployment.
T.R. Madan Mohan: It is not that just Indian players are operating on CDMA and GSM platforms at the same time. Operators in China and other markets are also doing so. What is crucial is the operators’ ability to bundle several services more efficiently. One can expect a mixed strategy of low bandwidth base-band services and high bandwidth application bundles in the short term. Data and mobile services is where these players are likely to bring in synergies in the short term.
Usha Rajeev: In the long term, CDMA may phase out.This is not because CDMA technology is not viable enough but, as the number of insulations progressively go down, the potential for equipment prices to fall gradually reduces. As opposed to that, since there is so much of GSM uptake, the prices of GSM equipment go down automatically. Globally, GSM prices are falling constantly. In such a scenario, CDMA is going to become less inexpensive as compared to GSM. So, there would be a time when CDMA may phase out or be limited to a very few applications and geographies.
In the interim, I see CDMA being retained by existing players in niche areas like data cards, where they would not want to roll out 3G only for data cards. So, while they will begin and expand GSM services, they will retain the CDMA infrastructure.Since CDMA equipment is already a sunk cost, it will be used to drive volumes in things like data cards, where offtake is higher in CDMA compared to GSM.
Romal Shetty: Once Reliance and Tata Teleservices Limited (TTSL) decide that they are really serious about getting into the GSM market, there will be some kind of transition with the companies trying to move their subscribers from the CDMA base to GSM. But it is not necessary that everyone is going to move. It seems that the two market leaders are moving towards GSM. They can use the existing infrastructure to move to GSM, and will have it easy compared to other companies that would have to set up the whole infrastructure. When these two players move to GSM, CDMA is likely to take a back seat. But I don’t think that CDMA as a technology will vanish completely because it will attract a particular segment of society. GSM does not really help except when roaming in different countries.
What are some of the trends that you expect in the near future?
Kunal Bajaj: A year from now, value-added services (VAS) are going to be much more important than voice. High-end VAS applications will come into the mainstream in 2008, and will be demanded by subscribers with devices which support such applications. Even many of the larger known brands in the media, internet and services, will start creating more robust VAS strategies for India.
Mobile number portability if implemented, will, for the first time, create competition amongst the operators for high-end users. Operators are obviously focusing on attracting new customers and retaining the existing high-end customers.The marketing focus will have to shift.
T.R. Madan Mohan: No comments.
Usha Rajeev: One, with tower players coming in, there will be a lot of interesting applications across the country ?? not necessarily to do with telecom. Because there are going to be base pockets in the rural areas and the hinterland, with each of these providing connectivity and having power supply, they will probably create an ecosystem that will drive a lot of services like insurance and retail.
Second, the face of the value-added segment will change with much greater offtake of content in the form of shorter clips etc.This is again going to drive a different ecosystem of VAS providers. From a technology perspective, service providers, who will be getting more and more linked, will need a more enhanced security system. Everybody will move a couple of levels in terms of their service delivery platform.
Third, at least two more large direct-tohome (DTH) players will enter the market.Apart from Bharti and RCOM, who have recently announced their plans to enter the DTH and IPTV markets, there will not only be many other companies with more service offerings for urban areas but also a land-grab type of scenario. This will be driven not only by the niche sector but also by the low-end segment. Offtake will be significant for content like Bollywood, Hollywood, cricket, etc. In less price-sensitive and more affluent parts of the country, offtake of interactive services like gaming and newsreading will be much higher.
Therefore, from the trend perspective, I see the communications piece and the entertainment piece actually converging far more visibly and far more quickly.
Romal Shetty: There will be really innovative offerings including bundled services like mobile commerce and mobile banking. More value-added services will be on offer. The present 9-10 per cent share of VAS in the total revenue of the telecom sector will increase to about 20 per cent in the next two to three years.
