The government is working on a policy that governs the entry and operations of virtual network operators (VNOs) that provide telecom services without owning spectrum or infrastructure. It is currently examining the Telecom Regulatory Authority of India?s (TRAI) recommendations to bring VNOs within g framework. Industry experts share their views on the prospects for VNOs and their impact on the competitive landscape?
What are the opportunities available for VNOs in the Indian telecom market?
Rahul Agarwal
Recently, TRAI recommended allowing VNOs to enter the market and offer all services (voice, data and video) at an entry fee of Rs 75 million. As per the recommendations, the fees range from Rs 1.5 million for internet services to Rs 12.5 million for a long distance telecom licence.
Anand G.K.
One of the benefits that VNOs offer is increasing the utilisation of network operators? fixed assets. Many operators have already entered into mutual passive infrastructure sharing agreements and could soon be allowed to share spectrum as well. This extensive sharing of infrastructure and resources (which is imperative to keep costs low and business models viable in a low-ARPU country like India) reduces, to some extent, the scope for VNOs to cut operational expenses. Moreover, the Indian market is extremely competitive and the anticipated entry of Reliance Jio Infocomm Limited with its disruptive pricing strategy and ecosystem of digital content will further stoke competition and consolidation in the industry. In addition, the incumbent operators have already evolved into sophisticated marketing machines with strong brands. However, this unique evolution of the Indian telecom industry, with different services and spectrum-holding timelines in various circles, has led to increased operational expenses and inefficiencies.
We believe that there is scope for virtual operators who can ensure the following:
- Tangible differentiation with regard to the content and telecom services that users can avail of as part of bundled offerings. Or specific differentiated features for target audiences (like enhanced mobile security for financial transactions).
- A uniform and simplified customer experience on a pan-Indian basis (or to the extent of geographical mobility).
- Discernible differentiation in service usage (which is quite poor at present) by integrating resources from different operators, and the efficient management of data and voice traffic.
- Efficient and unified operations.
- Effective and targeted marketing.
- Contracts for wholesale purchase from incumbent operators that allow for a level playing field where the VNO is contributing to enhance network asset utilisation. This can be done by either expanding the customer base on the network or substantially contributing to increasing the per subscriber usage through a differentiated offering.
Hemant Joshi
The market is already very competitive, with the lowest tariffs in the world. It has:
- An untapped rural market and scope for extending services in Tier I and II cities.
- Data-intensive services.
- Scope for extending the broadband and fixed line footprint in India.
- On-demand and value-added services.
- Niche market opportunities with specific content for specific user groups.
Rajan S. Mathews
International experience shows that the VNO concept is more relevant in the case of markets that have:
- Inadequate competition.
- Excess capacity or supply with operators.
- High penetration and market maturity.
- High ARPU levels so as to make a sustainable business case for VNOs.
In the Indian context, the following ground realities need to be acknowledged:
Competition: The Indian telecom market is highly competitive. As compared to a global average of three to four operators, there are as many as seven to eight operators in each service area. The competition in the voice and SMS segments is intense, which, along with the availability of mobile number portability, adds to competition and customer choice.
Capacity/Supply: There is no excess capacity or supply with access providers in India. The existing spectrum holding is around 13.8 MHz per operator, far below the global average. Given that operators are facing several challenges even in meeting customer demands for their own services, it is improbable that they will have spare network capacity to sell to VNOs.
Market penetration and maturity: As per recent research on the global VNO landscape by GSMA, VNOs remain most prevalent in mature markets where penetration (based on connections) is more than 100 per cent. As per the analysis, the VNO phenomenon mainly applies to saturated mobile markets where operators are seeking innovative ways of attracting new customers. The average penetration rate among the 69 countries that host VNOs stands at 129 per cent, while the global average is 98 per cent. India?s current market penetration is just 74 per cent, well below the global average. Hence, the introduction of VNOs has little relevance at this stage.
ARPU levels: ARPU levels are fairly low in India ? at Rs 115 per month, India has one of the lowest tariffs in the world, one-fourth of the global average. In such a scenario, a VNO, whose model is based primarily on purchasing bulk minutes and selling them in the retail market under its own brand, will find itself competing on very thin margins. This will put pressure on its business model.
Thus, we are of the view that, at this stage, a business case does not exist for VNOs in the Indian environment.
What will be the impact of VNOs on the dynamics of the Indian telecom market?
Rahul Agarwal
Impact on the telecom market: The initiative can have a positive effect on the telecom landscape as VNOs will invest in and target areas with limited penetration and no competition. This will help increase coverage and extend telecom and broadband services to underserved areas.
Impact on stakeholders: This can be considered an opportunity to increase coverage, which stands at 75 per cent in the country at present. Consumers are likely to get more choices as well.
VNOs will have the opportunity to leverage the existing infrastructure without making significant investments. Consumer-facing entities can make use of existing service delivery platforms for offering services to consumers. Operators can gain by getting access to new customers without making significant investments in marketing. This will offer an assured alternative revenue stream for them as they will look to sell bulk voice, text and data to VNOs at a wholesale rate.
Anand G.K.
If a VNO focuses on specific niche users, it is unlikely to have a substantial impact on the dynamics of the primarily low-cost telecom market, unless there are a substantial number entering the market with micro-segmentation based on tangible needs. For a VNO to have a substantial market share, it will have to achieve all the differentiators highlighted above and stitch together a powerful marketing strategy.
Hemant Joshi
VNOs could increase competition in the market. From the operator point of view, they would offer a good chance for new revenue sources by using their unused infrastructure in remote and rural areas. In smaller cities, the unused spectrum could be used in a better manner to provide new revenue streams. VNOs could also bring in global experience and launch innovative services in the market at competitive tariffs. Smaller operators would stand to gain more in comparison to larger players. Moreover, as VNOs would not need to build any infrastructure of their own, their capital outlays would be low. They could also help the Digital India and smart cities projects.
Rajan S. Mathews
In an environment where operators are burdened with huge payouts on account of acquiring spectrum and complying with stringent network roll-out obligations, it is undesirable for the government to introduce any regime that further derails the financial health of the sector or puts pressure on scarce spectrum resources. We believe that the introduction of VNOs will lead only to an overemphasis on services, with reduced incentives for infrastructure creation. VNOs will focus on cherry-picking the creamy layer in already developed areas and reduce the sustainability and business case for rolling out infrastructure in rural and remote areas. This will severely hamper the government?s connectivity and broadband objectives, along with the Digital India dream. Rather than introdu-cing VNOs, the need of the hour is to:
- Ensure the predictability and stability of the policy and licencing regime.
- Encourage investments in networks.
- Increase spectrum availability.
- Notify guidelines for spectrum trading and spectrum sharing.
- Review the merger and acquisition (M&A) guidelines to encourage and facilitate market-based consolidation.
What are the likely regulatory and operational challenges for VNOs?
Rahul Agarwal
Dealing with competition from existing operators in metros, Tier I and other established circles will be the key challenge. The initiative will definitely help extend coverage to underserved areas, but it would only be feasible in such areas since the VNOs won?t face stiff competition there. Apart from that, extending services in a profitable manner to rural and underserved areas is, in itself, a huge challenge. So far, the lack of infrastructure and the low returns have marred the growth of services in such regions.
Anand G.K.
The regulatory environment has improved significantly over the past year. Last month, TRAI recommended that VNOs be brought under a licensing framework and be allowed to offer voice, data and video services. It recommended that a separate category of unified licences be created for VNOs with an entry fee of Rs 75 million for those wanting to offer all services. However, it is advisable to wait for the formulation of the final policy.
Hemant Joshi
- Operational issues: VNOs will be dependent on operator infrastructure. Their service quality and reach will depend on the network?s efficiency and capability.
- Regulatory challenges: The regulator?s recommendation for acquiring licences could be a major challenge due to the existing competition in the market.
Rajan S. Mathews
We believe that the existence of differential spectrum usage charges to be paid by different telecom service providers (TSPs) could skew a VNO?s choice while making a decision to tie up with a particular TSP. There is a strong case to move towards uniform spectrum usage charges at 3 per cent of the adjusted gross revenue as repeatedly recommended by TRAI. In addition, the arrangements between the VNO and TSP should be based on mutual commercial agreements, as recommended by TRAI.
The duration of the licence, the entry fee, the net worth financial bank guarantee, etc. should be the same for all unified licensees, keeping in mind the spirit and intent of the unified licensing regime.
As VNOs will be responsible for providing services to customers, just like a TSP, they will need to comply with the guidelines and directions issued by TRAI or the Department of Telecommunications, including the reporting of tariff plans, etc. VNOs need to be responsible for customer acquisition, verification and activation, as well as for providing SIM cards, customer care and billing services, access to emergency services, etc. They should be accountable to TRAI?s quality of service parameters.
What could be the potential business models for VNOs in India?
Rahul Agarwal
There are a number of business models that a VNO can adopt. It can act as a reseller that sells telecom services under its brand name through its own distribution channels. This involves huge investments in back-end operations but the operator will be able to benefit from economies of scale in the future. Alternatively, it can partner with a third party that would extend its support through shared back-end services. The choice of the appropriate business model would be governed by factors like the telecom expertise of a player, its existing infrastructure or consumer access, the target audience, the scale of business targeted, the service offering, and the investment that the participant can make.
Anand G.K.
- Completely digitised lean operators like O2 subsidiary GiffGaff are a possibility. Another model could be with separate brands of operator subsidiaries that are operating independently and have no relationship with the parent company. These operators could have a very high margin of specialised services.
- They should have simplified offerings with tangible differentiation at the right price points, supported by efficient operations (digitised) and effective marketing.
- The business model should be such that the VNO has customer ownership, ownership of an intelligent network platform and partial/full ownership of unique differentiation elements. In addition, VNOs should control pricing, branding, IT platforms, customer experience and sales.
Hemant Joshi
The potential business model for VNOs in India would be that of a reseller that would use the operator?s infrastructure to provide services and pay the operator a fixed fee or a percentage based on usage. The revenue sharing model could also be explored.
Rajan S. Mathews
TRAI has opined that while the global focus of VNOs has mainly been on providing mobile access services, there are some other areas where VNOs can be useful. These are listed by TRAI as follows:
- VNOs can provide Wi-Fi services for the proposed smart cities.
- Converged technologies are occupying centre stage in people?s lives. VNOs can facilitate the spread of these concepts.
- VNOs can provide localised services in small towns and rural areas using the networks of multiservice operators (MSOs) or by providing last mile connectivity.
- VNOs can leverage the significant penetration of the hybrid fibre coaxial cable network of local cable operators and MSOs to enhance broadband penetration. These cables remain underutilised and hold huge potential for deploying broadband and wireline telecom services. That said, we believe it is more important to prioritise issues related to spectrum, M&As, and the industry cost structure.
