The past year was a challenging one for the Indian telecom sector. While declining profits, high debt burdens, regulatory uncertainty and limited foreign investments impacted growth, 3G service launch and the release of the draft National Telecom Policy (NTP) were the key positive developments. With important policy decisions likely to be implemented in 2012, the industry is looking forward to significant changes in the sector. tele.net invited the views of industry experts regarding the challenges faced by the sector in 2011 and the expectations going forward?
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How did the Indian telecom sector perform during 2011? What were the key milestones?
Kunal Bajaj
The Indian telecom sector exhibited a moderate performance during 2011. It could have been better if some of the pending regulatory issues had been addressed. While the decline in the earnings before interest, taxes, depreciation and amortisation (EBITDA) margins stabilised in 2011, net additions and subscriber growth dropped. Investments in the sector also slowed down, particularly in the first half of the year, due to the 2G scam and related court cases. The new players were the worst hit as investments from foreign partners dried up, which led to a decline in the overall subscriber growth.
3G service launch by private operators was a key milestone in the past year. In early 2011, the Telecom Regulatory Authority of India (TRAI) introduced a regulation related to active subscribers. We also saw a major change in SMS marketing following the introduction of new regulations by TRAI. Also, the draft NTP was released to provide a road map for the sector.
Ashish Basil
The year 2011 was a challenging year for the telecom industry. Tariff decline, stretched margins, the increasing 3G debt burden, regulatory uncertainty, litigation, restricted foreign investments and the 2G spectrum issue led to a decline in investor interest. However, the recent hike in mobile tariffs, 3G service launch and release of the draft NTP again highlighted the sector?s potential.
Industry revenues grew by 8.7 per cent in 2011. This was prior to the tariff hikes and the recently launched 3G services. With urban teledensity reaching saturation, the volume growth in SIM connections would be driven by rural India.
Benoy C.S.
The year 2011 was an exciting year for the telecom industry. Technological advancements enabled more efficient and timely service delivery as well as increased consumer expectations for service customisation and quality. The industry witnessed steady growth in subscriber additions, which increased the teledensity to over 75 per cent.
Some of the key milestones achieved in 2011 include the introduction of mobile number portability (MNP), 3G service rollout and release of the draft NTP. These three milestones will have a major impact on the sector.
Mohammad Chowdhury
The telecom sector continued to report dropping average revenue per user (ARPU), minutes of usage (MoUs) and capex in 2011. However, tariffs stabilised towards the end of the year. The key milestones for the year were the launch of 3G and MNP services.
Vijay Mani
Mobile service revenues of the top four Indian operators for the first three quarters of 2011 grew by about 15 per cent over the corresponding period in 2010. The total subscriber base reportedly grew from around 723 million at end-September 2010 to over 900 million at end-September 2011. However, there was considerable pressure on the profitability of operators, especially on account of rising network operating costs, 3G investments and the weakening rupee. The sector also faced challenges such as regulatory uncertainty.
Key positive developments, however, were the rise in tariffs and fall in dealer commissions, which marked a departure from hypercompetition. However, the tariff increase does not seem to have had a major impact on usage. While the subscriber base reportedly touched 900 million in 2011, there is still a major opportunity for future subscriber growth. When one considers the proportion of active SIMs in a multi-SIM usage pattern, the penetration in terms of unique subscribers is low.
The year 2011 also saw the commercial launch of 3G services. Though it was not a successful year in terms of 3G service uptake, it still marks an important milestone in the technological evolution of the Indian telecom market. Another important technological milestone was the launch of MNP. Although the record on successful portings might be debatable, MNP did not impact operators.
On the passive infrastructure front, concerted efforts were made towards cost optimisation. The mobile handset market also showed a strong performance. It is reported to have grown at 13-16 per cent to cross $6 billion in 2011. Also, several 3G handsets at sub-$100 levels were launched.
How has the Indian 3G landscape evolved over the past year? What developments can be expected in this space going forward?
Kunal Bajaj
Constrained investments have impacted the quality and reliability of 3G services. Since the 3G network is not robust enough, the service uptake has been below expectations. Given the promotional campaigns for these services and the availability of 3G handsets in the market, the industry was expecting higher adoption. The current 3G subscriber base has not even touched 20 million. However, it is important to consider that 2011 was the first year for 3G services and every technology needs time to mature. Going forward, faster growth of this segment is expected.
Ashish Basil
Most operators have launched 3G services in the country and the current subscriber base is estimated at 10 million. The lower-than-expected 3G penetration could be attributed to the lack of awareness about these services, high data download rates, low penetration of 3G handsets, etc. However, India being a late entrant in the 3G space, it is better placed to reap the benefits of proven technology, availability of low-cost equipment and handsets as well as data services, and the knowledge of consumption patterns as well as global 3G data and service pricing trends. This will not only help Indian operators to offer services at affordable tariffs, but also enable them to bundle 3G services according to customer requirements. Driven by this, the 3G subscriber base is expected to reach 72 million in 2012, and the adoption rate will be faster than in the Western world.
Benoy C.S.
3G service launch was good news for the telecom industry. While these services are gaining traction, the adoption has been below expectations. The ecosystem for supporting 3G uptake is slowly evolving. The Indian telecom market is now witnessing an increasing proliferation of smartphones and tablets, besides the launch of innovative services and applications. On the customer side, the demand for seamless mobility and on-the-go internet connectivity has been increasing. With these changes in the ecosystem, 3G service uptake is expected to pick up in the next couple of years.
Mohammad Chowdhury
3G service uptake has not been satisfactory. Therefore, to make an impact in this market, operators will need to develop and market innovative services through the right channels. The pricing and bundling of products like tablets will also play an important role in increasing 3G uptake.
Vijay Mani
The performance of the 3G segment so far is a cause of concern for operators. The 3G subscriber base at end-2011 was estimated at only 15-20 million, despite the increasing affordability of 3G-enabled handsets. There are several reasons for this. Some of them are transitory in nature including inflation, which may affect the customer?s propensity to spend, and the weakening of the rupee, which may have an impact on operators beyond balance sheet translation. These factors can affect the capital expenditure required for 3G network expansion. Also, the regulatory uncertainty surrounding 3G roaming arrangements could result in sluggishness.
Moreover, issues such as low levels of customer awareness may impact uptake despite high 3G network penetration. Also, sample studies and industry observations have suggested that a significant proportion of initial subscribers were dissatisfied with the 3G experience. Some of this dissonance may result from the lack of discernible differences in 3G content, which is still largely limited to browsing, email and social networking. The success of 3G services will be evaluated over a longer time frame.
What are the areas of immediate concern for the industry? What steps need to be taken by the government and telecom players to address these issues?
Kunal Bajaj
The major concerns are regulatory issues. These include allocating more spectrum in both the 2G and 3G space, formulation of the merger and acquisition (M&A) policy, 3G intra-circle roaming and the licence renewal policy. Any development in these areas will impact the sector. The government has accorded importance to the formulation of the NTP. Recently, it was announced that the final policy will be released in June 2012.
From the operator perspective, companies find it difficult to protect themselves from regulatory changes that cannot be anticipated. Therefore, operators need to devise strategies to intelligently maintain and improve their margins. They must focus on customer retention, revenue maximisation and ways to increase users? expenditure on services. This would be possible through proper customer understanding and segmentation, and by providing non-voice services to compensate for the competition in voice tariffs.
If some of the sector?s pending issues are clarified, 2012 can be a year of significant growth, business consolidation and increasing investments in the sector. However, if these challenges continue to exist, 2012, like the past year, will witness moderate growth and muted investments.
Ashish Basil
Due to hypercompetition and increasing pressure, the sector is currently reporting negative profits, EBITDA and cash flows, thereby making consolidation inevitable. In this situation, the incumbents would not be able to meaningfully participate in sector growth. In the medium to long term, the industry structure is expected to improve with six-seven players operating in each circle. Also, operators desperately need a suitable exit policy. It is important to create a special-purpose telecom finance corporation and rationalise the taxes on the overburdened Indian telecom sector, which spends 23-25 per cent more in levies than other Asian markets. The sector needs a clear regulatory road map in terms of licence renewal and spectrum allocation.
Benoy C.S.
The cut-throat competition in the telecom service industry is putting pressure on margins. To drive subscriber growth, operators are shifting their focus to rural areas but these subscriber additions are not translating into expected revenue growth. The low rural broadband penetration is still a major concern. Also, the poor telecom infrastructure in semi-rural and rural areas is a key impediment to tapping the huge rural market. The lack of basic infrastructure such as road and power adds to this and increases the time taken to roll out telecom services.
The high price of 3G spectrum has also slowed down sector growth. Huge investments have been made in 3G spectrum, which could have been used for infrastructure development. Spectrum scarcity is another issue and leads to higher capex for operators as they need additional cell sites to improve quality of service.
The regulatory charges in the telecom sector have a complicated structure because of multiple taxes. This impacts the implementation of telecom projects. Considering these challenges, the government needs to rationalise the complex tax structure.
Vijay Mani
Policy and procedural clarity is awaited on subjects such as the one-time spectrum fee, licence renewal fee, abolition of roaming and release of additional spectrum, including auctioning of the 700 MHz band. Also, the current system of tax levies for operators, which is being reviewed by TRAI, is another area that needs improvement. Both the government and the industry would need to collaborate to resolve these issues.
Another key area of concern is the meeting of rollout obligations by operators. This would require operators to consider the trade-off between the current average revenue per minute levels and future growth. They would also need to consider ways to optimise the operating expenditure, particularly energy costs.
In addition, low broadband penetration is a key issue for the telecom industry as well as the economy. The high cost of laying optical fibre cables on the operator side and high service costs for subscribers are key constraints in this regard. The government?s assistance for the broadband segment as envisaged under the draft NTP would play a critical role in achieving the desired levels of broadband penetration.
What are your views on the draft NTP? How will it impact the sector dynamics?
Kunal Bajaj
In the draft NTP, the government has focused on areas such as M&As, licence renewal and spectrum allocation. It seems that the government is going in the right direction with the M&A policy. Recently, the Telecom Commission approved some of TRAI?s proposals regarding the same. However, whether these proposals would become a part of the final policy remains to be seen. Intra-circle roaming will be a major area of conflict between the operators and DoT. This issue is expected to be addressed in the first half of 2012.
Ashish Basil
The draft NTP is a commercial guideline, comparable with one in any mature telecom market. The authorities have taken a 360-degree approach to address the concerns of all stakeholders, with a major focus on modernising the country?s broadband infrastructure, unified licensing, formulating the spectrum management act, indigenous research and development (R&D) and manufacturing, and connecting rural India for equitable and inclusive economic growth.
A key recommendation of the draft is a one nation, one licence regime, which would transform the industry and how it is perceived globally. The industry may see existing operators hiving off their services to network service operators (NSOs) and service delivery operators (SDOs), and the entry of new players such as airlines, FMCG majors and large beverage companies in the SDO space by leveraging their distribution network and a large brand presence. Also, existing operators or SDOs may diversify into new business ventures and leverage their brand. The sector could also witness mergers of NSOs and passive infrastructure companies to provide end-to-end network solutions to SDOs. The managed capacity and services model may emerge on a revenue-share basis.
Benoy C.S.
The NTP would take the Indian telecom sector to the next level of growth. Its main focus is to develop a decentralised telecom network, which offers seamless convergence of devices, technologies, etc. It aims to promote indigenous development of content, services and electronic equipment for the domestic as well as global markets.
As the groundwork for the rules and regulations is undertaken, an environment is being provided to put the sector on the consolidation trajectory. The government?s plan to develop a framework to facilitate consolidation and help the struggling operators to exit and return their spectrum would be beneficial to weaker telecom companies. However, the draft does not provide clear guidelines on how most of the objectives would be met or the timelines for a few of them.
Mohammad Chowdhury
The NTP is an opportunity for the government to set the balance right among the operators, DoT and consumers for the next few years. The policy is expected to address issues related to service access and the industry structure, and focus on strategic opportunities such as data as well as growth areas like m-health. The industry is hoping that the policy guidelines/objectives are practical and executable.
Vijay Mani
The draft NTP has an inclusive growth agenda. It addresses, among other things, issues related to mobile licences and spectrum management, M&A, tax reforms and broadband penetration. The timelines and manner of implementation, though, have not been made clear so far.
A key proposal is the delinking of spectrum from the mobile service licence. This would ensure more efficient utilisation of scarce spectrum resources as well as provide an additional impetus to data services delivery, including video. The policy is also aimed at facilitating industry consolidation. This is a much-needed step and needs to be followed up with more clarity on matters such as the road map for migrating the acquired licences and the mechanism for pricing of spectrum already held.
Further, the policy suggests the evolution of a framework for rationalising various taxes and levies. It also addresses the issue of broadband penetration, recognising broadband access as a basic necessity.
What expectations can the Indian telecom sector have from 2012?
Kunal Bajaj
The sector is likely to witness the launch of long term evolution time division duplex (LTE TDD) in 2012. Also, operators are expected to aggressively promote 3G services. Going forward, ARPUs will stabilise, initiatives towards increasing broadband penetration in rural areas will be taken, the National Optical Fibre Network (NOFN) will be implemented and there will be an increasing operator focus on non-voice services to enhance revenues.
Finally, if the relevant regulations are issued, the sector will witness the first wave of consolidation through M&As.
Ashish Basil
2012 will have something for all stakeholders. Subscribers can look forward to a decline in data tariffs, a marginal increase in voice tariffs, affordable 3G handsets and 4G experience. The mobile phone will become an instrument of empowerment that combines communication with proof of identity, secured financial and other transaction capabilities, multilingual services, etc. from a mere communication device.
Operators can expect more certainty in the regulatory environment, which will reduce competition and provide new revenue streams. Increasing penetration of the unique identification number facility and collaboration with banks will drive the use of handsets as wallets. Concerted efforts in the manufacturing space will encourage equipment companies to achieve self-sufficiency and reduce trade deficits. Global equipment vendors could also plan to set up base in India. However, the impetus to achieve the targets can be realised only through policy support and commitment.
Benoy C.S.
Major M&As and a steady movement towards consolidation are expected in 2012. Most of these activities are likely in the second half of the year.
Further, most of the broadband wireless access (BWA) spectrum winners plan to launch LTE, and are conducting lab and field trials for the technology. The commercial rollout of LTE networks is expected in 2012. This will drive drown the prices of high speed mobile data services.
Also, in 2012, the market will witness new combinations of the cloud, Ethernet and data centre services. Major activity is expected across the cloud service value chain. The small and medium business segment is likely to use cloud services. In 2012, we also expect the rollout of the NOFN.
Vijay Mani
The telecom industry can expect a follow-through on some of the positive policy proposals put forward in 2011. For instance, the industry is awaiting the details of the proposed M&A norms along with clarity on future spectrum allocation and pricing.
Operators are likely to make efforts to develop the content ecosystem for 3G and BWA. The recently signed agreement between Reliance Industries Limited and Network18 could lead to more content-based partnerships. BWA network rollout is expected in 2012, while LTE TDD dongles could be launched within another three months. However, the wider ecosystem will take some time to develop.
The year 2012 would be a critical period for expansion and stabilisation of 3G infrastructure. Operators might want to address customer awareness issues and introduce more compelling plans. Also, greater passive infrastructure sharing and energy cost optimisation would enable both operators and infrastructure providers to increase mobile penetration in rural areas, ease the pressure on profitability and reduce their carbon footprint at the same time.
