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250 million phones by 2007: Ambitious, but Achievable - Targeting 250 million phones by 2007

Discussion Board , July 15, 2005

With the government setting a target of 250 million phones by 2007, the race to meet the deadline has begun. tele.net asked industry specialists if this target was indeed attainable. The response was mostly positive, given, of course, that regulatory and policy issues (mainly spectrum, interconnection and ADC) are resolved...


India has set a target of 250 million phone lines, 18 million internet and 9 million broadband subscribers by 2007. Is this target achievable?

R.L. Dube: This target is quite optimistic. Before this, none of the operators, including BSNL, thought as ambitiously as this. However, the number correctly reflects the demand and requirement in the country. We were expecting to reach the target of 250 million phone lines latest by 2010 and had planned our operations accordingly. However, the minister has now raised the bar for all of us. We will do everything possible to meet the target. It is slightly difficult, but not impossible, especially with the large number of operators present in the market.

Nitin Gupta: The growth witnessed by the domestic telecom industry in the last few years has exceeded the most optimistic projections. In 1999, when the New Telecom Policy had set a teledensity target of 7 by 2005, many had wondered whether this would be achievable. The target was met in 2003, two years ahead of schedule. While the demand exists and the country offers great potential for improving telecom penetration, the net additions have stabilised at around 1.5 million subscribers a month.

The capacity expansions announced by various operators can create supply of not more than 75-100 million subscribers over the next two years. At present the coverage is confined largely to the urban areas. The operators will have to roll out extensively and penetrate deeper into the circles (including rural areas) to create enough supply to achieve the targets.

S.C. Khanna: The target of 250 million phones can be achieved provided the government takes the following necessary steps immediately. Private operators, CDMA and GSM, and the incumbent BSNL, should cooperate with each other to achieve the above goal. There is no denying the fact that the sudden growth of mobile and fixed line telephony was spurred by the launch of CDMA-based mobile services in early 2003, which set the market ablaze with imaginative prices and high quality services, including a dramatic lowering of the entry barrier. The government decision to introduce unified access licences was mainly responsible for the growth and we are continuously growing at a rate of 1.5 million to 2 million phones per month.

Rajat Sharma: India's telephony penetration as of March 2005 stands at about 102 million and internet penetration at 5.55 million. The telephony market has grown at a CAGR of about 34 per cent and the internet market by 23 per cent since 2003. Assuming the same growth rates till 2007 (unless some special steps are taken), the telephony penetration should stand at about 185 million and internet penetration at about 8 million. The target is extremely aggressive as it essentially means more than doubling the number of subscribers in the next two years, which have only come in over a span of eight years. In other words, some 200,000 subscribers are to be added every day (not considering the churn). Though daunting, this target can be achieved by strategising the journey to this milestone.

Mahesh Uppal: Even though telecom markets have outperformed forecasters in the past, I would hazard to suggest that the target of 250 million lines is perhaps ambitious. Future growth is largely expected to be in the mobile sector. A target of 250 million subscribers would imply, say, about 200 million who should be able to afford personal, mobile phones by paying about Rs 200-300 per month. When it made the licence unification proposals in 2003, TRAI had projected about 100 million wireless subscribers by the end of this year. At the current growth levels, it is unlikely this target will be met.

What policy and regulatory issues need to be addressed to achieve this target?

R.L. Dube: No particular regulatory changes are required to meet the targets. Regulation is very important for the market to function in its initial stages. However, the telecom sector and the players are quite mature by now. So we can now afford to relax the rules and move towards a freer market.

Nitin Gupta: TRAI recently recommended the spectrum policy for mobile communications. It is important for it to be implemented in a manner that it is acceptable to both the operator and consumers. Spectrum allocation for Indian mobile operators is amongst the lowest globally and an increase in spectrum could allow them to offer cheaper services. Further, a reduction in the access deficit charges (ADC) and revenue share would make services more affordable.

S.C. Khanna: It is extremely important that the government take some positive policy decisions to increase subscriber growth from 2 million per month to 3-4 million. One of the biggest hurdles plaguing the sector is inadequate spectrum allocation, which is a vital input for mobile and fixed wireless telephony. The key anomaly lies in the skewed spectrum allocation policies based on technology. This anomaly should be removed immediately with a single, transparent, clearly defined and technologyneutral spectrum allocation policy for all mobile and fixed wireless services. The government must allocate additional spectrum to all service providers in the specified bands for services, in accordance with international standards. This will facilitate quick rollout of networks in urban, semirural and rural areas. The allocation of spectrum should be brought closer to the international average of 15+15 MHz. Internationally, CDMA networks operate in the 800 MHz or 1900 MHz band in order to provide the benefits of the technology to the customer.

Moreover, presently there are a number of flaws in the definition of the adjusted gross revenue, which is used to calculate the licence fees payable to the government on a revenue share basis. The government should correct this anomaly which would give adequate relief to service providers in terms of financial resources that are much needed for largescale expansion of networks.

The ADC is at present one of the most vexing issues for the sector. The collective industry view is that there is no access deficit of the kind being forced upon the sector. The incumbent's profitability is testimony to this. Private operators paying ADC to BSNL is like financing the competitor. The USO Fund already exists to finance access deficit, if any. It is absolutely imperative to rationalise the USO and ADC as they are both serving overlapping purposes and the burden is being passed on to customers in one way or the other.

Then there are interconnection-related issues. The industry is facing enormous problems on account of lack of adequate interconnection. The incumbent controls almost the entire fixed line interconnection. There is need to expedite interconnection with BSNL, which should play the role of an elder brother and give interconnection as and when required by private players.

Rajat Sharma: Realising this target will require players to synergise and optimise utilisation of their existing infrastructure. Unbundling of the local loop, reducing the cost of bandwidth for broadband and resolving the spectrum issues (such as release by security and defence forces) are steps that need to be taken at the earliest, and conflicts between the incumbent and other players need to be obviated.

Mahesh Uppal: The biggest issue is the high level of investment required for providing telecommunications in the rural areas where access is less than 2 per cent of the population. Currently, rules require you to have a licence for a whole circle, which can often be larger in size and population than many European countries for example. This is the opposite of what is required. For rural communications, all regulatory plugs will need to be removed. Further, incentives like free spectrum, licence fee waivers, interconnection terms that favour those who take financial risks to serve rural areas, should be provided. This need not mean subsidies forever. They could continue till a threshold level of connectivity, say at least 5 per cent teledensity, is achieved.

What measures are being taken by mobile operators to increase the subscriber base?

R.L. Dube: All operators, including BSNL, are making efforts to procure equipment that will enable them to add more lines and meet the increased targets. BSNL plans to add about 80 million lines over the next three years. In fact, additional customers can join us with more value-added services as per present trends at very reasonable rates.

Nitin Gupta: All operators have announced plans to increase their coverage area. This will increase the reach for consumers. Marketing innovations like micro prepaid and electronic recharge have helped operators in increasing their subscriber base. Network infrastructure sharing is an area that is yet to be explored fully to improve the economics of providing services in uneconomical areas.

S.C. Khanna: We are expanding our networks, be it CDMA or GSM. Our tariff plans are changing; the cost of entry is coming down, which is a very important point. The entry cost now varies from Rs 1,600 to Rs 1,800. So, it's very easy to get a mobile connection these days.

Rajat Sharma: The players have adopted a two-pronged approach. They are going in for aggressive marketing on the one hand to woo more customers in an effort to increase capacity, coverage and quality by employing lower network cost equipment. On the other, they are looking at incorporating newer technologies to optimise customer acquisitions at lower operating costs. Operators are especially bullish on targeting rural and semi-urban markets to tap the huge potential that exists there.

Mahesh Uppal: More and more innovative schemes like cheaper second connections, attractive tariffs for closed user groups, bundling of voice and data services, and low-priced handsets are on offer. This will help expand services even more in small and large cities. However, the economics is still not attractive for mobile phone companies to provide rural services. For this, much more innovation and a long-term vision are required from them as well as from the regulator and the government.

What is the future of fixed line services in India?

R.L. Dube: Of course, the growth in fixed line is not as fast as it used to be. Earlier the growth rate was 20 to 25 per cent. Now it has decreased to about 5 per cent. The rapid advent of mobile phones, thanks to low costs, has drawn consumers away from landlines. However, mobile phones will sooner or later reach a point of saturation.

I feel landline phones are evergreen because the cost of communication through landlines will always be lower than that of mobile phones. Also, the quality of landline service is superior. And landlines offer many value-adds like internet and broadband which are yet to become popular with wireless technology.

Nitin Gupta: Growth in the fixed line segment is likely to continue, though not as high as wireless, driven largely by fixed wireless terminals. Looking at the facts, a total of 590,000 subscribers were added in the fixed line segment during April 2005, taking the subscriber base to 46.5 million. In the mobile segment, 1.44 million subscribers were added during the month (1.09 million GSM, 350,000 CDMA). As telecom operators are increasingly looking to provide triple-play services, fixed line services will play an important role in providing integrated offerings of voice, video and data.

S.C. Khanna: Fixed line is here to stay. While mobile phones can be compared to a wristwatch, fixed line phones are like the wall clock or the timepiece on the sideboard. Private players are already adding 300,000 to 400,000 fixed line subscribers every month, which will grow as broadband penetration increases. Most of the integrated players are rolling out optic fibre cables with copper in the last mile. With services like broadband, high speed internet and triple play set to come in, fixed line is going to be a lucrative business in the year to come. We currently have 47 million fixed line phones; we expect to achieve a target of 85 million by 2007, that is, there will be 165 million mobile phones and 85 million fixed line phones.

Rajat Sharma: Fixed line with wireless as last mile connectivity holds a promising future in India. Traditional fixed line, wireline, will not see high growth due to the high last mile connectivity cost. However, fixed line with limited mobility holds potential, but only if disputes like ADC and limiting the mobility to the premises are resolved.

Mahesh Uppal: Expansion of the fixed line network is slowing down because of the high costs compared to mobile networks. However, wherever fixed lines do exist, they are perhaps the most cost-effective way of delivering voice and data services. They are still very important for broadband services. This is, in a sense, a challenge for regulators, since mobile services are cheaper to roll out but not yet as effective for broadband and in the short term at least, users may have to contend with poorer quality internet services where only a mobile network is available.

Given the broadband policy guidelines, can the internet and broadband targets be achieved?

R.L. Dube: Yes, these targets can be achieved. However, one hurdle is the low level of PC penetration. At present, a common man cannot afford to buy a PC. A PC should cost about Rs 5,000 to Rs 10,000. Growth of PC penetration is an important determinant of growth in internet and broadband. Other factors are entertainment content, video-on-demand and TV.

Nitin Gupta: The broadband targets depend on a host of reasons. First, aggressive growth in PCs. PCs are the predominant mass-market-user interface for both internet and broadband access. The PC population is currently estimated at 10 million. Second, there is lack of last mile connectivity, except for the incumbents who have last mile advantage. Other operators are yet to find a scalable solution. Competition would also be essential for driving down prices for internet/broadband access, and thus help penetration.

Rajat Sharma: The broadband policy is a confirming first step. Plain vanilla bandwidth along with some killer applications and good quality of service can surely do the magic. More importantly, last mile unbundling has to take place for infrastructure sharing to encourage players to invest the capital required to reach the target.

Mahesh Uppal: The targets are ambitious. There are still many regulatory hurdles preventing effective competition. The market is still biased strongly in favour of the state players, BSNL and MTNL, who are able to leverage their dominance in the fixed line business and undercut most standalone ISPs, many of whom have already quit the market. For instance, accessing BSNL's internet service requires nothing more than a PC with a modem if you are using their phone. BSNL and MTNL add the internet charges in the phone bill. But using the services of standalone ISPs requires a prepaid account. For internet services to take off in a big way, TRAI has to take steps to make the ISP services market work better.



 
 

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