The Indian telecom sector has reached an inflection point. The industry, which has expanded exponentially over the past decade, is now set to enter the next phase of growth with data services being the prime driver. This transition requires a change in business models and strategies by industry players. tele.net talks to telecom experts about the emerging scenario in key stakeholder segments…

What are your views on the changing business models of the key stakeholder segments, namely, telecom operators, infrastructure providers and value-added service (VAS) providers?

Kunal Bajaj

Telecom operator segment

Significant growth is expected in the telecom space in the coming years. There is talk about the industry reaching twice its present size in terms of subscriber base. Although the current subscriber base is large, half the population is yet to be covered by the sector. This is evident from the low teledensity numbers. So, there still exists a huge opportunity in the sector.

Operators are also looking at other areas to venture into apart from voice. A lot of players are focusing on convergence. Voice, however, will continue to be the key driver. In 2016, we expect 1.3 billion telecom subscribers in India. Voice will be the core business though there are other businesses like broadband, media and internet. Most of the players, today, are providing small and medium enterprise (SME) services around data and application provisioning. They might move into cloud services for SMEs going forward. They are also diversifying into other related areas, and almost all have invested in tower companies and other passive infrastructure assets. So, voice will not be their only focus. We see overall VAS and data services contributing a major share of revenues.

Infrastructure provider segment

Infrastructure providers are facing a problem in terms of tenancy ratios. As most operators have expanded their presence, tenancy is stagnating. So the players are exploring other business options to remain profitable. Backhaul is one of the key opportunities that they are looking at.

Further, infrastructure companies need to move up in the value chain and be granted the status of operators if they want to increase their margins. Hosting a site is not going to be as attractive in the future as it looks today because margins will get squeezed going forward. Prices are going to freeze, especially in areas where you have multiple sites from different operators. There would be challenges in sustaining the traditional passive infrastructure tariff. These companies definitely need to venture into new areas like fibre optic networks. They can provide fibre optic backhaul from their towers as well as an aggregate bandwidth over this fibre optic cable.

In general, they would definitely want to see themselves moving up the value chain. Right now it is tough to see which areas they will venture into in the future.

VAS provider segment

The industry is at an inflection point. We believe that VAS is expected to take off in a big way. By 2016, we see VAS contributing about 31 per cent of revenues, of which data services will have a share of more than 50 per cent. We have data penetration, feature phones, social networking, etc. that are driving the growth. The next phase of growth will be driven by content. Operators would need to promote data, step up their marketing initiatives and strengthen their billing infrastructure.

Benoy C.S.

Telecom operator segment

Telecom service providers (TSPs) are facing a myriad of challenges, be it increasing network traffic loads, declining revenues or increased competition from “over-the-top” players. The Indian TSP segment has now realised the need for transformation. The business models and processes that have been in place for decades cannot support complex new business and customer demand. TSPs have to transform their businesses to become customer focused, cost conscious and efficient.

They will face threat and competition from computer vendors (like Apple), software vendors (like Microsoft) and internet vendors (like Google) as well. The technology and market conditions that are making managed and cloud services, and application stores attractive to customers are making telecom operators less relevant to the customer experience. They thus face the risk of being marginalised as bit pipe providers. To mitigate that risk, telecom operators need to aggressively start offering cloud services and leverage its existing customer base. They are also uniquely positioned to define and deliver cloud services as a stand-alone product and as a development environment for businesses in multiple industry verticals.

In the years to come, we are expecting operators to diversify their revenue sources, moving from an overdependence on voice to a broader range of services such as convergent voice and content and advertising. They will try to achieve these objectives in a number of ways including moving into the adjacent consumer markets of media and enterprise IT services.

TSPs  will also recognise the value of collaborating more extensively with external partners for cost efficiencies, lower risk of technology obsolescence, and improved business responsiveness and agility. The strategic question facing operators, however, is whether their distinctive capabilities in the existing market will provide them with an advantage over the incumbents and new market entrants in media and entertainment, IT services or advertising.

As network access and communication services become commoditised, customer experience and service quality will become the differentiators for the operators. They are frantically trying to manage customer “touch points” and measure the quality of experience each time a customer is in contact with their network or customer care unit.

The sustainable competitive advantage will depend on the ability of TSPs to align their distinctive capabilities, specifically their strategic assets in fixed voice, broadband and mobile networks as well as their customer relationships and insights, with the needs of non-traditional telecom markets to deliver new experiences that others are unable to match easily.

Infrastructure provider segment

The intense competition in the TSP segment is driving away carrier focus from networks and technology towards services and customers. As they spend increasing resources on marketing and customer service, operators are relying more and more on infrastructure providers to be their technology advisers, implementers and partners.

Indian TSPs are aggressively transforming their networks in a bid to achieve efficient, seamless and speedy delivery of multi-play services, both mobile and fixed, over converged and simplified network architectures. They are also aiming to simplify their overall network to a horizontal-layered architecture enabling converged services like voice, video, data, Web 2.0 and multimedia, running on a common core to be delivered seamlessly to multiple access devices.

While these are big opportunities for them, network infrastructure providers are also facing huge competition amongst themselves. Apart from the traditional network equipment/infrastructure vendors, system integrators and consulting firms are playing both against and alongside them, delivering a variety of network-related services to telecom operators. IT service firms are especially involved in providing services for OSS integration, and they are often partnered formally or informally with one of the large equipment manufacturers.

After being burned in the telecom downturn in the early 2000s, carriers now increasingly expect suppliers to assume part of the risk in deploying new network architecture. This occurs in managed service contracts where vendors provide assets and staff, and there are service-level agreements and key performance indicators to meet. Many TSPs are in the process of deploying IPv6 in their public and private networks. This also provides opportunities for network service providers. They will adopt a “network consultant” approach in providing clients with both innovative IPv6 services and winning migration strategies, and also help them in increasing revenues through new IPv6 devices, content and services.

VAS provider segment

With the increasing adoption of 3G, the sector will see more mass acceptance  of VAS, and its revenue contribution to the telecom industry is going to increase significantly. The VAS market in India is fragmented and has a large number of participants such as operators, content providers and aggregators, and system integrators. There are still arbitration and reconciliation issues in the VAS value chain, as market participants are on the lookout for more mature business models. The market fragmentation has spawned differences regarding revenue sharing among stakeholders. Despite the intense competition and price wars, there is still room for a better end-user experience and customisation of applications.

The way forward is to differentiate the VAS offerings by content-based and usage-related innovations (pay per use instead of subscriptions) rather than price. Market offerings such as managed VAS will enable end-to-end management of its entire portfolio, which is a huge advantage in a fragmented VAS market.

Market participants should aim to drive active VAS usage among mobile customers. They can achieve this by focusing on enriching user experience in a way that allows customers to derive maximum value. Innovative VAS offerings, introduction of 3G technology, operator consolidation and sachet VAS are some key factors that can hike VAS adoption rates. The industry should also focus on delivering more value with applications to facilitate transactions related to banking, education, travel, entertainment and commerce. To sustain this growth, all the stakeholders will have to work together and create a self-sustaining ecosystem. Similarly, it would take a joint effort from all the concerned players to overcome the roadblocks and unlock the true potential of mobile VAS in India. The key addressable barriers would be to ensure greater rationality in revenue sharing between telcos and content developers, and copyright protection, and develop higher quality content.

Amit Sachdeva

Telecom operator segment

The Indian telecom success story continues unabated, with the sector growing at more than 35 per cent annually in terms of subscribers. This exponential growth can be attributed to the wireless segment, primarily driven by voice-based services, which contribute about 90 per cent to the total revenues.

However, the overall growth of the industry depends on other sustainability factors such as revenue growth, profitability and capex as well. Revenue growth has decelerated in the past two years, during 2009 and 2010, to a meagre 7 per cent and 5 per cent respectively from 22 per cent in 2008. With the entry of new players in the market, tariff wars were re-initiated in 2009 with the entrants leveraging the pricing tool to grab an incremental share of the wireless subscriber market, which created inelasticity of demand, impacting operator top lines. Tariffs have been falling in spite of the fact that the inflation rate has been fluctuating between 9 per cent and 16 per cent over the past three years. In a well-represented sector, only a handful of telcos are cash positive in India. To ensure sustainability, along with adopting cost optimisation measures, leading operators are now increasing tariffs by 15-20 per cent.

To stem the secular decline in incremental revenues due to the commoditisation of the voice market, operators have shifted their focus to data services. Telecom service revenues are expected to reach $51 billion by 2015.

However, the Indian telecom space is highly competitive and dynamic in nature. The presence of as many as 14 operators, with 9-10 in each circle and competing for the same revenue pie, as well as rising financial pressures are expected to drive consolidation in the industry.

Infrastructure provider segment

As the country’s mobile network expanded, operator coverage ceased to be a sustainable source of competitive advantage. In order to rationalise capital expenditure and reduce the time to market, operators and independent tower companies began to share their passive infrastructure and compete through branding and distribution. The reduced cost burden for operators has benefited end-users with the lowest tariffs across the globe.

The country currently has a tower base of 360,000 catering to 612,000 base transceiver stations. The tower industry registered total revenues of $3 billion in 2009-10. Passive infrastructure sharing resulted in savings of over $1.5 billion in 2010, with many operators saving about $300 million each.

The next round of growth would be achieved as a result of the commercial implementation of 3G and wireless broadband based on next-generation networks. The next-generation technology will primarily result in increased tenancy on the existing tower base. The growing demand for data services is expected to augment the number of base stations per tower. The increased focus on rural penetration will also play a pivotal role in increasing the tower base. The focus in rural areas will be on erecting new towers in the short run followed by enhanced tenancies in the long run.

Over the next decade, the wireless subscriber base is expected to reach 1.5 billion, which will be catered to by 500,000 towers with an average tenancy of 2.3x. Future revenues will depend on the regulatory policy being mapped out for the industry. At present, tower companies are not required to pay a licensing fee. This may change with the new telecom policy that is expected to be announced later this year.

VAS provider segment

With the advent of 3G services, the mobile VAS industry is expected to reach $15 billion by 2015 from the present $3.2 billion, recording a compound annual growth rate of 39 per cent and contributing up to 32 per cent of overall service industry revenues.

This high revenue will be generated due to the demand for high speed data services such as mobile TV, video calling, online browsing, music-on-demand, and other bandwidth-intensive services. The focus of telecom operators has been shifting from infotainment services to utility services such as mobile commerce, mobile health, mobile education and mobile agriculture. Mobile marketing is poised to be another big revenue generator for telcos and represents an opportunity worth $200 million by 2015. Mobile banking alone represents an opportunity worth more than $1 billion for telecom operators by 2015. At present, 54 per cent of the population has mobile phones compared to the 15 per cent banked population. This indicates scope for coverage through mobile phones.

With the majority of the incremental revenues coming from data services, the current VAS revenue-sharing model, which is in favour of operators, is expected to be skewed in favour of VAS vendors, thus offering huge potential for growth and innovation.