How did the Indian telecom sector perform during 2011? What were the key milestones achieved by the sector?

Mobile services revenues of the top four Indian operators for the first three quarters of calendar year 2011 grew at nearly 15 per cent in rupee terms over the corresponding period in 2010.  The total subscriber base of the sector was reported to have grown from ~723 million at the end of September 2010 to over 900 million at the end of September 2011.

Along with this growth in volume and revenue, however, there was considerable pressure on the profitability of operators, especially on account of rising network operating costs, 3G investments (with sluggish 3G uptake) and the weakening rupee.  The sector also faced other challenges such as regulatory uncertainty.  Let us, however, focus on some of the key positives.

A key positive development for the industry has been the rise in tariffs and fall in dealer commissions, which marked a clear departure from hyper-competition seen earlier.  Importantly, the rise in tariffs does not seem to have had a major impact on usage.  While the subscriber base reportedly touched nearly 900 million in 2011, there is still significant opportunity in terms of future subscriber growth.  When one considers the proportion of active SIMs and the multi-SIM phenomenon, the penetration in terms of unique subscribers could, by some estimates, be low – maybe even below 40 per cent.

However, given that this penetration opportunity lies in non-urban/rural areas, it may not be realised at current ARPM levels.  2011 also saw the commercial launch of 3G services in India and while it wasn’t a successful year on this count, it still marks an important milestone in the technological evolution of the telecom market in India.  The year was witness to another important technological milestone for the sector, i.e. mobile number portability (MNP).  Although the record on successful portings might be a moot point, one could say that MNP did not produce any adverse effects despite some initial aggression in advertising and dealer commissions.

The passive infrastructure sector saw a number of important developments.  There were concerted efforts at cost optimisation, including measures such as energy cost savings initiatives and a move towards more “corporate” O&M vendors, i.e. those with a more professional approach to delivering O&M services.  There have been some very interesting results on the energy cost front suggesting that savings of 15-20 per cent or even more may be within the realm of achievability for the industry.

A lot more work needs to be done but the signs are positive.  The mobile handsets market in India also showed strong performance.  It is reported to have grown at 13-16 per cent to cross $6 billion in 2011. Some market participants have attributed this to changing preferences and continuing fall in replacement cycles.

We also saw the launch of a number of 3G handsets at sub-$100 levels with reasonable quality, which mitigates at least one of the issues affecting the potential for 3G in India.

Other than mobile services, a key area to watch is broadband.  Broadband penetration is generally considered to be a key factor driving economic growth.  For the nine months ended September 30, 2011, India saw its broadband subscriber base grow by ~17 per cent.

Considering the significant under-penetration of broadband (~13 million subscribers versus ~200 million plus households), this represents a low growth rate and a key area of under-performance for the sector and the overall economy.

The year witnessed the successful commercial launch of 3G services by most of the operators. How has the 3G landscape in India evolved over the past one year? What transformation can be expected in this space over the next few years?

The record thus far on 3G would be a cause for concern for the operators.  The 3G subscriber tally towards the end of 2011 was estimated at only 15-20 million, despite increasing affordability of 3G-enabled handsets in the market. Projections made earlier were often 3 to 5 times the actual results thus far.

Also, the existing number of wireless data subscribers (~375 million in September 2011) clearly points to conspicuous under‑penetration of 3G.  A number of reasons are attributable to this, some of a transitory nature and others more fundamental in terms of their impact.  Key transitory issues include inflation, which may be affecting customer propensity to increase mobile services spend, and the continuing weakness in the rupee, which may be having an impact on operators beyond balance sheet translation, i.e. on actual cash flows in terms of debt service payments.

This may be affecting capital expenditure required for 3G network expansion.  Also the regulatory controversy around 3G roaming arrangements could account for some of the sluggishness – indirectly if not deliberately.  There are, however, some issues that run deep and may affect uptake even after 3G network penetration is increased.  Key among these is low levels of customer awareness and/or buy-in.  Independent studies and media reports suggest that a section of the addressable market appears to not have a reasonable understanding of what 3G could do for them (for instance, they may associate 3G only with a limited feature set such as video calling). Retailers, for their part, may not have had a clear incentive to educate/persuade the customer on 3G until recently; higher commission rates for 3G have been noted only in recent months.  Still another section of the market may perceive 3G tariffs to be expensive compared to 2G data tariffs and not commensurate with the incremental value from 3G.  Also, some sample studies and industry observations suggested that a significant proportion of initial subscribers were dissatisfied with their 3G experience.

Some of this dissonance may be related to lack of discernible difference in 3G content.  Content is still largely limited to browsing, email and social networking, which are not precluded by 2G. It therefore appears that development of a content ecosystem may not be an immediate strategic priority for operators currently.  Other issues such as spectrum scarcity and trying to leverage 3G for its better scale economics on voice may be higher on the agenda.

3G has had a go-to-market timing advantage over BWA.  But there are signs that 3G operators may stand to lose some of this advantage, i.e. the sluggishness on 3G rollout / uptake and reports of some progress on TD LTE (dongles may be launched in a few months). One could, therefore, expect 3G operators to try and address some of the above fundamental issues in 2012 such as content issues.  Local language content and video are generally considered to be prime candidates for any such improvement initiative.

Having said this, 3G in India is not simply a 2011-12 story.  Its success would have to be evaluated over a longer timeframe.  We’d need to watch operators over the medium term for strategic moves on 3G network expansion, customer education, pricing, retailer engagement and content ecosystem development.

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?

Regulatory uncertainty is perhaps the primary concern for the mobile services industry.  Policy and procedural clarity is awaited on subjects such as one-time spectrum fee, licence renewal fee, abolition of roaming and release of further spectrum, including the auctioning in the 700 Mhz band.  Further, the current system of tax levies for operators, an issue taken up by TRAI, is another area for improvement.

Both the government and the industry would need to collaborate to resolve these matters.  The success of such collaboration may depend on the extent of flexibility shown by key stakeholders.

Another key area of concern for the industry in mobile services is meeting rollout obligations and generally increasing mobile penetration.  This would require operators to consider the trade-off between current ARPM levels and future growth.

They would also need to continue to consider ways to optimise their operating costs, particularly energy costs.  Operators have been struggling to control their energy bills in the face of increasing diesel prices and high levels of diesel pilferage especially in rural areas. Solutions such as non-renewable energy require capital expenditure and could entail long pay back periods.

As such, energy service companies (ESCOs) with low-capex solutions have an important role to play in helping passive infrastructure companies and operators set and achieve compelling energy cost savings goals.  There is also opportunity to optimise SG&A cost.  2011 saw reduction in retailer commissions on 2G.  There could be scope for more savings through rationalisation of subscriber acquisition cost, i.e. focussing on genuine subscribers rather than additional SIM sales.

In addition to the above, there are significant opportunities in passive infrastructure sharing.  Continued rollout discipline for new towers will deliver higher tenancies for tower companies, shared costs for the operators and overall reduction of capital expenditure for the industry.  A related and important area of opportunity for passive infrastructure providers and other stakeholders in non-urban/rural India is the development of other services around telecom towers such as ATM services, rural supply chain / logistics services, etc.

Apart from the above matters relating to mobile services, broadband penetration is a key issue for the telecom industry and for the economy.  As indicated earlier, India has very low penetration of broadband which could hurt future economic growth.  The high costs for the operator of laying optical fibre cables (OFC) and high costs for the subscriber (cost of a PC and current levels of monthly usage charges) are key constraints in this regard.  BSNL, which has thus far led broadband penetration in India, especially in non-urban areas, has been facing numerous financial and operational issues.

Government assistance for broadband as envisaged under the draft NTP, 2011 would play a critical role in achieving desired levels of broadband penetration.  It’ll also be interesting to note how the BWA story unfolds and what impact it may have on broadband penetration.  

What are your views on the draft NTP 2011? How will it impact the Indian telecom dynamics?

The draft NTP 2011 has an inclusive growth agenda.  The draft policy addresses, among other things, issues relating to mobile license and spectrum management, M&A, tax reform and broadband penetration. Details on timelines and manner of implementation though, are still being awaited.

A key idea proposed by the draft policy is the delinking of spectrum from mobile services license. This is a laudable goal that would bring about more efficient utilisation of scarce spectrum resources at an industry level and provide additional impetus to data services delivery, including video.  Once again though, details on how the policy will be implemented are awaited.

For instance, the policy is silent on the treatment of existing 2G spectrum and the manner in which it will be migrated under the new licensing framework.

The new policy draft also indicates the intent to facilitate industry consolidation.  The industry would welcome such intent given the large number of operators today (uncommon by global standards) and the associated risk of hyper-competitive practices such as price wars.  When considered along with the recent acceptance by the Telecom Commission of TRAI’s recommendations of higher revenue market share and spectrum holding thresholds, this is a much needed step in the right direction and needs to be followed up with more clarity on matters such as the roadmap for migrating acquired licenses and the mechanism for pricing of spectrum already held.

Tax reform is another area taken up in the draft policy.  It suggests evolving a framework for streamlining and rationalising the numerous taxes and levies incurred by the sector.  Though dependent on the details of the framework, the impact of this initiative could be expected to be positive for operators and subscribers.

The draft policy also addresses the issue of broadband penetration, recognising broadband access as a basic necessity. It targets 175 million broadband connections by 2017 and 600 million by 2020 at a minimum download speed of 2 Mbps.

To achieve this, the policy proposes an institutional framework to coordinate between different government departments for laying of OFC networks up to village panchayats.  It also proposes to mobilise the Universal Service Obligation (USO) fund for this purpose.  To stimulate subscriber demand, the policy plans to promote content development in vernacular languages.

There is no arguing the criticality of these policies and the benefits for a variety of stakeholders.  Concrete action plans would need to follow especially in light of the aggressive targets.

What expectations can the Indian telecom sector have from 2012?

The telecom industry might expect to see follow-through on some of the positive policy proposals put forth in 2011.  For instance, details on the proposed M&A norms would be eagerly awaited along with clarity on future spectrum allocation and pricing.

2012 may also be a very interesting year for the unfolding of the 3G story and progress on the BWA front.  It’ll be interesting to see what efforts are made by operators to develop the content ecosystem for 3G and BWA.  This could have a significant impact on content providers.  The Reliance Industries and Network18 deal was marquee in this regard and could be the harbinger for more content deals/partnerships.

Industry participants and customers would be eagerly awaiting the launch of BWA services.  TD LTE dongles could reportedly be launched by March 2012, though the wider TD LTE ecosystem is reported to take much longer to develop.  A fair amount of BWA network rollout though is expected to happen this year and this would have a positive cascading effect on infrastructure providers, equipment providers and O&M vendors.

Further, 2012 would be a critical period for expansion and stabilisation of 3G infrastructure aimed at improvement in subscriber uptake. In addition to addressing the content ecosystem, operators might want to address customer awareness issues and introduce more compelling plans.

The year may also see continuation of initiatives to optimise energy costs such as increasing adoption of renewable sources of energy and the use of fixed energy-cost models, on the back of greater engagement by ESCOs.  Passive infrastructure sharing could be another important trend to watch in 2012, including models such as in-building solutions and distributed antenna systems. Ultimately, greater passive infrastructure sharing and energy cost optimisation would enable both operators and infrastructure providers to increase mobile penetration into rural areas, ease the pressure on profitability and reduce their carbon footprint at the same time.

One would also like to see some progress on development of other services around telecom towers such as ATM services, rural supply chain / logistics services, etc.  This, along with developments in the broadband story, could be an important inflexion point for India’s non-urban/rural economy.