The Indian telecom sector has witnessed tremendous growth over the past decade, driven primarily by the wireless segment. The next level of growth will come from the rural regions and the rollout of 3G services. 3G is particularly relevant for the Indian telecom market as it will enable the country to meet its target of 20 million broadband subscribers by the end of 2010. While 3G was first implemented in Japan in 2001 and today, nearly 132 countries across the world have deployed it in some form or the other, India is amongst the last few countries to adopt this technology extensively.

Currently, the country has over 2 million 3G subscribers, serviced by the stateowned incumbents Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL). They were allocated 3G spectrum almost two years ago and thus, have had a headstart over the private players.

The telecom industry, however, is readying itself for a wider launch of 3G services over the next year. After several rounds of postponement, the 3G auctions finally began in April 2010, and the auction process has been progressing smoothly.

The auction process

With the reserve price of a pan-Indian block of 3G spectrum fixed at Rs 35 billion and three to four blocks of 3G spectrum to be auctioned, the government had initially expected to mop up about Rs 400 billion.However, 3G auctions in India, like elsewhere in the world, have far exceeded expectations as the government is now likely to garner close to Rs 639 billion as a result of aggressive bidding by operators.

Paired spectrum of 5 MHz is being auctioned for 3G in the 2.1 GHz band.While four slots each are being auctioned in the Punjab, West Bengal, Himachal Pradesh, Bihar and Jharkhand circles, only three slots are being auctioned in the remaining 17 circles. The companies participating in the process are Bharti Airtel, Vodafone Essar, Tata Teleservices Limited (TTSL), Etisalat DB, STel, Videocon Telecommunications, Reliance Communications (RCOM), Idea Cellular and Aircel. The spectrum, however, is likely to be allocated by late 2010, implying that the commercial launch of 3G services will only be possible in 2011.

On Day 30 of the auction process, the all-India bid price crossed Rs 158.14 billion. Among individual circles, Delhi and Mumbai have so far witnessed the maximum activity. While the highest price for the Delhi circle has reached Rs 30.33 billion, the Mumbai circle is close behind, at Rs 29.99 billion. The Karnataka circle has witnessed the third highest bid of about Rs 15.64 billion followed by the Tamil Nadu circle at Rs 14.65 billion. The Maharashtra circle has also elicited considerable interest with bids touching Rs 12.45 billion.However, the response in the Category B and C circles has so far been tepid.

Funding requirements

The investments needed for the launch of 3G services are expected to be in excess of $4 billion. While experts had pegged the value of 3G spectrum at $2 billion, it has so far been valued at over $3 billion.Investment patterns in the industry are expected to be largely diversified, including direct investments from shareholders and strategic investors, borrowing from local and international financial markets, and vendor financing from suppliers.

However, operators are already facing unprecedented margin pressure due to the introduction of schemes like per-secondbilling and the intense competition in this sector. To address the operators' ability to meet the huge capex requirements, the government has provided flexibility to telecom companies to fund their auction spends. According to the revised guidelines, telecom companies are permitted to pay the spectrum fee from rupee resources, and then refinance it with longterm external commercial borrowing (ECB) under the approval route.

However, as per industry experts, despite government efforts and the huge capital expenditure programmes that have been executed by the operators, the large debt funding of the additional investment on 3G spectrum licences is likely to exert further pressure on their already stretched balance sheets and operators are not likely to see a return on their investment for at least three years.

Trends in 3G adoption

Analysts have predicted that due to the high cost of acquiring 3G spectrum in the country, rapid growth in the 3G space will not take place overnight. This is because 3G will initially be rolled out only in the top 55-100 cities across the country, as a nationwide rollout will be unviable in the initial phase. The relatively high cost of 3G handsets is likely to act as another deterrent to early adoption of the technology. The price of 3G phones currently ranges from Rs 8,000 to Rs 35,000. Of course, handset manufacturers are making efforts to scale down the cost of 3G phones to increase the affordability and adoption of 3G in the country.

Analysts believe that 3G spectrum will initially be used to ease the spectrum crunch that operators have been facing in their existing 2G networks. They have also predicted that the rollout of 3G is expected to be easier for the incumbent operators who already have the necessary tower infrastructure in place. This is mainly because it will be easier for them to move their 2G voice traffic on to 3G while only using 50 per cent of the total 5 MHz of allocated 3G spectrum. The remaining 50 per cent will still be available for offering high speed data services.

However, since India is primarily a voice market with non-voice revenues accounting for only 9-10 per cent of total operator revenues, data services are likely to remain only a niche offering in the short term, targeting mainly affluent consumers and high-end business users. However, in the long term, these services will lead to a rise in data revenues, which will help to stem the fall in the average revenue per user (ARPU). This has been the observed trend in other countries as well.

For GSM operators, deploying 3G services will enable them to retain their high-ARPU customers by offering better quality services. This is extremely vital since the government is in the process of introducing mobile number portability.Even in the case of dual-technology providers such as TTSL and RCOM, acquiring 3G spectrum is important as it will enable them to utilise the spectrum and continue to leverage their evolution data optimised (EVDO) capabilities on the existing CDMA spectrum and infrastructure for data-centric wireless broadband.

The launch of 3G is also likely to see handset bundling on a larger scale for better service-device integration.Incumbent GSM operators are likely to offer reverse bundling (where handsets are bundled with connections and voice minutes) and carrier bundling (where handsets bought by the operator are sold as a co-branded offer along with a connection), to all consumer segments, including corporates, professionals, youth and even incremental low-ARPU subscribers. Dual-technology players will offer all three types of bundled models –­ the above two and a subsidised carrier bundling model, where handsets will be sold along with the connection, with some subsidy offered in the handset price.

While in global markets 3G is viewed as a service primarily for urban areas, in India, it will make an invaluable contribution to the rural areas. With higher data speeds, 3G will become the predominant platform to achieve the government's broadband objectives as well as to undertake key social initiatives such as e-education and telemedicine.

3G snapshot

BSNL and MTNL

• Subscribers: BSNL 1.5 million, MTNL 175,000
• Coverage and future plans: BSNL –­ Coverage across 318 cities as of end-February 2010, plans to cover 760 cities by September 2010; MTNL –­ Coverage across substantial parts of the Delhi and Mumbai circles.

Private operators

• Bharti Airtel, RCOM, TTSL, Vodafone Essar, Idea Cellular and Aircel bidding for pan-Indian spectrum.
• Highest national bid price Rs 158.14 billion (May 15, 2010).
• Etisalat DB, STel and Videocon Telecommunications bidding for select circles.
• Highest price attracted by Delhi circle at Rs 30.33 billion (May 15, 2010).

Spectrum allocation

• Advanced by four months and is now likely only in early 2011.

Based on its discussions with the Telecom Regulatory Authority of India (TRAI), research firm Nomura, in its latest Asian Economic Alert, has predicted that the 3G spectrum sale could spur mergers and acquisitions among players.The report also suggests that while 3G services per se may not drive differentiation, additional spectrum capacity with some carriers could disadvantage those who do not win at the auction. According to their research, the competition will also start moving from the consumer space to the enterprise segment. Enterprise businesses still generate more than 40 per cent of the margins for leading operators such as Bharti Airtel and RCOM.

Industry initiatives

In December 2008, India entered the 3G mobile space with the launch of 3genabled mobile and data services by MTNL in Delhi and Mumbai. The company made an initial investment of about Rs 5 billion to install the necessary network with a capacity to accommodate 0.2 million subscribers. BSNL followed suit in February 2009, offering 3G at a maximum data speed of 2 Mbps. It invested around Rs 27 billion to build infrastructure for its 3G network in various telecom circles across the country. Both the state-owned operators are still rolling out their networks. BSNL has managed to acquire a 3G customer base of about 1.5 million subscribers as of March 2010, while MTNL is estimated to currently have around 175,000 3G subscribers.

BSNL expects to expand its coverage to around 760 cities by September 2010 and has launched its 3G services in a number of circles recently, making a foray into the Tamil Nadu circle in January 2010 and in the Himachal Pradesh circle in March 2010. Of late, it has also launched its services in Andhra Pradesh and Imphal (Manipur) and is in the process of launching it in 32 towns in the Karnataka circle.

To leverage its first-mover advantage, BSNL has drawn up an aggressive 3G rollout strategy. The operator is targeting 5 million 3G customers by the end of 2010- 11. Initially, it expects 5 per cent of its total user base to come from 3G, which may later go up to 10 per cent. The company now offers video calls, high speed internet with a speed of up to 3.6 Mbps, and high quality multimedia services.

BSNL, which is expected to emerge as the biggest pan-Indian 3G service provider in the country despite the aggressive bidding by private players, has not only made 3G services affordable with lowest voice and video call charges as well as high speed 3G wireless broadband data connectivity at Re 0.01 for 10 kB, but has also facilitated socio-economic development of the masses through applications such as telemedicine, e-education and e-governance.

Meanwhile, MTNL represents the other end of the spectrum and has not witnessed similar success in this segment.After garnering only about 1,000 users in the first six months of its 3G launch, it floated a global tender for bringing in private players to manage its 3G business, in the Delhi and Mumbai circles. In November 2009, it shortlisted UK-based Virgin Mobile for rolling out its 3G mobile services on a franchisee model. The stringent tender conditions discouraged several other companies from bidding for the venture. MTNL had set revenue targets of Rs 2.4 billion for the franchisee in each metro circle over a three-year period. In case the franchisee failed to meet the targets, it would have to pay a penalty amounting to 10 per cent of the shortfall amount. MTNL had also sought a guaranteed minimum ARPU of Rs 500 a month.

Vendor initiatives

Meanwhile, vendors are gearing up for the 3G opportunity in this market. For instance, Nokia Siemens Networks is planning to manufacture 3G base stations at its plant in Chennai and has earmarked an investment of around Rs 1.05 billion over the next two years for this purpose. The company also inaugurated a research and development centre in Bangalore in February 2010, to support 3G-related initiatives for the domestic market and has rolled out the first batch of 3G-enabled base stations from this facility at Oragadam.China-based ZTE is planning to invest $20 million in 3G-specific value-added services (VAS) for the Indian market.

Beyond 3G

While the 3G spectrum auctions are progressing smoothly in India, the rest of the world is gradually migrating to 4G mobile wireless broadband technology, better known as long term evolution (LTE).TRAI has taken a small step towards accelerating technology adoption in the country and has recently floated a pre-consultation paper for initiating the launch of the superior 4G technology. However, with 3G spectrum being allocated to the winners only in September 2010 and with the country still struggling to meet its 3G rollout obligations, India has a long road ahead before it can catch up with other developed telecom markets. The immediate challenge, though, will be to get 3G off the ground and attempt to replicate the success the country has had in the case of 2G technology.