The 3G spectrum auctions have opened up growth avenues for the Indian telecom sector. However, aggressive bidding by the major players at these auctions has raised concerns regarding the implications of spectrum costs on operator revenues as well as the pricing of 3G services. Industry experts and leading operators share their views on the market potential of 3G, the investments required and the applications that will witness increased uptake with the nationwide rollout of 3G...

What is the market potential of 3G in India?

Kunal Bajaj
The market potential is substantial which is evident from the aggressive bidding at the 3G spectrum auctions. 3G presents an opportunity for operators to increase average revenue per user (ARPU) from their existing subscribers by offering additional services as well as induce better usage of data, value-added services and other applications.

3G will also be used as a retention tool to ensure that high-ARPU subscribers are kept on the network.

Jaideep Ghosh
In India, the uptake of 3G services will be skewed towards the top 100 cities in the next three years, depending on the demographic profile, disposable income strength and high-end usage. The total number of 3G subscribers on the small screen (handhelds) may reach 40 million in 2014. The bulk of this subscriber base will constitute existing users who have upgraded from 2G to 3G rather than first-time users.

Therefore, there is a business case to be capitalised on by operators, and the early movers (limited to three-four operators who win the 3G auction) will have an advantage.

Dr Mahesh Uppal
The potential of the technology might be small to begin with owing to low ARPU levels and insufficient data services usage.But 3G will grow rapidly in the future because of the abundant bandwidth it offers. This will make India specific applications like multiple languages, traffic interfaces, animation and videos more user friendly. This technology will play a big role in entertainment, education, health and m-commerce-related services in the future.

Senior BSNL official
The market potential for the 3G technology is huge. It is going to touch every walk of life. Take the case of security systems –­ installing a 3G SIM with a video camera along with the doorbell will enable subscribers to see who is at the door regardless of where they are located.

What kind of changes does 3G necessitate in the operators' network architecture?

Kunal Bajaj
The biggest challenge will be the upgradation of the backhaul infrastructure to support the quality of service that is offered by 3G networks. The lack of dense fibre connectivity at locations where 3G base stations will be set up will be another bottleneck. However, the setting up of 3G base stations and provision of 3G access will not be a problem.

Dr Mahesh Uppal
For the installation of 3G equipment, a telecom operator will be expected to spend Rs 0.5 million to Rs 1 million per base station. The network upgradation cost would be lower for CDMA-based operators and almost twice as much for GSM operators.

Senior BSNL official
BSNL has already launched 3G services and has over 1 million subscribers in the segment. In order to increase 3G penetration, we are now focusing on creating awareness among customers and developing 3G content.

What are the investment requirements for 3G and what are the likely sources of funding? How is the implementation of 3G likely to impact operator performance?

Kunal Bajaj
Apart from the actual spectrum auction price that an operator will have to pay, half a billion dollar worth of investments will be needed purely from a rollout perspective for an existing carrier. For new carriers, the rollout expenditure will be much higher. Investments will also depend on how quickly operators want to roll out services and ramp up operations.

With respect to sources of funding, operators are looking for debt, both for the spectrum auctions as well as for additional investments. Even though vendor financing is not very popular among European original equipment manufacturers, they are expected to be flexible with their long-standing Indian clients.

Moreover, the amount of capex that is required upfront is small as Indian carriers generally adopt the opex model.

If we evaluate the effect of 3G rollout on operator performance, looking at the way the margins are distributed, the high-end subscribers today account for a large portion of operator revenues and an even larger portion of margins. These users are the most likely candidates to migrate to 3G or beyond. So, excluding the cost of spectrum, the actual margins for 3G services, even on just voice, will be much higher because those customers will be higher ARPU customers.

With the addition of data and premium value-added services, the margins will be quite attractive. The only situation where margins on data will start to decline is when flat rate data plans are offered at very low prices. However, 3G service providers are not likely to offer extremely competitive data packages to begin with.

Following the 3G spectrum auctions and launch of 3G services, there will be a stratification of service providers and customers. High-end customers will migrate to service providers who are offering 3G in their circles, especially taking advantage of mobile number portability (MNP). At the same time, the youth and heavy users of data are likely to migrate to 3G networks. This is the emerging population, who may not be very high spenders today, but would be high spenders in the future. So, these are the two attractive segments that a 2G player will not have access to.

Jaideep Ghosh
The total investment requirements can be divided into spectrum costs, rollout costs, and incremental marketing and customer service delivery costs.

The total pan-Indian 3G spectrum costs are based on auction prices, which have been fairly aggressive with a clear premium for metros and Category A circles.

Network rollout costs for an operator looking to upgrade 15,000 sites in the first year will be about Rs 20 billion.

Thereafter, the pace of rollout may rationalise to cover the rest of the top Indian cities over three years.

The 3G spectrum auction winners will want to increase their brand presence. They will also try to differentiate themselves from other operators with superior service offerings. We can, therefore, expect a higher marketing budget allocation as a percentage of expected revenues. Absolute numbers will vary depending on the operator, the scope of their launch and their marketing approach. Since 3G aims to capture the higher end of the customer base, serving these users will need revised business models and service delivery capabilities.

To finance these investments, incumbents will use a mix of internal accruals contributing around 20 per cent and debt contributing the remainder of the total outlay. New entrants, on the other hand, will have to rely on bank debt, foreign borrowings and, possibly, fresh equity infusion from their majority partners to finance their 3G ventures.

3G spectrum will effect the following changes in operator performance:

It will allow operators to offload voice from congested networks in circles where the operator faces a spectrum crunch. This will improve the customer experience, resulting in lesser call drops and better call completion ratios.

Service providers will be able to offer high-end applications such as video calling, gaming, browsing and email at higher speeds, which will attract and retain top-of-the-pyramid customers.

Handset costs will fall with the growing 3G base, which, in turn, will increase ad-option and become a self-fulfilling cycle.

3G will constitute 15-20 per cent of the total business of the auction winners in about four years from now.

The have-nots will have to innovate to battle the churn of high-end customers.

Moreover, the introduction of MNP could see a churn market in the post paid segment, especially for non-3G operators.

Dr Mahesh Uppal
The investment requirements are difficult to estimate. The sources of funding will have to be debt or the operators' internal sources. Operators are not likely to recover any significant part of their costs from tariffs in the short term.

In terms of operator performance, the main factor will be the decongestion of networks, especially in urban areas that have a high concentration of subscribers.

3G's first and foremost contribution will be to ease the spectrum crunch. In the medium term, the operators are expected to deploy many other data services, which will generate a larger proportion of the revenues in the future.

What are the likely implications of 3G on the telecom industry? What are the key challenges and issues?

Kunal Bajaj
So far, only 5 MHz of 3G spectrum has been auctioned. Operators will be cautious about how aggressively they offer data-intensive services or how low they price dongles because they don't want to get into a situation where the amount of data usage on 3G networks surpasses their handling capacities, especially in the early days of network rollout.

Despite the presence of only four service providers including the state-owned operators in each circle, there will be enough competition in this space. Each operator will try to come up with a smart way of acquiring a market share, especially after the implementation of MNP.

Jaideep Ghosh
Some of the key issues in the 3G space are:

The optimal pricing of 3G-enabled handsets is yet to be determined.

The poor penetration of laptops is impacting the adoption of high speed downlink packet access.

To take 3G to the mass market, investments will be required in developing relevant applications, and location-and-language-based services.

The broadband wireless access auction could provide an alternative for enterprise users and broadband connectivity in rural areas.

If certain operators are overpaying for the spectrum, it could limit their ability to finance a successful rollout and may delay their plans. Also, follow-on spectrum prices could be linked to the 3G spectrum winning prices in each circle.

This will affect future spectrum prices in the country.

Given the negative bias towards 2G services, there is likely to be some form of consolidation in the operator space since sustainability for 12 operators will certainly be a challenge.

With the advent of broadband data transfer facilities on handhelds, transferring information has become easier, raising concerns regarding security and intellectual property.

Dr Mahesh Uppal
The most important implication will be if operators end up overpaying for this spectrum to such an extent that they cannot afford an aggressive rollout. This is because the impact of the auction price is less on consumer price and more on consumer access, especially if the operators are unable to roll out services in a large number of cities and locations.

Senior BSNL official
3G requires a strong focus on network optimisation and network operations because of an additional phenomenon known as cell breathing wherein the signal range varies with the load. The range decreases with the increase in load. This phenomenon is not associated with 2G.

The high cost of rolling out 3G services is definitely a challenge. With 3G spectrum now being valued at about $3 billion and given the low tariffs currently prevailing in the market, making this service viable in the near future will be a tough task.

The cost of 3G handsets, though on the decline, is still an issue because low handset prices have been a key growth driver in the 2G segment. However, as 3G penetration increases, the cost of handsets will come down further. Moreover, since 3G will be available in the 2.1 GHz spectrum band, the number of towers required is higher, leading to high investments.

Which applications are likely to witness rapid uptake with the expected launch of 3G services?

Kunal Bajaj
Initially, the killer application is just going to be better quality of voice. For high-end subscribers and heavy users, the overall quality of mobile service has deteriorated.

Once you get over that bump, 3G will offer two major applications –­ video and video-enabled services ranging from download of clips to accessing live TV or YouTube; and high speed data access to the internet via the phone, dongles and data cards.

Jaideep Ghosh
Social networking on the small screen, enterprise-centric applications, remote closed-circuit-television monitoring, mobile banking, location-based services (targeting advertising, GPS, etc.), email and broadband surfing on the move, multimedia downloads and video calling, especially in urban centres with large migrant populations, are some of the applications that will be marketed early. Some operators may be able to borrow these applications from the parent companies to introduce them quickly.

Dr Mahesh Uppal
Initially, applications based on Bollywood and cricket are expected to gain popularity. Other applications like video conferencing are not the products that one would expect an avalanche of demand for.

However, governance, health, education and agriculture are likely to offer some very serious applications.

Senior BSNL official
Like other markets, mobile broadband uptake will witness a surge with the launch of 3G networks in India. 3G will also serve as a key enabler of broadband applications in rural regions. The youth, which constitutes a large chunk of our population, will be interested in entertainment services, especially mobile TV.