The Indian telecom market has witnessed significant changes with the launch of next-generation services including 3G and 4G. As the voice market reaches saturation, service providers have been focusing on encouraging voice service uptake through technologies such as 3G, 4G and broadband. Aggressive pricing strategies, and increasing adoption of smartphones, tablets and value-added services coupled with supportive government policies have set the pace for data service growth in the Indian telecom market.

tele.net tracks key developments in the 3G, 4G and broadband space in 2013…

Slow but steady 3G growth

Despite a slow start, 3G service uptake has started gaining momentum owing to lower tariffs, increasing penetration of smartphones and growing demand for broadband applications. The 3G subscriber base in India increased from about 11.5 million in March 2012 to about 25 million in March 2013, witnessing a growth of 117 per cent. According to global financial firm Philip Capital, the 3G subscriber base in India would grow to over 96 million by March 2015. The exponential growth in the number of data users has led to a significant increase in data traffic. Over the past year, service providers have witnessed increased data usage and the share of non-voice revenue in operators’ total revenue has been growing. To drive 3G service uptake, a large number of operators reduced 3G tariffs in 2013. For example, following a 50 per cent reduction in 3G prices in July 2013, Reliance Communications (RCOM) reported that one-third of its 3G handset owners, who were earlier using 2G data services, have migrated to its 3G network. The move also led to an increase in 3G data usage per customer by 40 per cent. RCOM’s 3G subscriber base increased from 4.8 million in September 2012 to 9.1 million in September 2013, and data usage (2G and 3G) per customer increased by 66 per cent from 232 MB for the quarter ended September 2012 to 385 MB in the corresponding quarter in 2013. Similarly, data is a key service segment for Bharti Airtel. The operator’s data subscriber base increased from 40.6 million in September 2012 to 50.63 million in September 2013. Of the total data subscribers, 8.01 million (15.82 per cent) were 3G users as of September 2013. Moreover, data usage per customer increased from 133 MB during July-September 2012 to 231 MB during the corresponding quarter in 2013, resulting in an increase in ARPU from Rs 43 to Rs 70. The segment’s contribution to overall revenues also increased from 5.2 per cent to 9.2 per cent. Other operators including Vodafone India and Idea Cellular have been witnessing steady growth in their 3G subscriber base over the past few quarters. Interestingly, Vodafone India’s 3G volumes have overtaken its 2G data volumes, even though 3G coverage is limited as compared to 2G. For the quarter ended September 2013, Vodafone India added more 3G connections than 2G connections. The operator added 0.8 million 3G customers in the quarter ended September 2013 as against 0.5 million additions in the 2G segment.

In the past year, growth in the 3G segment has been primarily driven by lower 3G tariffs, enhanced service coverage and improved availability and affordability of 3G devices. Since the launch of 3G services in 2010, operators were focusing on rolling out networks and improving coverage in Category A circles and metros. However, given the huge demand for data services in Category B and C circles, operators have extended 3G coverage to these circles as well, thereby contributing to the growth of data services. Moreover, greater smartphone penetration has contributed to the uptake of 3G services. As per industry estimates, the number of 3G-enabled smartphones in India increased from 24 million in 2012 to over 58 million in 2013. According to a joint report by the Federation of Indian Chambers of Commerce and Industry and KPMG, the share of smartphones in internet-enabled devices is expected to increase from 30 per cent in 2012 to 62 per cent by 2017.

However, there are a few issues despite growth in the 3G segment. On the regulatory front, the 3G roaming issue is the biggest challenge for 3G service uptake. Since none of the operators won pan-Indian 3G spectrum in 2010, they have been offering  services in circles where they do not hold spectrum through intra-circle  roaming (ICR) agreements. However, the government has termed these pacts illegal and directed players such as Idea Cellular, Bharti Airtel and Vodafone India to not add subscribers in circles where services are being provided under these agreements. A final decision in this regard is still awaited. From subscribers, the cancellation of ICR pacts would result in an incoherent data usage experience as they move from one circle to another. Moreover, users who wish to continue with their current service provider may give up 3G services altogether, which will impact the overall uptake of 3G services.

Besides the roaming issue, operators need to address concerns regarding poor indoor coverage and lack of innovative value-added services. According to Nokia Solutions and Networks, spectrum availability will have to increase by 10 times to improve the overall 3G ecosystem in the future. To ensure this, operators will need to optimise the existing fragmented spectrum as well as share airwaves with other players. Further, to meet the growing demand for 3G services, the government needs to look at the possibility of opening up new frequencies such as the 470-694/698 MHz, 1427-1518 MHz, 2700-2900 MHz, 3600-3800 MHz and 3800-4200 MHz bands.

Pricing model key to 4G service uptake

Like 3G services, the uptake of 4G services has been slow on account of the underdeveloped 4G ecosystem, spectrum scarcity and the uncertain regulatory environment. Broadband wireless access (BWA) licences were awarded in 2010, but the industry is yet to witness 4G service roll-out by the majority of players. Bharti Airtel is the only BWA licence holder to have deployed the long term evolution-time division duplex (LTE-TDD) platform for introducing 4G services (in Kolkata). Following the 4G launch in Kolkata in March 2012, the operator has extended services to other areas including Bengaluru, Pune and Chandigarh. At the end of the second quarter of 2013, Bharti Airtel’s 4G subscriber base stood at over 28,000. The 4G segment is likely to receive a boost with several BWA licence holders including Reliance Jio Infocomm Limited (RJIL) (erstwhile Infotel Broadband), Tikona Digital Networks and Aircel aiming to launch 4G services in select circles in 2014. One of the biggest developments in the 4G segment in 2014 will be the debut of RJIL, which is the only player with a pan-Indian BWA licence. Initially, the company plans to launch 4G services in the top 40 cities and later extend them to Tier II and Tier III cities. RJIL is expected to invest Rs 48 billion in its LTE network. Aircel, which holds BWA spectrum in eight circles, is expected to invest about $10 billion in rolling out 4G services. Currently, the company is firming up its device strategy, rolling out optic fibre and setting up LTE base transceiver stations. In addition to the entry of new players, the 4G segment is expected to witness encouraging growth with the introduction of the unified licensing regime. The new licensing regime allows non-BWA spectrum holders to offer 4G services and BWA players to provide voice services, which would increase the scope for 4G service adoption. In addition, the government is considering the option of auctioning spectrum in the 700 MHz band. The move would provide a fillip to the 4G segment as operators will be able to use the highly efficient band to offer 4G services. Operators such as RJIL, Bharti Airtel and Idea Cellular are planning to bid for spectrum in the 700 MHz band and are looking forward to complement their existing spectrum in the 2300 MHz band with that in the 700 MHz band.  Further, access to spectrum in the highly efficient 700 MHz band will drive down capex for operators, paving the way for large-scale adoption of 4G services.

Going forward, a fast developing device ecosystem would also drive the uptake of 4G services. Currently, the availability of LTE-TDD devices is limited. However, with operators partnering with mobile handset manufacturers for developing 4G-compatible devices, the scenario is set to change. For example, Bharti Airtel has collaborated with Huawei Technologies and developed an LTE handheld device, the Ascend P1 smartphone. It is the first LTE-TDD-compatible 4G handset to be launched in India. As per industry experts, the 4G device ecosystem in India will follow the growth trajectory of 3G handsets, which would mean that initially 4G handsets will be available at high prices. However, in the long term, service providers are likely to adopt the low-cost, high-volume strategy. Besides a well-developed ecosystem, another key factor driving 4G service growth is low broadband penetration. Through 4G services, operators are expected to overcome challenges related to last mile connectivity and provide internet services to rural areas.

According to LTE Outlook, a report published by Frost & Sullivan, 4G revenues in India are likely to witness a compound annual growth rate of 220.5 per cent between 2012 and 2017 to reach $11.88 billion. The growing demand for high speed internet connectivity and data-intensive multimedia- and entertainment-led applications will drive the growth for 4G services. Going forward, service providers are likely to focus on metro circles, and use multilayered technology architecture, including Wi-Fi and fibre-to-the-x, for rolling out 4G networks. As 4G is a superior technology and offers higher connectivity speeds, operators can target high potential data markets and charge users a premium. In the long run, the pricing model adopted by operators would play a crucial role in 4G service uptake.

Trends in broadband uptake

According to the Telecom Regulatory Authority of India (TRAI), the country’s broadband subscriber base stood at 14.91 million at end-October 2013 against 14.81 million at end-October 2012. It is important to note that the latter figure includes broadband subscribers with a download speed of 256 kbps to 512 kbps. However in 2013, the Department of Telecommunications changed the definition of broadband services to include connections with a minimum download speed of 512 kbps.

As per TRAI, the country had 153 internet service providers (ISPs) offering wireline broadband services as of end-October 2013.  However, only a few ISPs dominated the wireline broadband segment. Bharat Sanchar Nigam Limited (BSNL) led the broadband wireline market with a market share of 66.8 per cent, followed by Mahanagar Telephone Nigam Limited (MTNL) and Bharti Airtel with a market share of 8.8 per cent and 7.4 per cent respectively. Other players accounted for a share of 16.9 per cent. Further, in terms of the subscriber base, the top five ISPs at end-October 2013 were BSNL (9.96 million), Bharti Airtel (1.32 million), MTNL (1.11 million), Hathway Cable (0.37 million) and Beam Telecom (0.34 million).

Sluggish growth in fixed line infrastructure is one of the key reasons for the slow uptake of broadband services in the country. Wireline growth has been impacted due to inadequate infrastructure, complexities in installation and management of connections, and the high capex requirement for providing wireline coverage to residential complexes.

These challenges notwithstanding, by 2015, data traffic in the country is expected to grow by 18 times. In fact, going forward, the country’s broadband subscriber base is expected to grow at 20-25 per cent on a quarterly basis. This growth would be largely driven by wireless broadband penetration. Operators such as Bharti Airtel, Vodafone India, RCOM and Idea Cellular are witnessing significant growth in their wireless broadband subscriber base and revenues from data services. Over the past two years, the wireless broadband segment has been witnessing steady uptake as it offers users mobility and ease of installation. Moreover, the increasing penetration of smartphones, tablets and other mobility devices is contributing to the growth of wireless broadband. Further, a significant reduction in 3G prices has driven growth in the wireless broadband segment.

Going forward, 4G service launch by players such as RJIL, Aircel and Tikona Digital Networks would drive growth in the broadband segment, particularly wireless broadband connectivity. Offering higher connectivity speeds than 3G, 4G technology would help service providers address the shortcomings of DSL-based wireline connectivity. 4G allows subscribers the flexibility of installing a modem and provides broadband access to multiple users simultaneously through a single connection on the customer premises. Given its advantages, 4G is likely to emerge as the preferred technology for accessing broadband at homes and offices. Also, over the next few years, social networking platforms such as Facebook and Google+ will continue to be the key drivers for data growth. Increasingly, subscribers will use wireless broadband services to meet high bandwidth requirements while accessing instant messaging service platforms such as WhatsApp, WeChat and Hike, and video sharing websites like YouTube. Further, the growing availability of content in vernacular languages and customised applications will drive mass adoption of broadband services. Currently, the demand for mobile broadband is largely driven by urban India. In the future, e-governance applications in areas of education, commerce, health and finance would drive the demand for broadband services in rural areas as well.

Besides, private players’ efforts to drive broadband uptake, government initiatives in bridging the digital divide between rural and urban areas will improve broadband access across the country, particularly in rural areas. For example, as part of the National Telecom Policy, 2012, the government has set an ambitious target of providing reliable and affordable broadband-on-demand as well as 175 million broadband connections by 2015. Further, the government has undertaken the National Optical Fibre Network project to connect 250,000 gram panchayats at a connectivity speed of 100 Mbps. The project is being funded by the Universal Service Obligation Fund and aims to support various e-governance services in rural areas.

According to PricewaterhouseCoopers, mobile broadband services are expected to generate revenues of Rs 940 billion by 2015. However, given the growing data demand and the limited wireless spectrum availability, wireless networks alone will not be able to address increasing broadband requirements in the long run. Therefore, service providers will be required to set up strong fibre infrastructure to provide bandwidth-intensive applications in the future.