by Puja Goyal, Consultant-Telecom, Media and Internet, Capitel Partners

With the Indian mobile market on the cusp of mass-market adoption of data services, we believe there will be a fundamental shift in the way operators manage, and investors value their businesses. Experience from markets with higher levels of data maturity, as well as the characteristics of the data business suggest that focusing on returns using metrics such as return on invested capital (RoIC) is more important than conventional performance metrics, such as earnings before interest, taxes, depreciation and amortisation (EBITDA).

The level of data adoption has been encouraging, even though consumer experience on the 2100 MHz network has not been the best. In 2014, mobile data traffic in India grew by 74 per cent, and will grow exponentially from 2016.

This trend will be supported by the availability of spectrum, increasing affordability of smartphones and maturing consumption pattern of users. With the liberalisation of spectrum, new frequency bands such as 850 MHz and 900 MHz are now available for good coverage. The 2100 MHz and 2300 MHz bands will add further capacity to the network to carry an incremental quantum of data as demand grows. The device ecosystem, led by local handset original equipment manufacturers and expected innovations such as LTE-only tablets, will further support feature-phone users to upgrade, as well as increase the adoption of home data devices. The key driver for higher data uptake is 3G, with an average 3G subscriber consuming over three times more data as compared to a 2G subscriber. Smartphones connected to 4G consume even more data than 3G. The changing consumption pattern of users, including social networking, video downloads and streaming will increase data demand and market revenues.

The expansion in usage will also be led by a decline in data prices, especially as new entrants launch LTE services. The current price per MB for data services is in the range of Re 0.22-Re 0.25 per MB, and we believe that blended data prices will soon decline to Re 0.12-Re 0.15 per MB. With a marginal cost (depreciated capex, allocated opex and spectrum capex), around Re 0.10 per MB, it becomes critical for operators to sharpen their focus on the cost per MB.

The major components of the cost-per-MB model are spectrum capex and network capex. Such capex increases non-linearly as consumer usage and network traffic go up, especially in markets such as India that are spectrum constrained and require higher-capacity sites. Profitability measures such as EBITDA do not capture the impact of increase in the capex required for supporting data traffic, as it measures the operating returns before charging depreciation on capital assets and taxation for the period. RoIC, therefore, becomes a vital metric for optimisation in the data context, as incremental capex grows at a higher rate compared to voice.

The optimisation of RoIC measures calls for maximising yield, minimising network costs as well as optimising spectrum investments.

Maximising yield and revenue per MB

Operators need to identify ways to improve yield per MB of data, especially as voice-pricing pressure goes up and the user consumption shifts towards voice substitution. Some of the approaches adopted by regional operators are:

• Device mix optimisation: Not all devices are equally profitable, with smartphones generally being higher on profitability. Further, within smartphones, some customers are more profitable than others due to higher breakage, consumption patterns and device characteristics. In India, we find that certain operators have a clear focus on the smartphone segment, while others have a broader mix of devices, including data-connected devices. Some of these decisions are also based on whether the operator is an incumbent or an entrant, and on the go-to-market strategy. Operators focusing on gaining market share within the mobile data market will generally have a broader device mix than those that are planning to upgrade their primary SIM users from EDGE to HSPA, and eventually to LTE. Irrespective of the device mix focus, the use of customer analytics to predict the service upgrade potential and consumption mix, as well as manage the customer lifecycle will be necessary for gaining share in increasingly narrowly defined segments.
• Pricing optimisation: Bundles are typically more profitable than pure bandwidth sales, although customers will buy bundles only from a provider with a full range of options including home broadband. We expect fixed broadband to become increasingly important with data adoption, as operators will use the relatively lower cost per MB for options such as fibre-to-the-network and Wi-Fi to reduce their overall cost of carrying network traffic. In addition, bundling multiple services reduces the visibility on the cost of each element for consumers, and allows for additional levers for pricing improvement – bundles will typically not be comparable across providers and therefore, not directly substitutable.
• Additional services: Large operators have also started considering over-the-top (OTT) distribution seriously, although the telco approach has been to focus on the pipe and not venture into the “media/OTT” space – the primary concern is the ability to provide breadth of content at a low cost. Global as well as regional operators have been very acquisitive in the past year, putting together the building blocks for a model that allows them OTT video play on mobile as well as on home broadband.

Minimising network capex and opex per MB

• Spectrum planning: Several parameters, including the deployed spectrum in the sub-GHz and above 1 GHz range, quantum of spectrum and topology (DU, U, SU/R) impact network capex. The number of sites required for the deployment of a technology in a given area is derived from these factors. Thus, optimising the spectrum mix to minimise the cost per MB and ensuring a consistent consumer experience are becoming increasingly important for spectrum-constrained markets.
• Technology planning: The spectrum plan ties into the technology roadmap and plan, and determines the percentage of total time that a consumer is on EDGE versus 3G versus LTE. In addition to cellular, planning the traffic offload on Wi-Fi/microcells helps reduce the overall cost per MB, and allows the relatively more expensive cellular bandwidth to be utilised for higher-yield-use cases.
• Site planning: One of the key focus areas for operators has been minimising their low utilisation sites through site optimisation and periodic review.

Optimising spectrum cost per MB

Spectrum sharing between operators increases spectral efficiency and allows for a better end-user experience, thereby reducing the site requirements. Given that spectrum sharing and trading guidelines are close to being notified by the government, there is a new economic model that can be worked out by operators, giving them access to the secondary market for spectrum assets.

The considerations for operators in such a secondary market process will include:

• Understanding the demand and supply sides for the spectrum under consideration; developing the optimal business case for maximum spectrum utilisation.
• Identifying potential buyers/sellers for trading/sharing.
• Ensuring compliance with the set of rules notified by the government; evaluating possible transactions subject to the policy and regulatory requirements.
• Valuation of spectrum, considering use cases and cost of liberalisation (in the case of administratively allocated spectrum).
• Structuring the contract for terms and conditions under the spectrum trading/sharing arrangement, in the case of a bilateral agreement.
• Organising secondary market auctions, including auction on e-platforms and gathering auction benchmarks from global experience.

Conclusion

In summary, the upcoming launch of mobile data and its expected adoption by consumers will compel operators and investors to increase their scope of focus beyond EBITDA, as was the case with the voice-led business model. Managing capex, both for spectrum and network, and opex, especially for large-ticket items such as sites and energy, will be key in developing a low cost-per-MB base, and allowing for increased competitiveness in the marketplace. Regional and global operators that have a relatively mature data market need to ensure a focus on customer life cycle management, innovative ways to carry traffic including voice traffic, as well as efficient management of spectrum to manage returns and profitability in a new business paradigm.