From “happy hours calling” in the late 1990s and early 2000s, when one could make calls at affordable rates only during non-peak traffic hours, to the current “call anyone anytime” regime that offers calls at dirt-cheap rates, the Indian telecom sector’s growth over the past decade has been a fairy tale. This has been driven by various policy initiatives and active participation by the government and private players.
In 1998, the country’s teledensity stood at 1.9 per cent; today, the wireless teledensity stands at 69 per cent with 826 million mobile subscribers, second only to China. This sharp increase in teledensity has made the Indian telecom story one of unmatched success, which can be attributed largely to the growth in the wireless segment.
The telecom sector’s current contribution to the GDP is almost 3 per cent, double the 1.5 per cent in 2000. Research has shown that a 10 per cent increase in teledensity can increase the GDP by 1.2 per cent. The cumulative FDI equity inflow into the telecom sector stands at Rs 483.13 billion or 8 per cent of the total FDI inflow. Telecom sector growth has had a cascading effect in terms of employment and development in other industries. Today, the sector plays a key role in national development. The mobile phone is being seen as an instrument to enhance consumer access to government services and deliver the benefits to the masses.
The whole ecosystem has evolved in an interesting way – low call and SMS rates, and availability of cheap handsets have made the mobile hand-held very popular. In 2010-11, a total of 120 million mobile devices were sold, at an average of 10 million per month. The year also saw many domestic handset manufacturing companies take off. Today, the Indian customer has the choice of more than 200 handset models. The urban teledensity currently stands at 159.63 per cent, which means many urban subscribers use more than one SIM. This is also evident from the popularity of dual-SIM phones. Meanwhile, the share of rural subscribers as a percentage of the total user base is steadily increasing.
On the other hand, the decline in the bottom line of telecom operators has become acute in the past two-three years with the number of mobile operators increasing, call rates and minutes of usage (MoUs) falling, and regulations being brought in pertaining to unsolicited commercial communication (UCC), mobile number portability (MNP) and stricter lawful interception.
In the late 1990s, when the industry was at a nascent stage, call rates were as high as Rs 16 per minute, and demand and usage were limited to the elite. The past few years have witnessed intense competition with the entry of several players in the GSM segment. In fact, the market is overcrowded with 12 to 14 players in a service area. This has led to a state of hyper-competition and price wars as operators try to retain and capture market share. Consequently, there has been a sharp drop in tariffs – subscribers are billed on a paise per second basis. The tariff drop is reflected in the average subscriber outgo per minute (ASOPM), which decreased from Re 0.99 to Re 0.52 for GSM and from Re 0.84 to Re 0.48 for CDMA during the period December 2007 to December 2010.
However, despite the drop in tariffs, there has not been any increase in MoUs. In fact, MoUs have decreased by more than 25 per cent in less than two years. As a result, ARPU levels have almost halved during the same period. Other factors contributing to the falling ARPUs are urban market saturation, expansion in rural markets, the use of multiple SIMs and a churn rate of 5.8 per cent.
For service providers, revenues are stagnating and operating costs are constantly rising. As they expand services, issues like lack of grid power are forcing them to use alternative energy sources like diesel, solar and hybrid cells. The use of these alternatives accounts for a third of the opex of tower companies. According to the Wharton School of Management, “Nowhere is India’s weak infrastructure more obvious than in power. In cities and towns across the country, richer homes hum with the sound of diesel generators during frequent brownouts. Poorer ones sit in darkness and silence.” This lack of infrastructural facilities is more acute in rural areas. As operators expand services to these areas, the network expense as a percentage of the total revenues has been rising continuously.
As a result, operator EBITDA (earnings before interest, taxes, depreciation and amortisation) and net margins have come under considerable pressure. The situation has worsened due to the multiple taxes levied by the central and state governments and additional costs associated with the introduction of UCC, MNP and stricter lawful interception.
While operators need to make substantial capital investments for service expansion in rural areas, the funds available with them are actually shrinking. Cash flows, taking into account the capital expenditure required for service expansion, are in the negative. All operators are losing money and are in debt. Also, following the 2G spectrum issue, banks have reduced their credit to the telecom industry.
With the telecom market being too fragmented, consolidation is the only plausible cure. But there has been no clear policy guideline on mergers and acquisitions (M&As), which has prevented consolidation in the industry. However, there appears to be some headway on this front, with the Department of Telecommunications accepting most of the Telecom Regulatory Authority of India’s recommendations on spectrum allocation and licence fees to be a part of the New Telecom Policy, 2011.
Moreover, there is no clarity on vital issues like spectrum charges, the terms on which old licences will be renewed and new spectrum granted, M&A rules, and the disparity between CDMA and GSM spectrum usage and fees.
Even the introduction of 3G services has not made a significant difference to operator margins. The government collected a total of Rs 509.68 billion from the 3G auction and Rs 385.43 billion from the BWA auction, almost three times the expected amount. However, only two operators won pan-Indian 3G/BWA licences. Others will have to form alliances with rivals to provide services or face the risk of losing market share to operators having a pan-Indian licence.
Despite these challenges, the mobile sector has invested close to Rs 1.5 trillion to date, and operators are expanding their reach in rural and semi-urban areas through existing and new service offerings. This requires large investments in network deployment and service rollout, and the projects typically have a long gestation period.
The pressure on EBITDA margins has led to a reduction in return on investments, thereby making investment in the Indian telecom industry a less attractive proposition.
In the given scenario of happy customers and shrinking profits, clarity and support on both the policy and regulatory fronts have become a key requirement to ensure sustainable development of the mobile telephony sector and for distribution of the benefits of affordable telecom service across the country.