MVAS: The next wave of growth (Part I)
With traditional revenue sources for the operators like voice and messaging at bottom levels, the subscriber churn, as a result of mobile number portability, it is quite natural that the operators are taking a safer route and betting on VAS as the next big opportunity to sustain and succeed in the market.
According to PwC, the mobile VAS market in India has the potential to generate Rs.55,000 crore by 2015. As per V&D100-the annual survey of the Indian communications industry-the Indian cellular market for FY11 is estimated to be around Rs.102,230 crore, ie, $22.3 mn and this market is growing at the rate of 16.6%. Of this total amount, VAS or non-voice revenue for mobile operators contribute around 13%, which translates to Rs.13,026 crore. It is expected that the Indian VAS market is bound to increase to Rs.32,000 crore in FY15. All this will happen only when operators provide stable 3G and 4G network and quality of experience so that data services improve considerably.
The Indian VAS market is also bound to grow as operators have already invested around ’100,000 crore in terms of 3G and BWA auction, and they are presently in search of a series of killer applications that will help them recover their auction money. Not only this, they are also looking at killer applications that are less bandwidth consuming and can bring a large chunk of revenue.
Growth Drivers
The launch of 3G services in India opened up a plethora of opportunities for VAS players. With 3G services, the operators will now be able to offer richer services such as mobile internet and video, as there is greater bandwidth available to deliver an enhanced service experience. While the operators will continue to offer pre-3G existing VAS, such as ringback tones, messaging, and infotainment services; there will be an opportunity to offer services that require more video or image based content, such as telemedicine, wireless teleconferencing, and e-learning.
VAS will also play a critical role in bridging down the digital gap between urban and rural masses, with operators coming up with innovative offerings to suit customer demands in all regions. Of late, VAS has also helped in digitally empowering the masses as it continues to play a major role in m-governance and m-commerce. Offerings like medical facilities, an SMS away, or mandi prices for farmers on phone, have even made the government to take a keen interest in the development of VAS. Innovations such as location based services, mobile TV, m-wallet have given the best breed of personalized services on mobile devices.
Market growth drivers on the supply side include declining ARPU, brand differentiation needs, and growing focus on entertainment-related content; demand-side drivers include the booming Indian economy, increasing user comfort with basic mobility services, personalization of content, devices, and cheaper handsets. From the early days of ‘Person-to-Person Short Message Service’ (P2P SMS), the industry is witnessing the growing portfolio of services including graphics/wallpapers downloads, ringtones and caller ringback tones (CRBT), SMS contests, and games.
Indian Telecom: The next round of spectrum auction would have to be telecom’s path into the future
Telecom, especially wireless, was supposed to be India’s ticket to economic development. Most operators contend that the government is trying to extract too much from them. The top four firms for instance must have paid close to $15 billion over the last four years itself as revenue share, licence fee, service tax and spectrum charges. Industry watchers contend that if they (the government) tries and extracts more, it will only be counter-productive.
One of the biggest obstacles faced by operators when it comes to breaking even is cost of spectrum (when you consider the rock bottom tariffs), especially when acquired through auctions. In India, spectrum is expensive, scarce and unpredictable. Those need to be changed for operators to be able to innovate around long-term investment plans.
Auctions must encourage competition between not just players but also technologies, say, 2G vs. 3G or GSM vs. CDMA. Technology neutrality is absolutely critical because just like you don’t want a player to have an undue advantage, you should also make sure a technology too doesn’t have one. When regulators pick a technology before the auctions, they’re essentially picking winners
Doing this allows savvy operators to marry the most efficient technology to the spectrum they purchase. Naturally, they’ll pick one that’ll have maximum consumer value.
A unified licence should mean an operator is free to offer whatever combination of technology [it] wants, even if that means a 2G plus LTE data card. The unified licence automatically takes care of revenue leakage.
There is also a case for offering slightly preferential treatment to those operators whose licences got scrapped and are re-bidding, versus those that are completely new. Globally, it’s a well-accepted strategy among regulators to reserve blocks of spectrum for new entrants and provide them certain handicaps. But that is now a political question in India. Incumbents believe that subjectivity and artificial restriction on the number of bidders will only lead to market distortion.
The long-term goal for the regulator must be to figure how to bring more spectrum for auction, more frequently. What is considered reasonable spectrum in most markets like the US and Russia for an operator is 15-20 MHz? That should actually be higher in India, given the size of our market. On the contrary Indian operators have to contend with 4X the number of consumers on networks working on fourth of the spectrum.
Unfortunately we have too much spectrum divided in narrow slices across too many operators, in itself leading to greater wastage. Every time spectrum is divided between two operators, guard bands are reserved around them to prevent accidental interference between them. The more the number of operators, the more the bands. About 15 percent of our spectrum is currently lost due to such guard bands, and in some cases I’ve even heard of 20 percent
After issues around the migration of Defence spectrum are sorted out, next up should be a comprehensive spectrum plan that includes more of lower bands that offer greater propagation at lower cost. Unnecessary secrecy and lack of transparency are three-fourths of the problem in telecom. If you reveal all relevant information in an auction, then players can decide for themselves
Indian Telecom’s New Deal too will need the “Three Rs”—Relief for serious operators and poorly served consumers, Recovery of the sector’s vast potential and Reform in order to bring lasting transparency and fairness.If we don’t get it right this time, the next 10 years of Indian telecom will be like the last 10 years.
This crisis really, never mind the cliché, is an opportunity.
Summarizing 2011 for Indian telecom
2011 is perhaps Indian telecom’s biggest year yet with launch of 3G services, mobile number portability implementation and 175 million new mobile phone subscribers in 10 months, taking the total subscriber base to 881 million.
However there have been challenges for the Indian telecom businesses-
1. 93 percent of users are low-spending pre-paid users
2. A low ARPU together with high energy costs for the diesel backup for a half-million towers, it’s a struggle for margins.
3. 3G licenses have come at a very heavy cost and the impact is in terms of cash strapped operations for many Telcos. The government made a lot of money and squandered off a little more, but that is a different story.
4. Inspite of huge investments on 3G, Poor user experience and a lack of content failed to draw users, killing all operator hopes of recovering that money.
5. Mobile number portability: 25 million users applied to switch operators while retaining their number, with 2.5 million requests pouring in each month. The churn is also taking its toll as Operators are responding with tariff cuts and deals.
A few future defining trends also shaped up in 2011 as markets evolved, matured and consolidated:
1. 2011 is possibly the year, when the Indian Telecom Industry moved up from a entry to a replacement market. The new sub adds plummeted to 6-7 million per month as against an average of 15-20 million activations in 2010.
2. Data emerges the hero as Telecom starts evolving from a some-what voice centric industry. 2011 should herald the decade of data for India with preliminary 3G and EVDO Rev. B launches. LTE is round the corner.
3. New classes of devices such as Smartphones and Tablets in the entry level with advanced OSs and application capabilities widen the consumer choice as well as the experience. Low cost Androidss are driving smartphone adoption rapidly across in ~$80 price segments
4. Tariffs bottoming out, Indian Telcos look for the next springwell of revenue and profits and new revenue models would start to emerge. Operators are looking at various VAS aided business models to augment their margins and profits.
5. The Aakash Tablet (and NotionInk’s Adam before that) established India’s status as a low cost innovator. Going forward with the markets in SE Asia and Africa being key to telecom growth, India will feature as a global innovation and R&D centre
6. The government has announced the NTP (National Telecom Policy) which is a proactive step in terms of defining telecom sector businesses going forward. The industry awaits greater clarity on a few issues such as mergers and acquisitions and we will see things get more clear and better as wel go along.
Indian Telecom Story (Part XXXI): Government rings in Rs.1 trillion from 3G and BWA auctions!
The spectrum auction for broadband wireless access (BWA) services fetched the Government of India an unprecedented Rs.38.543.61 crores (USD 8.56 billion) after 16 days and 117 rounds of auction. 11 companies were a part of the auction. The pan India licence price stood at Rs. 12,847.77 crore ( USD 2.85 billion), which was 634% (6 times) the base price set by GoI at Rs.1,750 crore. Unlike the 3G event, Infotel Broadband won a pan India license, while Aircel bagged 7 slots, Tikona got 5 slots, Qualcomm and Bharti 4 each and Augere 1. The others failed to pick up any stakes in the BWA circles. The total revenue of the government from sale of spectrum for both 3G and BWA touched over Rs.1.06 lakh crore. Reliance Communication, Tata Communications, Vodafone Essar, Spice,and Idea missed picking up even a single circle.
BWA spectrum is essentially for rolling out WiMAX services enabling handheld devices and laptops to access Internet.
GoI has been pushing for more widespread access to broadband usage in the country which is at a paltry 9% of the population currently. McKinsey study projected that a country GDP improves by 0.6% for every 10% increase in penetration levels of Broadband.
1. The high prices (above expectations) paid in both auctions, which were too rich for several major cellular operators who dropped out of the second BWA auction, ease the strain on the country’s public sector deficit for this fiscal year.
2. At the same time they exacerbate the financial difficulties of the two state-owned operators BSNL and MTNL which although automatically awarded both 3G and BWA spectrum are obliged to pay the same amounts for their spectrum as the winning bidders.
3. Furthermore, the outcomes of these auctions introduce additional players into India’s mobile market, whose supply structure, absent consolidation, is already unsustainable with an uneconomically large number of competitors.
4. The real impact and value of allocating this new spectrum for mobile broadband will depend upon sensible consolidation between operators – which will require a change in M&A regulations – and the establishment of roaming arrangements between operators.
5. The combination of very high spectrum prices (e.g. $1.34 per MHz/pop for 20 MHz of BWA spectrum at 2.3GHz in Delhi) will intensify the pressure that winning bidders will exert on the prices offered by equipment vendors for network rollouts to minimize capex, while the need for intercircle roaming agreements will favor technologies that are widely supported.
6. Qualcomm which won BWA spectrum in 4 circles – including Delhi and Mumbai – will be looking for roaming agreements with operators in other circles that deploy either WCDMA 3G (Qualcomm is the pioneering supplier of 3G/LTE chipsets) and/or TD-LTE networks.
7. Infotel Broadband is being acquired by Reliance Industries Ltd. This thus enables Mukesh Ambani who was barred under a family non-compete agreement from entering the telecom sector to re-enter and establish himself in the telecom sector.
8. Qualcomm which won BWA spectrum in 4 circles – including Delhi and Mumbai – will be looking for roaming agreements with operators in other circles that deploy either WCDMA 3G (Qualcomm is the pioneering supplier of 3G/LTE chipsets) and/or TD-LTE networks.
9. Infotel’s (Reliance) choice of technology will be critical in terms of introduction of TD-LTE. It will be influenced by Infotel’s ability to offer roaming as long as its network does not have nationwide coverage, as well as by the pricing of alternative technologies, and even the availability of international roaming arrangements (since target customers for mobile broadband customers will include the most internationally active of Indian customers).
Factors driving mobile internet in India
Mobility has touched the lives of 50% Indians and with the launch of 3G and enhanced spectrum, the numbers would see a bigger boost. As discussed in an earlier post, India is now going through a Data revolution. More and more people are accessing internet through their mobiles phones. Here are a key factors enabling the spread of Mobile Internet in India.
Proliferation of mobile internet
In 2011, Smartphone search rates are expected to exceed PC search rates of 2007.
In India alone, the GPRS users are estimated at 20 to 25 million, which is also estimated at 40% of desktop Internet users. Over 2009 internet traffic from metros from India grew 2.5X times other global carriers: Nearly half of this traffic was from Mobile phones.
India Smartphone penetration
Data from Admob shows that Internet traffic is mostly based on Feature phones accessing Internet through WAP sites. However, the smartphone penetration is also increasing across the country and 3G compatible devices are breaching the Rs.5000 mark. This provides an opportunity to replacement consumers to buy into higher end devices which have greater internet capability than the earlier devices.
Sample this: The Highest Mobile Traffic Mobile in India is the Nokia 5130/3310, which for most of its life was a 4K device. A user who bought into this device an year ago today has an option of upgrading to a more feature rich-internet enabled smartphone at 5-8K. That is where consumers are beginning to migrate to the internet
New Age Browsers: The start of a platform transition
With the smartphone entry price points close to the 5K, the browsing game now shifts from Mobile WAP browsing to full scale HTML browsing. While the former is optimized for Mobile, uses minimal navigation is quick loading and is without Frills to suit the limiting computing power of the mobile, full HTML browsing offers PC like browsing experience with multiple page support. The browsing experience will be aided by Location, direction and motion sensor, web apps and rich media experience.
Affordability of data plans
Mobile internet is set to surge see a surge as data plans now break down the price barriers and more and more competitors increasingly commoditize the voice revenues streams. A survey by Google puts the entry threshold for mass acceptance of data plans to Rs.100 per month citing that the volume increment in that case is a 5X multiple. As we go along, data revenues will continue spiraling downwards to the point of pay per downloads.
Two cases of Iran in 2007-08 and Algeria in 2008 prove the direct correlation between data plan affordability and surge in Internet traffic numbers.
A combination of the four factors has been and will be the driving force behind India’s Mobile internet growth in the near future.
Indian Telecom Story (Part XXXb): The case for Telco viabilities
Continued from earlier post: Indian Telecom Story (Part XXXa): 3G a near Reality
The 3G spectrum winning bids are under the microscope because of the huge drains on the Telco P&Ls and there is a lot of debate about how and why the costs that the Telcos have brown to get a 20 year stake in 3G Spectrum are unjustifed. This post tries looking at the costs and the accruals from a long horizon perspective.
High Tariffs and Low Returns
Doubts exist whether 3G services will prove to be a big money-spinner and ease the pressure on the sector, and some experts cite the experience of developed western markets where 3G services are only now starting to gain traction despite being around for at least five years.
The fear of higher prices is misplaced. The higher spectrum charges are sunk costs. Economists remind us that in a competitive market, such costs cannot be passed on to customers. A mobile company cannot attract customers if its tariff is not competitive. In India’s telecom market, raising prices will require a level of concerted action difficult even in simpler markets with fewer players.
Accrual of Benefits
The benefits of 3G spectrum will become even more pronounced once mobile number portability (MNP) is implemented. The presence of 3G offerings will allow operators to retain their premium subscribers and attract subscribers from competing networks; ARPUs for these subscribers are nearly four times the industry ARPUs, resulting in significantly higher profitability.
The Road ahead
The winners will be awarded spectrum in September, which means rollout of 3G services will be possible only by the end of 2010 or early 2011.For at least the first year, the main focus is expected to be on improving call quality. 3G uptake in India is expected to be slow in the initial stages as 3G handsets are costlier than 2G handsets.
Initially, the 3G spectrum to be primarily used for voice services, enabling operators to address the spectrum shortage that characterises the sector today. 3G technology, which is at least twice as spectrally efficient as 2G, will enable operators to service more subscribers with the available spectrum, without compromising on quality of service. This is critical given the lack of clarity on further allocation and pricing of 2G spectrum. However, the commoditised nature of voice services provides little scope for operators to differentiate in this arena. Therefore, to gain an edge, players will gradually leverage 3G technology and provide differentiated value-added services such mobile TV, videoconferencing and high-speed internet browsing. This will enable them not only to improve their ARPUs, but also to ease the pricing pressure that they face on account of intense competition in 2G services. 3G will also help operators reduce network congestion, and thereby cater to more 2G subscribers as well.
Indian Telecom Story (Part XXXa): 3G a near reality
After 4 years of delay, 34 days and 183 rounds of frenetic the Great Indian 3G auction has been a Great Big Fat Success. The proceeds of Rs.67,719 crore raised by GoI on higher-than-expected 3G mobile spectrum sale inflows could lower the government’s borrowing by up to Rs35,000 crore ($7.6 billion) in the 2010-11 fiscal year from estimates of Rs4.57 lakh crore ($99.3 bn). The government is likely to garner an additional Rs 12,000 crore from BWA auction.The notional value of a pan-India slot amounted to Rs16,828 crore, almost five times the reserve price of Rs3,500 crore. GoI fiscal deficit is slated to slide down to 5% from the existing 5.5% from the proceeds of the spectrum auction.
This post examines the views in the industry and otherwise debating viabilities. In an earlier post, I had written about how and why 3G would not be a viable alternative for enterprises.
Disturbing Balance Sheets
The unexpectedly high bids mean that companies have to raise a huge amount of cash to pay for licences, after which they will have to find more funds to buy equipment and roll out services. Operators that have won spectrum will have to pay for it within the next 10 days. Companies will have get rid of some of their assets to pay for 3G.
Airtel’s debt to equity ratio after factoring the cossts of 3G Spectrum acquisition stands at 2.3X while the debt to equity for Idea and Rcom was 3.5X.
Ten years back, European 3G auctions led to a similar bidding frenzy that left telecom operators with broken balance sheets and battered share prices. Telcos are expected to make money on their 3G spectrum only after 4 or 5 years.
The net margins of operators that have acquired 3G spectrum will be strained over a longer period of three to four years. This will be because of increased capital charges (the interest outgo on account of debt raised for 3G network rollout, and the amortisation of 3G spectrum charges). This would place additional pressure on operators’ bottom lines. Estimates by CRISIL for 3G investments at this level by any operator to be value-accretive, the operator will need to garner a total of 2.5 crore 3G subscribers by the fifth year, and charge an ARPU (average revenue per user) premium of 35% over 2G services. By 2013-14, a 3G operator that would enjoy a 500-700 bps advantage in EBDITA margins over one that does not.
Dawn of Industry Consolidation
3G services would be margin-dilutive in the near term, but could eventually lead to a significantly higher margins. Over the longer term, the availability of 3G spectrum can be a game-changer by catalysing consolidation in the telecom industry. For Telcos already battling a savage price war@, the end of the process marks the start of possible consolidation activity or network sharing pacts between operators as losers look to plug service gaps to prevent customers from jumping ship. Given that no single player has acquired pan-India 3G spectrum, the process of industry consolidation would be hastened. The significant pressure on profitability, and the need to gain scale, could induce players without 3G spectrum and new entrants to actively look to merge
Why 3G would be non-starter in Enterprise segment?
The Great Indian 3G auction was worth Rs. 15814.15 crore (for a pan India License) till the last round of billing (172 rounds of bidding over 31 days). This exceeded revenue expectation of Rs. 3500 crore by 352%. The revenues to the government at this price would be Rs 62254 crore against an estimated Rs.35000 crore in the budget 2010-11. However, the question that now comes up is that with spectrum coming dear, will the Telcos be able to provide 3G bandwidth at decent prices to consumers and enterprises.There is already a growing thought that enterprises will not opt for 3G at all.
The initial assumption thats been in the fore front was that 3G will be a solution to all and sundry. It would benefit the dual customer segments: Enterprises as well as Individual Consumers. Amongst the keys apps Social networking is one of the hot favourites for Consumers where as eMail, Connectivity, Video Conferencing and Web Sharing are the bigger enterprise apps. Enteprise adoption of 3G services would also help them to provide large bandwidths across a moving workforce to enable them to work from anywhere and secure access the company internet in lesser time with greater convenience and speed.Financial Inclusion of the masses across the geography and a unified communication service is the community extension of 3G services.
A recent survey by Voice & Data – IDC amongst enterprises found that only 13% of the enterprises seem to be excited about 3G and 87% enterprises were not very enthusiastic about the 3G roll outs. The reason being the better Return on Investement from competing technologies. What enterprises need today is predictability and a clear value proposition which helps them save costs, improve existing customer services and utilize their current investmenets in infrastructure the most.
The concern in adoption of 3G by enterprises is the availability of services uniformly across large areas and cities with consistent quality of service along with cheap tarriff plans. Here the cost factor is important. Too many different frequencies in the 3G spectrum would also drive down the scale and increase the cost of terminals. 3G is mostly about mobility and mobility as an application is not used much by enterprises. They mostly use email and voice which is also supported by the existing 2G networks in the country at very reasonable tarriffs. 3G would make the experience better but a lot of the adoption would depend upon the prevalent tarriffs. The higher order enterprise applications would possibly have to wait for 4G before they become mainstream.
However, the case for WIMAX entreprise led solutions is particularly strong. As against mobile services, WIMAX offfers fixed services within a geography unit with data speeds upto 70MBPS (versus 3G data speed of 15MBPS). The low cost of the WIMAX spectrum and its enhanced features such as security will drive service providers towards enterprise apps and enterprise adoption. The enterprises will also find WIMAX to be more suitable for their needs.
Mobile Internet: India surprises with No.2 position in the world
Mobile Internet is the next big thing in India going by recent reports by Google. Indians have emerged as the second biggest consumers of mobile internet with 5.9% share of 14 billion mobile page views. Though the report may be majorly flawed because Google has not measured the China numbers, the statistic is quite telling in favor of India.
The reported transition to the “fourth screen”, i.e Mobiles is well and truly happening as the number of new data connections added globally this year will be higher on the mobile than on the PC.
The rise in the numbers of mobile internet in India is fueled by both post paid data accounts (numbers 25 million of the 500 million or so mobile users in India) and another 55-65 million pre-paid users who use the operator WAP portals to access the Internet. Thats about 13% of the total subscription base* of India.The number of Internet users on PCs in India is growing at 50% per annum and would hit the 100 million mark by the end of 2010. In Comparison China added 100 million new users to the online community last year.
Interestingly however, the mobile access trends in India are completely contrarian to the global trends. Sample This:
1. Unlike almost every other country where the highest number of usage came from a smartphone, in India, the top two devices were mid-range Nokia phones — the Express Music 5130 and the 3110c, both of which cost between Rs 3,500 and Rs 5,500
2. The iPhone, the Rs 30,000 handset from Apple that accounted for nearly 40% of the global mobile web traffic in February, did not figure in the top 10 devices in India.
3. Nokia, which had just one presence in the world top 10 devices for mobile Internet, took all the 10 spots in India. Its devices also accounted for 59% of all mobile web traffic from India, followed by ‘Others’ and Sony Ericsson and Samsung.
4. Nokia’s N70, the only Nokia presence in world’s top 10 devices for generating mobile Internet traffic, was the most popular ‘smartphone’ in India, followed by other N Series devices such as N80, N73, N72 and the iPhone.
This thus re-iterates my view on the Indian Markets that low cost innovation would drive adoption in Indian Markets. The Indian markets have not seen any effort to reduce the cost of ownership of smartphones which has thus been an entry barrier to mass adoption of smartphones.
The voice network congestion, high data tariffs and low penetration of VAS services (compounding by lack of compelling apps and VAS) have been stumbling blocks to mass adoption of internet on Mobile. Regulatory clearances and 3G roll outs will help massification of the mobiel internet.
*
In the mean time, Indian markets have crossed the 600 million subscriber mark. The last 100 million subscribers came in a record of 3 months.
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