4G- Can Telecom Operators count on 50% data revenue contribution for their business cases?

Even when the base price for 2G is being debated and the 3G tariffs are registering a free fall, 4G services are supposed to be taking over as the revenue engines for Telcos riding on the data wave. However, a recent research report from PWC states that it is highly unlikely that data use revenues will grow from the current level of around 14 per cent of total revenue to 50 per cent by 2020.

TRAI, while figuring out per unit 4G spectrum rates, had assumed that data services will contribute more than half of an operators’ revenues by 2020. Analysts and industry operators are now arguing that this basis of pricing spectrum is wrong. At present, non-voice revenues as a percentage of total revenues stand at 14 per cent, out of which pure data services contribute only 5 per cent and the rest comes from message-based services.

PWC has a sound basis- Even in mature telecom markets such as Denmark, Italy and the US, the contribution of data services to revenue is only 19.6 per cent, 27.2 per cent and 33.20 per cent, respectively in 2010. In fact, not even Japan has 50 per cent data revenues as a proportion of total revenues today.

Sometime this week, Mukesh Ambani put off the launch of RCom 4G services by an year. Even while Airtel has been quick to launch 4G, for all purposes this is a soft launch. RCom entry has been deferred because the markets are not matured yet. Lack of demand may also see two foreign operators — Augere Wireless (backed by France Telecom) and US chipmaker Qualcomm — quit the 4G data segment.

So now the question that begs to be answered is given sluggish market maturity, lack of demand – and the fact that most mature telecom  markets havent performed at 50% revenue contribution levels, was the industry APEX body – TRAI over setting its targets and the spectrum pricing? For those who invested in, the case of a break even seems a little distant already.

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.

to be concluded

Indian Telecom Industry – Stuck in a rut

Reeling under the pressure of borrowings for 3G services, the profit of telecom sector is likely to dip by 84.7% in 2011-12, according to an economic survey of Indian telecom industry. PAT (Profit After Tax) during 2011-12 is expected to fall by 84.7%, mainly on account of the sharp rise in the industry’s interest outgo and higher depreciation charges due to the heavy borrowings for acquiring 3G licences and rolling out 3G services. The pre-Budget document said it expects sales of telecom industry to slow down in 2011-12 to 8.7% from 10.5% during 2010-11. However, it is optimistic about the growth next year and expects the revenues to gain momentum in 2012-13 with a growth rate of 10.6%.
Needless to remark here, the Indian telecom industry has been stuck in a rut, majorly because of ambiguous government policies and a poor blueprint for growth. The telecom industry earnings have been used to offset large government subsidy projects for a while now. However the auction model with such high outgo of capital from the Telecom operators without an adequate and clear indication from the government on the way forward has knocked the wind out of the sails for the Telecom industry.

The learnings have not been absorbed by the government yet. Case in point, is the 2G auction as per the recent Supreme court 2G verdict. Then there is the 700 MHz auction later this year. With profits and coffers drying out, the Government still believes that the operators have an appetite for so many auctions. On the other hand, there is no clear roadmap from the Government as to how much spectrum is going to be auctioned and when. The recent Supreme Court verdict will lose its very purpose if the policy back and forth continues. The reason telecommunications industry is in a mess today is that our policy roadmap is unclear. Any successful industry needs a strong and consistent policy framework to be successful. The Indian telecom industry has been let down by the Government in this very critical requirement.
It might help to reduce the role of various Government bodies involved in the day-to-day affairs of the industry. There are so many Government bodies under the aegis of DoT that it is difficult to keep track. TDSAT, WPC, TRAI, Telecom Commission – each at crossroads with the other.

The recent Supreme Court judgment coupled with the forthcoming National Telecom Policy are a golden opportunity for the Government to revamp the processes and to focus on the basics to get the industry moving. Reducing the role of the Government in the day-to-day functioning of the Government might be a good beginning.

The TRAI road map for the troubled telecom sector

The telecommunications sector is the most significant and visible success story of economic liberalization in the country. However, its sustainability and continued growth path can only be ensured with firm but soft-touch regulatory measures. Any future foreign investment in the telecom sector will be largely determined by the manner in which the govt address the present upheaval.

To provide the background, The regulatory function in India is performed both by the government — that is, by the department of telecommunications — and by the regulator, the Telecom Regulatory Authority of India (TRAI). Given the present functional jurisdiction, the answers to most regulatory issues lie with the government. The industry’s paramount need, in order to provide for the functional efficiency and financial health of telecom service companies, is that the process of consolidation be catalyzed. The international experience says that five or six licenses are adequate both to ensure the quality of service provided, as well as to induce sufficient competition in the sector. Even if we account for India’s vast population, there is no viable case for having a dozen licenses in each service area.

While there were many license seekers in 2007-08 in the queue for unearned gains and some foreign companies invested in the hugely appreciated script value of the newly licensed companies. By 2012, there is already a clamor for incentivizing a merger and acquisition policy and a friendly exit policy. The issue was partly addressed by the recent judgment of the Supreme Court.

However, the government would be repeating its earlier mistake if the number of licenses is not rationalized. It is imperative that the need and timing for new licenses should be considered by the regulatory authority, TRAI, on a reference from the government. No one is making a case for pre-determined numbers or any form of capping of licenses. However, the process of granting licenses can be initiated in phases to assess the felt need. Meanwhile, a cloud of regulatory uncertainty has spread after a series of review petitions has been filed in the apex court.

The government has announced the draft National Telecom Policy, 2011. Its finalization and announcement deserve the highest priority, in order to dispel any misgivings about regulation that may linger. There are also important recommendations from TRAI which deserve to be accepted by the government for incorporation into the draft telecom policy. The most critical structural recommendation relates to the introduction of a Unified Service License, which will provide for the freedom to use any technology, as well as the separation of spectrum. The acceptance of this policy would also require a defined path for the migration of present UAS license holders. This should be addressed along with the license renewal policy, as many of the industry incumbents will complete 20 years, beginning in 2014. It also entails the determination of a renewal fee.

There is another pending issue that is worrying investors in the telecom sector. That concerns the determination of the price of spectrum beyond the 6.2 MHz that is presently with the major telecom service providers. TRAI has made certain recommendations on this subject. The government may auction 2G spectrum band as per the orders issued by the Supreme Court. Therefore, a balanced view needs to be taken so as to avoid any situation of litigation and irrational bid performance.

Another recommendation from TRAI concerns re-farming in the 900 MHZ band of spectrum. It may be desirable to consider the monetization of the spectrum value in the 900 MHz band, among the possible solutions to resolve this issue. The gains in terms of spectrum release from re-farming are far less, and, further, it would open up a Pandora’s box of litigation.

There are also technology and interconnect issues. TRAI has already recommended the permitting of Voice over Internet Protocol (VoIP). In future, Long Term Evolution (LTE) technology will be a major challenge to the existing telecom service providers. The issue of interconnection within and outside the service area in different spectrum bands is already before the appellate court. There are official announcements of the introduction of one India circle, and the consequent abolition of roaming charges. These deserve serious consideration on grounds of technology, tariff and resolution of National Long Distance licences.

Lastly, the rationalization of tariff must remain with the telecom service providers under the watch of TRAI. The need of the hour is to seek the view of telecom service providers and evolve regulatory policies in the larger national interest, without any tag of “winners” and “losers”.

Reproduced from an article by Nripendra Misra

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.

Re-thinking Indian Telecom

Continued from earlier post- Indian Telecom: Under seige

Focus in Indian Telecom now needs to shift from infrastructure creation and network rollout towards reuse of resources and innovation. The concept of tower sharing that began four to five years ago was a great milestone. It showed operators realising there is more value in sharing assets than in keeping them to one’s self. Therefore, Instead of penalising operators for sharing scarce resources, as the drive against “illegal 3G roaming” indicates, the regulator should encourage all forms of asset sharing, including spectrum, provided consumers aren’t being short-changed.

The legislators also need a MVNO policy to allow MVNOs(virtual operators who lease the infrastructure from other operators) into the market eco-system. This enables idle assets become economically productive platforms for consumer innovation. Once this freedom is established, the wholesale market will naturally begin to evolve. Players like Lightsquared, a company that is building a $7 billion wholesale-only 4G network across the USA, could make eminent sense in broadband-hungry India.

Wholesale should be very seriously encouraged. In fact, for BSNL it could be a brilliant option, given its huge strength in infrastructure but almost nothing on the retail side.

The government needs to Encourage mergers and acquistions, by doing away with all restrictions on spectrum held and increasing the combined market share level in consultation with the Competition Commission of India (CCI). Playing the regulator by imposing artificial constraints on mergers, prevents a free play of market forces. When it comes to mergers, fears of cartelisation or monopolisation are almost always overblown.

The concept of regulators determining the number of operators is itself outdated. Regulating the telecom sector requires certain expertise which a government ministry cannot be expected to have. Today we have technological and economic solutions like spectrum and network sharing which should dictate the sectoral dynamics. In fact, the concept of an operator being an end-to-end entity needs to be rethought. They can be just a customer facing entity. Regulators should become innovative and forward looking, and behave like economists. Unfortunately, many dont think and cannot understand and comprehend their basic tasks and responsibilities. Regulators today are still stuck in the pre-91 Hindu-rate-of-growth babudom dominated decision taking authoritarian culture. The market and the economy has evolved multifold and should be treated as a play of multiple market forces where the rule of regulator is to set a level playing field and safeguard customer interest against cartelization.

An alternative model in Spectrum Licensing

Think of the spectrum like the village commons

In a shock ruling ten days ago, the Supreme Court cancelled 122 mobile phone licences that had been deceitfully awarded in 2008. The ruling sent the telecom industry into chaos, confirmed dreadful corruption in the government’s decision-making process, and damaged the reputation of our nation in the eyes of the world—especially foreign investors. There was much euphoria inside the country, however, for justice had seemingly been served.

The Supreme Court also instructed the telecom regulator (TRAI) to auction the illegally gained 2G spectrum, as it was done in the case of 3G spectrum. “While transferring or alienating natural resources, the state is duty bound to adopt the method of auction by giving wide publicity so that all eligible persons can participate,” said the court judgment. Auctions are certainly a better way to allocate a scare resource than first come first served, but what former telecom minister A Raja did was, of course, preposterous — he subverted the “first come first serve” policy by changing rules mid-way; he allocated spectrum out-of-turn in a non-transparent manner, and that too at 2001 prices, thus creating the biggest corruption scandal in India’s history.

But is auctioning the best way to allocate radio spectrum? Although it is scarce, should it be used as a money-making device by government? Since water is scarce, should it be auctioned? No. The risk in an auction is that “animal spirits” of entrepreneurs forces them to bid very high, which is then reflected in high tariffs, and this forces the poor out of the market. Thirty-one countries have used spectrum auctions and many have regretted it for this reason. India is, perhaps, the world’s most successful telecom market with the lowest tariffs in the world. Hence, it has the highest number of subscribers who are poor. The credit for this goes to the previous government which had the courage to change policy from high license fees to revenue sharing between the telephone company and the government. If the state had been “duty bound to hold an auction”, cell phones would not have reached the poor.

In the ideal world, radio spectrum would be like sunshine which is not owned by anyone or any government but everyone enjoys it without any cost. But unlike sunshine, spectrum is finite and hence it has been historically controlled by governments. It is widely accepted that government allocation is inefficient and leads to corruption. Ronald Coase, the Nobel Prize winner, exploded the myth long ago that governments should control spectrum to prevent airwave chaos. Today many experts think of spectrum as a common grazing ground around a village, which is open to everyone to use freely. They claim that new spectrum-sharing technologies allow a virtually unlimited number of persons to use it without causing each other interference-this eliminates the need for either property rights or government control. This is why the United States has gone ahead and designated a 50 MHz block of spectrum in the 3650 MHz band as a “commons”.

If the spectrum were a “commons” nobody would own it nor need to auction it. A telecom company would merely register with an authority, which would assign it a spectrum frequency for its use. When the company reached the limit of its spectrum, the authority would release it some more. Just as a villager pays a nominal tax for maintaining the commons, depending on how many cattle he grazes, each cell phone subscriber would pay a nominal fee, say a paisa per minute, towards upkeep of the spectrum. It would be form a part of the monthly bill, and transferred by the phone company to the authority. Just as a village needs rules to prevent over-grazing, there would be rules in maintaining spectrum to avoid a “tragedy of the commons”. The rules would be transparent, monitored in real time, and no one would be able to corner the spectrum.

Unfortunately, the Supreme Court judgment has come out so heavily prescriptive in favour of auctions that future governments in India will be shy to adopt a better alternative. Technology is developing very rapidly and soon the world will be ready for an “open spectrum” regime, but the court’s inflexible judgment will inhibit the Indian government in doing the right thing. A pity!

Reproduced from an article by Gurcharan Das in ToI

Indian Telecom: Under seige!

Bad governance and regulation in India is an equal opportunity offender. UPA’s errors of omissions & alleged commissions beginning 2004, has all but ruined one of the best stories of the Indian economy—telecom.

While new entrants struggle for their very right to exist in India, older incumbents are currently staring at the prospect of being “retroactively” charged an estimated Rs. 37,000 crore each for 10 years-worth of “excess spectrum” held by them. State-owned Telcos are being progressively run to the ground, earnest private operators have been waiting for start-up spectrum in key markets for any number of years. When a foolhardy new entrant pops up, and when it bid $1 billion for 4G licenses in four lucrative markets, its application was rejected for thoroughly frivolous reasons.

A mish-mash of secretive and uninformed regulators—the ministry of Telecom, TRAI, Department of Telecom, TDSAT—work at cross-purposes with each other. Operators and other stakeholders come to know of regulations via frequent “leaks” to the media, in most cases traced back to unauthorised photocopies of official documents that are palmed off and sold by junior staffers. The phrase “regulation through photocopy” would not be out of place, most stakeholders agree in private.

With nearly 900 million subscribers across seven to 15 operators (depending on whether you include the ones whose licenses were cancelled), regulators ought to understand Indian Telecom is no longer in its infancy. The whole idea of prescribing how an eighth, ninth or tenth operator should roll out their networks doesn’t make sense today. Consumers need service competition, not multiplicity of infrastructure. There is a strong belief that this logic of introducing many more operators in each regional market may not be consistent with how wireless telecom has evolved across the world. According to the credit rating agency CARE’s research, on an average there were 15 players (both GSM and CDMA) in a telecom circle in India as compared to three in Singapore, three in China, four in Mexico and five in the US.

Out of the total 122 cancelled licences, 39 licence areas (about 32 percent) are under-utilised as these many operators did not even have 1,000 subscribers in many circles as of December 2011, implying the services were not fully rolled out. And here’s a telling comment on the state of the industry: After the cancellation of licences, average number of operators will come down to around nine to 10.

This indicates that further entry of operators beyond four or five does not significantly increase the competitiveness of the market. And what do the fringe guys have to show for their efforts? A $2 billion pan India network without any subscribers!

(to be continued)

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.

The pictures in Numbers: Indian Mobile Handset industry

Gartner release on the size and growth projections of Indian Mobile handset numbers:

Mobile handset sales in India, expected to grow an annual 8.5 percent and reach 231 million units in 2012
Annual Mobile handset sales in India to top 322 million by 2015
Smartphone sales 6 percent of the total device sales in Q2, 2011. Gartner expects to go up to 8 percent in 2012
Average selling price ASP for a mobile device sold in India is about $45
75% of the Mobile devices sold costing below $75

These set of projections amongst other things emphasize the growth of the smartphone segment in the mobile phone markets. Smartphones are projected to grow by 45% as against a total market growth of 9% Y-o-Y 2011-12.

The report also speaks about the waning klout of the Tier A brands to the local and Chinese brands such as G’Five, Micromax, Spice, Karbonn.Going forward in 2012, the big global brands will continue to face competition from local and Chinese brands as some of these brands are building capabilities to compete at a larger level covering broader consumer segments.