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Indian Telecom Story (Part XXXb): The case for Telco viabilities

Posted in Industry updates by Manas Ganguly on May 21, 2010

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

Posted in Industry updates by Manas Ganguly on May 20, 2010

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

to be continued

Digital Dividend: The future in Mobile Communications

Posted in The Technology Ecosystem by Manas Ganguly on October 18, 2009

The govt of India, Telecom  Regulatory Authority of India (TRAI), Cellular operators association of India (COAI), Association of Unified Services Providers of India (AUSPI), Broadband wireless consortium of India (BWCI) and may industry apex bodies are single minded persuing three point agendas in the Indian telecom ecosystem.

1. Mobile Penetration

2. Lowering the costs associated with mobility / Allowing population to go “mobile”

3. Bundling services for the masses through mobiles.

According to studies by Telecom researchers and consultants, Thrust in rural telecom sector can increase GDP by $520 billion in next 8 years. ALso, a 10% increase in broadband penetration can deliver a 1.4% growth in GDP. Currently it is the best available opportunity of bringing 70% of Indian Population who love in far scattered rural areas to the mainstream. Thus the necesssity of a communications model which will reach out to the remotest rurak citizen at lowest capital and operational costs.

As with many other countries, Spectrum limitation and exponentially growing telecom subscribers are putting a lot of pressure on the existing spectrum (900/1800 MHz). The 2.1 and 2.5/2.6 GHz spectrum will have utilities more in 3G and higher end technologies. It is here, that a parallel innovation promises a lot of help. Traditionally TV spectrums have been very wide because of the fact that most of it is analogue. With the coming of Digital age, a large amount of spectrum will be freed up in case of switch over from analogue to digital signals. Digital compression technologies and coding systems make it possible to squeeze much more information into a radio signal than in the case of analogue technology.

Digital DividendDigital broadcasting is roughly six times more efficient than analogue, allowing more channels to be carried across fewer airwaves.The surplus spectrum not required for the Digital transmission is called the Digital Dividend.

  1. It is approximately 70% cheaper to provide mobile broadband coverage in the 698-806MHz band than at 2100MHz.

DD 2

      2.     Lower the spectrum, more the coverage per BTS, in effect reducing the number of BTSs required for an area coverage, which reduces the capex costs.


Both the reasons considered, a 700 MHz is twice the coverage of 3500 MHz at roughly 20% the cost. Indian Government willing, the Digital dividend could be the next step in connecting the masses in India and reaching out to them with information, technologies that would empower them and allow them to become “mainstream”.

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