Telecom

KEY POINTERS TO UNDERSTAND THE TELECOM INDUSTRY

Regulatory

and competitive factors that led to the high growth of

the telecom industry

Past

dispute between GSM and CDMA players and how it was

resolved?
Important

operational metrics and trends in the operational

Metrics
Market
Tower
How

shares

Infrastructure (Trends)

3G and VAS are going to impact the performance of the

Telecom players?
Why

consolidation is most likely in this industry?

Future
2

outlook

Pre 1995

Govt Monopoly

Tele-density was less than 1%

1995 - 1998

Sector opened up for the first time to private players

But the tele-density did not increase (only 0.88 mn customers were

added in the 3 years, of which half were in Mumbai and Delhi.

This

is due to:

Fixed

licensing structure

less competition (only 2 players were allowed per circle)

1998-2003

Licensing structure was changed to revenue sharing model

4 competitors were allowed per circle

Subscriber base increased to 13.3 mn

2003 - 2009

Golden period for the industry

Govt. implemented CPP

With more subscribers, cost came down

Telcos had both revenue and profit growth

2009 - 2013

Price wars

Negative regulatory environment (2G scams, Vodafone

retrospective taxes)

Profitability reduced and debts increased

Slowdown

in subscriber additions due to saturation.

2013 ONWARDS

Competition

in the mobile services space has been less intense

during the last 18 months, compared to earlier years.
Post the release of the verdict on licence cancellations, many
operators (such as Etisalat, S-Tel and Loop Mobile [except Mumbai])
wound up their operations, while others (Telewings, Videocon and
Sistema) scaled down operations to select circles.
Operators (particularly the larger ones) who have been reducing
the quantum of free/discounted minutes offered to subscribers,
have regained pricing power to an extent.
Also the proportion of revenues from data services and 3G
subscribers has been increasing.
This has aided an improvement in their realisations since the first
half of 2013-14.
6

All India mobile subscriber base

MAJOR REASONS FOR GROWTH SLOW DOWN IN SUBSCRIBER

ADDITIONS

Rising tele-density
The

rising tele-density is one of the very many reasons for the

fall in subscriber growth.

The

wireless tele-density has risen rapidly over the past few

years.
Decline in the use of multiple SIM cards
The

softening competitive intensity in the sector has led to a

reduction in the use of multiple SIM cards, thereby impacting the

net additions.
Besides,

the implementation of MNP in India empowered the

subscribers to switch operators without having to change their

numbers.

MAJOR REASONS FOR GROWTH SLOW DOWN IN SUBSCRIBER

ADDITIONS

Moderate growth in rural net additions

The

rural wireless tele-density, at 48% per cent, is still on the

lower side implicating a huge un-tapped potential in the rural and

semi-urban markets.
Despite
While

this, the growth in rural net additions has been moderate.

the cost of servicing subscribers in the rural areas is very

high, the stringent verification norms also impact the new

subscriber additions is these areas, as rural subscribers may not
have all the relevant subscriber verification documents.

MAJOR REASONS FOR GROWTH SLOW DOWN IN SUBSCRIBER

ADDITIONS

Deactivation of inactive subscribers in 2012-13

In

2012-13 the subscriber base declined drastically.

The

subscriber base plunged from 919.2 million in March 2012

to 867.8 million in March 2013.

Operators

undertook large-scale deactivation of inactive

subscribers from their networks.

This

deactivation will enable operators to increase their focus

on high Average Revenue Per Unit (ARPU) subscribers.

The proportion of active wireless subscribers has risen to 84.9

per cent
in September 2013 from 77.1 per cent in September 2012,
owing to the massive subscriber clean-up done by operators.
ACTIVE SBUSCRIBER BASE

A reduction in competitive intensity, following exit of few

operators, and an
increase in the share of revenues from data services, aided the
overall increase in growth after 2012.

INDUSTRY REVENUES

ROCE has come down drastically from 2007-08 .

Return on capital employed (RoCE) of Top 3 players

ROCE has come down drastically from 2007-08 .

RURAL OPERATIONS : LESS PROFITABLE
An important reasons of decreasing profitability apart from price wars
is the expansion of rural subscriber base
Profitability of rural operations as a standalone business unit is 7-10
per cent lower than that in urban areas due to following reasons:
Lower ARPU from rural subscribers
High Network Running Cost
Rural India is not only deprived of adequate grid
power but also
the
quality of power supply
(frequent fluctuations and phase
shifts) is poor.
Consequently, service providers have to largely bank on
DG sets, which significantly increase the NOC.
Lower Tower sharing in rural areas

GSM VS CDMA

GSM
OVERVIEW
AsAND
GSMCDMA:
was the
more widespread technology worldwide,

regulators decided to adopt GSM as the technology in

India.
In

2001, permissions were given to provide limited

mobility services based on code division multiple access

(CDMA) technology.
Limited

mobility is provision of mobile services within a

short distance calling area (SDCA) and has reduced

features compared to cellular services.
Under

limited mobility service, the important roaming'

feature is not available.

GSM AND CDMA: DIFFERENTIAL LICENCE FEE

CDMA

players paid lesser fees as there was no roaming and

certain other services.

Due
Till

to this their calling rates were low.

2003, separate licences were given for GSM and

CDMA (CDMA is a limited mobility service).

The

government thought that these 2 segments

were distinct and hence do not compete with each

other.

The
limited
mobility
services
however were more or less
GSM
AND
CDMA:
DIRECT
COMPETITION

competing directly with fully mobile services.

Limited mobility services competed almost directly
with mobile services, on account of two reasons:
first, only a small proportion of the
mobile subscribers used
roaming
services and
second, one of the operators provided
features like call forwarding, which
effectively resulted in the subscriber
getting roaming facility.
As the licence fees paid by CDMA players was
substantially lower than that of GSM players, they could
offer cheaper rates.
GSM players were in a highly disadvantageous position.
This led to a dispute and litigation between the erstwhile
cellular service providers and the basic service providers.

GSM AND CDMA: UASL

The

disputes resulted in operators, particularly GSM

operators, holding back their investment plans and thus

hampering the growth of the industry.
Subsequently,

to put an end to this dispute, the

Telecommunications Regulatory Authority of India (TRAI)

introduced the Unified Access Service Licence (UASL) in
November 2003, wherein the licence fee are same for any
type of technology.

Key Operational Metrics

KEY OPERATING METRICS

Pre-paid vs Post paid

GSM Vs CDMA

ARPU

Minutes of Usage

Subscriber Market share

Revenue Market Share

Exclusive owned vs shared towers

Share of VAS

PROPORTION OF PRE-PAID VS POST-PAID

GSM VS CDMA

ARPU has been increasing gradually after hitting the bottom in

2011-12 due to tariff increase, removal of inactive subscriber
base increasing 3G subscriber base and data usage.

ARPU
ARPU : LONG-TERM TRENDS
(GSM)

ARPU : SHORT-TERM
TRENDS (OVERALL)

Minutes of usage has been gradually increasing after

September 2011 due to removal of inactive subscribers
from operator networks.
MINUTES OF USAGE
MOU: LONG-TERM TRENDS (GSM)

MOU: SHORT-TERM TRENDS

(OVERALL)

Wireless subscriber market share

Wireless revenue market share

Tower Infrastructure

Tower base break-up

2009

2010

2011

2012

Consolidation in passive infrastructure segment

Cumulative increase in EBITDA margin of Telecom Service Prov

Indicative operating and PAT margin of a tower company at

different tenancy levels

Analysis of VAS and 3G

As voice service has become highly commoditized, the

telecom operators are looking at VAS and 3G for future
growth.
Why VAS and 3G?
Voice

services have got commoditised and is now set to enter a

more moderate phase of growth.

Consequently, operators are now focusing on value-added

services, particularly data services, to drive future growth.

VAS

market is expected to grow exponentially over the next five

years and Indias high-speed data subscriber base to cross the

200 million mark by 2017-18.
Besides

offering scope for differentiation in services, data

services can help operators offer a unique value proposition to

their subscribers, particularly their high-ARPU subscribers.

CRITICAL FACTORS FOR 3 G SUCCESS

Spectrum Fees

Building 3G infrastructure

Cost of 3G enabled handsets

Variety of services offered through 3G

Vernacularisation or regionalization

Revenue model from VAS

Operators are also aggressively pushing for VAS through

promotions, bundled data plans and increasing number of
cell-sites.
AGGRESSIVE PUSH FOR VAS

Operators have been trying to increase subscriber adoption of these

services through:
Marketing & promotional strategies for creating awareness
among subscribers about the availability and affordability of such
services.
Continuous addition and expansion in the number of cell-sites,
particularly 3G BTS (cell-sites), for enhancing their offerings.
Bundling of branded smart-phones with data plans, as done by
Idea Cellular, for example.
Recently, Reliance Communications and Bharti Airtel also
offered bundled data plans for two years on the purchase of

Data usage has been showing a tremendous increase over

the last couple of years.
DATA USAGE TRENDS

Share of Data is increasing among non-voice revenues

while messaging is coming down.
SHARE OF DATA IN NON-VOICE REVENUES

Four large operators saw their 3G subscriber base almost

doubled between September 2013 and September 2013.
NUMBER OF 3G SUBSCRIBERS

Share of revenues from VAS is expected to increase to 9%

in 2012-13 to 25.2% in 2017-18.
VAS AS % OF WIRELESS REVENUES

High speed internet will be the biggest segment in the

high bandwidth services but Video VAS and Music VAS will
grow fast
HIGH BANDWIDTH SERVICES: MARKET POTENTIAL

Service

Revenues (in Rs. Bn)

2011-12

High Speed Internet

2015-16 (P)

17.6

120

Video VAS (Video

Calling, Video
Downloads)

65

Music VAS (Streaming,

Downloads)

60

Mobile gaming

15

Chances of Consolidation

*Established and New operators

Established players:
Bharti Airtel,
Vodafone,
Reliance Communications,
Idea Cellular,
Mid sized-players
Tata Teleservices,
BSNL + MTNL,
Aircel
New entrants:
Uninor,
Shyam Sistema (MTS),
Videocon,
Etisalat,
STel

Subscriber share of operators

Revenue share of operators

Gross ARPU trend for operators

Future Outlook

The subscriber base would rise steadily to touch 951 million

MOBILE SUBSCRIBER GROWTH PROJECTIONS

Industry net ARPUs is expected to increase at a steady

pace as a result of the above reasons to reach Rs 145 by
2017-18 from Rs 97 in 2012-13.
ARPU AND RPM FORECAST

MOU is expected to steadily increase to 381 minutes by 2017

MOU FORECAST

Reduction in competitive intensity has reduced the prices

wars and marginally improved the realizations.
REDUCTION IN COMPETITIVE INTENSITY
Competition

in the mobile services space has been less intense

during the last 18 months, compared to earlier years.
Post the release of the verdict on licence cancellations, many
operators (such as Etisalat, S-Tel and Loop Mobile [except
Mumbai]) wound up their operations, while others (Telewings,
Videocon and Sistema) scaled down operations to select circles.
Both these factors helped ease the competitive scenario.
Operators (particularly the larger ones) who have been reducing
the quantum of free/discounted minutesoffered to subscribers,
have regained pricing power to an extent.
This has aided an improvement in their realisations during the
first half of 2013-14.
This trend is expected to continue.
51

ARPU and MOU are likely to increase to Rs. 145 and 381
minutes respectively by 2017-18..
Operating metrics to keep improving steadily
The

recent large-scale subscriber clean-up by operators and the

abating competitive intensity would lead to an increase in the

key operating metrics - MoU and ARPU, although at a moderate
pace.

While the MoU is expected to increase to 381 minutes in 2017-

18, from 346 minutes in 2012-13, net ARPU is likely to keep

increasing steadily to Rs 145 in 2017-18, from Rs 97 in 2012-13.
52

The coming years will see a saturation or decline in 2G

and rise of 3G and 4G
3G and 4G ADOPTION WILL WITNESS A STEADY INCREASE
2G,

which is currently the dominant wireless technology in India,

will see a gradual decline in its share in the total wireless

subscribers.
There

is very limited scope for revenue expansion in pure-play 2G

offering, which hinges primarily on conventional voice services.

As

against this, 3G and 4G enables operators to provide

differentiation in service offerings through the inclusion of several

data-centric services
and

also improved ARPUs.

With
53

the proliferation of 3G-enabled smart-phones due to

3G subscribers are expected to increase from 27.8 mn in

2013 to 200 mn in 2017-18
3G SUBSCRIBER PROJECTIONS
Post

the 3G auction in mid-2010, most operators have gradually

rolled out and expanded 3G services to more areas.

As

at September 2013, the top four wireless operators had a 3G

subscriber base of 27.8 million, an increase over 14.6 million in

September 2012.
The

3G subscriber base is expected to cross 200 million by

2017-18, which translates to over 20 per cent of the total mobile

subscriber base.
Uptake

of 3G services, which has been slow till date, is

expected to increase steadily over the next few years, with rapid
additions expected after 2015.