Telecom report final

India 2012: Telecom growth continues

Confederation of Indian Industry

Unveiling India 2012:
Telecom growth continues

Nripendra Misra, Chairman, TRAI unveils CII- Ernst & Young report “India 2012: Telecom
growth continues,” at the CII Roundtable Conference—India Telecom Landscape 2012 on
28 November 2008.
From left - Ambrish Bakaya, Director, Corporate Affairs, Nokia India Pvt. Ltd., Nripendra
Misra, Chairman, TRAI, Rajat Mukarji, Chief Corporate Affairs Officer, IDEA Cellular Ltd,
Prashant Singhal, Telecommunications Leader, Ernst & Young Pvt Ltd and Sujith Haridas,
Director, ICT & Defence, Confederation of Indian Industry (CII).

“The report by Ernst & Young on ‘India 2012: Telecom growth continues’ is
based on very exhaustive research and rational analysis. The key challenges
impacting the growth of the sector has also been very constructively identified.
I am confident that this very valuable report would provide the gateway for
understanding telecom in India.”
Nripendra Misra
Chairman, TRAI

Foreword
The Telecom sector in India has witnessed unparalleled growth by global standards. In
a little over a decade of wireless telephony, India has moved from a subscriber base of
zero to becoming the second-largest market in the world after China. This growth would
continue provided we have progressive policies that shall provide impetus to free flow of
investment, ideas and technology that facilitate growth and evolution of this sector. The
progress in the sector has been something to be proud of and it is often viewed as ample
testimony to the India growth story.
Several developments in the industry are afoot, which will be crucial to defining the
state of this industry in times to come. Additional 2G spectrum has been recently
allotted, allowing the entry of several new players — wherein a majority of them are
also acquiring strategic international partners, commencing the globalization of Indian
Telecom. The rollout of 3G, which could potentially transform the bouquet of services
extended to consumers from vanilla voice and basic data to rich entertainment and
far more, is poised for a take-off with the impending auction of the 3G spectrum.
Broadband — conventional as well as wireless — is poised for a major leap. In the wake
of such developments, a concerted effort must be made between the industry and the
Government (as the prime mover and regulator on policies in Telecom) on ensuring that
policies, regulations and laws are formulated in a manner that creates systematic growth
and harnesses the full potential of this industry for the Indian consumer.
CII, in collaboration with Ernst & Young, has put together this report, which brings out
the current status of the industry with a brief perspective on how that growth has been
achieved, and sets the context for the landscape in 2012. It focuses on current issues
and the envisaged future concerns and potential points of debate, which would need to
be jointly addressed by the industry and the Government in order to enable this industry
to continue on its already-impressive growth trajectory, and become the cynosure of the
Telecom world.

Anil Sardana
Chairman
National Committee on Telecom & Broadband
Confederation of Indian Industry

2 India 2012: Telecom growth continues

Introduction
Welcome to Ernst and Young - CII industry report “ India 2012: Telecom growth
continues”. We are very excited to release this report in association with the
Confederation of Indian Industry (CII) for its Roundtable Conference on “India
Telecom Landscape 2012.”
This report aims to capture the developments witnessed in the Telecom sector
over the last few years and analyze historical performance to estimate growth
over the next four years. It is targeted at stakeholders in the Telecom industry,
including operators, industry practitioners, the Government, content providers,
infrastructure builders and equipment vendors. In the report, we examine and
evaluate the buoyancy of the Indian Telecom sector through to 2008 and map
the key variables that will be the primary drivers for India’s Telecom growth
story in 2012.
Only change seems to be constant in the Indian Telecom sector. Fixed lines
were the main stay till 2004 – which were substituted by wireless services
that led to steep growth in urban areas. From 2008 to 2012, we will witness
wireless expansion in the rural areas. We are also going to see a data revolution
triggered by 3G and WiMax and supported by content, towards the latter half of
this period.
We have endeavored to present a holistic view of the growth that the sector
is likely to witness in the next four years. To meet this objective, we have
undertaken primary and secondary research and have also incorporated inputs
from key opinion leaders in the Indian Telecom sector ranging from vendors and
operators to industry bodies and the Government.
We hope you find the report interesting and informative. We would like to
extend our gratitude to the industry leaders who participated in the report and
the CII for giving us the opportunity to present the evolving perspectives in
the sector.

Prashant Singhal
Telecommunications Leader
Ernst & Young Pvt. Ltd.

India 2012: Telecom growth continues 3

India 2012: Telecom
growth continues
We value special contribution of:

Association of Unified Telecom Nokia Siemens Networks India
Service Providers of India Private Limited
S. C. Khanna
► Sandeep Bhargava
Secretary General Head - Corporate Finance

To give a first-hand
perspective, we are
delighted that senior Bharat Sanchar Nigam Limited Tata Communications Limited
executives from a range S. D. Saxena
► Srinivasa Addepalli
►
of Telecom companies Director - Finance Senior Vice President—
participated in the study. Corporate Strategy
This includes industry
analysts, Telecom company
executives and members Bharti Airtel Limited Tata Teleservices Limited
of telecom Manoj Kohli
► Anil Sardana
►
industry bodies. Chief Executive Officer and Managing Director
Joint Managing Director
We conducted in-depth
interviews with all the
participants, supported Cellular Operators Tata Teleservices
by research, analysis Association of India Maharashtra Limited
and insights from our T. V. Ramachandran
► Madhav Joshi
►
global team and industry Director General Chief Regulatory Officer
professionals.

Ericsson India Private Limited Telecom Equipment Manufacturers
P. Balaji Association of India
Vice President Bharat Bhatia
Marketing and Strategy President

International
Telecommunication Union
Pawan K. Garg
Member - Radio Regulations Board


• In perspective
• Mobility for every other Indian
• New growth areas for 2012
• Broadband — a key driver
• Operators to target for larger “share of the wallet”
• Telecom sector — resilient or impacted by economic slowdown?
• In conclusion


India 2012:

In perspective

Telecom sector: the In the last few years, robust growth
in the sector has been driven by
power performer in the several factors:
Indian economy • In India, the reduction in average

revenue per user (ARPU) is mitigated
Telecommunications continues to be by an increase in the subscriber base
one of India’s biggest success stories. In that contributes to healthy revenue
recent years, the Telecom sector has been growth. In addition, declining tariffs are
delivering strong returns on investments made up by an increase in the minutes
and steady subscriber additions. of usage.
This growth has been built on the wireless • Operators are reducing operating costs

revolution. The sector has charted an and hiving off infrastructure elements
impressive growth trajectory, adding such as towers into separate entities,
nearly 9 million subscribers per month. thus inviting significant investment.
Despite this, the overall tele-density was Passive infrastructure sharing has
recorded at 31.5% at the end of October benefited the Indian mobile industry
2008. The current wireless subscriber and its customers, reducing the cost
base of over 325 million is expected to burden of each operator and speeding
exceed the half billion mark by 2010. Even the rollout of mobile services.
at this growth, India has one of the world’s
lowest mobile penetration levels at about
• In the last three to five years, initiatives
such as network cost optimization,
28% and one of the highest minutes of
outsourcing of non-core activities, as
usage (MOU) per subscriber per month,
well as low-cost business models have
at more than 400 minutes.
improved operator returns at
Multiple factors — planned and unplanned, low ARPUs.
anticipated and unanticipated — have
On the regulatory front, the nodal body
coalesced to produce a remarkable decade
— the Telecom Regulatory Authority
of continued success. These include
of India (TRAI) — mandated National
low tariffs, low handset prices, effective
Long Distance operators (NLD) to
Government regulation, higher incomes
discontinue charging a monthly roaming
and changes in customer behavior.
rental fee and to cut roaming tariffs by
The Indian economy has recorded GDP
over 50% in February 2007 — a move
growth of over 8% for 12 successive
that led to tariff reduction, increased
quarters since 2005. The Telecom sector
competitiveness and transparency as well
is expected to perform even better:
as rationalization of excessive roaming
its contribution to the nation’s GDP is
costs. The spread of Telecom services in
expected to increase from 2% in 2006 to
India between 2006 and 2008 was aided
an estimated 3.6% in 2010.*
by a significant decrease in international
call charges, reduction in interconnect

* From Emerging to Surging - India Telecom: 2010, Ernst & Young report, page 22


charges, introduction of feature-rich low of license fees and a lowering of the
cost handsets and the roll out of micro- Universal Service Obligation (USO) fund
prepaid and lifetime validity schemes. The contribution by operators are
Access Deficit Charge is being phased also expected.
out in 2008, while a further reduction

There are positive enablers for • In 2012, the total Telecom penetration to USD5 billion by 2012. WiMax on
the sector is expected to reach 58% to 60%. the other hand, could attract about
Approximately 40% of rural users are 8 to 10 million subscribers and could
The addition of each new subscriber
estimated to own a phone. Nearly account for about USD1 to USD1.5
lowers average revenues. Despite
everyone in the urban constituencies in billion by 2012. This is based on the
this, Indian Telecom companies
India will have a Telecom connection. assumption that low cost devices and
continue to post better results
Circle B and C would experience the data cards are available and services
than investor estimates. Indian
highest growth and would contribute are affordable. These numbers could
Telecom market will continue to
to about 60% of the total mobile see a further upside if the operators
grow till 2012 at a robust pace.
subscribers. innovate to offer more attractive and
Telecom landscape in 2012, refined value added services.
how will it look? • In 2012, India’s Telecom services
industry revenues are projected to • MNP is essential for the Indian
• In 2012, the total Telecom
 reach USD54 billion, as compared with Telecom Industry. It would provide
subscriber base is expected to USD31 billion in 2008. (Conversion ease of switching to the subscriber.
reach approximately 690 to 700 rate used USD1 = INR40) To create an impact, MNP will need
million to include about 640 to to be spread across the country and
650 million wireless users and • The blended ARPU is expected to

there should be easy and affordable
approximately 45 to 50 million stabilize at approximately INR150
porting. Globally, number portability
fixed line users, driven by a rise to INR155 by 2010, while MOU per
has not induced much churn, however,
in communications demand from subscriber per month is projected to
depending upon aforementioned
semi-urban and rural India. stabilize at approximately 520 to 530
factors, MNP could lead to some
minutes in 2012.
• In 2012, the internet subscriber impact in the Indian telecom market.
base is expected to rise to • From early to mid part of 2009 to
2012, most of the Telecom circles are • The entry of MVNOs will help achieve
approximately 45 million. Despite
expected to have approximately 12 growth faster by targeting niche
25 to 30 million broadband
operators(based on state boundaries customer segments. Between 2008
subscriptions, the broadband
and socio-economic parameters). and 2012, entry of MVNO is expected
penetration is still likely to reach
However, by the latter half of this in a 12 operator telecom market.
approximately 2.3%. However
period, consolidation activity is With almost 4 to 5 operators being
broadband could see a 30% to 40%
imminent and would reduce the new, entry of MVNOs would help
increase from the said projections
potential players to five to achieving growth faster. Globally,
if WiMax services gain traction
seven operators. successful MVNOs are those which
and entry barriers for customers
already have a distribution network
are significantly lowered through
• 3G and WiMax are likely to be auctioned and brand image and India would be
cheaper devices and services. The
in early part of calendar 2009, initially no exception. We could also witness
wireless internet base is estimated
concentrating on top 20 cities in India. some existing brands with customer
to rise to approximately 196
Based on this, 3G subscriber base could reach launching into this space –
million from the current 76 million.
reach 25 to 30 million by 2012 and 3G which would fuel further growth in
revenues would reach around USD4 the sector.


Key challenges impacting the growth of going to be fuelled by 3G and WiMax.
the Telecom sector by 2012 However, for the expansion of data
services and for it to gain scale and
Even as, positive trends in the Telecom
momentum, customized and vernacular
sector and the economy reinforced each
content catering to the diverse masses
other in a virtuous cycle and caused a
needs to be developed coupled with
sharp acceleration in the demand for
low device costs. Better upload/
Telecom services, there are significant
download speed for data services
challenges for growth in 2012. Most of
backed by customized content and
the significant global Telecom players
lower voice prices should augur well
are either present in the Indian Telecom
for subscribers. The growth of 3G and
market or are seeking entry through
WiMax would be the key for telecom
a partnership with an existing or start
companies to maintain growth and/ or
up Telecom operator. They have been
enhance profitability in the low tariff
attracted to the strong growth potential
regime especially when significant part
of the sector. But there are some focus
of subscriber additions would emerge
areas that will need attention in order to
from rural areas in India.
maintain a positive outlook for 2012:
• Focus on strategy to lower operators’
• Rural Telecom will be the new growth
capital expenditure: To achieve a
constituency: Rural market will be the
subscriber base of approximately 700
next growth driver for operators with
million by 2012, Telecom industry
the near saturation of urban markets.
in India will need capex investment
To capitalize on the growing population
of approximately USD18 billion to
and disposable income of rural India,
USD20 billion in this period. Sharing
Telecom operators will have to explore
of passive and active infrastructure
and expand into hitherto “uncovered”
and intra-circle roaming, would be
geographies. By 2012, we see the
some ways to bring down the capex
rural base accounting for nearly half
requirements. Most importantly, to
the total subscribers who will have
attract further capital into the country,
access to communications services.
it is very important for the Government
The Government can capitalize on rural
to provide a stable regulatory regime
Telecom growth to boost economic
to maintain the confidence of the
development across rural India which
key stakeholders and investors in the
could also help the growth of the
Telecom sector.
country’s gross domestic product.
The next engine of Telecom growth is • Need to revisit the high levies on the
clearly rural India and there will need Telecom sector: The Indian Telecom
to be strong partnership between the sector is one of the highest taxed
Government and the private operators sectors in the developing world. This
as well as an effective and optimum is through levies, which comprise
utilization of investments from of service tax, revenue share, spectrum
the USO fund to ensure that India cess and value added tax totaling to
surpasses 55% to 60% penetration approximately 25% of the total levies
by 2012. payable by operators apart from
income tax on their profits, which
• Emphasis on data revenues to
ranges from 10% to 33% of profits
provide additional “buffer”: The
depending on the eligibility of tax
launch of 3G services will drive data
concession for some of the operators.
revenues. India’s data revolution is
Revisiting high duties and levies in the


sector would help reduce costs and the • Uncertainty in the global economic
benefits can eventually be passed on scenario: The current financial crisis
to the customers by further lowering of could have a low-to-medium impact
tariffs. on the Telecom sector in terms of
rising cost of capital and reduction
• Most importantly, an urgent need
for clear roadmap vis-à-vis telecom in discretionary spending on the
regulations: There is an urgent need part of customers, among other
for stable policies and a conducive and determinants. A range of factors
consultative regulatory environment – decline in average revenue per
to improve investor optimism in the minute, stabilizing minutes-of-use,
sector. A clear roadmap for future peaking subscriber adds, spiraling
spectrum allocation has to be drawn, network expansion costs, large
whether it is a 2G or 3G platform. The deployment in the untapped rural
allocation of adequate spectrum is areas — could also result in
an urgent requirement for new and margin pressure.
existing operators. Operators should Looking ahead, in order to
be careful in bidding for spectrum and ensure strong growth rates, the
should not end up overpaying. While Government and the regulator
there is significant interest between will need to put in place
the incumbents and the new players, comprehensive directions
interest from new international and companies will need
entrants may be muted, in part by the to consistently innovate to
global economic outlook. The prospect effectively manage revenues
of paying the Universal Access Service and costs.
License (UASL) fee without any
guarantee on the timeline for getting
the 2G spectrum, coupled with the
advantages that incumbents enjoy with
an established infrastructure, may act
as a deterrent for the entry.

• Enhance the skill - sets of personnel
for employment in the Telecom
sector: This sector will require
specialist resources to support and
sustain growth over the next four to
five years. The pressure on talent is
expected to increase with the rollout
and deployment of 3G and WiMax
services. The private sector will
need to reorient its focus on talent
development through training schools
and facilitation programs that cater to
the needs of the Telecom industry
for 2012.

11

Mobility for every other
Indian in 2012
India’s wireless base increased from 1.6 By end 2012, there are expected to
million1 at the beginning of 2000 to over be about 640 to 650 million wireless
325 million2 in October 2008. It has subscribers, accounting for about 90% of
been achieved with successive years of the total Telecom base. By then, wireless
sharp subscriber growth — 69% in 2004, penetration would have exceeded the 50%
mark.8 We do not see any major slowdown
58% in 2005, 97% in 2006 and 57% in
in growth in the immediate future due to
2007.3 Since wireless penetration is
the global economic slowdown. India’s
approximately 28% in 2008,4 there is still operators have still not exhausted the
large potential for future growth. full potential of the domestic Telecom
The rising wireless base is reflected in market. Large parts of rural India will
the growing share of mobility of the have the need and will be able to afford
We see some trends in mobility total Telecom base. From just 5% of the Telecom services. Operators will need to
over the next few years: country’s Telecom base of 32 million5 in significantly invest in network expansion
March 20006, it has increased to 87% of for 2G services till 2010 to 2011. Towards
• The growth of the wireless the 300 million Telecom subscribers in latter part of this period, a large part
subscriber base will continue at March 2008.7 of the capital expenditure will also be
a robust pace. However, this will required for the launch of 3G services.
be primarily driven by
Wireless on a roll
rural subscribers.
800 697
• We expect another round 639 648
575 594
of mergers and acquisitions 533
600
(M&A) in the market. As 485
Subs (Mns)

445
new operators roll-out 384
400 345
networks, there could be 10 272
to 12 operators in each circle. 233
However, by end 2012, 200
M&A activity will result in 39 39 40 42 45 49
about five to seven large
0
wireless operators.
2007 2008F 2009F 2010F 2011F 2012F
Mobile Fixed Total F = Forecast
• In 2012, 3G services will have
Source: COAI, AUSPI, CII-Ernst & Young analysis
just begun to spread in India
and mobile entertainment and
mobile banking are likely to
become popular services. 1
http://coai.in/statistics.php?val=1997-2004
2
TRAI press release No. 89/2008, 24 November 2008
3
TRAI press release No. 6/2007,15 January 2007 and TRAI press release No. 11/2008, 22 Jan 2008
4
TRAI press release No. 86/2008, 24 October 2008
5
International Telecommunications Union: World Telecommunications/ICT Indicators Database,
December 2000
6
http://coai.in/statistics.php?val=1997-2004
7
TRAI press release No. 43/2008, 25 April 2008, Page 2
8
CII-Ernst & Young analysis


It is to be noted that eight of the 10 most It has been noted that the net wireless
populous countries9 -China, India, the US, addition in Circle C has begun to
Indonesia, Brazil, Pakistan, Russia, and exceed metropolitan cities. In the first
Japan— are among the top 10 wireless nine months of 2008, while the four
markets.10 Similarly, in India, the most metros added 10.3 million subscribers,
populous states are expected to have the Circle C had an addition to 11.3 million
maximum wireless subscribers. subscribers.12 This trend is expected to
continue till 2012.
Next wave of growth from Circle B and
Rising rural spread
Circle C
We expect wireless growth to increasingly
emerge from rural India. In December In 2012, the majority of new wireless
2007, tele-density in metropolitan circles subscribers will emerge from Circle B
was close to 75%, rural tele-density was and Circle C.13 Based on analysis, Circle
still below 10%. In 2012, rural subscribers C will garner approximately 102 million
will account for almost half the total subscribers and will exceed metros,
wireless base.11 which will have approximately
62 million subscribers.

Projected circle wise wireless subscribers (in millions)

Service area December2007 2012 F Growth (%) No. of states
Metros 41 62 8.6 4
A 83 207 20.1 5
B 83 276 27.2 8
C 23 102 35.2 6
Total 230 648 23.0 23
Source: CII-Ernst & Young Analysis F = Forecast

9
http://geography.about.com/cs/worldpopulation/a/mostpopulous.htm
10
Wireless Intelligence, Subscriber Statistics, December 2007
11
12
TRAI press release No. 11/2008, 22 January 2008 and TRAI press release No. 86/2008, 24 October 2008
13


ARPUs will stabilize; pressure on ARPU becomes even more
significant. Operators will have to work
data services to have a on the twin front of increasing ARPUs
positive impact through data and value-added services
as well as by lowering costs through
As the subscriber base continues to innovative business models.
increase in India, operator ARPUs have Data, driven by 3G and WiMax services,
steadily declined. However, there is likely will exert a positive impact on ARPUs.
to be a level of stabilization in the average Mobile internet, mobile entertainment
revenues per subscriber for the Indian and mobile banking are expected to gain
operator over the next couple of years. significant traction with the introduction
Blended ARPU is likely to stabilize at INR of 3G and WiMax services.
150 to155 by 2012,14 while MOU per
subscriber per month would stabilize Wireless phones: the emerging conduit
at approximately 520 to 530 minutes for banking
per subscriber. As mobile operators are looking to
Even though declining ARPUs have been introduce mobile banking, the Reserve
a concern to operators, they have been Bank of India (RBI) has come up with
offset by increasing MOU and staggering guidelines for implementing it.15 While
subscriber growth. When subscriber security is definitely an issue, today there
growth starts slowing, and when MOUs are more wireless phones than savings
start becoming inelastic, the downward bank accounts in India.16

ARPUs and MOU to stabilize
500 800

400
511 522 527 600
473 496
300 442
Minutes
INR

400
200 236
209
188 169 160 152 200
100

- 0
2007 2008F 2009F 2010F 2011F 2012F
Blended ARPU (INR) Blended MOU F = Forecast

Source: CII-Ernst & Young analysis, TRAI Performance Indicators December 2007,
AUSPI-CDMA Statistics 2007

14
15
http://rbidocs.rbi.org.in/rdocs/notification/PDFs/87664.pdf
16
http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=342


Socio-economic characteristics that enable mobile banking

Economic Characteristics Detail
Standard of living • High cost of the access to the banking services/

(Rural economy) High transaction costs
• Banks are mainly in big cities, hence difficult

to access
Poorly developed • Geographies like hills and deserts
►
transport and financial • Limited transport services
►
sector • Weak and not very accessible banking
►
environment for the population
Telecom Infrastructure: • Domination of mobile phones
►
strong penetration rate of • Very low fixed line penetration between 1% to 2%
►
the mobile compared to • Less expensive to develop a mobile network
►
fixed telephone • Dwellings unsuitable for the fixed line
►
Joint families • Family gathers in a single place
►
• India: concept of the “joint family” relates to 70%
►
of population
Illiteracy • Average rate of illiteracy varies between
Sociological 50% and 80%

The wireless phone will emerge as a new Operators are already sharing their “The growth in mobility
means for banks to tap the “un-banked” passive infrastructure such as towers, is not driven just by low
masses. This would enable banks to get diesel generating sets, battery back-up, prices. It also includes
more business from users who do not fuel, air-conditioning and all civil support deeper network coverage,
approach a bank today. This is clearly a and partners share all costs related to better distribution network,
multi-faceted opportunity to be tapped. acquiring a site. This results in fewer and affordable handsets.”
sites and less equipment to maintain.
Macro-economic and social conditions Senior executive,
Subsequently, operators will engage in
coupled with the status of infrastructure in
active infrastructure sharing that could leading Telecom
India can provide an excellent eco-system
include network sharing. There the operator in India
for the growth of mobile banking.
spectrum would be owned separately
and capital and operating savings would
be available even in the Radio Access
Network sharing is a new Network (RAN)components.18 Sharing
frontier of growth parts of the networks with competitors
helps operators to reduce capital expenses
On the cost front, the first step is network as well as lower their operating expenses.
sharing. Network costs account for It is estimated that by sharing, operators
60% to 80% of the capital expenses and can reduce a third of all 3G network costs
about 20% of the operating expenses.17 and a fourth of 2G network costs.19

17
“The Rise of Network Sharing”, Oliver Wyman, www.oliverwyman.com, Page 2
18
Grivolas, J., “Sharing to Save”, Ovum Research, 8 September, 2008
19
“The Rise of Network Sharing”, Oliver Wyman, www.oliverwyman.com, Page 2


As networks expand, big operators will aim By then, the internet and mobile
to acquire the smaller players. Currently, entertainment will also begin to make
there are seven or eight wireless operators an impact. As of June 2008, there were
(four to five GSM and three CDMA about 76 million subscribers who accessed
operators) in each of the Telecom circles. the internet over their wireless phones.20
But with five more operators rolling out This is likely to rise to approximately
their networks, customers will be able to 196 million21 by 2012 - positioning India
choose among 12 or more operators by among the leading wireless internet
early 2010. However, M&A activity could markets. This is, in part, likely to be aided
lower the number of operators to five to by rollout of 3G and WiMax services.
seven by 2012.

Telecom Services Performance Indicators, April-June 2008, TRAI, 7 October 2008, Page 23
20

21


New growth areas
for 2012
Data revolution to be new domestic entrants and
international entrants.
fuelled by 3G and WiMax
• Spectrum remains a key issue in the

In August 2008, the government auctions. There are a few Circles like
announced the auction guidelines for West Bengal, Delhi, Gujarat that have
both 3G and WiMax. In September between 2 and 3 slots of spectrum
2008, it followed up with amendments including one reserved for BSNL/MTNL.
on certain issues based on queries and Only these slots will be auctioned in
requests from the industry. As per latest the first round. Vacating of spectrum
industry information, the WiMax auction by the Indian Armed Forces, is a key
is expected to occur on 10 January determinant to when operators can
2009 and 3G auction will take place on 9 start rolling out services in these
February 2009. The detailed information circles. Globally, 10MHz to 15MHz, i.e.
memorandum is expected on 8 December 2 to 3 carriers have been awarded in
2008. 3G and WiMax services are 3G auctions, in India, it will be a single
expected to commence by latter half 5 MHz carrier. In the case of WiMax,
of 2009. there are concerns on the contiguity
and interference levels of the
Key focus areas relating to 3G spectrum bands.
and WiMax
• Clarity on spectrum charges, i.e.,

• While there is significant interest whether it is to be calculated on total
between the incumbents and the new versus incremental AGR, or if it is
players, interest from new international different rates for incumbents and
entrants may be muted, in part because the new entrants will also have to be
of the global economic outlook. The resolved before the auction.
prospect of paying the UAS license fee
without any guarantee on the timeline • WiMax spectrum in the 2.3 and 2.5

for getting the 2G spectrum, coupled GHz (four slots of 20MHz)is likely to
with the advantages that incumbents be auctioned before 3G. The reserve
enjoy with an established infrastructure price, which was initially 25% of the 3G
may act as a deterrent for the entry. reserve price in each circle category,
Metros and Circle A are likely to be was doubled to 50%. The removal of
keenly contested in the auction “data only” from the services, implicitly
and have chances of witnessing gives successful bidders the option
aggressive bidding. to provide voice services on WiMax.
However, the business case for mobility
• Regulatory clarity is one key step in
 based voice on WiMax remains to be
ensuring competitive interest in the proven globally.
bidding process, from incumbents,


Key drivers for adoption of 3G and WiMax in India

► Availability and contiguity (WiMax) of spectrum
► �Spectrum fee for 3G (incremental vs. total),
Regulatory clarity Broadband Wireless Access (BWA)for existing players
► Foreign players timing of joint venture formation

► �Improved data speeds providing enhanced
Improved data
user experience
speeds backed by
► �Customized, vernacular and compelling content
superior content
catering to the interest of the diverse masses

► �Affordable data and voice pricing plans leading to
Affordable services higher adoption levels
► �Affordable content

Affordable ► �Affordable 3G handsets
handsets/customer ► �Affordable PC/laptops, other customer
premise equipment premise equipment

Critical factors that will enable a data the price sensitive nature of the Indian
revolution in India market, operators will have to combine
global experience with the Indian
3G and WiMax should provide enhanced
2G experience.
services through high speed data backed
by compelling content. In the case of • Handset and end use equipment
3G, ability to offer a full suite of high affordability would also be critical to
bandwidth multimedia applications may drive penetration. 3G services would
be hampered by the availability of a single require cost effective phones and data
5MHz carrier. cards, while WiMax will require low
cost PC/laptops and customer premise
India’s data revolution is going to be
equipment. This is especially true in the
fuelled by 3G and WiMax. However, for
case of WiMax where the eco-system is
the data revolution to gain scale and
not as developed as compared to 3G.
momentum, customized and vernacular
content catering to the diverse masses • 3G and WiMax will, in our view, are

needs to be developed. In our view, complementary technologies serving
entertainment and banking are likely to different markets. 3G will cater to full
be the biggest drivers of data services. mobility voice and data while WiMax
Several operators in India have experience will cater to fixed or limited mobility
of running 3G and WiMax services globally. broadband and voice services. This
They are going to significantly use this could change once the business case
experience to retain their customers and for mobility based WiMax is proven
capture a greater share of their wallets. across the globe and there is significant
development of eco-system around it.
• Services would have to be affordable

However, it could take a minimum of 2
to drive penetration. Global experience
to 3 years for this to happen.
has shown that expensive data pricing
contributes to poor user experience The incumbents will have to ensure their
and adoption levels. Flat rate plans with presence on the 3G front in order to
unlimited data usage has resulted in retain their high ARPU 2G subscribers
significant data volume. However, given (the primary target group for 3G), who


will otherwise churn to 3G operators. Moving towards MVNO
Operators would have to incorporate this
value erosion due to subscriber churn in There is renewed interest in virtual play
their 3G bid pricing. In spectrum starved in the country as the Indian regulator
circles, 3G will also be used by the released recommendation to allow MVNOs
incumbents to provide better quality voice (Mobile Virtual Network Operator) in
services. On the flip side, the new entrants India, soon after the release of 3G and
would try to capture a good part of this BWA policy. TRAI defines MVNO as a
churn. Incumbents, who do not manage to “licensee in any service area that does
get 3G spectrum will have to think of ways not have spectrum of its own for access
to reduce this churn. Providing enhanced service, but can provide wireless services
Enhanced Data for Global Evaluation to its customers through an agreement
(EDGE) based data services could be one with the existing providers”. Around the
such strategy. world, MVNOs begin operations when
Auctions of WiMax and 3G are likely to 3G services are launched. As subscribers
happen in January 2009 and February migrate to 3G services, capacity is
2009 respectively. Rollout of services is available on the 2G network. This is
likely to commence by latter part of 2009 when operators begin to host MVNOs as
and will be limited to top 20 cities in India. it helps monetize the investment made
Initially data services are likely to take off. to launch 3G services. The MVNO allows
As services become further customized operators to utilize their infrastructure
and network coverage becomes wider, effectively. If, on the one hand, this could
we anticipate nearly 25 to 30 million lead to increased collaboration between
subscribers adopting 3G by 2012. 3G players, then on the other hand, there
revenues will touch USD 4 billion to are questions around sustainability of
USD5 billion. WiMax, on the other hand, the MVNO business case in a highly
could attract about 8 million to 10 milion competitive 6 to 7 player, low tariff,
subscribers and account for about USD1 emerging Telecom market.
billion to USD1.5 billion by 2012. (These
projections will be dependent on the kind TRAI has also identified MVNOs as a
of services offered, the availability of distinct service provider with its own
handsets and network coverage). licensing and regulatory framework, while

Dynamic MVNO activities in mature mobile markets, December 2007
150%
MVNO No MVNO
Mobile Penetration %

100%

50%

0%
Singapore

Hong Kong

New Zealand

Australia

Taiwan

South Korea

Malaysia

Japan

Thailand

Philippines

China

Indonesia

Vietnam

India

Source: International Telecommunications Union: World Telecommunications/ICT Indicators Database,
December 2007


allowing the virtual operators to decide agreement between the MVNO and
upon their business model on the basis of MNO needs to be submitted at the time
strategies and capabilities. In summary, of the license issue
the key TRAI recommendations relating to
• Foreign Direct Investment (FDI), M&A
MVNOs are:
restrictions shall be the same as that of
• License service area of MVNO shall be the MNO
same as that of parent MNO and their
There are two ways in which MVNOs could
mutual agreement would be driven by
attempt targeting the Indian market:
market forces
1. MVNOs that follow the budget
• Entry fee would be 10% of that of the approach: MVNOs that could
MNOs, subject to a maximum of INR
specifically aim to serve the needs of
5 Crore (USD1.2 Million) for Metro/
niche segment, competing solely on
Category A, INR3 Crore (USD0.7
voice and SMS pricing would reduce
Million) for Category B and INR1
ARPUs and focus on volumes-play. The
Crore (USD0.2 Million) for Category C
appeal could be limited to a portion of
service areas
the market, leading to diversifying into
• No spectrum charges and roll-out
 value-added services.
obligations would be applicable to the
2. MVNOs that serve the needs of a
MVNOs; annual license fees shall be
niche segment: On the other hand,
same as that of MNO in the particular
niche MVNOs have the ability to
service area
increase ARPUs by creating appealing
• No limit on the number of MVNOs
 differentiation in terms of content,
attached to a MNO; however an customer service, information
services and promotional offers
Prospective MVNO groups

Industry group Strength/competency Examples in Asia
Retailers Strong brands; extensive and efficient 7-Eleven, FamilyMart
distribution network (Taiwan)
Media/content providers Well-recognized brands and Virgin Mobile (Australia)
ownership of multimedia contents
Mobile resellers and Knowledge of local mobile markets; Aurora, Arcoa (Taiwan)
distributors existing customer base
Mobile network operators Excellent communication service PLDT (Philippines), China
brands; strong customer and network Unicom (Hong Kong)
control; customer care and billing
experience
Cable operators Entertainment and communication Jupiter (Japan), MiTV
service integration; bundling (Malaysia)
capability
Fixed operators Fixed mobile convergence; bundling AAPT (Australia)
capability
Banks and financial Large customer base, emergence of Merchantrade (Malaysia),
services electronic credit card; wallet and cash KFTCI (Korea)
applications
Private equity Strong financial position Tune Talk (Malaysia)

Source: Ernst & Young analysis and Yankee Group


and the beauty of the model then Full potential of Mobile
lies in the endless possibilities of
customer segmentation where the Number Portability
targeted segments can go beyond guidelines yet to
the obvious break-down of youth,
enterprises, sports fans, low-spending be realized
groups and regional communities.
While most countries implemented
the Mobile Number Portability
Critical success factors for an MVNO (MNP) guidelines at a mature stage
player in the India market of penetration, Indian policymakers
formulated them at a time when the
• 
MVNO operator will need to have a industry is still seeking a solution to
strong distribution network, effective some key regulatory hurdles. MNP is
customer service channel and strong essential for the Indian Telecom Industry.
financial fundamentals. It would provide ease of switching to the
• 
Leading business houses could be subscriber. To create an impact, MNP will
better enabled with their spread across need to be spread across the country
retail sector, financial services, media, and there should be easy and affordable
aviation, handset distribution and the porting. Globally, number portability
hospitality sector. Globally, there has has not induced much churn, however,
been an emergence of non-telcos as depending upon aforementioned factors,
significant players in this space. They MNP could lead to some impact in the
are best positioned to leverage upon Indian telecom market.
their existing strengths of customer
know-how and reach.

• 
New players will need to leverage
their existing strengths to create a Country wise penetration at the time of MNP implementation (in %)
niche through content tie ups and/ or • France (68)
through customer segmentation. • Finland (97)
• Australia (61)
• 
Foreign Telecom operators could • Portugal (101)
leverage this opportunity to becoming a • Denmark (72)
• South Korea (72)
part of the India Telecom growth story. • Italy (85)
However success would largely be United Kingdom (15) • USA (56)
• Norway (80)
dependent on their ability to combine
with the overall strengths of an 1998 2000 2002 2004
Indian enterprise.
1999 2001 2003
• 
Finally, the long-run triumph of the
concept at large would rest upon clear Hong Kong (48) • Spain (31) • Belgium (74) • Brazil (37)
definitions of licensing, spectrum and
• Sweden (55) • Germany (72) • Japan (68)
regulatory restrictions.
• Switzerland (36)
Source: CII - Ernst & Young analysis


In India, as is elsewhere in the globe, • Operators, for their part, must be

the biggest gainers from portability will prepared to factor in various porting
be end customers. Indian customers and non-porting costs. Porting
will be able to change service providers, costs may constitute the set-up,
while retaining their mobile numbers management, administration and
— something akin to an individual’s transport costs. Non-porting
identification these days. But there are costs may include the cost of
some issues that need to be addressed promotions, customer service and
before India is ready to embrace MNP. value-added services.

India at its 28%22 plus mobile penetration
 While MNP may promise a significant
level could be considered relatively upside for some operators (those with
young for this phenomenon. At the same lower market share), it could also pose
time, it is important to consider the full serious challenges for others if the risks
implementation of number portability for involving regulatory, operational and
all service areas. revenue assurance are not carefully
managed. MNP also has a potential for
There are some potential risks and increasing customer acquisition and
challenges that will need to be overcome retention costs.
for the launch of MNP:
Hence, in order to ensure the successful
• Cost-conscious customers could be

implementation of this regime, various
deterred by the porting charge that
stakeholders of the industry, including the
could be applied when a customer
licensor, regulator, operators and industry
switches to another operator.
associations, would need to work closely
• Switching between CDMA and GSM-
 for an effective rollout of this service.
based technologies may also result
in an operational challenge of
changing handsets.

22


Broadband — a key driver

In October 2004, India’s wireless in demand for fixed broadband services
subscribers exceeded the fixed line base.23 among small and medium enterprises and
Four years later, there are eight24 wireless home users. We estimate the fixed line
connections for each fixed line. As the base to be approximately 45 million to 50
wireless growth continues, the fixed line million in 2012.30
base has been gradually declining.
The Government has waived the license
By end-September 2008, the fixed line fee on rural fixed lines.31 The immediate
base declined to 38.4 million25 from an gainer will be BSNL, which has 36.6%
all-time high of 41.5 million in March of its fixed line subscribers in rural
2006.26 Yet, India’s fixed line network is areas.32 While this is a good beginning,
the seventh-largest globally.27 it is not enough. To realize the fixed line
The fall in fixed lines is not unique to India. growth, this waiver needs to be extended
China’s fixed line base has declined by throughout the country.
a substantial 11.6 million from January Broadband subscribers are expected
2008 to August 2008 to 354.1 million to grow from approximately 3 million
subscribers.28 But the difference is that subscribers in 2007 to 25 million to 30
fixed tele-density in China is substantially
million subscribers in 2012 whereas
higher at 27% against India’s
internet subscribers are expected to
tele-density of 3.4%.
grow from 10 million subscribers in
In the first nine months of 2008, the 2007 to 45 million subscribers in 2012.
fixed line base declined by 0.9 million in However broadband could see a 30% to
India. While state-owned Bharat Sanchar 40% increase from the said projections
Nigam Limited (BSNL) and Mahanagar if WiMax services gain traction. Though
Telephone Nigam Limited (MTNL) WiMax is unlikely to replace existing
together lost 1.61 million fixed line wireline broadband, it is going to
subscribers, private operators managed to drive broadband subscriber additions
add 0.7 million new lines.29 Starting 2010, especially in areas where quality last mile
we see a rise in fixed lines due to a rise infrastructure is not available.

23
24
TRAI press release No. 79/2008, 24 September 2008
25
Ibid.
26
27
International Telecommunication Union; World Telecommunications Indicators/ ICT Indicators Database
28
Ibid.
29
TRAI press releases No. 86/2008; TRAI press release No. 11/2008
30
31
“Amendment in license Agreement for Basic Telephone Services/UAS license agreements with respect to license
fees”, Department of Telecommunication, Government of India, 29 August 2008
32
Telecom Services Performance Indicators April to June 2008, TRAI, 7 October 2008, Page 60


Wireless Internet use on the rise
400 800
Wireless Internet Subs (Mns)
648

Total Mobile Subs (Mns)
594
300 533 600

445
196
200 345 179 400
233 148
123
100 87 200
58

0 0
2007 2008F 2009F 2010F 2011F 2012F
Wireless Internet Subs (Mns) Total Mobile Subs (Mns) F = Forecast
Source: CII-Ernst & Young Analysis

Broadband growth to pick up in India
50
45.4
45
40
34.8
35
Subs (Mns)

30 26.6 27.3
25
20.3 21
20
15.2 14.4
15
10.4 9.4
10
5.8
5 3.1
0
2007 2008F 2009F 2010F 2011F 2012F
F= Forecast Internet subscribers Broadband subscribers

Source: CII - Ernst & Young Analysis
Note: Internet subsriber base is inclusive of broadband subscribers

Compared to smaller countries such with 76 million broadband subscribers is
as the Netherlands and Turkey, India is marginally behind the US that registers
much behind in global ranking relating to 77 million broadband subscribers.33
broadband subscribers. In contrast, China

33
Vanier, F., Point Topic, World Broadband Statistics, September 2008, Page 22


Raising the stakes India. The first sign of a rise in broadband
subscriber base is visible. During the first
Broadband is defined as an “always on” nine months of 2008, the broadband
data connection that is able to support base has grown by 1.8 million.34 This is
interactive services, including internet nearly three times than the 0.6 million
access and has the capability of minimum broadband subscribers added during the
download speed of 256 kilo bits per same period of 2007 (designated the
second (kbps) to an individual subscriber. “Year of Broadband”). Net broadband
The surge in broadband penetration is additions this year rose by 56.5%, as
expected to be the driver for the next opposed to the 52.7% growth achieved
phase of Telecommunications growth in in all of 2007.35 While broadband growth

Table 4: Economic impact of broadband

S. no. Area Benefits of broadband Quantification
1 Growth in national output (present Overall Approx USD90 billion
value of estimated additional
Labour productivity improvement of existing Approx USD49 billion
growth in the 2010-2020 period)
workforce
due to ubiquitous broadband
deployment in India Output growth due to e-literacy programs in Approx USD14 billion
secondary schools
Output growth due to e-education in Approx USD27 billion
vocational / higher secondary schools
2 National Employment Opportunity Through increase in employment of rural 59 million full time equivalents (approximately 68
Creation by 2020 youth and improvement in labour participation million people including part-time teleworkers)
of urban women through teleworking and
distributed computing
3 Broadband as a new Industry Revenues of the entire industry value chain USD25 billion
by 2020
Industry value chain - total employment 1.9 million
potential
4 Education Improved accessibility, flexibility and quality 100% connected villages can have a virtual primary,
for all secondary, adult literacy and distance education
through the village kiosks
5 Health Real time professional medical attention / care Every village broadband kiosk can act as a
available for all telemedicine centre
6 Governance and citizen Real time interface between every citizen and Every enterprise, home connection and urban/
empowerment the relevant government agency; virtual single rural kiosk can act as a single window government
window service interface

Source: CII India’s Broadband Economy: Vision 2010

34

Ibid.
35


seems to have begun, India is still way One of the problems that broadband
behind target. Against a target of providers face is the multiplicity of
20 million broadband subscribers approvals needed before laying an optic
by 201036, we expect to close at fibre backbone. Indian states need to
approximately 14 million.37 proactively look at providing a single
window approach to Telecom operators to
Though broadband additions are better
gain the benefit of faster connectivity.
than ever before, penetration is a marginal
0.3%38 against the global average of 6.1%.39
Wireless internet
Despite the current challenges, India
is expected to rise up in the ranks in
subscriber base to post
subscriber numbers over the next few strong growth
months.40 It would feature among the top
10 broadband markets by subscribers in India is a unique market as far as the
2013.41 However, this may be a long haul internet subscriber base is concerned. As
as far as penetration levels are concerned. of June 2008, there were 11.7 million
The growth of broadband continues to be internet users. There were an additional
hampered by inadequate last mile network 75.9 million users who accessed the
coupled with low personal computer/ internet on their wireless phones.42 This
laptop penetration.

Broadband penetration continues to be very low
80 77 40
76
33
60 30 30
Penetration %
Subs (Mns)

24 22 26 26 26
25
24
40 20 20
28 18 18
20
20 16 16 15 10
11 9 8 8 5
5 5 64 5 3
5 4 3 4
0 0
Netherlands
Italy
Japan

India
Germany

Australia
China

Brazil
Canada
Spain

Mexico
Turkey
UK

S Korea

Russia
USA

France

Taiwan

Broadband subs (Mns) Broadband population penetration (%)

Source: World Broadband statistics June 2008, Point Topic

36
Broadband Policy 2004, Government of India; Ministry of Communication of Information Technology;
Department of Telecommunications, Page 6
37
38
Ibid.
39
Ibid.
40
Ibid.
41
http://point-topic.com/content/dslanalysis/bbaforecast081119.htm
42
Telecom Services Performance Indicators April-June 2008, TRAI, 7 October 2008, Page 23


figure is expected to rise to 196 million divide among nations is apparent. In
in 2012.43 The share of wireless internet Japan, South Korea and Hong Kong,
users will rise from 26.5% to 30% of the the minimum advertised broadband
total mobile subscribers in June 2008 to speed is more than the maximum speed
30% in 2012.44 in Cambodia, Bangladesh and Laos.46
The arrival of 3G and WiMax will drive the • For broadband penetration to
uptake of wireless broadband. increase, tariffs need to reduce. In
India, a subscriber is offered unlimited
It is estimated that India and Japan will be
downloads on a 256 kbps line for
the largest markets for WiMAX in the
a minimum of INR999. However, a
Asia-Pacific region by 2012, with an
subscriber in Singapore gets unlimited
estimated 35.7%, and 16.9% share,
8mbps fixed broadband, 2 mbps
respectively, of the total regional market,
wireless broadband and access at some
followed by Pakistan and China.45 On the
800 Wi-Fi hotspots for just
WiMax front, India’s market leadership
INR1,575 per month.47 This differential
will be fostered by ambitious investment
reflects the urgency to revise the
plans by Telecom operators and the
tariff structure to see a considerable
replacement of ageing or legacy fixed-line
breakthrough in achieving optimum
broadband infrastructure.
broadband penetration levels.
Critical success factors for
broadband growth
• There is a need to develop content
that meets the need of the Indian
The Government needs to implement key consumer. While the immediate
initiatives for broadband on fixed lines to benefits of broadband will be for
take-off: business users, the real gains will be
for rural India in applications such as
• The local loop needs to be unbundled.
telemedicine, e-commerce, e-education
Although TRAI recommended local
and e-governance. The prices have to
loop unbundling (LLU) in 2004, it has
be lowered to popularize broadband
still not been implemented. It is time a
services among the rural masses. The
decision is taken and LLU is allowed.
availability of content that caters to
• There is a need to redefine the speed the needs of the rural population might
of conventional fixed line broadband. It be as important as low tariffs for this
should be hiked from the current 256 consumer group.
kbps to at least 2 mbps. The broadband

43
44
Ibid.
45
“Laying the Foundation: WiMAX in Asia/Pacific 2008”, Springboard Research, July 2008
46
http://www.itu.int/newsroom/press_releases/2008/25.html
47
Ibid.


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