Surfing against the Tide

The Indian telecom industry is going to witness an unprecedented market
condition in the next five years.

There are alarm bells ringing loud in the wake of stiff competition between
the new operators and existing players over a possible tariff war. Factors such
as the possible sharp decline in the number of additional users, that will be
shared among possibly fifteen operators (from the present five pan-India
players); dwindling ARPU; and non-voice revenue streams will decide the future.
If we top this up with government policies; regulatory hurdles; and weak
economic conditions the picture could become even more grim.

During the last fifteen years of the telecom liberation, ever since the
launch of the revolutionary NTP 1994 in India, the industry has identified the
strengths and shortcomings that it has to work to keep the success story alive.
With A circles across the country seeing mobile penetration touching the 100%
mark, a larger share of growth is coming from the rural markets.

The present is prefect for the industry. Undeterred by the chill in the
global market, the Indian telecom industry continues to tread strongly-through
FY 2009 to the current fiscal. The telecom subscriber base has grown in the last
three years at a CAGR of 44% to reach 415.2 mn at the end of May 2009, supported
by a progressive regulatory regime, falling tariffs and the increasing
disposable income of Indian consumers.

The future of the telecom industry in India seems bright, but small hurdles
could blur the picture that appears perfect at the moment. The players believe
that the next five years are going to play a crucial role in deciding the growth
chart of the industry. The country's telecom industry has reached a stage of
transition from a developing market heading towards maturity. Thus, all the
stakeholders must act towards eliminating the roadblocks that are likely to slow
the growth rate.

Positive Signs

Bharti Airtel CEO & Joint MD, Manoj Kohli believes that the telecom sector will
be among the top three in the country. “Already, we have moved ahead of FMCG as
a sector and you will see this sector moving far ahead of many other sectors,”
he says.

“We have seen that infrastructure areas always take time to pick up, and
infrastructure investment takes time. I believe the growth could be faster
because by that time the infrastructure investments and rural investments will
start having positive impact,” Kohli adds.

The CEO sees bright prospects for the sector in the next five years: “The
next five years are going to be extremely attractive. But at the same time, we
have to keep in mind the intensity of competition and its the impact on the
sector,” he says, adding that “the sector needs a lot of maturity and prudence
in terms of viability and setting tariffs. I hope all the major players in the
sector will be prudent enough to take long term oriented decision. If this
happen, not only will the size of the sector grow but the viability of the
sector will also grow,” he says.

Sustenance of the growth of the industry at the same EBITDA levels and
meeting the stock market expectations is going to be a challenging task,
observes CS Rao, chairman, WiMax Forum.

There is no denying the fact that there are issues revolving around
sustenance of the growth, and players will have to chart out solutions for
these. “The sector will have to actually enhance the business models and make it
more and more viable for higher competitive intensity and lower tariffs. So,
business models have to become more lean and cost effective if the viability of
the sector has to be robust,” says Kohli.

There lies a big opportunity in rural markets. The rural push is going to
generate both direct and indirect employment, according to Satya N Gupta, chief
regulatory advisor, BT.

Broadband Dreams

The industry has been nurturing high hopes from broadband. Rao believes that
the telecom industry promises higher revenues coming from new broadband users
and mass adoption of mobile broadband that will ensure 'Digital Democracy'
through affordability of services and devices around Mobile Internet Devices
(MID) Wireless Broadband.

Rajesh Chharia, president, Internet Service Providers' Association agrees. He
says allocating spectrum at reasonable cost to ISPs for rural broadband is what
the government must consider to give broadband connectivity in these areas a
thrust.

“A big challenge exists in getting the government to allow ISPs to
participate in USO fund projects for broadband in rural areas. This segment
offers opportunity of growth and should be approached effectively,” Chharia
suggests. Certain other initiatives can be taken like opening up of Internet
telephony unrestricted to ISPs, allowing them to share active and passive
infrastructure, and bringing ISPs also in to termination charge regime removing
the Rs 100 crore net worth clause for IPTV services to bring market competition,
adds Chharia.

With the new technologies, 3G and WiMax, data usage of the Indian consumer is
likely to increase leading to an increase in the dwindling ARPUs, says Idea
Cellular chief corporate affairs officer, Rajat Mukherjee.

Challenging Times

India has failed to respond to some of the opportunities that had come
knocking at its door. The delays in allocation of spectrum for new technologies
and the interconnection regime for NGN have caused the country not only monetary
loss, but also made the movement sluggish, points Gupta of BT. “The government
should explore ways of using the network most efficiently, for this functional
separation can be a good move,” he recommends.

“An immediate challenge that needs to be addressed is the dwindling ARPU. The
airtime is increasing, and there is fierce competition in the market, and
survival in such a stiff competitive milieu is not going to be very easy for
operators. We will see a higher trend of consolidation, the government should
create an ecosystem that facilitates that,” says Mukherjee. According to him,
since most of the big players are national players, it becomes a burden on the
consumer to pay for roaming charges each time he crosses a state-border. Perhaps
the government should have a relook if there is need for so many circles.

On the Mobile VAS area, that has become a significant contributor to an
operator's revenue and promises bigger contribution, the industry feels that
getting the “next million” to subscribe to value added services is not going to
be a cake walk. The VAS providers have innovated to find solutions to the rural
consumers' vernacular and technological constraints.

What Vijay Shekhar Sharma, MD, One97 Communications views as a challenge is
transforming the applications on the device side. “At present, all the VAS is
designed on the 'network side'. The application developers focus on creating
generic applications. This problem will continue to exist for sometime, there
should be a healthy share of developments of devices aspects as well.”

To survive in the price-sensitive market it will be a Herculean task for both
the partners-operators and VAS providers-to design compelling applications. It
will be inevitable for both to work out profitable, scalable revenue models for
the rural consumer, he says.

The country has been unnecessarily sitting on MNP, believes SC Khanna,
secretary general AUSPI, “The market should be conducive to adapting to changes
that keep the country in step with the rest of the world.” The use of
technologies that will reduce dependency on travel and bring down fuel
consumption are ones that are being most talked about in the telecom corridors.
“Use of power-efficient, eco-friendly technologies is definitely on the cards of
all the players not only because it is the latest fad, but also because it makes
a profitable business case, notes DK Ghosh, chairman, ZTE.

India is a country that has a unique arrangement of separate bodies to look
at making regulatory recommendations to the government, and to settle telecom
related-disputes.

But, of late, there have been serious concerns: “There is a need to review
the overall spectrum management policy,” says RN Prabhakar, member, Trai. With
MNP coming in, the consumer is going to be very quality conscious. Assuring
quality services to the consumer is what service providers will have to work
very hard on.

As data consumption takes off, content regulation will become crucial. Misuse
of newer technologies like VoIP has been giving sleepless nights to security
agencies.

Even though the first half of the last financial year has been a good time
for the Indian market, attracting big investment in the scenario of worldwide
recession is another hurdle the industry needs to cross, according to Prabhakar.
The telecom infrastructure industry has transformed from being a cost center to
a revenue center, with most of the existing telecoms operators de-merging their
tower assets into joint ventures and subsidiaries. Infrastructure development in
rural areas and taking optical fiber to the villages, will be important
milestones for the industry.

The domestic telecom industry has overcome several challenges. Only a matured
market can accept MVNOs and MNP. The industry needs to gear up for pumping in
revenues from untapped areas. Till now, the tale was about subscriber surge.
Operators have already begun watching the time people spend on the network.
Emergence of more, better managed operators with focus on non-voice revenue
streams will pave the way for a smooth ride.

Heena Jhingan

heenaj@cybermedia.co.in