Decling Margins of Telecom Sector in India

8/2/2019 Decling Margins of Telecom Sector in India

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A

REPORT

ON

DECLINING MARGINS OF

INDIAN MOBILE TELECOMINDUSTRY

BY

ANSHUMAN SHARMA

10BSP1179


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A

REPORT

ON

DECLINING MARGINS OF

INDIAN MOBILE TELECOMINDUSTRY

BY

ANSHUMAN SHARMA

10BSP1179

A report submitted in the partial fulfillment of the requirements of

PGPM Program of IBS Bangalore

Date of submission:5th March, 2011


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Authorization

I, Anshuman Sharma, the undersigned hereby declare that the stated report on DECLINING

MARGINS OF INDIAN MOBILE TELECOM INDUSTRY is my own work. The report is

submitted as partial fulfillment of the requirements of PGPM program of IBS Bangalore.

I further declare that this dissertation has not been submitted earlier to any other university or

institution for the award of any other degree or diploma. I have carried out the research work

during the academic year of 2012 under the guidance of my Faculty Guide Dr. Shafiulla B of

IBS Bangalore.

Location: Bangalore Dated: 5th March, 2011

Anshuman Sharma.


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Acknowledgments

My Management research project has been a truly enriching experience. Apart from the efforts

of me, the success of this project depends largely on the encouragement and guidelines of many

others. I take this opportunity to express my gratitude to the people who have been instrumental

in the successful completion of the project.

In the first place I would like to show my greatest appreciation to Dr. Shafiulla B.- Faculty IBS

Bangalore. His support and encouragement along with constant motivation inspired me to put on

my best effort. His excellence in his field and disciplined taught me a lot on the skills I need to

incorporate within myself. He always assisted me and gave adequate attention in clearing every

kind of doubts and helped me to overcome problems in due course of the project. His able

guidance, moral support and useful suggestions helped me to complete project successfully.

My sincere regards to Dr. Lata Chakravarty (Director, IBS Bangalore) for giving me the

privilege to be associated with such an esteemed educational institute and carry its name

forward.


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Abstract

The management research project involved to study the Indian telecom industry's present

situation. The declining margins of the industry as a whole due to various reasons like

government policy of allocating the spectrum, incompetent business models, huge investments in

3G infrastructure comprises the basis of the project. With the help of this project, a research has

been conducted to know what were the mistakes done in past? What are the implications and

effects on the industry? How it has impacted the Indian telecom sector as a whole? And what

will be the future roadmap in order to get rid of these issues.


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Introduction

Indian Telecom Industry.

Telecommunications has been recognized the world-over as an important tool for socio-

economic development for a nation. It is one of the prime support services needed for rapid

growth and modernization of various sectors of the economy. It has become especially important

in recent years because of enormous growth of information technology and its significant

potential for the impact on the rest of the economy. The Telecom Sector, which has the

multiplier effect on the economy, has a vital role to play in economy by way of contributing to

the increased efficiency. The available studies suggest that income of business entities and

households increases by the use of telecom services. Thus it contributes to the growth in GDP.

Telecom is one such sector in India, which has seen the most and fundamental and institutional

reforms since 1991. In recent times, country has emerged as one of the fastest growing telecom

markets in the world, particularly in mobile telephony. This high growth rate has been achieved

in major part due to sharp fall in tariffs. The rapid growth in Indian telecom services has

prompted major global manufacturers of telecom equipment to consider investing in India,

paving the way for extensive provision of modern communication services in rural areas and also

provide a strong boost to government revenues.

Present status of Indian Telecom Industry

1) Indian telecom market is one of the fastest growing markets in the world.2) With its 787.29 million telephone connections as on 31st December, 2010, is the second

largest network in the world after China.3) Over 18 million connections are being added every month.4) Wireless telephony is increasing at the faster rate. The share of wireless telephone as on

31st December 2010 is 95.54% of the total phones.

5) The share of private sector in total telephone is 84.60%.Indian telecom market has still a huge untapped potential to grow further. With a large

population yet to have access to telecommunication and tele density still being 66.17% and rural

tele-density at 31.22%, there is significant growth opportunity for the sector, especially in rural

areas and 3G yet to make significant inroads. The rural market is expected to drive the next

round of growth for the voice based services while data services will create the much neededchurn with in maturing urban markets. The focus of the shareholder is now shifting to these

untapped rural areas for voice based services and urban areas for the data based services which

will provide engine for the second phase of the growth in Indian Telecom. Rural teledensity

target has been upgraded to 40% by 2014.


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Problem Scenario:

The Indian mobile industry has been successful in providing affordable telecom services, thereby

empowering the common man, driving wider economic growth across the country andcontributing to the government finances. However, after a phase of robust growth, Indian

telecom sector as a whole appears to be slowing down. The number of net mobile connection

additions in December 2011 was around 35% less as compared to March 2011. The slowdown in

the sector should be an area of great concern as the growth journey of the sector is only partially

complete. It is evident that the urban markets are almost saturated whereas there is lot of

untapped demand in rural markets. And no effective measures have been taken for rolling out

services to unconnected population, primarily in rural areas. Moreover, with Indias broadband

penetration being abysmally low. While large scale additional investments are the need of the

hour, the sector is witnessing a reverse trend. There has been a significant slowdown in the FDI

as well as capital expenditure in the telecom sector

The problem also became grave with the allocation of 2G licenses and spectrum of several

companies; Out of these a lot of companies did not fulfill the basic conditions to be eligible for

these licenses. The allocation was done randomly on first come first serve basis, which resulted

in considerable loss to government and telecom sector. Thus denying the exchequer the

opportunity to realize the actual value of licenses. This resulted in entry of new players into the

telecom market and created a hyper competition. Many of the private players started lowering

prices and tariffs which resulted in low margins and squeezed profitability. Due to this severaltelecom companies have faced hit in their bottom lines and new players are in huge loss.

In 2010, this problem began to intensify leading to the intervention of government. The Indian

government realized this situation of hyper competition is due to wrong allocation of licenses

and spectrums to the telecom companies. In order to rectify this move Supreme Court of India on

2nd of February 14, 2012 gave a verdict to revoke the 122 licenses and spectrums from 8 telecom

companies conducting business in India.

This resulted in huge lose suffered by various telecom companies.


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Main Text

Issues in telecom sector:

The last three years witnessed a dramatic change in telecom sector of India. The total number of

subscriber is reported to be 800 million in India. But despite this huge base of customers for

telecom in the country, telecom companies are not able to earn profits. Here are the reasons for

it.

Wrong Policy for spectrum allocation:

In the year 2007, TRAI (Telecom Regulatory Authority of India) gave a recommendation to not

restrict the number of players in telecom sector hampered the sector as a whole. TRAI made a

recommendation to sell the licenses of 2G spectrum at cheap rates which were valid in the year

2001.The decision to keep the 2001 price and go along with First-Come-First-Served (FCFS)

policy was done in the name of growth, affordability, penetration of wireless services in semi

urban and rural areas. As a result a lot of companies tried to get the licenses to do business in the

sector. More than 500 applications were flooded to Department of Telecom of India to get

licenses. The wrong procedures followed by Department of Telecom in allocating the telecom

spectrum were not in accordance with the original policy and the internal procedures adopted by

the DoT and government have not been in tune with extant policies and directions of thegovernment. The decisions taken by the DoT in respect of grant of Unified Access Service

Licenses (UASL), bundled with spectrum, right from 2003 onwards and including the actions in

2007-08, were neither consistent with the decisions of Union Cabinet dated 2003 nor the

recommendations of telecom regulator TRAI.

Earlier it was seen as the advantage for increasing the healthy competition in the market. But this

proved as a disadvantage which created a situation of excess competition in the market.


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2G Spectrum Scam

A telecom operator cannot do its business until it has a specified area called Telecom

Spectrum. The word spectrum refers to a collection of various types of electromagneticradiations of different wavelengths. Spectrum or airwaves are the radio frequencies on which all

communication signals travel. In India the radio frequencies are being used for different types of

services like space communication, mobile communication, broadcasting, radio navigation,

mobile satellite service, aeronautical satellite services, defense communication etc. Radio

frequency is a natural resource but unlike other resources it will deplete when used. But it will be

wasted if not used efficiently.

In the year 2008, the telecom minister A Raja issued 2G spectrum licenses to private telecom

players at throwaway prices, the 2G spectrum scandal involved officials in the government of

India illegally undercharging mobile telephony companies for frequency allocation licenses,which they would use to create 2G subscriptions for cell phones. The shortfall between the

money collected and the money which the law mandated to be collected is estimated to be

176,645 crores (US$38.86 billion).

India is divided into 22 telecoms zones and there are a total 281 zonal licenses in the market.

According to the telecom policy of India, when a license is allotted to an operator some start-up

spectrum is bundled along with it. The policy does not have a provision for auctioning the

spectrum. In year 2008, 122 new second generation (2G) Universal Access Service (UAS)

licenses were given to telecom companies at the price of 2001 and on first come first serve basis.

In the recent development with respect to this scam, the supreme court of India cancelled 122

licenses allotted during A. Raja's tenure and iposed a fine Rs. 5 crores on Unitech telecom

(Uninor), Swan and Tata Teleservices Ltd, in addition it the court also fined penalty of Rs 50

lacs to Loop Telecom, S-Tel, Allianz Infratech and Sistema Shyam telecom Ltd. The table

showing number of companies and cancelled licenses


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Exhibit 1

Companies Technology No of

Licenses

Cancelled

Impacted

subscriber(Millions)

Total

Subscriber

(millions)

% of total

Subscriber

impacted

Circles with

less than

1000

Subscriber

Idea/Spice GSM 13 6.7 106.4 6.3% 0

Uninor GSM 22 36.3 36.3 100% 9

S.Tel GSM 6 3.5 3.5 100% 1

Videocon

Telecom

GSM 21 5.4 5.4 100% 3

Loop

Telecom

GSM 21 0 3.2 .2% 20

Etisalat DB GSM 15 1.7 1.7 100% 0

Sistema

Shyam

CDMA 21 12.7 15.0 84.3% 6

Tata CDMA 3 0.3 83.5 .4% 0

Total 122.0 66.6 255.1 26.1% 39

All India 334.0 66.6 893.8 7.5% 107

Exhibit 2

Revenue of affected telecom companies for the year 2011

Telecom Operator Affected revenue 2011

in millions

Total Company revenue

2011 in millions

Revenue Impact as %

totalIdea/Spice 2,131 116,282 1.8%

S-Tel 522 522 100%

Uninor 5,311 5,311 100%

Videocon 228 228 100%

Etisalat DB 49 49 100%

All India 8,242 1,216,141 0.7%


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Fierce Competition and heavy losses:

After the allocation of 122 circles to the various telecom companies in the year 2008 by the

government of India allowed many players to compete; This wrong allocation of 2G circles was

due to nexus between government and top executives of few telecom companies, also many of

these companies did not satisfy the basic conditions that were required to be met for the license.But the government issued spectrum licenses to nearly everyone, resulting in a considerable loss

to the government as well. Rather than adhering to the protocols and auctioning the licenses,

government awarded the spectrum on first come first serve basis at any random prices. Thus

denying the exchequer the opportunity to realize the actual value of the spectrum licenses. The

result was that there were several new players in the telecom market. Thus leading to hyper

competition. It resulted into price wars followed by reducing the prices very down by almost

every telecom company to survive in the competition. After this there were losses incurred by

new and old telecom companies in the market.

During this time every telecom company reduced the prices of their tariffs and call rates I orderto attract the new customer and to retain the old ones. But due to this companies failed to recover

even their operating cost. Profitability of the old companies was squeezed and heavy losses were

incurred by the new players in the market.

Simultaneous issue of licenses to multiple players in 2008 has resulted in increases competition

in the Indian mobile market. At the end of December 2011, on an average, 10 players were

operational in each of 22 circles of the country, with Mumbai and Bihar having a staggering 12

players and further 8 circles having 11 players each. Comparison of Indian market with a broad

spectrum of other countries- both developed and developing reveals the extent of hyper

competition prevalent in India. Only a handful of countries have more than four players.

This scenario of hyper competition has unfavorably impacted the operating parameters of the

industry. The exponential increase in mobile connections has been accompanied by decreasing

average revenue per minute(ARPU), stagnating minutes of use per subscriber and declining

average revenue per user. Mobile services revenue have also started to stagnate and have not

kept pace with the growth of mobile connections. Further increasing complexity of operations

due to rural rollouts has exerted pressure on operating expenses. Thus operators are being hit at

both revenues and cost levels, adversely impacting their margins significantly


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Decreasing Average Revenue per Minute

After the introduction of new operators from the year 2000 onwards, tariffs have declined

phenomenally from Rs. 15.5 per minute in 1999 to Rs 0.5 per minute in 2010. It should be noted

that noted that in the year 2007 as well tariffs in India were among the lowest in the world and

the rates have reduced further by half since then. Rates have stabilized at Rs. 0.8 per minute by2008 before the new round of licenses allocation was undertaken.

The Indian mobile market has witnessed Average revenue Per User declining at an alarming rate.

This is happening as a result of aggressive fall in revenue per minute combined with reducing

minutes of usage. Industry wide ARPUs have dropped from as high as 362 per GSM subscribers

per month in 2005 to 100 per GSM subscriber per month in 2011. Globally also India has onle of

the lowest ARPUs such that an Indian mobile subscriber generated less than one-third of

revenues per month as compared with an subscriber in other nations or emerging markets in

Asia. Further on average, developed markets have more than ten times the ARPU per month as

that in India. Mobile Operators currently face challenge of not only stagnating revenues but alsoincreasing operating expenses. Operators have undertaken a number of initiatives like

infrastructure sharing, outsourcing and increasing asset productivity, yet operational challenges

remain.

Listed below are the excerpts of the financials of few major telecom companies

Exhibit 3

march,2011 march, 2010 march,2009 march, 2008

total income 38,241.20 36,693.09 32,791.86 25,874.86

Operating Profit 13,425.70 13,966.34 13,215.68 10,662.41

Net profit 7716.9 9426.15 7743.84 6244.19

Operating Profit Margin(%) 32.25 39.08 38.74 41.37

Net Profit Margin(%) 20.21 26.36 22.58 23.99

Return On Capital Employed(%) 15.97 23.86 28.4 27.95

Return on Long Term Funds(%) 16.89 24.36 29.01 28.52

Current Ratio 0.7 0.7 0.69 0.57Quick Ratio 0.77 0.67 0.65 0.55

Debt Equity ratio 0.27 0.14 0.28 0.33

Long term debt equity ratio 0.21 0.12 0.26 0.3

Bharti Airtel Financials

In crore


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Exhibit 4

march,2011 march, 2010 march,2009 march, 2008

total income 12,614.02 16,009.77 19,234.79 15,312.58

Operating Profit 421.89 2193.43 5229.93 6173.29Net profit -757.99 478.93 4802.67 2586.45

Operating Profit M argin(%) 12.85 16.18 34.66 41.73

Net Profit Margin(%) -6 3.33 30.47 17.45

Return On Capital Employed(%) 1.03 1.97 4.8 9.65

Return on Long Term Funds(%) -2.44 2.12 5.34 11.81

Current Ratio 1.84 1.37 1.45 0.95

Quick Ratio 1.81 2.14 2.7 1.63

Debt Equity ratio 0.65 0.48 0.6 0.82

Long term debt equity ratio 0.46 0.38 0.44 0.48

Reliance Communications financials

In crores

Unsuccessful 3G

In 2010, India made a strong move towards the advancement of mobile technology in the country

by launching 3G services. The uptake of these services immediately following the launch has

been below industry expectations. Licensing delays and network stabilization issues have led to a

lukewarm response from Indian consumers. Telecom operators in India have failed to deliver thegood quality of 3G telecom services in India. A market estimates suggest that the total number

of 3G subscribers in India is just about 2% of the total cell phones users (893.8 million according

to TRAI). The main reasons are high cost of 3G enabled hand sets in India, Lack of

infrastructure, inadequate knowledge about 3G advantages among consumers, high prices

charged by telecom operators for the 3G voice and data services.

Exhibit 5

Company Total Subscribers 3G subscribers Percentage

Airtel 243 million 7 million 2.8%Reliance 150 million 2.8 million 1.3 %

Idea 106 million 2.3 million 2.1%Tata Teleservices 88 million 2 million 2.3%

Vodafone 148 million 6 million 4.1%


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Despite investing 65,000 crores together, telecom operators have failed to gain profits out of 3G

consumers.

Reason for 3G telecom not successful in India

1) Expensive 3G pricingThe foremost reason as to why 3G has not been adopted in big numbers is pricing,

telecom operators have kept 3G pricing relatively higher than it should have been. India

being a price conscious nation and higher pricing seems to have put them off. From

Telecom Operator perspective, they dont have much option but to keep the pricing

higher, purely because they need to recover huge spends ($11 billion) they have made in

buying the 3G spectrum and setting up the infrastructure for the same.

2) Poor Service QualityAlmost every telecom company in the country has failed to deliver what it promised to its

customers. Poor coverage due to lack of infrastructure, poor speeds for video streaming,

video calls, and online gaming have added more problems to the companies. Many

customers have complained that sometimes 2G works faster than 3G. Telecom companies

showed a great interest in buying the 3G spectrum and launching the service as soon as

possible in order to gain subscribers bas and purchased the 3G spectrum at a very high

price, but failed to invest in necessary infrastructure required for 3G service. Hence this

resulted in poor service delivery to the customers

3) Low Smartphone and 3G devices penetrationThis is also an important reason. Major chunk of Indian telecom customers are price

conscious, as they prefer to use these kinds of services for the low cost. The smart phones

and 3G enabled devices are not so popular among Indian customer base due to expensive

cost. According to a recent market survey 2G enabled hand sets still have a market share

of 60% in India

4) Lack of InfrastructureDespite the launch of 3G all over the country, there are several regions which are still notopen to 3G services, due to this poor services quality is a major concern. Companies do

not have enough infrastructure to serve these regions, on the other hand companies are

advertising and promoting to increase the subscribers base but do not have enough

resources to serve and retain them. After the 2G scam and cancellation of 122 2G licenses

many foreign telecom infrastructure companies like Alcatel-Lucent and Qualcomm have

reported losses (due to credit sales to telecom service providers.) and have stopped


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productions of various telecom equipments and are planning to move back to their

countries.

5) Lack of content3G operators do not have enough content of applications which run on 3G platforms. As

India is a culturally diversified country, telecom operators do not have enough content of

data applications in the regional language, which also the reason for no acceptance of 3G

telecom among customers.

6) Low AwarenessIndia has a very low awareness of 3G products and services, according to a market survey

by Neilson, the percentage subscribers willing to take the a 3G connection is only 19%

since November, 2011. The survey also revealed that in India more than 99% of telecom

service users rely on desktop internet or television or print media for getting the

information they need. Hence telecom operators have dual challenge of raising awarenessand then pushing adoption of 3G telecom services in India.

Exhibit 6

Dec,2011 Sep,2011 June,2011 Mar-11

sales turn over 2,788 2,844 2,835 2,893

Total Income 2,855 2,851 2,854 3,242.90

Total Expenses 2,522 2,522 2,543 2,437.29

Operating Profit 266 321 292 456

Gross Profit 333 329 311 806Net Profit -277 -99 -272 574

Dec,2011 Sep,2011 June,2011 Mar-11

sales turn over 10,500.60 10, 164.50 10,180.00 9828.5

Total Income 10,523 10,177.50 10,199 9856.6

Total Expenses 7178.6 6843.7 6985.2 6470.5

Operating Profit 3322 3320.8 3194.8 3358

Gross Profit 3344.4 3333.8 3213.8 3223.3

Net Profit 1,416 1,307.50 1432.3 1,837.90

Quarterly Results of Relaince Communications

Quarterly Results of Bharti Airtel

In crores


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Slowdown in Capital Expenditures

When capital expenditure needs to be rising to meet new rollout challenges, investment is, in

fact, falling. Evidences show that mobile operators have begun to go slow over the recent past on

making fresh investments into the sector. Further, operators granted licenses in 2008 have been

slow in rolling out their networks. Many new 2G operators have not started operations in manycircles and even in circles that they have rolled out services, their expansion has been slow.

Moreover FDI into the sector is in decline. FDI in telecom sector in India was $1.7 approx. in

financial year 2011, down by almost 35% compared to $2.6 billion in financial year 2010. The

slow pace of investments by operators is also reflected in low tenancy ratios, slowdown in

growth of telecom tower companies and decreasing size of the Indian telecom infrastructure

market. Tenancy ratios of the tower companies are low relative to the the potential given the

number of players. The pace of rollout of towers has also declined significantly. In the year2008, the year on year growth rate was over 60%. In contrast, the year on year growth rate was

only 5% in the year 2010. Considering the massive need for the towers for rural and 3G

expansion, this represents almost halting of the network rollout machinery. This slowdown in

investments when the industry needs to make massive rollout can be attributed to a great extent

to the poor and deteriorating financial performance of the companies in the Indian mobile

telecom sector.

Exhibit 7

Chart showing the expenditure done by telecom companies from the year 2007 to the year

2010

0 50 100 150 200 250 300 350

2007

2008

2009

2010

2007 2008 2009 2010

expenditure in crores 263 296 127 95

expenditure in crores


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Exhibit 8

Chart showing the FDI in telecom sector from the year 2009 to the year 2011.

0 500 1000 1500 2000 2500 3000

2009

2010

2011

2009 2010 2011FDI 2558 2554 1665

FDI


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Levies and Duties

The Indian mobile industry is also burdened by multiple duties and levies, both at the central as

well as the state level. Central levies include annual licenses fees including Universal Service

Obligation (USO) fees, annual spectrum usage fees, and service tax. Over and above these levies

various states of India also apply additional tax/ duties such as Octroi, VAT, stamp duty andlevies on towers

Exhibit 9

Regulatory

Charges (as

% of

revenues)

India China Malaysia Sri Lanka Pakistan

License Fee 6% to 10% Nil 0.5% .3% ofturnover+1%

of capitalinvested

0.5%+0.5%R&D

Spectrum

Fee

3% to 8% 0.5% nil 1.1% Cost recovery

USCF 5% oflicense fee

Nil 1% Nil 1.5%

Service Tax 10.3% 3% 5% TelecomLevy

GST

Total 19 % to 28% 3% to 3.5% 6.5% 1.3%turnover+1%invested

capital+telecom levy

2.5%+GST+Costrecovery

As evident from the table above, regulatory charges in India including license and spectrum fees

are on higher side compared with other countries. Central levies themselves are around 19% to

28% of Adjusted Gross Revenues (AGR) of operators.

No reforms in Indian Telecom Infrastructure Industry

The telecom equipment manufacturing sector in India has hardly been able to keep pace with the

growth in demand. The telecom service sector has been growing at a rapid pace with addition of

about 7-8 million subscribers every month. The telecom infrastructure has basically been built

and is still being built with by and large imported network elements to the extent of almost 97-98

percent. This exponential growth has been possible because of the positive steps taken by the

government through liberal policies and proactive decisions. While on one hand, the


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government's liberal policies have been largely responsible for providing a fillip to the growth of

service sector but on the other, the Indian telecom manufacturing sector has somehow got a step-

motherly treatment. Hence, the telecom manufacturing sector has hardly shown any significant

growth.

The R&D, innovations, and manufacturing of Indian telecom equipment as one of the keyobjectives of Indian Telecom infrastructure Industry but it remained on paper only as no

subsequent steps were initiated by the government to ensure that this objective was also taken

seriously by all concerned and efforts were made by one and all to accomplish these. The total

estimated value of the equipment installed in the Indian telecom network last year was about

`55,000 crores, out of which the value of equipment supplied by domestic manufacturers was a

meager `1400 crores, implying that they have a market share of less than 3 percent. Had the

government provided the right environment and the right push over the last two decades, there

would not have been such a dismal situation. As per figures available today, average value

addition is just about 11 percent or less. TRAI has extrapolated the Indian telecom market

demand until 2020, which is expected to grow from `68,697 crores in 2011-12 to `170,091 crores

by 2019-20. The real domestic content of the telecom equipment being categorized as produced

in India, where the know-how and intellectual property rights (IPRs) reside in India, is

insignificant. The major contributors have been multinational companies, who are importing

most of the products/sub-assemblies and selling them in the domestic market as Indian products.

There is neither any significant value addition nor the know-how is percolating into the country.

Most of the critical software/subsystems remain unknown. The problem with the Indian telecom

manufacturing industry has further escalated from the above figures as also from the trade

imbalance between exports and imports. The comparative data shows that while the imports

grew about 30 times, exports grew by only 6 times. In a similarly placed country like Brazil, thesituation is just reverse as imports there grew by only 1.6 percent while exports grew about 10

times. In 1997, India exported telecom equipment worth USD 63 million as compared to the

import of USD 280 million. By 2007, the exports stood at USD 355 million with imports of USD

8320 million, which clearly indicates the status of the industry.


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Implications

With the Supreme Courts verdict regarding cancellation of 122 licenses for 2G mobile services,

here are the possible implications in future

Mixed implication for the Incumbent telecom companies

Supreme Court verdict has negative implication for the telecom sector, lenders and overall

business sentiments in the country, shattering Indias image as an attractive investment

destination. However the verdict will bring advantage to incumbent telecom companies as it will

to much needed rationalization in the overcrowded telecom market as it will bring down the

number of players per circle by few. At the same time, it might have some negative impact for

the incumbents as the Supreme Court has objections to the government policy of First Come

First Serve which was used for all 2G licenses allocation, in future the incumbent players might

also be dragged in to controversy, as they were unaffected this time.

Investment by impacted players to be delayed

Substantial investment was planned by some of the affected players like Idea, Sistema Shyam

and S. Tel, to roll out their networks, in the next 2-3 years, which might get delayed or cancelled.

As per Centre for Monitoring Indian Economy (CMIE) data, Idea, Sistema Shyam and S. Tel

have planned investments of Rs. 12 billion, Rs. 275 billion and Rs. 20 billion for their network

expansion and service roll out till 2014.This in turn will impact the allied industries, includingthe telecom equipment providers and the passive infrastructure players.

Verdict is a negative for foreign investment in India

Most of the foreign players entered India as partners of local telecom firms after the license

allotment. As in the last few years, India is already suffering from policy paralysis, the verdict

will adversely impact the sentiments of foreign investors in India.

Impact on subscribers

As per a report by TRAI (Telecom Regulatory Authority of India), nearly 5% of the total active

mobile user base of India would be impacted by this decision. This would mean that nearly 45 m

of the country's 894 m subscribers would see their services go off when the licenses are

cancelled. However, Supreme Court has given four months to the companies. This means that


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these subscribers have some time during which they can change their operators. This is where

Mobile Number Portability (MNP) would play a big role as subscribers can retain their phone

number and still switch their network provider.

Impact on Telecom companies

The 9 companies facing license cancellation have two choices. They can either appeal for a

reversal of the verdict, which means expensive legal costs. Or they can bid for new licenses

whenever the government decides to auction the same. Or they can completely move out of

telecom space. If they choose to bid for new licenses they would be looking at high license costs.

To add to this, the incumbents would be participating in the auction as well as they would seek to

expand their networks.

For incumbent players like Bharti Airtel , Vodafone as well as Idea Cellular (the company draws

nearly 85% of its revenues from the 13 old circles) this verdict is a blessing. They would stand to

gain from the subscribers who would be moving out of the affected companies' networks. They

would also get a chance to bid for the additional spectrum as and when that is made available.

Impact on whole sector

The verdict would lead to the much needed consolidation in the sector. With players moving out,

the level of competition is expected to come down. In the absence of hyper competition, the

existing players would have the opportunity to increase tariffs too to be able to increase their

profitability levels. But the companies would be cautious when it comes to increasing prices.

Indian consumers are extremely sensitive to prices as a result of which price elasticity is high.

Therefore so as to not lose out in terms of minutes of usage, operators would be careful when

adjusting tariffs upwards. The decision to cancel the 2G licenses would lead to short term pains

for the affected companies as well as investor sentiment in the short term. But in the long run,

this same decision would serve as a boon for the Indian telecom sector.

Impact on lending banks

The Supreme Courts verdict will prove as a disadvantage to the banks who have given short term

and long term loans to the companies for acquiring licenses out of those many have been

cancelled. The banks, mostly public sector banks have an exposure 10,000 crores to the telecom

companies which were granted licenses in the year 2008. As assessed by the banks these loans

are now at a high risk.


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Solutions to the existing problem

Proper auction process for the spectrum

To get out of the present crisis in the telecom sector, Indian government should conduct selling

the spectrum to the telecom companies in a systematic manner. For doing this first, all the

telecom operators have to be divided into three categories- First, those companies whose licenses

have been cancelled in specific circles or pan-India in the recent supreme court verdict. Second,

those companies who are totally fresh and new entrants who do not have a presence in the Indian

telecom market. Third, the companies which have got more than the prescribed limit of the

spectrum. After this more chance should be given to the fresh companies then to those whose

licenses are quashed and if the spectrum is left out last chance should be given to the incumbent

telecom companies. The reason behind this is to avoid any kind of monopoly of any incumbent

players in the future, because these companies have surplus funds with them in this way they willbe able to bid higher than those who are in loss. So in order to avoid another phase of loss in the

sector, Auction process has to conduct in a very systematic manner. This can be done by

auctioning the telecom spectrum in two stages. First, to the fresh and loss bearing companies and

then to the incumbent telecom operators. As per the recent development in this aspect, Indian

government is still not able to decide the new telecom policy. A speedy mechanism has to be

designed for formulation of new telecom policy and auctions of 2G, 3G and 4G with LTE

spectrums. Any further delay in decision making will lead to grave losses and more declining

margins in the telecom sector.

Consolidation: Mergers and Acquisitions

Government of India should also focus on to make a strong and efficient policy for the

consolidations in the telecom sector. As the whole industry is going through a rough phase, the

telecom operators are looking for mergers and acquisitions. After the Supreme Courts verdict on

2G scam, many companies lost the licenses for which they suffered heavy losses and telecom

spectrum but they still have the strong subscribers base to which they cannot serve due to this

these companies have two choices either they move out of the telecom sector or go through a

consolidation process, if mergers and acquisitions made easier, there will be a decrease in

number of players in the telecom market which will decrease the level of competition. The

incumbent players will be able to merge with or acquire the small companies and can gain

profits.

Earlier the TRAI gave its M&A policy in which consolidation can happen between two or more

company if they have the presence in at least 4 telecom circles but now its been increased to 6.

Also there was policy that two or merged companies can have a market share of 40% but now


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that has been reduced to 30%. In addition to this companies cant hold spectrum range more than

14.4 MHz (GSM) and 10 MHz (CDMA). All these restrictions are not allowing companies to go

for consolidation, as they feel that company acquires other company not only for brand and

customers but also for spectrum and bandwidth. In order to promote consolidations and healthy

competition, Government of India along with TRAI should come up with flexible but robust

consolidation policy.

Fair telecom exit policy:

After the Supreme Courts verdict on cancellation of 122 licenses, telecom sector is urgent need

of exit policy. The requirement of such an exit policy is mandated in view of a number of new

players not being able to roll out services because of lack of funds and the spiraling costs in the

face of intense competition due to the presence of a large number of operators and also their

inability to even start services in some cases, owing to the ongoing investigation in the 2G scam.an exit policy will help free spectrum for incumbent players like Bharti, Vodafone, Idea, Tata

and Reliance, who can use the scarce resource for expanding their operations. The reason for this

being; if spectrum becomes available in abundance, the demand-supply equation will push down

their spectrum costs even if allocated through a transparent auction process. On the other hand,

the policy will give respite to new players, who are finding it difficult to compete in the telecom

market. The policy will facilitate them in surrendering licenses and spectrum and get money

back from the government. For example, a new operator like Loop Telecom has already

informed the Supreme Court of its desire to surrender its license.

Focus on VAS for 3G telecom

As there is an intense competition in the voice market of telecom, and companies are finding it

very difficult to survive. In order to get away from this issue, more and intense focus has to be

given towards developing innovative applications in VAS (Value Added Services) segment.

Today, companies have the spectrum, but they lack in number of application. In a diversified

market like India, companies should focus on developing the application content in regional

languages as well. This will help them to penetrate in market. In addition to it, proper

infrastructure is also required in order to improve the service quality for video-streaming,

interactive gaming, video calling and mobile TV. In addition to this company should try to

spread the awareness about the added advantage of 3G telecom to their customer base. The

companies should try to keep the prices affordable for the customers.


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Key Drivers of the 3G and VAS in future are

Multilingual content, application support around languages, killer applications and

readiness of handsets could drive over INR 55,000 crores of VAS revenue by 2015.

With the launch of 3G services and expected launch of high bandwidth BWA services,

VAS currently has reached its inflexion point. The constituents of VAS ecosystem such

as mobile operators, content creator, handset manufacturer will need to show greater

collaboration to achieve full potential of VAS.

The future growth in VAS is expected to be broad based in contrast to the past where

fewer services dominated the VAS scene.

There is strong demand and increasing propensity to pay for Regional and multi-lingual

content.Medical Advice VAS has the capability to allow the deprived sections of society to

access quality medical advice at an affordable price.

Transactional VAS (m-commerce) would need special attention to address the issues of

ease of use and data privacy.

Demand for news updates through VAS is high and operator and VAS value chain

players would need to address the challenges in delivering news updates in multimedia at

a reasonable cost.


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Rural Penetration

Indias rural mobile teledensity is only 35%. This is only around one-fifth that of urban mobile

teledensity and the gap between urban and rural teledensity has widened significantly over the

past decade. Moreover, the gaps can widen even further as rural growth slows down

Exhibit 10

Comparison between Urban and Rural teledensity in India from 2001 to 2011

Boosting rural mobile connections and bridging the rural urban gap is extremely important to

ensure that the people in rural and remote areas of the country whose capita income levels and

access to other infrastructure/ services are relatively lower, do not miss out on the tremendous

opportunity provided by the mobile services t fulfill their communication and information needs.

Moreover, rise in mobile penetration can also stimulate the rural economy significantly. To

bridge the gap, operators need to make significant investments over the next few years to expand

their network as well as distribution coverage and bear the high operating expenses in the form

of tower rentals, diesel consumption, and backbone expenses of serving rural areas. Rural

teledensity and penetration is still primitive by comparison and there is a whole lush landscape

untapped for Greenfield projects in this segment. By and large, the 9% growth projections inIndia seem right barring cross-border spillover or increased global food prices interference.

Given its important participation in GDP so far, Indian telecom should fare relatively well with

greater focus on the right segment now. Rural telecom market in India enjoys all potentials of a

booming and massive economy with a big population. Although the paying capacity is lesser but

this bigger chunk has about the same needs as the urban market making it a parallel economy.

0%

20%

40%

60%

80%

100%120%

140%

160%

180%

dec,01 dec,03 dec,05 dec,07 dec,09 dec,11

Urban and Rural

teledensity gap rural

Urban and Rural

teledensity gap urban


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Providing connectivity and communications to the revenue villages and village Panchayats

(broadband access) is one of the Governments near future agendas.

Reforms in the Telecom Infrastructure Sector

There will be a massive requirement of telecom equipment in India in the near future as thedemand for telecom services will be driven by 1 billion subscribers soon. Undoubtedly, this

demand will be not only for voice services, but also for the most essential data services to be part

of the information age. There will be large-scale 4G network rollouts this year by BWA

spectrum winners. According to Boston Consulting Group, the size of the telecom equipment

market in India was around `300,000 crore (USD 60 billion) in 2011. Although operators have so

far imported the telecom equipment to build their core networks, they could consider expanding

these networks further using indigenous products going forward. Here is a SWOT analysis of the

Indian telecom equipment manufacturing (TEM) situation.

Exhibit 11

The last few years saw many renowned foreign telecom companies setting up their

manufacturing base and R&D centers in India. These foreign players enjoy several benefits in

their home countries, which help them to cross the border and enjoy economies of scale from

global operations. Some of the leading Indian players like Tejas Networks, VMC, and HFCL

have also set up manufacturing facilities and R&D capabilities. But these companies are not able

to compete and expand their operations compared with Huawei and ZTE due to some of the


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basic advantages available to these Chinese companies. Tremendous support and benefits from

the Chinese government have helped these companies become world leaders in telecom

equipment within a few years. They enjoy long-term financing at nominal interest rate, make

large R&D and patenting investments from low cost loans, and receive huge research funding

from the government

Indian government should also learn from Chinese examples and act as a facilitator for creating

and nurturing a favorable environment for telecom equipment manufacturing. If India could play

a leadership role in R&D in other sectors like automobile parts, pharmaceuticals, software, the

country can definitely replicate the success in telecom manufacturing as well. The question is not

whether India can be the powerhouse of telecom equipment manufacturing in the world, but the

question should be how to make this possible.

There should be a separate mission similar to the one for green revolution to enable indigenous

manufacturing of state-of-the-art telecom products and services with focus on:

Providing fiscal and monetary incentives

Creating and nurturing a culture of innovation

Promoting R&D initiatives through grants and funds (similar to western benchmarks as

shown in the graph)

Giving incentives to global companies for setting up R&D and manufacturing centers in

India

Providing infrastructure status and low-cost financing

Developing Indian technology standards for telecom equipment that would automatically

start providing an edge to local development and manufacturing

Ensuring preferential access mechanism for government procurement. WTO allows the

government to reserve certain portion of its buying for products manufactured in India

(with certain minimum value addition)

Carrying out technical, financial, and operational performance efficiency benchmarking

of leading telecom infrastructure providers of the world


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References

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2) Moneycontrol.com, Will SC verdict hurt telecom future?http://www.moneycontrol.com/news/business/will-sc-verdict-hurt-telecom-sectors-future-

_663002.html, 6th Feb,2012

3) Silicon Valley India, The Future of Telecom in Indiahttp://www.siliconindia.com/shownews/The_future_of_telecom_in_India-nid-83479-cid-

2.html, 13th May, 2011

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Decling Margins of Telecom Sector in India

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