Digital India Jan 2011 - BCG

Digital India The $ 100 Billion Prize

Arvind Subramanian, Alpesh Shah, Rishab Gulshan, Kanchan Samtani and Karishma Bhalla

January 2011

THE BOSTON CONSULTING GROUP JANUARY 2011

Digital India The $ 100 Billion Prize

he market for digital products and services in India, as distinct from narrow telecom offerings, is currently about $65 billion a year and is poised to break the $100 billion mark by 2015. But tomorrow’s market will be far different from today’s—much more oriented toward new

services and characterized by intense competition from nontraditional players. And with the traditional telecom business showing signs of maturing, operators will need to carefully manage their capital resources while simultaneously building new capabilities in order to develop new offerings and serve new customers. This high-wire act will be perilous for operators that cannot maintain the needed balance—and richly rewarding for those that can.

The Real Market

The traditional telecom market in India is worth about $32 billion, but that number misses adjacent businesses and opportunities where many of the best growth prospects lie. Examined through a wider lens that captures digital devices, services, video, and software and applications, the market quickly swells in size, revealing a broader array of competitors that are active in or near the telecom market.

As Exhibit 1 illustrates, the telecom industry is typically divided into government, large-enterprise, small- and medium-enterprise (SME), and retail segments. The retail segment accounts for two-thirds of the industry’s revenue. SMEs employ 60 million people and account for 45 percent of India’s manufactured output and 40 percent of its exports. But many SMEs—which have annual revenue of less than $100 million—are relatively unfamiliar with digital technology and are geographically dispersed. They are hard to target, sell to, and serve. Educating and finding innovative ways to reach these customers will be critical.

T

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Another way to understand India’s telecom market is by looking at the contribution of access, devices, and services to overall industry revenue. Most of the sector’s growth over the past decade has come from expanding access through the rollout of nearly ubiquitous mobile networks. Not surprisingly, therefore, access generates the largest share of annual revenue, at $31 billion. Without a connection, devices and services—which contribute $22 billion and $12 billion, respectively—don’t do much good. Viewing the market through the lens of access, devices, and services is helpful in understanding future developments, as nontraditional telecom players start to make inroads in India.

These two views of the market, however, are just snapshots. They do not capture where the market is headed or how fast it is moving. By 2015, things will look very different.

Future Growth

Before we peer into the future, it’s worth recounting briefly how quickly India’s telecom industry has matured. Until 1994, fewer than 1 out of 100 people had phone service. The National Telecom Policy of 1994 was meant to increase telecom penetration by allowing private investments, but it succeeded only modestly. The New Telecom Policy of 1999 further liberalized the industry and helped lay the foundation for rapid growth. Today, there are more than 700 million mobile subscriptions, equivalent to a penetration rate of about 60 percent.

Despite this explosive growth, total operator revenue has begun to show signs of stagnation. This is not a surprise. Developed markets have experienced the same slowing of revenue growth as markets start to reach maturation. While the Indian market still has room to grow, it is a much more competitive market than that of most developed nations, and it has become increasingly difficult for carriers to maintain effective price realization.

In India, the key to unlocking future growth will be to create new services that drive traffic and revenue growth. Specifically, successful operators will focus on four attractive opportunities:

Retail offerings delivered on handsets and on the “wide screens” of personal computers, laptops, and tablets

Enterprise network and managed services enabled by cloud computing

Machine-to-machine applications

Mobile advertising, marketing, and commerce

These opportunities will be enabled by three factors. The first is the rollout of 3G and wireless broadband networks. These fast networks will initially be limited to the top 100 to 200 cities, but smaller cities will eventually be beneficiaries, too. Second, technological and product development in devices and user interfaces, such as touch screens and voice and gesture recognition, will encourage consumer adoption. Third, prices will fall. The average price of smartphones will likely drop to less than $100 by 2015, from more than $250 today, while the price of advanced-feature phones will fall to around $60.

With the right networks, products, and prices in place, and with continued widespread penetration of mobile connectivity, operators will need to start offering the right services. Experience from similar markets, such as Indonesia and China, demonstrates a ready-made market for consumer services like social networking, video, and messaging. Young Indian consumers, in particular, are increasingly digitally savvy and want to enjoy the convenience and entertainment value of mobile communications.

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The more meaningful opportunity, however, may lie in providing services that help consumers improve their employment and earning prospects and that fill gaps in health care, financial services, and education. Nokia Life Tools and Nokia Money, for example, are both aimed at this sweet spot of improving the lives and livelihood of consumers.

Likewise, operators have to help SMEs become more productive. Through cloud computing, for example, they can deliver computing resources and applications to businesses on a pay-per-use model. In fact, dozens of community banks are already relying on Tata Consultancy Services’ “bank in a box” cloud offering to automate deposit and loan processing. Operators can and should be making cloud investments, too.

Machine-to-machine applications are an emerging opportunity across the globe. In India, for instance, they could help solve the distribution and logistical challenges of moving goods around the subcontinent by means of vehicle and inventory tracking.

Finally, a market of nearly a billion connected consumers creates tremendous opportunities for operators to help companies reach their customers. Mobile advertising is the thin edge of a much wider wedge of commercial activities that can generate revenue for operators. Below-the-line marketing, such as mobile coupons and mobile customer relationship management, is another promising new source of revenue. Finally, with its dispersed population and low penetration of formal banking and electronic payments systems, India is ripe for mobile commerce. It is premature to accurately size these opportunities, but each could easily total several billion dollars.

In the areas that that can be sized with some confidence, we forecast the digital market to reach as much as $116 billion by 2015.

The retail market will grow by 10 percent annually from 2010 to 2015, to $67 billion, largely due to the growth of mobile-data revenue.

The SME market will grow by 13 percent annually to $11 billion on the strength of data services, applications, equipment, and cloud services.

The large-enterprise market will grow by 17 percent to $29 billion owing to machine-to-machine applications and the same factors that will bring about growth in the SME segment.

Government will double its spending to nearly $10 billion as it harnesses digital services and technology to improve the reach and efficacy of its programs. The Unique Identification Authority of India, through a program aptly named Aadhar, or “foundation,” is creating the platform for a slew of digital services. Initiatives like the Accelerated Power Development and Reforms Programme will drive IT and telecom adoption in government-run utilities.

These are forecasts, not certainties. But they do suggest that the telecom sector, rather than running out of steam, has the opportunity to keep growing.

A key component of any growth strategy will be large capital investments. The government and industry together need to invest $35 billion to $50 billion in order to develop the backhaul, backbone, and data centers needed to power wireless-broadband networks that can support these new services. This is not a small sum. To fund the network enhancements, operators will need to share infrastructure, such as towers and active electronics components, pool their engineering and maintenance activities, and find other creative ways to collaborate with one another and participate in the government’s public-spending programs.

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In addition, Indian operators will have to contend with a new breed of competitors. These include Web giants like Google and Facebook and leading device players, such as Nokia and Apple, which are providing alternative forms of access and new devices and services.

This heightened competition is blurring the boundaries among access, devices, and services. By 2015, digital services will likely start to rival access in terms of size. (See Exhibit 2.) These shifting dynamics are causing traditional operators to rethink their strategies. Carriers in India, for example, have generally stayed out of the device business, but the winners of the 3G and wireless-broadband auctions in 2010 have decided that devices are too important to ignore and are starting to bundle them with their services.

Who will win this impending battle? While it is too early to tell, a few observations are in order. First, the traditional access business is maturing and carriers need to start focusing on return on invested capital as a meaningful metric, not just on revenue growth and subscriber market share. Second, as operators look for growth in revenue from services, they will need to rapidly build their capabilities and skills. It will not be easy to juggle the demands of managing capital efficiency and profitability in their traditional business while building these new revenue streams. Those operators that can balance this bipolar strategy will succeed in the new era that India is poised to enter.

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To Contact the Authors

Arvind Subramanian Partner & Director Mumbai [email protected] Alpesh Shah Partner & Director Mumbai [email protected] Rishab Gulshan Partner & Director New Delhi [email protected] Kanchan Samtani Principal Mumbai [email protected] Karishma Bhalla Project Leader Mumbai [email protected] © The Boston Consulting Group, Inc. 2011. All rights reserved 1/11

Digital India Jan 2011 - BCG

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