The Indian Telecom Sector

IIPM PUBLICATION

The Indian telecom sector is unfolding a strange saga of unprecedented growth on one hand and some nonsensical interference from the ministry on the other hand. If everything goes as per the telecom ministry’s glorious plans, the time is not far when the telecom sector’s fantastic growth journey is smashed to extinction without even a ‘dumb’ hope of resuscitation

Ram Singh a labourer by profession, knows nothing beyond his paraphernalia and his daily target of digging the land. Along with a few coworkers, he is busy digging the pavement and putting in cables besides a road in the hustling city of Indore. As instructed by his the kedar, he is dumping the mud right on the road, causing disruption to the traffic and frustration to the pedestrians. In reality, Singh and his men are laying down the foundations of the all-important telecom infrastructure, undertaking on-ground execution of the most important revolution to have hit the Indian economy in the past 60 years, the great Indian telecom revolution.

Well, neither Ram Singh nor the frustrated pedestrians (who are cursing him for all the hassles created on the road) quite realize the importance of the work being carried out. The funny part is, after analysing the Indian telecom sector, we’re left wondering whether even the Indian government does? At one point, it became tough for us to decide what was dumber – the telecom policies or the politicians & bureaucrats implementing them? If you find out, write back to us...

Yes, the telecom sector is no more just another success story, it’s a revolution indeed. With new records being made every day, the world’s fastest growing sector has entered a phase where growth seems to be an obvious phenomenon. Exactly one year back, Business Week had written how India’s fixed land line and mobile base had reached 150 million, with the mobile subscriber additions growing at around 5 million a month. In one year, the monthly subscriber additions have already thundered beyond the 7 million mark and the total subscriber base has crossed the 200 million figure.

Before you start praising the government, you should know that almost all the growth (yes, all) has been because of private corporations and their aggressive marketing policies. Well, even rising income levels and falling communication costs (partly because of lower tariff s by the government) are a few factors that have literally fuelled the growth of this sector. According to Gartner, the value of the cellular services segment in India would grow from $9 billion in 2006 to a massive $25 billion in 2011, at a CAGR of 18.4%. Also, as per Gartner estimates, the cellular market penetration would also increase from 12.7% in 2006 to 38.6% by 2011. The Department of Telecom (DoT) “plans to achieve” (given their propensity to take credit for anything positive) a subscriber base of 250 million by the end of this year and 500 million by the end of 2010. The fact is that even a better target is quite achievable as long as the government keeps its interference to the minimum and enacts pro-customer policies rather than being clearly nepotist.

Government; The Grid-Locker
If you were to double the ‘dumb’ quotient portrayed by Jim Carrey in the side-splitting classic, Dumb & Dumber (yes, we plagiarised the concept for the cover picture), you still wouldn’t have reached half of where our government’s policies are currently. Be it the long pending issue of spectrum allocation, infrastructure sharing, levying of Access Deficit Charges or the heavy burden of taxes on operators, the government doesn’t seem to be having a solution to these cliff -hangers.

In a hitting quasi-indictment, the report submitted by the Spectrum Management Committee clearly questions the work being done by Union Communications and IT minister A. Raja and even his predecessors – “The committee feels that the lack of foresight planning on the part of DoT has led to ad hoc and injudicious allocations of spectrum, which in turn has caused non-availability of this scarce resource when the telecom operators need it the most for faster expansion of telecom services.” Well, instead of answering the issues raised in the report, Raja conveniently preferred to call off the meeting of the Group of Ministers (which was called to most urgently resolve the most critical spectrum related issues) till September. DoT has not even been able to pursue the Army to vacate the additional 42.5 MHz spectrum, which was supposed to be eventually utilized for mobile services. Top players like Reliance Communications and Idea Cellular are now facing delayed roll-outs of their GSM operations in circles they were hitherto absent, and all because of spectrum allocation problems.

As per the present spectrum policy of DoT, a GSM operator receives up to 6.25 MHz spectrum, while a CDMA operator – without any supporting logic given by the government – gets only up to 5 MHz, on meeting the specified subscriber base criteria. Any additional allocation of spectrum is made on the basis of the total subscriber base of the operator. This unequal distribution of spectrum to GSM and CDMA has oft en resulted in dispute between the two groups.

Well, the unhappiness of the operators does not end here. Presently, the levies and duties on Indian telecom sector are perhaps the highest in the world. The telecom industry carries a burden of levies like the license fee, the universal services obligation fund, spectrum charges in addition to the compulsory service charge. In total, a telecom operator in India pays a total of 17-26% regulatory charges (of total revenues) in addition to the Goods and Services tax. When compared to China (where regulatory charges are approximately 3.5%), Sri Lanka (2.3%) and Pakistan (2.5%), the Indian operators clearly seem to be bearing the burden of the government policies, more than anything else. In the Union Budget 2007-08, the Finance Minister announced that the government will constitute a separate committee to study the present structure of levies on telecom and make suitable recommendations to simplify the levies. However, even in this case, no pre-emptive action has been taken till date.

Utterly ludicrously, news floats in now that the government, instead of allowing more competition per circle (which will favour the consumer), is actually toying with the idea of capping the number of players in each circle! Oh, how easy a way to solve competitive issues...

Towering aspirations or towering infernos?
The telecom war in India is getting all the more interesting by the day. Although the telecom players are fighting an aggressive marketing war to substantially increase their monthly subscriber additions, the real war is taking place closer to the towers. But why are suddenly telecom companies (telcos, if you may) in India running after the tower business?

Firstly, existing players in the absence of additional spectrum, will have to incur higher capex to service the increasing number of subscribers with their limited available spectrum. Secondly, about 70- 75% of the incremental capex of the telcos will be used for the rural areas, which are currently having very low penetration levels. According to Shubham Majumdar of Macquire Research, “The rural population base in India is widely dispersed geographically, which underlines the need for a larger number of towers...” Thirdly, the telecom sector has one of the highest minutes of usage in the world, implying that number of cell sites required would also be very high. As Arpita Agarwal, Associate Director of PwC deliberated to us, “Towers are a basic infrastructure for the mobile industry to grow. Unless you have the towers, you cannot have the desired reach of the services.” Shushmul Maheshwari of RNCOS confirmed to B&E, “To create a strong countrywide network, as per our analysis, the requirement for mobile towers will double from the current level by 2010.”

Hence, be it the market leader Bharti Airtel, the public sector giant BSNL, the aggressive Reliance Communications, Vodafone-Essar or be it the comparatively smaller players like Tata Indicom and Idea Cellular, all are embracing ‘towering’ expansion plans. Such is the madness to set up the telecom infrastructure that the cumulative expansion plans of all the players for the year 2007-08 have touched an astronomical figure of Rs.600 billion [For the uninitiated, the figure represents an astounding 60% of the total investments that have been made in the infrastructure business since the sector was thrown open to private investment]. Th e Indian telecom sector currently has 120,000 towers and already 80,000 more towers are under construction. Harit Shah, Sr. Research Analyst, Angel Broking, shared with B&E, “We still have about 110,000 towers in India. If we have to go near the government target of 5oo million subscribers by 2010, then we would be required to have around 330,000 towers – that means 220,000 more!”

Well, leading this race of telecom infrastructure expansion is Reliance Communications, which has already announced the world’s largest telecom network roll-out this year. In one of his media interactions, Anil Ambani, Chairman, Reliance Communications, addressed to B&E, “By the end of this fiscal year, the coverage of our wireless network will expand to 23,000 towns and 600,000 villages, with almost complete coverage of the country’s rail and road network. We have already committed 95% of this year’s capex guidance of $2.5 to accelerate this roll-out!” Sunil Mittal, CMD of Bharti Airtel, wasn’t far behind when he exclaimed, “We believe that the Indian telecom sector is entering the next phase of growth. We will continue to expand our network aggressively to enhance penetration in the rural markets and be at the forefront of this growth.”

Bharti too has announced massive capex plans for the year 2007-08. Interestingly, a majority of its funds (nearly $1 billion) would be utilized to expand its tower business, which currently comprises 40,000 towers as compared to Reliance’s 13,000. According to a report on Indian telecom sector released by Macquire Research, Bharti Infratel (their tower business) would capture a dominant market share in the tower space. As per the estimates, Bharti Infratel will have a portfolio of 114,000 towers by March 2010, translating into all-India towers market share of 33%. Reliance Telecom Infrastructure is likely to have the second largest portfolio of 63,000 towers, with a market share of 18.3%.

Though these leading players are investing heavily in the telecom tower business to rapidly expand their presence, the smaller players like Idea Cellular are taking it slow, expanding from one circle to another. The Birla Group owned Idea Cellular currently operates in 14 circles and is planning to become a pan India player. However, its late entry in the remaining circle poses to be a big challenge for this sixth largest telecom player of India. Apart from the telcos, there are many other companies like GTL, Quipo and Essar Telecom Infrastructures which are providing towers to operators. Out of these third party tower companies, GTL is perhaps the most significant player with 1,350 towers. Though the figure is small, GTL plans to take these numbers to 18,000 in the coming three years.

Together in ‘towering’ losses?!
While a few industry experts believe that laying down new telecom infrastructure is the best way for the telcos to tap the massive potential of the Indian telecom market, there are others who feel that infrastructure sharing is the most cost effective and the fastest means of reaching the last mile. According to Nripendra Mishra, Chairman, TRAI, “The challenge is to optimally utilize available resources while ensuring competition and availability of services at affordable prices. The infrastructure sharing therefore is the crying need of the hour.”

India is on the threshold of advanced services like 3G and WiMax. Though the deployment of the 3G and WiMax networks is taking some time, once laid down, these services would require a sound telecom infrastructure. Also, if the government wants these services to be priced competitively, an effective lowcsot solution like infrastructure sharing would suit best to the operators’ needs. Also, in a scenario where the falling tariff orders are squeezing operators margins, sharing of infrastructure would be the best suited solution for the operators.

Though passive infrastructure sharing (sharing of towers) is already taking place in a few circles, there is still no clear mandate from DoT on how should the telecom operators share the passive as well as the active network infrastructure [In a letter posted to TRAI, DoT injudiciously comments,“One of the ways of ensuring infrastructure sharing is to bring out a proper legislation...”].

As Macquire research states, “This (tower building) is a highly capex intensive business. A huge increase in capex could have a very negative impact on the balance sheets of the companies, exposing them to significant financial risk.” Even if we assume that only the top players would take up the daunting (and important) task of laying down telecom infrastructure, it would surely adversely affect the profitability of these players. Also, other factors, like an unexpected failure to execute the tower and infrastructure sharing business, could well prove fatal to the sector’s future. Not only this, the sector would also have to confront the unforeseen financial burden that might arise from likely 3G auctions. Well, finding a proactive solution to these foreseen problems might well help the telcos to continue their extraordinary growth.

Right now, it is the government and its regulations that seem to be enjoying the laughs. The previous issue of B&E even brought out how miserably BSNL, once a top telecom firm, was being mismanaged horrendously due to governmental interference.

However, blindly to all this, with more unanswered issues than a pack of cards to its credit, the telecom ministry is perhaps basking falsely in the glory of the growth brought about by the private operators. Communication Minister A. Raja might wish to ‘wish’ all the problems away; but strangely, despite his predecessor wishing the same, all that got ‘wished’ away successfully were the persons themselves. Indian telecom has seen much of ‘dumb’ and ‘dumber’; one just hopes a new definition of ‘dumbest’ is not around the corner...

B&E edit bureau: Devdeep Singh & Surbhi Chawla

For Complete IIPM Article, Click on IIPM Article

Source : IIPM Editorial, 2007

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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