Indian Telecom: Sunshine ahead

With the Indian economy showing signs of a continued and robust growth in the coming years, telecom cannot have a different outlook. Recent developments in the Indian telecom sector have brought the world focus on what is being pronounced as the fastest growing telecom market in the world. While crossing the landmark 200 mn subscribers has indeed brought Indian telecom sector in the big league telecom markets, the best ever rate of growth that we see is the added silver lining. No wonder the world focus is on India, which in all modesty is bound to become the second largest telecom sector in the world, after China. The telecom story unfolding in India has enough spice for any aggressive player because the market is just growing and will continue to see more action!

Strong Signs of growth

In the wake of the western markets promising sluggish growth in the wireless, broadband and fixed line segments, and investors turning heat on telecom giants being forced to exist saturated markets, any action in India will be worth watching. I see substantial telecom growth happening in the next two to four years with a slight slowdown in investments later. The intensification of growth will be primarily driven by the wireless market especially the 2.5G, 3G and WiMax in that order. With wireless users being around 55% of the current population, there is vast scope for expansion of the 2.5G network to provide the basic voice connectivity to the masses. Every operator intends to seize the opportunity to grab the land and plans major investments in the area. Despite almost a simultaneous deployment of 3G and WiMax in India, 3G is likely to have a scorching growth depending on the availability of the spectrum. The current 2.5G scenario in major cities shall add to the compulsion of operators to deploy 3G networks to take advantage of the capacity and the device savvy Indian urban population. The Indian urban market is as demanding as any other developed nations which has been proved by the success of applications launched by service providers like CRBT and music downloads. 3G brings in a broadband pipe to the wireless device thereby enabling launch of bandwidth intensive services such as video streaming and mobile TV. Value added services such as video on demand, video streaming, etc would be on customers' most favored list when India embraces 3G.

Innovative technologies

With the government focus on broadband penetration and initiatives like e-Governance and m-commerce, 3G and WiMax shall complement each other to drive the broadband penetration from the current dismal levels of 1.8 mn to a target of 20 mn by 2010 which may seem overambitious to somebody who is new to the Indian telecom sector. While markets for these innovative technologies would be large cities and metros, rural India is thriving to get their pie.

The set target of reaching around half a billion customers by 2010 and a teledensity of around 45% seems achievable. What gives the industry the confidence of achieving these numbers is the investor-friendly government policies, a consistently strong GDP growth, the exploding young population and the Indian business model of being profitable despite having the lowest tariff in the world. A case in reference can be the Indian market currently re-attracting foreign players, who had abandoned the market for lucrative propositions. The resurgent India story can be attributed to the phenomenal growth in the BPO sector, growth in industrial production, housing sector, agricultural, fresh demands from the burgeoning middle class population, investments in infrastructure, and finally exports that strengthen our 'made in India' tag. On top of flexing muscles in the home turf, Indian operators/players have become more aggressive by spreading their wings abroad by aquiring new licenses and existing companies.Strong Rural Markets Considering the fact that the urban markets are reaching saturation point and the ARPU (Average Revenue Per User) is dwindling, cellular service providers have started moving towards rural India. The focus now is on improving the low rural teledensity and radio coverage to cover about 70% of the population, which given the Indian terrain, is a tall order. This is essential to get to the 500 mn mark and the growth envisaged in the telecom sector. These deployments to start with, would primarily be voice centric at lowest possible cost structures in order to support the low ARPU expected.

The technology trends, which drive the cost of deploying such low cost, low power requirement, low capacity infrastructure and large scale passive infrastructure, sharing is certainly going to be adapted in India. One of the major bottlenecks in such deployments is the backhaul cost. Apart from the government initiatives to promote passive infrastructure in rural areas through the USO fund, the technologies for an effective backhaul for the rural radio coverage are key to the Indian telecom growth, and service providers are examining all possible options in adapting these.

There is a distinct possibility that broadband might be the future technology to connect masses especially in rural area. This was witnessed in several overseas markets. Customers abroad are experiencing a new telecom phase because they can talk freely as free VoIP would be riding the broadband wave. Although, VoIP would not be a major driver because the current voice tariff in India is almost equal if not lower than the VoIP tariff in the other markets, the e-Governance and m- commerce initiatives would be major drivers for broadband penetration. The natural growth path for current wireless operators being HSPA, it should also be the preference in the urban areas. However, there is potential for WiMax to compliment it in the rural areas. Residences in rural areas, and SMEs in both rural and urban areas, would attract WiMax with private and public sector companies playing key roles. Initiatives such as lifetime free incoming calls, substantial reduction in long distance rates, value added services, have been tried to boost the area in concern. Foray in to the rural market would ensure similar if not better ARPUs.

Youth to Drive Growth

We will see many players with value added services and packages that mainly attract the youth who have plenty of money to splurge. As seen in urban areas, the youth riding the BPO wave are prepared to shell out for services that make their lives simpler. Prepaid connections would continue to grow in India at the present growth rate with customer enjoying control over his/her prepaid connections. customer services and the range of VAS, would be the dictating factor for the subscribers to stick to or churn out of the operator. The current driver for churn – namely the tariff offered, would no longer be an issue as it has almost bottomed out. We do not expect much churn among the post-paid customers, as they do not want to change the cell number frequently.

Investment in abundance

In the next two to four years, investments will increase, but the growth in investment may take a beating in the next stage because the main focus of the operators will be consolidation, revenue generation and customer retention with specialized services. Infrastructure sharing is the main aim of several players and therefore they have started building their own networks which can be shared to tap this lucrative market, and hopefully India would soon see further upsurge in teledensity with low investments. Besides internal generation of funds, bank and financial institutions are preparing to support this growth in a big way. However, the uncertain interest rate regime may hurt the fund raising plans.

Outlook for coming years

Source: Voice & Data

In the next two years, India is expected to become the 3rd largest mobile market in the world, after the US and China and soon be in a position to overtake the US as well. The number of service provider might come down to around five from the present six to seven as the next phase of consolidation will take place shortly. I see a buoyant and strong Indian telecom sector in the coming years and every major player in the world in the telecom space trying to take his share in this pie.India has seen huge investments by operators to grow their networks. This is bound to increase as indicated by the capital expenditure plan announced by several key players. The main investments will be in new lines, technologies and manpower.In the ongoing need for communication, close to 50 crore Indians, though price sensitive, can spend Rs 200 a month. The number of Indians who can afford to pay this benchmark figure is growing. Another big driving factor for the confidence in the growth in telecom sector is the youth population in India. With around 40% youth population for whom communication needs are as essential as food and water, this is a huge potential market.