Hyper Competition

Discussion Board, October 15, 2010

The exponential growth in mobile subscribers in India has led to ther emergence of 14 players in this space. However, as they struggle to take part in the action, some of the new telecom licensees are facing difficulties in garnering a viable market share. tele.net asked industry analysts if such a hypermarket scenario was sustainable and for how long, and what changes need to be made to the existing merger and acquisitioon (M&A) norms to facilitate consolidation..

Given the hypermarket telecom scenario, how imperative is it to ease the consolidation norms in the sector?

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Discussion Board, October 15, 2010

Sivarama Krishnan, Executive Director, PricewaterhouseCoopers

The hyper-competitive market conditions are beneficial for consumers and the industry. So it is not necessary that consolidation is an immediate imperative. On the other hand, as telecom is a capital-intensive industry, excessive competition reduces the ability to invest in the long term. Thus, there needs to be a balance in terms of the competition in the market vis--vis the investments needed. In any given market, the subscriber base and long-term revenue potential are the basis for both the valuation of the business and any investment decision. Thus, it is notional for us to compare four to five players in the Indian market with the global telecom market, thinking that this is the scenario across the globe. The situation in India is different from that in other countries as the population there is much smaller and the market penetration is very different from Indias. Thus, the potential to have multiple players with large volumes of users is comparatively high.

Romal Shetty, National Telecom Head, KPMG India

If we look at the worldwide scenario, there is no country with as many as 14 operators in a single region. While globally there are four to five operators in a market, in the Indian case, given the larger population, the number can go up to six or seven operators. Telecom is one of the most important industries in the country. It has contributed significantly to the GDP and to the overall growth in society. This industry needs to be nurtured and consolidation is imperative for it to survive. Hence, the steps that need to be taken in terms of norms and regulations, etc. should be considered.

Prashant Singhal, Telecom Industry Leader, Ernst & Young India

There is space for 10-odd telecom operators in India simply because of the large population. In that way, India is vastly different from most other countries that have four to five operators. However, going forward, the consolidation norms in the Indian telecom industry need to be eased. The current M&A norms specify that a merged entity should not control 30 per cent or more of the subscriber base and revenues in any circle. What this means is that a large operator can acquire a small operator, or two small operators can merge. However, it does not permit a large operator to acquire another medium-sized operator. To have a dynamic telecom

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Discussion Board, October 15, 2010

industry, M&A norms should become easier. That will drive healthy competition and will also lead to innovations that are beneficial to both the consumer and the operator.

Snigdha Verma, Senior Research Analyst, ICT Practice, Frost & Sullivan, South Asia & Middle East

There is excessive fragmentation of spectrum in the country, with the average spectrum held by a GSM operator being 5.7 MHz, about a third of the global average. India currently has 13 mobile operators in contrast to large markets such as the US and Japan, which have a maximum of five operators. Inefficient operators are forced to continue operations instead of allowing consolidation to reach a company size that makes commercial sense. Increasingly fierce price wars further highlight sustainability issues.

Consolidation will result in synergies in the areas of infrastructure, human resources, spectrum, etc. This can bring down costs, improve the quality of service due to the availability of sufficient spectrum and increase investment. Except for the vendors, consolidation would benefit each participant in the Indian telecom value chain.

How have the six new telecom players performed so far in terms of service rollout and subscribers additions?

Sivarama Krishnan

Their performance has not necessarily been encouraging, but it is not very bad either. Uninor, for instance, has announced that it has added many more subscribers than what it had expected and initially planned. Aircel too has been doing fairly well in most of the new circles it has entered. Videocon, on the other hand, has not been very effective, but then its rollouts were not very speedy. Etisalat, again, has not rolled out services at many locations. Of the six new players, 50 per cent are doing well while the other 50 per cent are still lagging.

Romal Shetty

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Discussion Board, October 15, 2010

The six players received licences in different circles but not all of them have rolled out operations in every circle. They are rolling out operations cautiously as it is a difficult market. Their subscriber numbers have been somewhat satisfactory but these numbers may not be the right parameter to judge their performance. An operator may have a million subscribers, but what actually matters is whether these subscribers are high-ARPU paying and long-term users or they are using the connection for some time and then discarding it. The new operators are looking for more options in order to differentiate their product offerings and services, etc. to attract customers. With number portability expected to come in, these innovations will be the defining factors for future success. As of now, the new players are finding it difficult to sustain themselves in the market.

Prashant Singhal

The six new operators had close to 20 million subscribers as of end-July. Uninor already has 10 million subscribers within a year of having launched services. Sistema Shyam TeleServices Limited (SSTL) follows with 5 million plus subscribers while Videocon has 3 million. As these operators gradually expand their footprint to cover the country, their subscriber numbers are expected to rise.

Snigdha Verma

Despite adopting a low-tariff strategy, the cumulative market share (by volume) of Loop, Videocon, S Tel, Himachal Futuristic Communications Limited (HFCL) and SSTL is less than 1 per cent. Etisalat has the lowest share of 0.005 per cent while 10-month-old Uninor has garnered 1.05 per cent share.

By the quarter ended March 2010, the six operators had cornered 1.2 per cent revenue market share compared to 0.9 per cent by the quarter ended December 2009. However, in the second quarter, SSTL reported a net loss of Rs 4.93 billion, more than three times that in the corresponding period in the previous year. Also, Uninor reported a net loss of Rs 8.5 billion. The low-tariff strategy does not seem to be working for the smaller players. These companies are yet to break even.

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Which of these players are likely to sustain themselves in the long term and which ones are likely to exit first?

Sivarama Krishnan

Other than Uninor and Etisalat in some circles, none of them is really a significant telecom player. They have all entered the market for a valuation game. So they will wait till they gain a substantial subscriber base, be it Videocon, S Tel or the other players. When they have a critical mass of subscribers, they would potentially start looking at exit options.

If we look at the current scenario, at some point, Videocon is expected to move out. S Tel, which has also acquired 3G spectrum in some circles, is also likely to plan an exit. In Etisalats case, its exit plans depend on how long the parent group will be able to fund the company.

Romal Shetty

Of the 13-14 operators, the players that are most likely to survive in the market are the incumbents who already have their network coverage, distribution coverage, franchises and retail outlets in place. They have also attained economies of scale due to which they can survive in tougher market conditions in the short term. Players who entered with a short-term outlook and were looking to sell out after the right valuation are most likely to exit first.

Prashant Singhal

All the new operators are strong and have a long-term vision for their telecom operations in India. These operators are supported by some of the largest global telecom brands including Russias MTS and Norways Telenor. These companies have a market cap of over $20 billion each in their home markets. Videocon, which is a global consumer durables company, is expected to expand its presence in telecom services. What will be critical in the longer term are the individual strategies adopted by these companies in India.

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Snigdha Verma

Mobile number portability could give the newer companies a chance to get a substantial market share. There will be a churn with people mostly high-value customers moving to operators that can promise better service. An operator that can differentiate itself in terms of service quality will have an opportunity to attract customers, giving it more leeway for sustainability.

What changes need to be made in the existing M&A norms to facilitate consolidation in the market?

Sivarama Krishnan

Why should the government take any steps to assist M&As? These are business decisions taken by the new players and if they were right decisions, these businesses should be able to stand alone on their own, survive and thrive in the market. The government should not be providing this support because now we are not in need of large investments for telecom infrastructure as we are no longer in the promotional arena. We are in a mature market with a return arena. In this scenario, by promoting all the small players, we are not doing anything for the growth of telecom. Given that some of these players are hoarding spectrum without launching services, the right step would be to take back the allotted spectrum.

Romal Shetty

At present it does not make sense for a large player to take over a new player as the former already has about 8.4 MHz to 10 MHz spectrum. If they acquire a new player, they would be violating the norms. Other than spectrum, there is no incentive for an incumbent player to acquire a new player. Also, what is the path forward when two players merge; for example, does one pay for the extra spectrum? The three-year lock in period needs to be eased as well as it only results in spectrum lying idle without any operations being carried out.

Prashant Singhal

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Discussion Board, October 15, 2010

The communications ministry must bring in a policy that will encourage consolidation among the large and mid-level telecom operators.

Snigdha Verma

Operators find consolidation an expensive proposition as they will need to pay one-time spectrum charges and spectrum transfer charges. However, replacement of rollout obligations by new rollout norms, with a thrust on rural coverage, may encourage exits by some new players.

In practice, there can be no buyout within the same circle. The 10 per cent cross-holding limit for telecom operators within the same circle should, therefore, be removed.

DoT is reportedly considering three options: allowing mobile virtual network operators (MVNOs) to operate, letting the players surrender spectrum for a return fee, and shortening the three-year lock-in period. What is your view on these options?

Sivarama Krishnan

I do not think there is any reason for them to bail out anyone because it was a conscious call taken by the player, and each of them has encashed the licences given to them. If we study the players, we can clearly make out that each of them has got a good valuation and has made money. The government does not bail out all the players in other upcoming industries, then why telecom?

Romal Shetty

MVNOs will increase competition and will allow people to utilise the excess spectrum. Larger

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players do not have any scope for leasing out spectrum, so it will be the new players who would benefit if MVNOs were allowed. Allowing for the surrender of spectrum is definitely an option as this spectrum can be re-farmed and be given to other players who need it and are ready to pay for it.

Prashant Singhal

The DoT is considering a proposal to allow the new operators to become MVNOs. This move will help avoid buying back spectrum from the operators. On becoming wholesale operators, they would not be required to refund the money they paid for their licences in 2008. This could be one of the simplest solutions.

The other option is to surrender spectrum for a return fee, which will depend on what the finance ministry has to say. It seems unlikely that the finance ministry will agree to such a scheme, as it would set a precedent for all such cases in the future. Shortening the three-year lock-in period would mean that operators could look at selling out almost immediately. That would help operators looking to exit the sector.

Snigdha Verma

In order of preference:

Shortening the three-year lock-in period: This will be one of the most favourable steps for both players and regulators as players can continue their expansion and bring about a more efficient use of spectrum, generating revenue for the Indian government.

MVNO: The concept of active infrastructure sharing in terms of sharing of spectrum and MVNO has not caught on in India yet. This is because, although DoT has allowed the sharing of a wide array of active infrastructure, it has still not permitted spectrum sharing. However, with the increasing need for improving spectrum utilisation efficiency, spectrum sharing could be permitted soon.

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Discussion Board, October 15, 2010

Letting the players surrender spectrum for a return fee: Delays in rolling out services should attract liquidated damages for six months and subsequent defaults should result in th cancellation of licences and withdrawal of spectrum. This would not be a profitable option for operators as they are very cash-low and after paying penalty fee, they would get very little in return. The government does not benefit much either, as foreign investors are backing these new operators, and their exit would result in a drop in FDI inflow.

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