India Telecom Overview

Niraj K. Gupta Indian School of Business

December 2004

by

for

Data used here is only approximate and indicative. This presentation is only for discussion and not to be quoted.

Business of Telecom: 3 Pillars

Technology

Policy & Regulation

Business Strategy

Presentation at ISB December 2004

copyright 2004: Niraj K Gupta. All rights reserved.

Technology Hype: The Great Telecom Crash

Banks and investors lent $1.3 trillion to telecom companies since 1996 most of which was lost in Chapter 11 filings Winstar Comm. Worldcom

t Chapter 11 filings Telecom

Trillions of Dollars lost in market caps Over half a million telecom jobs lost
Global Crossing FLAG

PSI

360Networks

Teleglobe

many others

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copyright 2004: Niraj K Gupta. All rights reserved.

Managing Technology: The 3G Hype 4G

WCDMA

WiMax

?
CDMA1xEV-DO

3G
over 100 billion US Dollars paid in 3G licence fees

? ?
Content Killer Applications

HANDSETS availabilty

Technology obsolescence => Need to recover invetment fast

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Cellular Industry in India

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History
Phase 1 1994: cellular service licenses were first awarded 2 operators each in the four metro cities of Mumbai, Calcutta, Chennai and Delhi => based on GSM technology Phase 2 Licenses were awarded to 2 operators per telecom circle in rest of the country => based on the license fees quoted Cellular companies committed to high license fees based on projections of future revenues, fell far short of estimates => most operators unable to meet their license fee obligations July 1999: the license fee structure changed to a one-time entry fee and a revenue share arrangement. Simultaneously the maximum tariff allowed was reduced significantly => market has continually grown ever since January 2001: fixed line (CDMA technology-) providers allowed to provide limited mobility services => no roaming Phase 3 March 2001: Government owned operators - BSNL and MTNL - entered the market as the third cellular mobile operator Phase 4 July 2001, 4th GSM license was awarded in various circles Recently, wireline (CDMA technology-) operators allowed to provide full mobility and move towards a unified license i.e., fixed+mobile access services can be provided using one license

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Telecom Indicators
now
Telecom Services Revenue (2003) Fixed Telephone Lines (Dec03) Fixed Line Growth CAGR (1997-2003) Wireless Subscribers (Jan 04) Wireless Growth CAGR (1997-2003) Public Payphones Teledensity (2003) Internet Users (2002) Internet Subscribers (June03) TV Households (2002E) Cable TV Subscribers (2002E) US$ 10.9 Billion 42.5 Million 15.6% per annum 29.9 Million 77.0% per annum 1.1 Million 7.0 per 100 16.6 Million 3.77 Million 78 Million 40 Million
$12.25 billion (2003-04)

=> now 44 M Oct 2004 now very small => now 44.5 M Oct 2004 now 100% now over 8%

Mobile subs 44.51M Fixed 43.96M44M

(Oct04)

Source : International Telecommunication Union; Analyst Reports

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Telecom Scenario Analysis 2003-04

Indias communications industry

Tele-density: 7.12 on 31 March 2004 5.35 on 31 March 2003

Revenue FY 200304 Rs 56,367 crore ($12.25 billion) FY 200203 Rs 47,121 crore ($10.24 billion) Growth 20 % 5%

Cellular services: - The cellular grew by around 72% in revenue terms and 135% in terms of subscribers. - The star => will continue to grow fast for few years. - contributed more than a quarter of the overall revenues. Key factors for excellent growth: - low pricing and the - calling-party pays (CPP) regime. If low tariffs continue, India will overtake other giants on the numbers front Quality of service (QoS) is still far below TRAIs benchmark.
Source: DoT, TRAI, V&D and other media.

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copyright 2004: Niraj K Gupta. All rights reserved.

Telecom Indicators: Targets

Dec 2007 Mobile Fixed 175 mn 75 mn

250 million
Oct 2004 Mobile Fixed 44.5 mn 44 mn

Additions by 2007
Monthly additions required Todays level

161.5 mn

Mobile
& Fixed
Over 4 mn

~ 2 mn

Source: Association of Unified Telecom Service Providers of India 3rd Dec 2004

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Mobile

Dec 2007 fcst=> 175 Mln

TRAI expects to achieve this growth rate since the current mobile network coverage in India is only 20% of the population but this coverage is likely to increase to 75%, as shown, in next two years.

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Cellular Telephony

Mobile subs 44.51M

(Oct04)

Source: COAI, ABTO, TRAI, V&D

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Cellular industry growth

20.00 29.9* 400% 300% 200% 6.4 5.00 0.00 0.1 0.4 0.9 1.2 1.9 0% Jan-04 3.6 100%

Subscriber base (Million)

15.00 10.00

12.7

Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03

Subscribers (millions)

Annualised Growth rate

Mobile subs 44.51M Fixed 43.96M
(Oct04)

* January 2004 subscribers includes both GSM and CDMA subscribers

(Source: Cellular Operators Association of India and Association of Basic Telecom Operators )

Since the shift in the license fee structure in July 1999 the industry has been growing at a high rate
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India is amongst the fastest growing wireless markets

100
Subscribers-Million ( December 02)

206.6 140.8 81.1

120%

80 60 40 20 0 43.0% 38.6 10.0% 8.0% 7.0% 7.0% 7.0% 60.0 53.0 49.7

2001-02 >> 98.0% 100%

80% 60% 34.8 25.9 21.0% 11.0%19.0% 12.7 32.3 40% 20% 0%
Growth YoY 2001-02

3.0%

USA

Japan

Germany

Mexico

France

Italy

UK

Korea

China

Brazil

As of January 2004, the wireless subscribers in India were approximately 30 Million showing an annual growth rate of 120% over the last 12 months
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(Source: International Telecommunication Union)

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India

Mobile Growth: Milestones

Source: TRAI

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Mobile Penetration
65.5%
60%

43.7%
40%

Source ITU
32.0% 21.0% 18.3%

2002

20%

6.2% 1.8%
0% Korea Malaysia T hailand Philippines China Indonesia India

Source: TRAI

Countries like Japan, China, Brazil, South Korea and Mexico have more mobiles than fixed lines. Czech Republic: 96.5% (mobile subs 9.75 M => thrice of fixed lines). Spain: 91.6% (mobile subs 37.5 M => twice of fixed lines). Taiwan: 111% (25 million subs). China : 21.4 % India : 4% => now growing at about 2 million new subscribers every month.

The wireless penetration has since increased to over 3% as in January 2004 with wireless forming 40% of the total telecom subscribers=> crossed fixed in Oct 2004
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Mobile 2003-04
Top Mobile Service Providers in Terms of Revenue (FY 200304) Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Company/Group Bharti Tele-Ventures Hutch Group Reliance Group BSNL Idea Cellular BPL Group Spice Aircel* Escotel# Tata Teleservices Group MTNL Hexacom** HFCL Infotel Shyam Telelink
Reliance Infocomm made history by getting a subscriber base of 6.9 million subscribers taking the overall tally of its cellular subscribers to 7.2 million. Reliance Group #1 in numbers, Bharti #1 player in revenue (Rs 3,261 crore). Hutch increased its service areas.

*Includes RPG Cellular revenues #Escotel has been bought over by Idea and from FY 200405 it will have a combined turnover **Hexacom has been bought over by Bharti and from FY 200405 it will have a combined turnover Group revenues include GSM as well as CDMA services revenues, wherever applicable

The Subscriber Surge: Mobile subscribers swelled from 14 mln in March03 to 33 mln in March04 => 135% explosive growth

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Mobile Market Shares 2003-04

Top 5 => 80% of Rev

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Mobile Subs Oct 2004

GSM Cellular No. of Subs. Reliance Bharti BSNL Hutch Idea BPL Aircel Spice Reliance MTNL 9062K 7941K 6566K 4419K 2402K 1512K 1457K 964K 442K Fixed Wireline 27 CDMA (F WLL F 984 + Mob) Mobile 8387 Total No. of Subs. 9399K

Tata Tele
Bharti HFCL Shyam Total 34770K Total

390
749 127 94 1388

1336
27 40 21 2409

657
45 26 9116

2384K
776K 213K 141K 12914K

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ARPU
Average Revenue Per User (ARPU) of cellular consistently declining over the past few years due to quest for quick subscriber growth

58 % down from 2001 to Rs 469 in 2004.

Reasons for steep decline: - Entry of CDMA players intensifying competition in the mobile communication space. increasing pressure on voice tariffs (voice 90% of the traffic) - Dominance of the pre-paid user. Prepaid Vs. Postpaid: - TRAI July 2004 data: almost 75% of GSM subscribers are pre-paid (which has seen the most rapid growth in the past 5 years). - Growth: While the pre-paid segment has grown by almost 27 times, post paid has growth of just 5.4 times. - Tata Teleservices had highest ARPU, at Rs 650, with is largely post-paid mobile subscriber base. - Among the GSM-only operators, Hutch has the highest ARPU in the industry, at around Rs 534. In its stronghold Mumbai (higher incidence of post-paid customers) the ARPU was as high as Rs 608. - State-run BSNL and MTNL have lower ARPUs : Less applications => less non-voice usage. BSNL had a large subs base in the B- and C-class cities where even the voice usage is relatively low.

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Wireless Data
SMS services have been very successful in India in line with the trends in rest of the of the World SMS accounts for approximately 3-5% of the total wireless revenues GPRS/EDGE services have been launched in India Data services offered by operators are E-Mail, instant and group messaging, MMS Downloads Internet access, Internet chat Mobile banking Fax and data services Web directory access through SMS Information services such as news, stock quotes, airline and train schedules, cricket scores and horoscopes Games

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Spectrum
Spectrum allocation

for 2/2.5 G cellular mobile services 800 MHz International allocation* 824849 MHz paired with 869894 MHz Indian allocation 824844 paired with 869889 MHz (Used to provide WLL (M) and CDMA-based mobile services) 900 MHz International allocation* 890915 MHz paired with 935960 MHz (880890 MHz paired with 925935 MHz E-GSM band) Indian allocation 890915 paired with 935960 MHz** (Used by 1st, 2nd, and 3rd cellular operators for GSM) 1800 MHz International allocation* 17101785 MHz paired with 18051880 MHz Indian Allocation 17101785 Mhz paired with 18051880 MHz (Used by 4th CMSP and for additional allocations to 1st, 2nd, and 3rd CMSPs) 1900 MHz International allocation* 18501910 MHz paired with 19301990 MHz (North American PCS band) Indian allocation 18801900 MHz is earmarked for micro cellular technologies based on TDD *SOURCE: ITU-R Recommendation M.1073-1 & NFAP 2002 / TRAI Consultation Paper

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Spectrum
GSM:900MHz to start with
metros after 600K subs entitled for additional=> after 1 mln sub entitled for additional=> 6.2 MHz +1.8 MHz 8.0 MHz +1.8 MHz 9.8 MHz

Examples: Delhi: Bharti 1.5 mln subs => 10 MHz idea now 600K => applied for next 1.8 MHZ
after 9.8 Hz, given in 1800 MHz band

CDMA:
given 5.5 MHz 800 Mhz band => enough for over 1 mln subs

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Spectrum
SPECTRUM POLICY TO ADDRESS 1900 MHZ BAND ALLOCATION ISSUE Telecom Regulatory Authority of India the spectrum policy to be announced this month will address the controversy between GSM and CDMA operators over allocation of radio frequency for third generation services (3G) services in the 1900 Mhz band. The policy on 3G has to be evolved with caution while at the same time building flexibility in allocation offrequency and making it affordable. The policies would have to be dictated by standards laid down by the International Telecommunications Union (ITU) and the availability of equipment. Both CDMA and GSM operators have been clamouring for the 1900 Mhz spectrum. While GSM operators say that allowing CDMA services in 1900 Mhz would create interference in their cellular network, GSM operators are also opposing the entry of CDMA players in the 1900 Mhz on grounds that internationally the band has been reserved for thirdgeneration services. CDMA players say that there is no equipment available for any other frequency. On the other hand, CDMA operators highlight the fact that globally there are only two other countries where CDMA networks arerunning on frequencies other than the 1900 Mhz band.

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Spectrum
DoT MAY DELICENSE MORE FREQUENCY BANDS TO PUSH BROADBAND To accelerate the penetration of broadband and internet, Department of Telecom is planning to delicense certain spectrum frequency bands. "With a view to accelerating penetration of broadband and Internet, the 5.15-5.35 Ghz band is also being delicensed for the indoor use of lowpower Wi-Fi systems. For outdoor use, the band of 5.25-5.35 is under active consideration for delicensing in consultation with the existing operators in the band" - Nripendra Misra, chairman, Telecom Commission. He said alternative spectrum frequency bands which are not in high use for other applications could also be deployed for broadband services. The process of siting clearance by the clearing agency SACFA as also the grant of wireless licences has been simplified to some extent and further simplification is on the anvil. A transparent scheme is being outlined separately for time-bound frequency as well as siting clearance and wireless licensing by removing the cumbersome procedure.
2.4 GHz band already free band for WiFi

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Brand Rankings
This years 2004 telecom services brand ranking
1 BSNL (usurping the top spot from last years leader Reliance IndiaMobile) 2 Reliance 3 Airtel (# 3 in 2003 too) 4 Tata Indicom (# 4 spot belonged to BPL Mobile in 2003) 5 BPL (??) 6 Hutch inches up one rank taking over # 6 position from MTNL 7 MTNL 8 Idea (# 8 in 2003 too)

Overall services list: three out of the top 10 service brands are telecom brands (last year there were two)
3 BSNL (late entrant into the mobile telephony market) 6 Reliance India Mobile (last year # 3) 7 Airtel (# 15 last year, Airtel could well be on its way into the top five next year) 20 Hutch (Orange in Mumbai- has seen the highest ascent in its category, and overall, jumping 14 places from No. 34 to No. 20 this year)
Source: The Economic Times 15 Dec 2004 RINGING IN A NEW ORDER

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Growth factors in the Indian market

Overall growth of the Indian economy and increasing demand for telecom services

Increased competition driving down tariffs Decline in tariffs for both wireless and long distance services
Reduction in prices of the handsets (In India, operators have not been subsidising sales of handsets)

Prices of handsets has reduced from US$ 1,140 1,430 in 1995 to as low as US$ 60 80
Introduction of pre-paid services estimated to account for over 60% of the market Productive tool/security: Increasing familiarity with the utility of mobile services

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Technology trends: 3G

Wideband CDMA (WCDMA) is an approved 3G standard that uses 5 MHz channels for both voice and data, offering excellent voice capacity and a peak data rate of 384 kbps. NTT DoCoMo launched the first WCDMA service in 2001 and now has millions of 3G subscribers. WCDMA (UMTS) is also the 3G technology of choice for many GSM/GPRS operators, with dozens currently trialing the technology and more than 100 having licensed new spectrum with the intent to launch services in the next few years.
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Telecom FDI
RS 41,000 CRORE TELECOM FDI PROPOSALS CLEARED IN 13 YEARS In the telecom sector since 1991 (total of 930 FDI proposals) between August 1991 and September 2004. Number of proposals Delhi (208), Maharashtra (134), followed by Karnataka with 63 and Tamil Nadu with 53.

'INDIA NEEDS $70 BN FOR TELECOM GROWTH

The Indian telecom industry will require about $70 billion in the next couple of years to achieve new target of 250 million subscribers by 2007-08 (against present 85 million). As the second largest telecom market in the world after China, India has also emerged as one of the fastest growing markets, adding around two million fixed-cum-mobile phones per month. The government allowed 49 percent FDI (foreign direct investment) in the telecom sector, only $2 billion had come through the FDI route so far. There is demand for increasing the FDI limit to 74 percent => being considered by the present government.

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Long distance

Telecom Scenario Analysis 2003-04

LD continued southward in FY 200304 too. From a negative growth of about 20% in FY 200203, it has come down to about 14 percent. NLD National Large infrastructure of about 572,675 Rkm . => need to promote broadband services (triple-play). ILD International DATA: good growth in data => growth est 65%. VOICE: good growth in voice minutes 22 percent, but a drop in prices led to fall in revenues

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Thanks !

http://www.telecombynirajgupta.com

.com

gupta_niraj@hotmail.com

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