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New Dynamics: Consolidation and 4G uptake redefine sector landscape

July 18, 2016
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The Indian telecom sector is undergoing a significant change. As the market evolves to adopt new technologies and new growth drivers emerge, operators are re-looking at their business strategies. Consolidation has gained momentum and several operators are resorting to mergers and acquisitions (M&As) to derive operational benefits and ensure long-term sustainability. Data is being seen as the key revenue driver as operators focus on garnering 4G market share. Industry experts share their views on the emerging trends…


What are your views on the changing competitive landscape in the telecom sector and what are the key emerging trends?

Rahul Agarwal

The Indian telecom industry is witnessing consolidation and recent deals, wherein major Indian operators acquired spectrum from other service providers, only hint at smaller companies planning to exit the industry. Some recent deals like Reliance Jio Infocomm’s acquisition of MTS and Bharti Airtel’s acquisition of Videocon’s spectrum in the 1800 MHz band are some major steps towards consolidation. Meanwhile, operators also have a 4G strategy in place while acquiring spectrum or entering into any M&A activity. Further, operators like Vodafone and Idea Cellular have rolled out 4G services in a number of circles and are targeting the data market aggressively. They are also expected to invest in network modernisation and expansion. The entry of Reliance Jio will intensify the competition further and keep tariff increases at bay. 

Kunal Bajaj

One of the key trends that we are witnessing is consolidation, and this was anticipated a long time back because the operating economics has not been sustainable for telecom companies. This can be attributed to the increased capex requirements for network deployment, network upgrades and spectrum acquisition. While costs have increased, revenues have not kept pace. This has compelled operators to look for consolidation opportunities that can help them monetise their unutilised assets.

Hemant Joshi

Consolidation is already taking place among telecom network and tower companies; however, its pace needs to accelerate. Global telecom equipment manufacturers are setting up research and development centres and manufacturing facilities in India and hence, bringing in huge investments. In the next few years, more consumers will switch to smartphones, thereby increasing data uptake. Moreover, 4G services are expected to transform the consumer behaviour and usage patterns, demanding a high quality and personalised user experience.

Inderpreet Kaur

Consolidation is under way in the telecom industry. While Reliance Communications and Sistema Shyam TeleServices Limited have already concluded a merger agreement, smaller operators are likely to follow suit either by way of M&As or by consolidating their spectrum assets. The entry of new players such as Reliance Jio will not only increase competition, but will also encourage operators to identify and implement new business models centered on data and digital services. The likely trends in the telecom sector are as follows:

• The key policy reforms may be a game changer. The clearing of the spectrum sharing and trading norms indicates a move towards a more liberalised and flexible policy environment. Policy changes are likely to benefit large operators.

• While voice remains the bread-and-butter segment, data is expected to show strong growth. The growth in voice revenues is declining due to immense pressure on pricing in a 12-player market, while operators are still reporting mid-single-digit growth in voice minutes on networks. Data pricing is experiencing similar pressure, but growth in traffic is offsetting pricing cuts. According to Ovum estimates, data revenues are expected to grow at a compound annual growth rate of 15.1 per cent between 2015 and 2020, and with a much slower growth rate, voice will account for 60.4 per cent of total mobile services revenues by 2018.

• There will be consolidation among smaller players while incumbents will focus on increasing the proportion of high-ARPU subscribers. A 12-player market is not sustainable as operators have to recoup the benefits of their investments in spectrum and networks. Smaller players are likely to exit (through either acquisitions or mergers) or find niche markets that they can serve profitably.

What will be the likely impact of the ongoing consolidation on industry stakeholders?

Rahul Agarwal

The ongoing consolidation and spectrum acquisition could further add to operator debt. The entry of Reliance Jio is expected to intensify competition, making it difficult for the incumbents to increase tariffs. Operators are also likely to invest in network expansion and modernisation in order to foray into the 3G and 4G markets. Operator consolidation will pose new challenges for tower companies. Fewer operators and increasing spectrum sharing/trading deals will result in fewer tenants. This will have an adverse effect on their margins and, in turn, result in higher rentals.

Kunal Bajaj

Consolidation amongst operators and tower companies will not have an immediate and direct impact on vendors and other players in the ecosystem. Meanwhile, from the consumer perspective, consolidation is likely to give greater pricing power to operators. We are already seeing that prices are not falling in the same way as they used to in the past. In fact, in some cases, they have actually started to rise because of the elimination of promotional offers, freebies and other introductory schemes.

Hemant Joshi

The telecom industry has been highly competitive with 12 operators and the lowest ARPU in the world. With the cost of doing business increasing, there is an urgent need for consolidation, which will lead to efficient use of spectrum and profitability.

What are the key strengths and strategies needed for an operator to ensure long-term business growth and sustainability?

Kunal Bajaj

One of the key strengths that an operator needs is the ability to maintain a rational cost base. Further, the operators need to optimise capex to ensure maximum returns on the investments. In addition, they need to maintain consumer loyalty, which has assumed more significance, given the fact that operators are attempting to increase tariffs.

Hemant Joshi

Operators need to focus on increasing data usage and gear up for the opportunities arising from Digital India, for example, smart energy, smart cars, smart metering, etc., which will be very data intensive. Improving the customer experience should also be a key focus area.

Inderpreet Kaur

• Spectrum is the key, supported by robust fibre (backhaul) infrastructure: As the focus shifts towards improving service quality, the amount of spectrum available per mobile subscriber has to improve. As compared to developed and developing markets such as the US, Japan, France, Germany, Italy and China, India has among the lowest mobile spectrum and MHz per mobile subscriber at present.

• Network investments have to increase to match other Asian markets: In 2015, the capex per subscriber in India was just $6 as compared to $35 for every mobile subscriber in China. Operators looking to make a successful transition from the current 2G-centric model will have to narrow the gap in per-subscriber capex over the next five years.

• Long term evolution (LTE) as a new revenue stream: For deriving the  best business case for LTE investments, the operator focus should be on  capturing new revenue streams rather than winning market share. Given that ARPU levels had fallen from $2.56 per month to $2.38 per month (although subscriptions have grown by 8 per cent) in the past year, LTE should aim at lifting ARPUs by offering data services.

Where does India stand vis-à-vis other developing markets in terms of telecom technology advancement? What is your outlook for 5G?

Kunal Bajaj

The Indian telecom market is ahead of most African markets and certainly at par with other developing markets. Although we were late in 3G adoption, we are fully adopting 4G across multiple bands. However, fixed broadband is an area where we lag considerably compared to other markets.

It is too early to comment on the outlook for 5G technology in India as the technology has not been commercialised anywhere. Here, we are generally not able to adopt a new technology in its early life cycle stages because we do not have that many high-end consumers who could justify investments in a new technology. We generally adopt technologies that have matured and improved up to a certain point and then take them forward.

Hemant Joshi

In terms of technology adoption, India is lagging behind its global peers. This is mainly because of the high roll-out costs in a vast country like India. In addition, the high debt burden of operators does not allow them to spend on deploying new and innovative services. As far as 5G in concerned, it will take a long time for it to enter India as this market is yet to witness a full-fledged roll-out of 4G services.

Inderpreet Kaur

China and India have been the two most dynamic mobile markets in the world. Where China has successfully made the transition from mobile telephony to smartphone and mobile internet, India remains 2G-centric, with 83 per cent of the total subscriber base on GSM networks. As of end-2015, only one in seven mobile subscriptions was 3G or 4G in India  as compared to more than one in two mobile subscriptions in China. Although smartphone adoption is growing rapidly in India, only a minority of smartphone owners use mobile broadband services.

What will be the key growth drivers for the Indian telecom market?

Rahul Agarwal

The Indian telecom market is one of the world’s largest and fastest growing markets. The increasing penetration of mobile phones and internet services, and the proliferation of utility services such as e-governance, mobile education, health and banking have actively helped bridge the gap between rural and urban India. Some of the key growth drivers in the Indian telecom space going forward are as follows:

• Emerging middle class: With the growing middle class population, there is an increased appetite for the emerging telecom services and greater possibility for the uptake of mobility services.

• Rising disposable income: With the growing middle class households and higher disposable incomes, there is an increase in spending and demand for consumer services. India remains a high-potential market with accelerated market growth expected over the next seven years. India’s GDP (at constant prices) had grown about four times during 1990-2009 and is expected to be on an unprecedented growth trajectory, supported by a GDP growth of 6-7 per cent.

• Mobile broadband growth to pick up in India: The first phase of the telecom revolution was about voice connectivity and the next phase, which is ongoing, is about data transfer. Despite the impetus given by the government and other key stakeholders to increase broadband penetration, it continues to be negligible. Factors like poor fibre connectivity, availability of affordable smart devices, next-generation network roll-outs and cost-effectiveness of wireless technology as an access medium make mobile broadband the perfect solution for the broadband connectivity woes in India.  The large population and low broadband penetration presents a huge opportunity waiting to be tapped. An underserved broadband market not only puts the sector on an unprecedented growth trajectory, but also offers immense growth prospects for service providers and equipment players. Growth in wireless broadband will help increase non-voice revenues for telecom companies. Further, increased market accessibility augurs well for innovation and manufacturing in the sector.

• LTE roll-outs: As the demand for mobile broadband services continues to grow, service providers are moving towards faster data networks. With LTE technology offering lower operating costs for mobile data transfer, mobile operators worldwide are progressively committing themselves to LTE network deployments in a bid to move towards 4G services. In India, while 4G spectrum was auctioned in 2010, the roll-outs thus far have been limited to only a few cities. However, the prospects for LTE in a country like India are encouraging as the growth of fixed broadband subscribers has been abysmal. Besides, poor fibre connectivity and cost effectiveness of wireless technology as an access medium make mobile broadband the ideal choice for increasing broadband penetration beyond urban habitats.

• Availability of affordable devices: The price of handsets and other customer premises equipment including modems have been falling due to the declining cost of materials, manufacturing, etc. There has been a constant drop in the average selling price of smartphones. This can be largely attributed to the decreasing cost of chipsets and other components. In addition, intense competition in the market has led to a price reduction.

• Government efforts to increase broadband penetration: The government’s efforts to increase broadband penetration also bode well for the growth of the sector.

Kunal Bajaj

The key growth driver will be consolidation across the ecosystem. It will have an impact on the operators’ ability to rationalise investments and on consumers in terms of the price that they pay for services. Finally, we need to see how things pan out once Reliance Jio starts full-scale commercial operations.

Hemant Joshi

Data and machine-to-machine connectivity will play a major role in the growth of the telecom industry. In addition, services with local relevant content and regional languages could boost growth. The telecom sector will facilitate services for other sectors such as healthcare, retail, manufacturing and supply chain. This will create growth opportunities for many industries and the economy as a whole.

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