Telecom Industry

TELECOM INDUSTRY INTRODUCTION The Indian telecom industry has evolved as one of the fastest-growing sectors in the country. Currently, India’s telephone network is one of the largest communications network in the world. India's tele-density has improved from under 4% in March 2001 to over 26% by the end of March 2008. Cellular telephony has emerged as the fastest growing segment in the Indian telecom industry. The mobile subscriber base (GSM and CDMA combined) has grown from under 2 m at the end of FY00 to touch 300m at the end of March 2008 (compounded annual growth of nearly 85% during this eight year period), of which 261.07m were mobile subscribers and 39.42m were fixed/landline subscribers. This is expected to reach 402.4m by the end of 2008. India is the third-largest country in the world in terms of telecom subscriber base, with 205.86 million subscribers as on March 2007, up from the earlier eleventh position in 2001; at the end of December 2006 total world telecom subscriber base was around 3,921.0 million. The largest subscriber base is in China (828.84 million), followed by the US at 405.03 million. Service sector is one of the most significant sectors of the Indian economy, contributing nearly 55% to the GDP in 2007–08. The sector contributes more than 2.83 per cent of the country’s GDP. Total revenue of the telecom sector during FY07 was estimated at Rs 1053.19 billion, up by 21.4 per cent over the previous year. In FY07, the revenue share of private sector companies was 57 per cent as compared with 48 per cent in FY06, while public sector companies’ revenue share declined from 52 per cent in FY06 to 43 per cent in FY07. The revenue generated from the Telecom Sector is represented in the chart below. Chart. 1: Indian Telecom Service Sector Revenue

Source: TRAI

TELECOM SEGMENT The Telecom sector can be broadly classified in four categories. • Fixed Line Telephony

• Mobile Telephony • Internet • Telecom Equipments However in the present report the market segment considered is limited to only fixed line and mobile telephony only. FIXED LINE TELEPHONY The current market size of this segment is about Rs. 30164 crore with a total of 43 million lines. This market is dominated by the state operators, BSNL and MTNL, who together accounts for around 92 per cent of the total subscriber base. Private sector services are presently available in selective urban areas (in about 18 circles), and collectively account for remaining 8 per cent of the subscriptions. However, private services focus on the business/corporate sector, and offer reliable, high-end services, such as leased lines, ISDN, closed user group and videoconferencing, and as a result average revenue per user (ARPU) is higher for private players. MOBILE TELEPHONY In the mobile segment there are 25 private companies providing cellular service in 19 telecom circles and 4 metro cities, covering 1500 towns across the country. Presently there are 5 private service operators in each area and an state operator. Almost 80% of the cellular subscriber base belongs to the pre-paid segment. DOT (Department Of Telecommunication) has allowed companies to buy rivals within the same operating circle provided their combined market share did not exceed 67%. Previously, they were allowed to buy companies outside their circle. Chart. 2: Number of wire line and wireless subscribers over the years

SUPPLY - DEMAND ANALYSIS: The wireless sector has grown exponentially in the last couple of years as compared to the wireline sector. As a matter of fact in the last 2 years the number of wire line consumers have decreased by about 13%.

Cheaper call rates, mobility, good connectivity and other value added services such as SMS, E-mail service, Live updates are some of the reasons that have spurred the growth of the mobile sector. The wireless sector can again be grouped into GSM (Global System for Mobile Communication) service providers and CDMA (Code Division Multiple Access) service providers. The two basically denote the difference in technology in providing wireless service. The major GSM service providers in India are: Bharti Airtel, Vodafone, BSNL, Reliance, Aircel, Idea, Spice, MTNL and BPL. While in the CDMA sector major players are: Reliance Infocom, Tata Teleservices, BSNL, MTNL, HFCL and Shyam Telelink. The relative market share of various players in the two segment are: Chart.3: Market Share of CDMA Operators Chart. 4: Market Share of Wire line Operators

Chart.5: Market Share of GSM Operators

Now accessing and analysing the demand side for the telecom sector we see the following salient points:

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A large sector of the market is still untapped, specially the rural regions. The telecom revolution has been able to extent its wing only in the urban and semi-urban small towns of the country. Out of the total population of about 1.136 billion in India, only about 28% live in urban areas and the rest 72% live in rural areas. But however, only about 2% (16m) of the rural population has access to mobile phones. It is a high time for the companies to invest in these rural areas, too. Driven by a significant addition in rural telephony, overall population coverage in the country is expected to increase from 65% to 80%. Therefore still there are large segments which have not been addressed yet by the wireless companies, either due to price structure of the calls (profitability for the company) or due to inaccessible terrain (demographic reasons).

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The GSM subscriber base reached 192.70 million in the quarter ending March 2008, as against 172.23 million at the end of the previous quarter. The growth for this quarter is 11.89% as compared to previous quarter. Bharti, with 61.98 million subscriber base, remains the largest GSM mobile operator followed by Vodafone with 44.13m, BSNL with 36.21m. The CDMA Subscriber Base on he other hand reached 68.37 million during the quarter ending March 2008 as against 61.39 million at the end of December 2007. The quarterly growth in was 11.37% as against 11.44% the previous quarter. Reliance remains the largest CDMA mobile operator followed by Tata Teleservices and BSNL with subscriber base of 38.78m, 24.33m and 4.58m respectively. Not taking into consideration the wire line segment, going by the number of mobile phone subscribers, India has become the world’s fastest growing region. With almost 5-6 million subscribers added every month, 500 million subscribers till 2010 actually seems a reality. Such kind of extra-ordinary growth rate clearly indicates the huge demand among the people for wireless service. The lifestyle of the people of India is changing dramatically. They need to be in contact with each other continuously. This is spurring the growth of the wireless sector.

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Chart.6: Addition of GSM wireless subscribers monthly

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However the story is little different on the wire line services front. The total subscriber base of Wire line services stood at 39.42 million as on 31st March 2008. The incumbents BSNL and MTNL have 80.05% and 9.33% market share

respectively in the subscriber base, while all the five private operators together have 10.62% share. Wire line subscriber base has been declining in the last few years. So we can safely say that the demand for wire line services is less and is decreasing at a faster rate. Summarizing the demand analysis we can say that, given the low penetration levels in the country and continuously falling tariffs, demand will continue to remain higher in the foreseeable future across all the segments.

Analysing the supply side of the sector: Intense competition has resulted in prompt service to the subscribers. The reducing tariffs will hurt the new entrants, as they will be unable to recover their high capital investments.

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The various wireless service providing companies have been investing a lot in the sector for keeping up with the demand. The total investment in the sector is about Rs. 1,96,584 crore which was spread over 127 projects. The growth is fuelled by growth in GSM sector, consequently Bharti Airtel is planning to invest about $ 8 billion by the end of 2010. Chart.6: Investment Trends (in Crores)

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Additional spectrum to service providers India is on the brink of full-fledged rollout of 3G and WiMAX services across the country. The regulators and the government are in deep discussions on spectrum allocations. It’s decided to have Additional spectrum to be allocated to service providers, based on their existing subscriber base. This will provide the foundation for next generation mobile services in the country.

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The wire line sector still lagging way behind the demand as far as the supply is concerned. Even wire line service providers have failled to reach every nook and corner of the country. There are 5,93,485 villages in India, as per census 2001 reported by BSNL. Presently there are 5,59,503 VPTs (Village Public telephones) in the country. 29,376 VPTs were increased during the last 2 years. BSNL reported increase of 1,547 VPTs during this time, while the rest five private operators together added of 27,829 VPTs during this period.

Thus the total number of villages still left uncovered is about 33,982. Some factors of concern as far as supply is concerned are: • Due to the proposal from TRAI to hike spectrum charges from 4% to 5% of the revenues generated by the service providers, for the new spectral band it is proposing to open, mobile operators may have to shell out a higher percentage of their annual revenues towards spectrum charges. •

Low ARPU (Average Revenue Per User) Despite the high penetration in urban areas, the ARPU is quite low, one of the lowest in the world and continues to fall steadily. For operators, this is offset by increased subscription. However, profit margins are decreasing and to stay in good shape operators will have to leverage on larger economies of scale. One trend seen in this direction is the sharing of towers and base station location sites among operators. However during the same period the Minutes Of Use (MOU), per user has grown phenomenally. Chart.7: ARPU &MOU comparison (both GSM & CDMA)

Chart .8: Margins (percent)

FUTURE PROSPECTS BASED ON DEMAND SUPPLY ANALYSIS •

As far as the fixed line business goes, the low penetration levels in the country and the increasing demand for data based services such as the Internet will act as major catalysts in the growth of this segment, which had a subscriber base of over 39 m at the end of FY08. The huge market share of public sector behemoths, MTNL and BSNL is likely to get reduced further as the penetration by private players spreads. In spite of this the PSUs will continue to retain their dominant position this is on account of high capital investments required in setting up a nationwide network. As a result, the private sector players will have to rely on key business centers and pockets of high urbanization for their growth.

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According to industry estimates, total subscribers are expected to increase by about 34% to touch 402 m by 2009. Cellular subscribers will continue to propel the subscriber growth. As per the CMIE, cellular subscriber base is estimated to grow by around 40% during FY09. On the other hand, landline subscribers are expected to decline by 6% to 37 m, while the total tele-density is expected to touch 35% by the end of the fiscal.

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Increasing choice and one of the lowest tariffs in the world have made the cellular services an attractive proposition for the average consumer. The segment’s subscriber base has grown by over 57% Year on year in FY08. Policy measures like lowering of taxes on the cellular industry and benefits of enhanced FDI limits shall further the prospects of the cellular industry.

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The International Long Distance (ILD) telephony business is expected to witness increased competition with the entry of private players. Already, private players like Bharti, Reliance and Data Access have started providing ILD services and this has pulled the tariffs significantly down. Although increased competition will result in depressed revenues in the near term, low tariffs would ultimately result in increased volumes and higher usage