A litany of bad news throughout last year has put the Indian telecom sector under stress. But there are some bright spots on the horizon and with strong government support, the sector can overcome its year of doom.
In 2012, the telecom sector in India came under intense scrutiny due to a number of reasons ranging from cancellation of 2G licences, ambiguity in implementation of key policy measures and dip in wireless subscriber net additions. Topping them all was the spectrum auction debacle. These events have stolen the limelight from the National Telecom Policy (NTP), the draft of which is hailed as progressive and encouraging for the sector in the coming decade.
The most significant miss in the year was the feeble response to the 1,800-MHz spectrum auction in November that raised only Rs 9,407.6 crore, which is less than 25 per cent of the government’s expectations of raising approximately Rs 40,000 crore. There were no bidders for GSM spectrum in four circles — Delhi, Mumbai, Karnataka and Rajasthan. Moreover, there were no takers for the 800-MHz spectrum band across all circles, due to withdrawal by potential bidders from the auction process. The auction of spectrum was mainly due to the cancellation of 122 2G licenses of nine operators, allocated in 2008, by the Supreme Court of India in February 2012.
The spectrum auction results indicate that the reserve price of spectrum was on the higher side. Operators already burdened with increased debt and margin pressures chose not to bid for additional spectrum, indicating lack of worthiness as well. The muted response to the auction forced the government to reduce the base price of spectrum in the 1,800-MHz band, by approximately 30 per cent in the four circles. For example, in the Delhi circle, reserve prices reduced from Rs 6,93.1 crore to Rs 4,58.1 crore. Also, pan-India reserve price of spectrum has been reduced from Rs 14,000 crore to Rs 12,000 crore. The result stymied the government’s efforts of meeting its fiscal deficit recovery target.
Policy uncertainty has been a continuous theme in the sector in 2012, even after the launch of the Draft NTP in October 2011. It is a concern for operators as major operational and strategic decisions are largely dependent on it. For instance, implementation of an M&A policy has paused consolidation in the industry. 3G roaming pacts among operators is another area that has embroiled the operators in a legal tussle with the government. The ‘when’ and ‘how’ of policy implementation needs more clarity.
Wireless subscriber net additions were negative (loss of 20.5 million) for the first time in the month of July. This marked the end of the positive growth momentum in subscriber additions that the country witnessed so far as part of the wireless boom. The wireless subscriber net additions have steadily declined month-on-month from a high of 20.21 million, in March 2011. Subscriber losses continued in August and September as well. Incumbents have mainly attributed the loss to deactivation of inactive subscribers and the fact that new operators have ceased to rollout services in new circles or stopped operations in existing circles, due to the licence cancellation and profitability concerns.
The significance of key performance indicators (KPIs), such as average revenue per user (ARPU) and minutes of usage (MoU), have been diminishing over the years. Commonly used external metrics, such as ARPU, fail to give investors a full picture, given the recent inactive subscriber deactivations and dual-SIM phenomenon. Operators are moving to newer metrics such as average margin per user.
The past year induced negative sentiment in the sector and affected investor confidence. As a result, international interest in the India telecom market is gradually waning. Unless the government makes a strong move to support the sector, telecom may follow the aviation sector, which despite being opened up for FDI has not seen much of an interest. 2012 will be remembered in the history of Indian telecom for all the wrong reasons.
Amidst the gloom, though, there were few bright spots that hold significant promise for the future growth of the sector. Launch of commercial 4G/LTE services in Kolkata and Bangalore was the highlight of the year. India became the only country in the world where 4G/LTE service was launched within 1.5 years of launch of 3G services. India also finds its place among a handful of countries that has launched 4G services using the TD-LTE technology on the 2,300 MHz band. 4G/LTE significantly enhances the user experience by offering improved data speeds and latency, multi-player games, seamless streaming of videos and video chat in high definition (HD). For the operator, LTE improves spectral efficiency, reduces opex and is an important differentiation in wireless broadband.
The reduction in 3G data tariffs in the first half of 2012 was a key inflection point and is expected to increase the uptake of 3G services, which was lagging so far. Price cuts of approximately 40–80 per cent, compared to introductory offers by almost all the operators, has lowered one of the primary barriers of adoption for 3G services in India. Consumers can benefit from lower differential cost in switching over from 2G services and increase perceived value of the service. The current 3G tariffs are one of the lowest in the region when compared in relation to voice tariffs. Mobile data traffic is steadily increasing. According to Nokia Siemens Networks MBit Index, the combined 2G and 3G mobile data traffic in India increased by 54 per cent between December 2011 and June 2012. The concerted shift to data services is gradually picking up for Indian operators.
In 2013, we are going to see some key trends and a number of policy initiatives being implemented. Mobile tariffs are expected to increase. The increase may not be substantial in absolute terms, but operators could reduce discounts and free call allowance, and introduce lower validity packs. This is expected to increase the average revenue per minute (ARPM) for operators. However, the flip side is that data revenue growth is likely to be at the cost of margins.
Operators would increasingly focus on revenue growth rather than on absolute subscriber growth. Overall, the non-voice revenues of operators would continue to grow. 3G service uptake is expected to pick-up backed by price cuts and increasing coverage. Category B circles would continue to witness strong mobile data growth.
The year will also see launch of LTE services by the remaining operators. LTE service is priced at a premium over 3G and 2G services and it is expected to take around 2–3 years to become a mass market phenomenon in India. 3G is expected to dominate the small-screen segment of the market while the dongle market is likely to witness enhanced competition between 3G and LTE players.
Just like the world has survived the end of ancient Mayan calendar this year, we hope that the hardships faced by the Indian telecom sector comes to an end and 2013 sees the much needed revival for the sector.
Partner in member firm of Ernst & Young Global