The Analysis of the Indian Telecom Industry-Opportunities and Challenges

Going to the Past:

The telecom industry started in 1850 where the first experimental electric telegraph line was started between Kolkata and Diamond Harbor. In 1882 Telephone Exchanges in Calcutta, Bombay and Madras were opened. Since then the telecom network was owned and managed by the government since it was a strategic service. Reforms in telecom sector began in 1980 with telecom manufacturing being opened for private sector followed by National Telecom Policy (NTP) in 1994 and 1999.

Policy Reforms in 3 phases.

Phase1: A telecom commission was set up to give focus to telecommunications policy formation. In 1975, the Department of Telecom (DoT) was separated from Indian Post & Telecommunication Accounts and Finance Service. DoT was responsible for telecom services in entire country until 1985 when Mahanagar Telephone Nigam Limited (MTNL) was carved out of DoT to run the telecom services of Delhi and Mumbai. In 1990s the telecom sector was opened up by the Government for private investment as a part of LiberalizationPrivatization-Globalization policy. Therefore, it became necessary to separate the Government's policy wing from its operations wing. The Government of India corporatized the operations wing of DoT on 1 October 2000 and named it as Bharat Sanchar Nigam Limited (BSNL). Phase 2: It was during this period that the Narsimha Rao-led government introduced the National Telecommunications Policy [NTP] in 1994 which brought changes in the following areas: ownership, service and regulation of telecommunications infrastructure. Foreign firms were eligible to 49% of the total stake. The multi-nationals were just involved in technology transfer, and not policy making. Phase 3: NTP 1999 brought about 3rd generation reforms on this sector. FDI increased from 49% to 74%. Internet telephony was launched in 2002 and broadband policy was launched in 2004.

Government Initiatives over the Past.

The Government has taken the following main initiatives for the growth of the Telecom Sector: All telecom services have been opened up for free competition for unprecedented growth. 217 (Information Technology Agreement) ITA-I items are at zero Customs Duty. Specified capital goods and all inputs required to manufacture ITA-I, items are at zero Customs Duty Availability of low cost mobile handsets The International Long Distance Services (ILDS) opened with effect from April 2002. Calling Party Pays (CPP) regime was implemented with effect from 1st May 2003. Guidelines for Unified Access Service License regime were issued in November 2003, 27 licenses out of 31 Basic Service Licenses were converted to Unified Access Service Licenses In April 2004, license fee for Unified Access Service Providers (UAS) was reduced by 2 per cent License fee for infrastructure Provider-II reduced from 15 per cent to 6 per cent of the Adjusted Gross Revenue and spectrum charges between 2 to 4 per cent in June 2004 Entry fee for NLD licenses was reduced to Rs. 2.5 Crore from Rs. 100 Crore. Entry fee for ILD reduced to Rs. 2.5 Crore from Rs. 25 Crore Lease line charges have been reduced to make the bandwidth available at competitive prices to facilitate growth in IT enabled services One India plan i.e. single tariff of Re. 1/- per minute to anywhere in India was introduced from 1st March 2006 by the Public Sector Undertakings. This tariff was emulated by most of the private service providers also. This scheme has led to death of distance in telecommunication and is going to be instrumental in promoting National Integration further. The robust telecom network has also facilitated the expansion of BPO industry that is having 500,000 employees now and adding 400 employees per day. Annual license fee for National Long Distance (NLD), International Long Distance (ILD), Infrastructure Provider-II, VSAT commercial and Internet Service Provider (ISP) with internet telephony (restricted) licenses was reduced to 6 per cent of Adjusted Gross Revenue (AGR) with effort from Jan 2006.

 The Governments policy is neutral on use of technology by telecom service providers subject to availability of scarce resources such as spectrum etc. License Fees 6-10 per cent of Adjusted Gross Revenue (AGR).

Present FDI Policy for the Telecom sector:

Foreign Direct Investment up to 74 per cent permitted, subject to licensing and security requirements for the following: - Internet Service (with gateways) - Infrastructure Providers (Category II) - Radio Paging Service FDI up to 100 per cent permitted in respect to the following telecom services: - ISPs not providing gateways (Both for satellite and submarine cables) - Infrastructure Providers providing dark fibre (IP Category I) - Electronic Mail - Voice Mail The above is subject to the following conditions: - FDI up to 100 per cent is allowed subject to the condition that such companies would divest 26 per cent of their equity in favour of Indian public within 5 years, if these companies are listed in other parts of the world. - The above services would be subject to licensing and security requirements, wherever required. - Proposals for FDI beyond 49 per cent shall be considered by Foreign Investment Promotion Board (FIPB) on a case-to-case basis. In the manufacturing sector 100 per cent FDI is permitted under the automatic route. In Basic, Cellular Mobile, paging and Value Added service, and Global Mobile Personal Communications by Satellite, FDI is permitted up to 49 per cent (under automatic route) subject to grant of license from Department of Telecommunications.

Basic Gyaan (Stats as of Mar 2011) Growth, Users, Wired v/s Wireless
The Indian Telecom industry is the world's fastest growing industry with 811.59 million mobile phone subscribers as of March 2011.It is also the second largest telecommunication network in the world in terms of number of wireless connections after China. Indian telecom operators added a staggering 227.27 million wireless subscribers in the 12 months between Mar 2010 and Mar 2011. The fixed line segment has seen a decline in the subscriber base. It has declined to 34.73m subscribers in March 2011 from 36.96 m in March 2010. This decline is mainly due to substitution of landlines with mobile phones. Mobile teledensity increased by almost 18.4 percentage points from Mar 2010 and Mar 2011 (49.60% to 67.98%) while wired subscriber numbers fell by a modest 2.2 million. This frenetic pace of monthly subscriber additions means that the Indian mobile subscriber base has shown a year on year growth of 43.23% As the fastest growing telecommunications industry in the world, it is projected that India will have 1.159 billion mobile subscribers by 2013. Furthermore, projections by several leading global consultancies indicate that the total number of subscribers in India will exceed the total subscriber count in the China by 2013.The industry is expected to reach a size of 344,921 crore by 2012 at a growth rate of over 26 %, and generate employment opportunities for about 10 million people during the same period. A large population, low telephony penetration levels, government policies and regulations and a rise in consumer spending power is the cause of this spurt in telecom industry.

Budget Impact on Telecom Sector

According to the general budget for 2011-12: The government has proposed to raise Rs 29,648.33 crore through recurring license fees, and other usage charges from the telecom sector. The usage charges includes license fees from the telecom operators, receipts on account of spectrum usage charges, auction of third generation (3G), and Broadband Wireless Access (BWA) spectrum. The Minimum Alternate Tax (MAT) has been increased from 18% to 18.55. This will adversely affect the telecom companies. The reduction in the surcharge on corporate tax from 7.5% to 5%. The budget targets rural broadband connectivity in 2 years to all 2.5 lakh panchayats. Point of View of Industry: Key areas like clarity on deduction of upfront 3G spectrum fees, re-introduction of tax holiday to new operators, resolving controversy around tax withholding on payments for interconnectivity charges, use of passive infrastructure, clarity on taxability of inbound roaming are not addressed. The license fees will put additional financial burden on the larger telecom service providers The industry demanded an exemption of service tax on broadband which was not considered.

Classification of Indian Telecom Sector

1: Fixed Line Telephony: BSNL and MTNL account for 90% of the revenue. Private companies are available in 18 circles and collectively account for 10% revenue. Private Sector companies offer high end services like leased lines, ISDN, videoconferencing because of which Average Revenue Per User (ARPU) is more for private players. Now even the public sector companies have entered into high end services and are doing very good. Mahanagar Telephone Nigam Limited (MTNL) is one of the first in the world to deploy the Asymmetric Digital Subscriber Line (ADSL2+) network. Internet Protocol Television (IPTV) services have started in Delhi and Mumbai on MPEG-4 2: Mobile Telephony: There are approx 15 private companies providing cellular services in 19 telecom circles covering 1500 towns across the country. The DoT has now allowed cellular companies to buy rivals within same operating circles provided their combined market share does not exceed 67%. Previously the companies were allowed to buy rivals only outside their circles. - GSM (Global System for Mobile) Sector: Private operators have 75 per cent subscribers whereas Public sector Operators (BSNL & MTNL) have 25 % subscribers in the GSM segment. - CDMA (Code Division Multiple Access) Sector: CDMA technology was introduced in India as a limited mobility solution. The introduction of CDMA services has created competition, lowered tariffs and offered many citizens access to communication services for the first time. 3: Internet: Internet Telephony has been officially allowed from 1st Apr 2002. The growing demands of corporate for applications such as e-commerce, internet leased lines, ISDN, VPN etc. is the driving force for the growth in internet services market. 40 million use the Internet via mobile phones as of December 2010. Internet telephony is permitted to 128 ISPs; only 32 of which actually provide the service. New services like IP-TV and IP-Telephony are becoming popular with the demand likely to increase in coming years. The scope of services under existing ISP license conditions is unclear. 4: Telecom Equipments: Growth in telecom equipment market resulted in increasing demands for telecom services. The Government has already set up Telecom Equipment and Services Export Promotion Forum and Telecom Testing and Security Certification Centre (TETC). A large number of companies like Alcatel, Cisco have also shown interest in setting up their R&D centers in India. With above initiatives India is expected to be a manufacturing hub for the telecom equipment. Switching systems with a size of about Rs. 50 billion will remain a big market in coming future.

Some Stand Alone Gyaan for Topics

Mobile Number Portability (MNP) TRAI announced the rules and regulations to be followed for the Mobile Number Portability in their draft release on 23 September 2009. Mobile Number Portability (MNP) allows users to retain their numbers, while shifting to a different service provider provided they follow the guidelines set by TRAI. Once a customer changes his/her service provider & retaining the same mobile number they are expected to hold the mobile number with a given provider for at least 90 days, before they decide to move to another service provider. This restriction is set in place to keep a check on exploitation of MNP services provided by the service providers On 25 November 2010 said Mobile Number Portability (MNP) was finally launched in Haryana. 3g Technology This technology has been intended for smart phones which can be used for high speed internet. It can provide with speeds up to 2 Mbps. Thus services like internet surfing, gaming, video conferencing are easily provided. 3g technology was implemented in Japan for the first time. Major Players in Telecom Industry There are three types of players in telecom services: State owned companies (BSNL and MTNL) Private Indian owned companies (Reliance Communications, Tata Teleservices,) Foreign invested companies (Vodafone-Essar, Bharti Tele-Ventures, Idea Cellular, BPL Mobile etc.)

Service Provider Reliance Tata Airtel MTNL BSNL Vodafone Idea Spice BPL Aircel

No of CDMA subscribers in Crores 2.7 1.07

No of GSM subscribers in Crores

3.37 0.25 2.44 2.44 1.3 0.26 0.11 0.48

Prospects (Hindrances and Opportunities): 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. The PSUs will however 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. Increasing choice and one of the lowest tariffs in the world have made the cellular services in India an attractive proposition for the average consumer. During FY10, the Government completed the auction of 3G as well as the Broadband Wireless Access (BWA) spectrum auctions. The final price for a pan India 3G spectrum stood at a whopping '16,751 crores. As a result, there was no single operator with a pan India license. The maximum circles that an operator got 3G spectrum was for 13 circles. For BWA, the final auction price for a pan India license was '12,848 crores. There emerged a new competitor in this field with Reliance backed Infotel being the only operator to win a pan India BWA license. The main driver out here would be the ability to get real time information on the move. During the year the Telecom Regulatory Authority of India (TRAI) also proposed new guidelines for charging spectrum fee and for mergers and acquisitions in the sector. On the face of it these guidelines appear to be more detrimental for the sector rather than helpful. If applied, these guidelines would increase the financial burden for the GSM operators by making them pay higher spectrum charges as well as humongous fee for holding higher quantities of spectrum. The guidelines also pose hurdles for mergers and acquisition activities. MNP would definitely lead to an increase in churn in the sector with each operator vying for subscribers attention to their own networks. Hence the operators would have to maintain Quality of Service (QoS) to retain their customers.

Investors can look to capture the gains of the Indian telecom boom and diversify their operations outside developed economies that are marked by saturated telecom markets and lower GDP growth rates. Infrastructure equipment cost is down to a fraction of what prevailed just a few years ago. Operators can plan better expansion plan now. Operators can look at options like Interactive gaming, Mobile TV, M-Commerce and other MVAS to generate revenue and arrest falling ARPUs. Internet users base fast reaching near the English speaking population base. Local language and content required for further growth. Increased viability for the operators to expand to semi-urban and rural markets and hence accelerate the growth further. Mobile advertising is another source of revenue which is expected to grow to $56.6 million in 2011.

Career Prospects:

With the setting up of new service bases, expansion of coverage areas, network installations maintenance etc. the telecom industry is going for high scale requirements. There is high demand for software engineers, mobile analysts, hardware engineers etc. for different work in telecom sector. There are ample opportunities for marketing people whose services are required to capture the ever increasing consumer base.