g

Foreword
India is amongst the fastest growing telecommunications markets across the globe. The average monthly mobile subscriber growth over the past year has been 15-17 million customers. Currently, the mobile subscriber base is approximately 671 million (as of August 2010). The overall teledensity for India has already surpassed 60 percent and the market continues to exhibit unabated growth1. With the successfully concluded auctions of the 3G and BWA spectrum, this growth is set to become even more aggressive. Indian telecom operators have very effectively worked with rest of the telecom ecosystem to enable India emerge as the country which offers the lowest mobile tariffs across the globe2. All these achievements have helped India emerge as one of the most attractive investment destinations for all international players looking to win a share of the second largest mobile market in the world3. These players can also look at leveraging on the successful low-cost model that India has pioneered. During the past year, several telecom players in India have made tremendous efforts to establish themselves on the global level through cross border mergers and acquisitions. These strategic alliances are a step towards the globalization of the Indian telecommunication industry. The credit for the growth witnessed by the sector has to be attributed to the well-defined regulatory provisions designed by the government. The government has been instrumental in making key policies to drive the rural growth which is expected to keep this bullish phase going strong over the next decade. Within the rural area, there is additional focus to enhance the penetration of broadband and data usage. The aim is to wirelessly connect villages and remote areas through broadband and provide access to basic facilities for health, education, banking and others. On the occasion of India Telecom 2010, the 5th International Conference and Exhibition, the Department of Telecommunications is pleased to release this report on ‘Indian Telecom Success Story – Broadband for All’. Developed by KPMG in India and FICCI, it provides an overview of the Indian telecommunications sector and will serve as a useful reference manual for all stakeholders including regulators, policy makers, telecom operators and the general public. R. Chandrasekhar Secretary Department of Telecommunications & IT Government of India New Delhi

1 ‘Monthly Telecom Scenario – August 2010’, DoT, October 2010 2 ‘Mobile tariffs in India to decline by 25 percent’, Silicon India, May 2009 3 ‘India becomes 2nd largest mobile market in the world’, The Hindu Business Line, April 2008

© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The Federation of Indian Chambers of Commerce and Industry (FICCI) and KPMG are proud to present this report on “India Telecom 2010 – Broadband for All” in association with the Department of Telecommunications (DoT). , The present phase is extremely exciting for the telecommunication industry which is looking forward to 3G and BWA rollout to help re-invigorate the aggressive growth that the industry has witnessed in the past two years. Rapid swelling in the subscriber numbers has resulted in urban teledensity exceeding 100 percent. The rural market is expected to drive the next round of growth for the voice-based services, while data services will create the much needed churn within the maturing urban markets. This report highlights the importance of broadband and data services market in India. Our aim has been to highlight the key ecosystem requirements and strategies that telcos may follow in order to achieve the government targets of broadband subscriptions. This report provides the reader an insight into how the telecom industry has evolved over the last decade. The report also highlights the growing importance of broadband and how it has the potential to contribute to the overall socio-economic development of rural India We are extremely grateful to the Department of Telecommunications (DoT) for providing us with this opportunity to work with them for the India Telecom 2010 event. Amit Mitra Secretary General FICCI, India Sean Collins Global Chair KPMG’s Communications and Media practice Romal Shetty National Head Telecom KPMG in India Arpita Pal Agrawal Head - Telecom Risk & Compliance KPMG in India

© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Executive summary
Ranked amongst some of the fastest growing economies of the world, India has registered steady growth over the last few years, especially in comparison to the OECD and other similar emerging economies1. The strengthening domestic market and enhanced domestic consumption helped India to successfully weather the global economic turmoil. The Indian telecom sector particularly, witnessed aggressive growth during the last two years, emerging as a global benchmark for other developed countries as well. All major international operators are exploring opportunities to make inroads into the Indian telecommunication sector, both for the vast customer base as well as to leverage on the low cost outsourcing model which India has been successful in pioneering. As of August 31, 2010, the country’s subscriber base (wireline + wireless) stood at 707 million2, with the overall teledensity reaching 60 percent. With increasing maturity of urban markets, the next round of growth is expected to be generated from the rural areas in the form of increased uptake of voice and databased services, as well as broadband services. The penetration of broadband in India has not been as aggressive as the wireless communication services. As of August 2010, the broadband subscriber base in India is approximately 10.08 million. The government, in recognition of the potential of broadband as a key enabler in furthering its growth agenda, has taken a strong stance to address the issue of low penetration and enhance broadband coverage across the country. The recently concluded 3G and BWA auctions are likely to be the catalyst that furthers the government’s agenda of providing broadband connectivity to the remotest parts of India. The government as well as other telecom stakeholders believe that these wireless technologies will help overcome the barriers of expensive wireline infrastructure, especially in the low revenue generating zones. The primary aim of the ‘Broadband for All’ movement is to ensure that all Indians are able to connect with the world and are able to remotely access basic facilities like health, education, banking, commerce, entertainment, utility and e-governance services to enhance their quality of life.

1 Ministry of Finance 2 ‘Monthly Telecom Scenario – August 2010’, DoT October 2010 , 3 ‘Consultation Paper on National Broadband Plan’, TRAI, Business Line, June 2010

© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The government, along with TRAI and DoT, has been making tremendous efforts to achieve the desired results. TRAI is considering plans to roll-out a national optical fiber cable network which will act as a backbone to broadband services across the country. The funding for this project is likely to be routed through the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) for non-skilled work and from the Universal Services Obligation Fund (USOF) for material and equipment cost3. The Indian government has unveiled a prototype tablet computer that would sell for a mere INR 1,500 or USD 354 thus increasing affordability of the end user device which is essential to access the broadband services. The government is considering making broadband connections along with other equipments such as computer, printer and telephone more affordable to every gram panchayat. These initiatives, which are intended to provide universal broadband access to the rural residents of the concerned gram panchayats, are likely to be funded through the Universal Services Obligation Fund5. All these steps are clear indicators of the efforts that are being directed towards achieving strong broadband growth in India.

The private telecom players are also expected to play an important role to achieve the objective of ‘Broadband for All’, by covering the key aspects of relevant content, seamless connectivity and affordable end user device by introducing innovative business models for their broadband service offerings. Due to the rich diversity in India, locally relevant content is essential to make an impact and enhance penetration of telecom services, especially in the rural areas. The regulatory environment in India has been extremely supportive for the telcos to have achieved such phenomenal growth in the past years. The industry is now eagerly awaiting the roll-out of 3G and BWA which is expected to have a significant impact on the sector and its growth in the next few years. The Indian telecommunication industry is at the brink of entering a fresh round of growth, to be stimulated by the launch of wireless data services. The policy makers and the private players have successfully come together with various initiatives to ensure that the industry continues to remain a shining star for India.

4 An IIT IISc-designed laptop for just INR 1,500’, Times of India, July 2010 , 5 ‘Special purpose vehicle planned for broadband push’, Hindu Business Line, July 2010

© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Table of Contents
Macro-economic view of India 1

Global telecommunications market

7

Indian telecommunications market

13

Regulatory and policy environment

19

Broadband for all

25

Broadband infrastructure Broadband - catalyst for convergence Value added services in India Connecting rural India Telecom manufacturing Telecom research & development Emerging trends and technologies Green telecom Investment opportunities after broadband rollout International best practices

34 39 43 51 59 65 69 73 79 83

Conclusion About KPMG in India About Department of Telecommunications (DoT) About Federation of Indian Chambers of Commerce and Industry (FICCI)

89 91 92

92

© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

1

Macro-economic view of India
India is one of the fastest growing economies across the globe. The economic size of the country, at the end of the fiscal year 2010, is expected to be worth INR 49 trillion (GDP at market prices). It is also the fourth largest economy in PPP terms after USA, China and Japan1. The country experienced rapid economic growth between 2003 and 2007 , registering an average annual GDP growth rate of 8.8 percent. In fiscal 2009, the country weathered the global downturn successfully and registered a GDP growth of 6.7 percent, which is significantly higher than the performance of both the OECD countries and emerging Asian economies. This performance was primarily driven by the services sector, which posted a year-over-year growth of 9.7 percent. For 2010, the country is expected to post a GDP growth of 8.5 percent2. By 2020, the economy is expected to quadruple its current size driven by nominal annual growth of 13 percent3. Progressive liberalization of government policies, rapidly expanding services sector, FDI growth, rising global competitiveness and increasing domestic demand have all contributed to a strong economy. India ranks as the number one FDI destination among non-financial investors4.

1 2 3 4

CIA – World Fact Book 2009, The World Bank Ministry of Finance ‘GDP to quadruple to $ 4.5 trillion by 2020: Edelweiss’, Financial Express, March 20, 2010 A.T Kearney’s 2010 Confidence Index .

© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

2

© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

3

Key features of the Indian economy
Favorable demographics: Currently the median age in India is 24 years and the country possesses a working population of close to 340 million5. This young and dynamic working population of India is one of the biggest factors having a positive impact on the consumption and investment pattern of the country. For instance, in 2009-10, India became the second fastest automobile market in the world, registering a growth of 26.4 percent6. Rising urbanization: Currently, India has 42 cities with a population base greater than one million7. Widely believed to be the centres of economic activity and wealth generation, these cities are estimated to contribute 60-80 percent of the total output in India8. Urbanization adds about one percent each year, through productivity gains. The benefits from urbanization to the economy come from the clustering of firms and businesses which allow them to learn from each other and attract workers. Examples include the clustering of software firms in India’s Silicon Valley (Bengaluru) or auto component firms in Gurgaon9. High savings ratio: The country has one of the highest national savings ratio of 32.4 percent (2010E) as against 22.9 percent for Japan and 10 percent for USA10. Higher domestic savings has resulted in higher investment, making India less vulnerable to global situations.

Shift from an agrarian to a services-led economy: Over the years, the Indian economy has transformed itself from an agriculture-dependent economy to a services-driven economy. The share of agriculture, which comprised more than half of the GDP in 1950-51, is now gradually shifting in favor of the services sector, which has currently got a share of 58 percent of GDP The growth of the services sector . marks a watershed in the evolution of the Indian economy and takes it closer to the fundamentals of a developed economy.

GDP Mix of India and developed economies
2005 2010P 2010P Agriculture Industry 14% 18% 58% Services 81% 71%

28% 28% 54% India

18% 1% USA

27% 2% Japan

Source: EIU

5 6 7 8 9 10

’World Population Prospects: The 2008 Revision Population Database’, United Nations Population Database ‘India India car sales are No. 2 in world’, Financial Express, April 09, 2009 ‘LIMITS OF PEOPLE’S WAR- Naxalism faces serious hurdles that can be used against it’, The Telegraph, January 21, 2010 ‘India’s urbanization bonus’, Mint, August 16, 2007 National Productivity Council EIU

© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

4

From survival to revival
The Indian economy, much like its global counterparts, witnessed a substantial deceleration in growth in 2008, consequent to the global financial and economic turmoil. Towards the end of 2008, corporate profits deteriorated, consumption and investment demand shrank, and there was a shrinkage in employment opportunities. The manufacturing sector’s slowdown was slightly more pronounced with growth in the manufacturing output turning negative in December, 200811. Economic indicators
Quarterly Net FII Inflows (USD Millions) 6421 5428 4017 3811 2199 1417 407 -236 -27 357 114 824 -0.2 0.3 4372 8.9 2272 7 8 5.5 5.4 6 8.3 9.3 5.8 5.6 Quarterly IIP (%) 14.8 17 .6 14.5

Dec-07

Dec-08

Dec-09

Sep-07

Sep-08

Sep-09

-1807 -2359

Dec-07

Dec-08

Dec-09

Sep-07

Sep-08

Sep-09

Mar-07

Mar-08

Mar-09

Source: Bloomberg, CSO

Though the growth momentum of the Indian economy was substantially impacted with the onset of the global economic slowdown, the severity of the impact was considerably less as compared to emerging Asian economies. The fiscal and monetary stimulus announced in the latter part of 2008 helped the economy to recuperate from the slowdown phase. After witnessing deceleration in GDP growth for five consecutive quarters, a notable turnaround in India’s real GDP growth took place during April-June 2009 quarter, with the GDP registering a growth of 6.0 percent (y-o-y) as against 5.8 percent during the previous quarter. The rise in GDP growth in the third quarter of 2009 to 8.6 percent, which was viewed as an initial sign of recovery in the economy, was primarily due to the slow impact of increase in government spending and the improved performance of the industrial sector12. Notably, FDI in India remained resilient during the crisis. With most of the countries witnessing a downfall in the growth of FDI between 2007 and 2009, India displayed a CAGR growth of 16.5 percent for the same period13. India weathered the global crisis comparatively well, in part due to the government’s quick response in the form of stimulus which encouraged foreign investors.

Sep-10

Mar-10

Jun-07

Jun-08

Jun-09

Jun-10

GDP growth
GDP (%) 9.6 9.4 9.7 8.5 8.6 7 .8 7 .5 6.1 5.8 6 6.5 8.6 8.8

9.3

Dec-07

Dec-08

Dec-09

Sep-07

Sep-08

Sep-09

Mar-07

Mar-08

Mar-09

Mar-10

Jun-07

Jun-08

Jun-09

Aug-10
Jun-10

Mar-07

Mar-08

Mar-09

Mar-10

Jun-07

Jun-08

Jun-09

Source: Bloomberg, CSO

11 D&B Outlook, Q2 2010 12 Bloomberg 13 OECD

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Jun-10

5

FDI inflows in selected countries 2007 Japan Korea Russia Brazil China India
Source: OECD

Indian equity markets outperform EM 2009 11,939 1,506 37 ,134 25,949 78,200 34,577 CAGR (27 .2)% (8.1)% (17 .9)% (13.4)% (24.8)% 16.5% 12 Months returns as on March 2010 MSCI India MSCI EMF MSCI EM Asia MSCI Europe MSCI Asia Pacific BSE Sensex 113.6% 77 .3% 70.0% 48.3% 72.3% 80.5% 42.7% 56.9%

2008 24,418 3,311 75,002 45,058 147 ,791 41,315

22,548 1,784 55,073 34,585 138,414 25,483

Dow Jones NASDAQ
Source: Morgan Stanley Research

Domestic industrial activity also witnessed a sustained improvement during April-December 2009, as evident from the strong IIP growth figures. While this can partly be attributed to the low base effect; restocking by manufacturers following the earlier cutbacks in factory output and drawdown of inventories also aided the industrial production in the latter half of 2009. The other positive aspect of this rebound in the industrial activity was that it was broad based. As many as 14 out of 17 major manufacturing sectors witnessed a positive growth during January-December 2009, thereby strengthening the prospects of faster recovery in the domestic industrial activity. The fiscal and monetary stimulus measures announced earlier played a major role in stimulating consumption and investment demand in the economy during 200914. Government impetus The fiscal stimulus Impact (INR Billion) Duty cuts Additional expenditure Sixth pay commission Farm loan waiver % of GDP 500 1000 157 600 4.0% Comments Cenvat Cut 4%: Excise duty to 8% Increased allocation to flagship programmes A consumption kicker: to continue in FY10 Indirect impact

Outlook
The Indian economy is at its initial stages of economic progress, as compared to some of the other emerging economies. The growth prospects of the economy are expected to improve significantly in FY 2011 as the domestic demand – driven by rising private consumption and investment - begins to gain momentum. However, the government consumption demand is expected to remain moderate on account of fiscal consolidation plan and expected steady withdrawal of stimulus packages. Nonetheless, the focus of government spending on infrastructure sector would continue to support growth.

Growth would largely be driven by: Favorable demographic profile
India’s high population growth has had a positive impact on productivity gains over the last 10 years – a trend likely to continue over the coming decades. It is expected that the working age population will continue to grow to peak at roughly 70 percent by 2040, in contrast to much of the developed world and regional peers, such as China and South Korea (which are already in de-growth phase)15. The recent years have also seen considerable development in the education systems of the country, marked by the presence of world-class universities and management schools including the Indian Institutes of Technology (IIT) and Indian Institutes of Management (IIM). This is expected to further strengthen India as a breeding ground for knowledge and consequently innovation. The country scores 4.4 (where 1= Not Well, 7 = very Well) on the Quality of Educational Systems Index performing close to Japan (4.5) and leaving behind outsourcing competitor China (3.8) as per the Global Competitiveness Report 2009-201016.

Source: Report on India Strategy, IDFC-SSK, May 17 2010 ,

Strong industrial and manufacturing performance, stimulus packages by government and growing confidence of foreign investors was well-supported by high-performing capital markets, indicated by growing market capitalization of the Bombay Stock Exchange (BSE).

14 D&B Outlook, Q2 2010 15 The Reawakening of Domestic Demand, Business Monitor International, Q22010 16 ‘The Global Competitiveness Report 2009-2010’, The World Economic Forum © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

6

Improvement in private consumption
With rapidly waning uncertainty on employment and expected increase in disposable income due to measures like broadening of overall income tax slabs for individuals with consequent reduction in effective individual tax, as announced in the Union budget of FY11, private consumption is expected to improve. Improvement in private consumption will also result in increase in resumption of capital expansion plans by Indian corporations.

Low labour cost
In recent years, the country has positioned itself as a preferred manufacturing and production centre owing to the abundance of skilled, cheap and English speaking labor, a factor that helps India distinguish itself from its Asian contenders in the global outsourcing market. India has the lowest labor costs (per hour) and the highest availability of engineers and scientists (after Japan) in the world18. NASSCOM estimates that an approximate 400,000 diploma and degree engineers graduated in the year 2009 alone19.

Infrastructure development
The Government has put significant emphasis on developing core infrastructure including roads and power with expected investment of over USD 500 billion from the public as well as the private sector over the next five years. This is expected to result in enormous productivity benefits for the economy17.

Labor costs India Labor Force (million) Labor Costs per Hour (USD) Labor Productivity Growth (%)* 478.3 2.5 6.5 China 815.3 2.2 9.5 Japan 65.6 25.3 3.7 US 154.9 27 .0 2.3 France 28.2 29.0 1.7 Germany 43.4 38.1 2.8 UK 31 28.3 -0.2

Source: Economist intelligence Unit; Data for 2010(Estimated); *Efficiency of labour measured in terms of output per worker (real GDP per person employed)

17 XIth Plan Documents, The Planning Commission 18 ‘Global Competitiveness Report 2009-2010’, The World Economic Forum 19 www.osec.ch

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7

Global telecommunications market
Telecom services will continue to be one of the key growth sectors having generated revenues of roughly INR 67 trillion in 2009. Global wireless subscribers reached 4.6 billion1 in 2009 with a CAGR of 22 percent over 2004-20091. This occurred despite some carriers experiencing marginal declines or flat trends in revenues with enterprises and consumers exercising cut backs on telecom spending during the global economic slowdown.

1 International Telecommunications Union database, June 2010

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8

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9

The continuing rise in affluence levels in emerging markets and the resultant increase in the standard of living is expected to have an increasing impact on the revenue per subscriber. Telecom market revenue by sector
Telecommunications Market - 2009 Enterprise Networking and Communications 2% Carrier Network Infrastructure 4% TOMS 2% Mobile Devices 11% Mobile Services 45% Fixed Services 36%
Mobile Services 45% Fixed Services 31% Enterprise Networking and Communications 3%

Telecommunications Market - 2014
Carrier Network Infrastructure 4% TOMS 2% Mobile Devices 15%

Revenues – USD 1.9 Trillion

Revenues – USD 2.3 Trillion

Source: Market Trends: Global Telecommunications Market, Gartner, July 2010

Falling voice ARPUs in most countries; mobile data to drive growth
Wireless ARPU ranges from USD 54 per month in Japan to under USD 5 per month in the Philippines, Indonesia and India, evidently demonstrating the lower ARPU realization in emerging countries2. The blended wireless ARPU is roughly USD 18 globally, declining at 10 percent per year (on a local currency basis)2. Global wireless ARPU comparison (2009)
60 49 50 40 47 54 46

The demand for applications with platforms such as Apple’s App Store continued to drive new handset launches, adoption of smartphones and increasing sale of data plans in the developed markets. Mobile data represents a growing part of overall ARPU as voice ARPU continues to deteriorate. Globally, data ARPU (mobile data, fixed data and fixed internet) constituted 34 percent of the total ARPU versus 31 percent in 20083. The country with a relatively low wireless ARPU, Philippines, generated the highest mix of mobile data services globally (52 percent2 of total wireless ARPU). Japan had 43 percent of its wireless ARPU coming from mobile data services driven by early deployments of 3G services2.

ARPU ($)

40 30

33 29 21

20 10 0

14 10 5 4

12 8 4

U.S.

Australia

Japan

South Africa

China

Brazil

India

Indonesia

Netherlands

Source: Global I/O: Wireless Services, UBS, October 2009

2 Global I/O: Wireless Services’, UBS, October 2009 3 ‘Market Trends: Global Telecommunications Market’, Gartner, July 2010

© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Philippines

France

Germany

Russia

Italy

UK

10

Convergence – shifting dynamics This quote style is in telecommunications ecosystem set in Univers 65 Bold 33pt on 36pt leading
The success of the Apple’s iPhone and the App Store is a case in point of a wider ecosystem, where the device manufacturer has had a significant impact on the telecom carrier’s success. As mobile devices become globally ubiquitous, faster computing power and quick access to seamless information via location-based services is likely to emerge as the norm of the day. These devices are increasingly emerging as strategic partners for telecom carriers. Co-opetition (Cooperative Competition) and value creation opportunities are likely to influence market direction, technology decisions and solution offerings in the market. Content providers are forming exclusive partnerships with telecom carriers to create a marketing strategy to influence consumer decisions. A good example has been MTV Networks’ partnership with AT&T for the “MTV Vault” giving AT&T subscribers exclusive access to archive content.

Value added services continue to increase its share in overall telecom revenues
Uptake of mobile value added services has been on the steady rise in most of the developed countries. Globally, Mobile Value Added Services (MVAS) accounts for more than 30 percent of the total telecom revenues as compared to 10 percent in India4. Emerging economies such as China, India, Indonesia, South Africa, Nigeria, Egypt, Turkey, Israel, Saudi Arabia, Brazil, Mexico, Argentina, Russia, Poland and the Ukraine are expected to increase global MVAS revenues from USD 200 billion in 2009 to USD 340 billion in 20145. High-end services such as Mobile Internet, Mobile Gaming, GPS, Mobile Money, and other innovative mobile applications are more popular in developed economies as compared to SMS based and basic internet services in emerging economies. A key global trend observed is the shrinking of MVAS value chain. VAS players such as Content Developers, Content Aggregators, Platform Enablers, and Telecom Operators have started growing into each others role6. With the emergence of new technologies and more countries advancing towards 3G & 4G provide a future path for MVAS to grow exponentially. Moreover, declining voice tariffs across the world, resulting in low ARPUs compels operators to focus more on MVAS.

The telecom equipment sector is also offering new and converged services, supporting CSP’s in the transformation toward content-driven services and applications. These converged solution offerings are expected to help equipment players restore the dramatic collapse in sales witnessed in 2009, to renewed growth in 2010. This is increasingly evident in the areas of unified communications and video management services, where equipment players are positioning themselves to deliver new value-added services.

Increasing broadband adoption with declining fixed line subscribers
Emerging nations in Asia like India, Indonesia, Bangladesh and other African nations like Ghana, Zambia have shown tremendous growth in wireless penetration due to ease of rollout compared to wireline deployment. Consequently, global wireline subscription remained stable with 1.2 billion7 subscribers as a result of the negative growth in most developed countries such as US, UK and Japan and near static status in developing markets.

4 5 6 7

‘MVAS: Where are we heading to?’ - CIOL, October 2008 ‘Global Mobile Data Market to be Worth USD 340 Billion by 2014’ - Informa Telecoms & Media. July 2009 ‘Global Mobile Value-Added Services (VAS) Market’ - Religare Info Service, March 2010 International Telecommunications Union database, June 2010

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11

With software application surge and usage of advanced devices for media rich services, users worldwide have been demanding higher speeds. The broadband penetration increased to 480 million7 subscribers globally with 25 percent CAGR (2004-2009). Emerging countries in Asia, Middle East and Africa have seen high growth in broadband subscription while developed nations have witnessed a stable growth pattern. Japan with over 30 million broadband lines, has the third largest broadband subscriber base and one of the widely cited broadband success stories, due to surge in adoption of DSLbased broadband subscribers around 2003. In Africa, broadband penetration has been increasing, due to lower tariffs as a result of the new submarine cables reaching its shore and the rollout of wireless broadband services. In South America, CSP’s are innovating by providing video-ondemand and other bundled services in order to increase broadband adoption. China has witnessed a blistering pace of PC-based broadband connectivity, where near ubiquitous broadband availability and low tariffs, have resulted in internet penetration levels close to thirty percent, resulting in a large class of digital consumers with strong adoption and exposure to the internet in the last decade. India too is witnessing rapid growth in broadband subscribers due to falling tariffs. However, there is potential to significantly improve broadband penetration in the country through investments in last mile connectivity such as fibre, cable and DSL. The expected broadband wireless rollouts in 2010-11 would also provide an additional impetus towards increasing broadband penetration in the country. Mobile subscriber data (millions)
772 525 347 267 110 278 115 293 119 853 677

Mobile payments to foster a trend for cashless transactions
According to the GSM Association (GSMA), mobile money in emerging markets would bring in USD 7 billion of sales .9 for operators by 20128. Of this, money transfer services for handset owners without a bank account itself would result in USD 5 billion of transaction fees and text message linked revenues by 2012, with the remainder coming from indirect benefits such as customer loyalty8. In India, offerings from some operators enable a mobile phone user to send or receive money instantly between their banking accounts, using their mobile phone to authorize the transfer. However, changes in regulation could result in the advent of end-to-end mobile payment solutions, enabling customers to make simple financial transactions through the mobile phone, furthering the objective of financial inclusion being targeted by the Government.

Fixed line data (millions)
239 247 175 60 50 2005 251 167 244 158 6352 2007 India 240 235

687 459 205 95 534 150 233 100 2006 616 234 253 105

140 70 48 2008 Japan

121 3744 2009 USA

103 3639 2010

5657 2006 China

76

2005

2007

2008

2009

2010

China

India

Japan

USA

Source: Economic Intelligence Unit database, 2010

8 GSM Association 2009

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12

M&A activity and diversification in emerging markets has been a vital component for success of large CSPs
The world’s largest CSPs lost share in the global services market as four of the top 10 lost their positions. Most top CSPs from Western Europe are encountering difficulties with competition, saturated markets and regulatory restrictions. Acquisitions in developed markets were executed with the primary objectives of consolidation, gaining cost synergies and utilizing network capabilities. On the other hand, emerging market acquisitions were mainly focused towards tapping the growth in these areas. E.g. Frontier Communications (US), acquired wireline operations of Verizon’s 14 states to expand and achieve cost synergies worth USD 500 million annually9. Mexico’s America Movil acquired Telmex International for integrating players and providing mobile and fixed line service across Latin America9.

Asia to continue to lead growth in wireless services
The Asia Pacific region driven by growth in India and China will continue to be the key growth market for global telecom over the next few years. Developed markets such as Japan and Korea, are witnessing the benefits of significant technology investments and innovation. Meanwhile, India and China, which constitute 28 percent10 of the global wireless subscriber base today, are witnessing the benefits of significant growth in income levels due to sustained economic growth. Penetration figures in both countries continue to remain significantly lower than developed economy levels, auguring well for continued growth and development of the telecom market in the region.

9 Mergermarket Database, September 2010 10 International Telecommunications Union database, June 2010

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13

Indian telecommunications market
The Indian telecommunications market has continued to show consistent growth during the last one year, with exciting developments such as rollout of newer circles by operators, successful auction of 3G and BWA spectrum, growing push by telecom operators to rollout network in semi-rural areas and increased focus on the value added services market. Telecom continues to be one of the fastest growing sectors of the Indian economy, becoming a strong contributor to India’s overall GDP and is expected to grow further.

Mobile subscribers (share of the world)
Others 65% China 16%

India 13%

USA 6%

Source: EIU’ 2010 estimates, International Telecommunications Union statistics report - 2010

Overall teledensity in India has risen to the levels of ~59.6 percent (as of August’10)1. With a large part of the population yet to obtain access to the telecommunication market, there is immense potential for the sector to grow, especially in non-urban areas, where wireline and internet services are yet to make significant in-roads. Wireline services have shown relatively slow growth with low teledensity of approximately 7 percent and 1.1 percent2 in urban and rural .6 regions respectively. Even the mobile services space which has seen exponential growth in urban areas, has not yet reached the vast majority in rural areas with rural teledensity of approximately 27 percent3, indicating huge untapped potential for .8 the sector.

1 ‘Telecom Subscription Data as on 31st August 2010’, TRAI, October 2010 2 ‘The Indian Telecom Services Performance Indicators January – June 2010’, TRAI, October 2010 3 ‘Monthly Telecom Scenario – August 2010’, DoT, October 2010

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14

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15

Broadband is yet to reach a critical mass despite rapid growth; the numbers have risen from 6.98 million in August 2009 to 10.08 million by August 2010, registering a growth of 55 percent on an annual basis4. With subscriber penetration under 2 percent5, the sector has potential for aggressive growth in the future. Mobile services The Indian mobility market can be characterized as one with a very large subscriber base4 (~671 million as of August 2010), high growth5 (addition of 16-18 million subscribers every month in last six months), low ARPUs (~INR 122 per month in June, 2010) and significant churn rates. In the prepaid segment, ARPU declined by 6.2 percent from INR 113 in March, 2010 to INR 106 in June, 20105.

The Calling Party Pays regime was introduced in 200304 which allowed free incoming calls for the subscribers. This revolutionary change can be designated as one of the watershed milestones in the growth of the Indian telecom sector. The 22 telecom circles in India have been classified into 4 categories viz. Metros, Category A, B and C. With penetration rates in metros touching 100 percent, the market in Metros is nearly saturated. However, there is still immense potential in other circle categories, particularly B and C. Mobile subscriber base and mobile teledensity across telecom circles
J&K 4.68 mn 42.09% Punjab 85.57 mn 69.86% HP 5.86 mn 91.81% Delhi 32.76 mn 195.33% North East 6.01 mn 48.14% Assam 10.03 mn 34.00%

Growth of wireless subscriber base (year end numbers)
700 636 525
Rajasthan 36.92 mn 57 .03% Gujarat 37 mn .64 67 .02%

Subscriber base in mn

600 500 400 300 200 100 6 0 11 28 47 75 142 229 347

Haryana 16.60 mn 68.66%

UP (W) 36.03 mn UP (E+W) 43.23 % UP (E) Bihar 43.30 mn 51.88mn 34.82% West Bengal MP 30.21 36.35 mn 41.28% 39.54% Orissa 18.13 mn 46.11%

Maharashtra 49.54 mn 56.41% Mumbai 30.46 mn 161.74% Karnataka 42.52 mn 76.57%

Kolkata 18.61 mn 134.25%

2001 2002 2003 2004 2005 2006 2007 2008 2009 H1’10

Source: TRAI Annual Report and Quarterly Reports on Telecom Services Performance Indicators

Andhra Pradesh 51.62 mn 64.04%

Metros Tamil Nadu 49.00 mn 85.20% Circle A Chennai 12.08 mn 156.37% Circle B Circle C

The Government of India opened up mobile services to private participation in 1994-95 by inviting bids for providing services in the four metropolitan cities and 18 non-metro circles. Services were introduced in 1995 with the high tariffs resulting in poor demand. The National Telecom Policy 1999 moved the industry to a revenue share model from the fixed license fee and the lower tariffs resulted in the addition of ~ 12 million subscribers during the 1999-03 period as compared to less than a million subscribers added during the 1995-99 period. During this period the government also setup the Telecom Regulatory Authority of India (TRAI) in 1997 and ‘Telecom Dispute Settlement and Appellate Tribunal (TDSAT)’ in 2000.

Kerala 27 mn .21 88.54%

Source: ‘Monthly Telecom Scenario – August 2010’, DoT, October 2010

The current subscriber base of 707 million (August 2010)4 comprises 476 million urban subscribers (teledensity of ~134 percent) and 230 million rural subscribers (teledensity of ~28 percent)4. The market is highly competitive with some of the telecom circles having more than 10 operators. Competitive intensity in the market has contributed to reduction in tariffs and launch of innovative schemes like lifetime prepaid and low cost handset bundling which further reduced the entry

4 ‘Monthly Telecom Scenario – August 2010’, DoT, October 2010 5 ‘The Indian Telecom Services Performance Indicators January – June 2010’, TRAI, October 2010

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16

cost for a new subscriber. With downward spiraling ARPUs, changing economic profile of subscribers and the need to meet the aggressive roll-out targets, the operators have been under tremendous pressure to bring in operational efficiencies. Operators have been realizing efficiencies through extensive outsourcing across the telecom value chain. This has resulted in large scale opportunity for players belonging to all the categories within the telecom ecosystem. Some of the prominent categories include network equipment vendors, tower infrastructure companies, telecom implementation vendors and IT vendors. Active sharing is a newer area which is being looked at by telcos to reduce costs of rollout further. It has been observed that the past subscriber growth has been skewed in favor of the urban market. The large rural population base of around 590 million5 and low rural teledensity 27 percent4 indicates that there is still large .76 untapped opportunity in the Indian market. With urban markets nearing saturation, operators are actively seeking to tap growth in rural India. The entire telecom ecosystem of operators, network equipment players and passive infrastructure players are expected to evolve low-cost delivery solutions such as significant reduction in telecom network rollout costs as well as key operating costs such as energy charges, which would make the business case for serving the large but potentially low ARPU rural opportunity increasingly viable. As a testimony to this growth potential, rural teledensity has increased from 17 percent5 in June, 2009 to the current 26 percent5 in June 2010 which translates into addition of 83 million rural subscribers in the last one year. We expect to see continued heightened activity in this direction in the near future as well.

However, the potential for wireline services remains large due to very low penetration in the wireline industry and the ability of wireline to deliver broadband at lower operating costs than wireless broadband. New players in the telecom space had hitherto concentrated on wireless space leading to low competition and promotion of wireline services. Greater pan-India expansion by private players can significantly lead to growth of wireline services. In addition, with combined offering of internet/ broadband and allied services like IPTV, the sector can bounce back in the future. But, the aggressiveness of mobile operators in rural areas due to easier and cheaper rollout and newer offerings on BWA spectrum can further slow down the wireline penetration. Wireline subscriber base
45 40 35 33 38 41 41 41 42 41 39 38 37 36 36

Subscribers in Mn

30 25 20 15 10 5 0

’0 1

Source: TRAI Annual Report and Quarterly Reports on Telecom Services Performance Indicators

Wireline services
While wireless has seen consistent growth over the years, wireline over the last few years has actually seen a decline in the subscriber base. The total number6 of fixed line connections in India increased from 5.81 million in 1991-92 to 40.8 million in 2006-07 During . 1999-2000 to 2001-02, approximately 5-6 million customers were added to fixed-line services each year. However, with the drop in mobile tariffs and increase in coverage of mobile services, net additions in fixed-line subscribers started slowing down from 2.5 million in 2002-03 going down to 0.5 million in 2004-05. Due to mobile substitution and lower tariffs, the fixed line subscriber base actually decreased by 3.5 million between 2006-07 and 2008-09. This decline was aggravated by slow rollout of fixed line services by Telcos due to the significantly higher total cost of service provision for fixed line services compared to mobile wireless services.
4 ‘Monthly Telecom Scenario – August 2010’, DoT, October 2010 5 ‘The Indian Telecom Services Performance Indicators January – June 2010’, TRAI, October 2010 6 Annual Report – 2006-07 TRAI, October 2007 ,

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17

Broadband and internet services
Internet subscriber base in India, though currently at a low level, has been experiencing significant growth over the last 2-3 years. This growth is being driven by the growing popularity of broadband, increasing user comfort with usage of internet applications, continuous fall in PC prices and decreasing costs of internet/broadband access plans. Internet subscriber base
18 16 14
Subscribers in Mn

Value added services
Currently, the VAS market is worth INR 110-120 billion, which translates into approximately 10 percent of wireless industry revenues. The share of VAS in wireless revenue is likely to increase to 12-13 percent by 20118. This growth would be driven by increased operator focus on VAS due to continuous fall in voice tariffs, increasing penetration of feature rich handsets, availability of vernacular content and increased user adoption of VAS applications.

12 10 26% 8 6 4 2 0 9.2 9.6 28% 30%

35%

38%

40%

43%

46% 47%

50%

51%

54%

57%

60%

Growth of VAS revenues
50% 40% 30% 20%

140 120 100 80 60 40 91 61 119 7 .5% 8.3% 9.6%

12% 10% 8% 6% 4% 2% 0% 2008 VAS Revenues 2009 2010 (Estimated) Share of VAS

10.4 11.1 11.7 12.2 12.8 13.5 14.1 14.5 15.2 16.2 16.7 10% 0%

20 0
Internet Subscribers Share of Broadband

Source: TRAI Annual Report and Quarterly Reports on Telecom Services Performance Indicators

Source: Industry consensus estimates, KPMG analysis

This growth has been accompanied by an associated increase in the number of internet users which have attributed to the growth of public internet cafes and multiple members of a household accessing internet. Access technologies play a crucial role in broadband penetration. Right of Way (RoW) issues and costs of the existing broadband technologies has been a constraint for the growth of internet. While there a number of technologies being used by service providers to provide broadband services, DSL continues to be the most preferred technology and constitutes nearly 86.6 percent of total broadband subscribers7. Cable modem technology follows with 6.9 percent connection. On an overall basis for accessing internet, DSL leads with 51 percent while dialup stands second at 33.3 percent7. Wireless technologies have carved a unique niche in terms of connectivity to internet with a share of nearly 7 .6 percent which is a significant shift in the last two years. Newer access technologies like BWA and 3G can completely transform the character of Internet/ broadband scenario in India. BWA will overcome the key hindrance of RoW in India, while 3G has the potential to make the mobile phone, a ubiquitous device for accessing the internet.

Prior to 2008, majority of VAS revenues were attributable to SMS and that too peer-to-peer (P2P) text messages. Over the last few years, non-P2P SMS VAS has been gaining importance and is likely to become a dominant contributor to VAS revenue over the next few years. In 2009, non-P2P SMS VAS accounted for 5-6 percent8 of operator revenues. This is expected to go up further, as operators focus more on VAS, especially with the launch of 3G services and with the availability of differentiated and customized content. The addressable market for non-P2P SMS VAS has historically been dominated by ringtones and caller ring back tones (CRBT), but its contribution has been fading gradually and was within the range of 35-37 percent8 of VAS revenues in 2010. Market split for non-P2P SMS VAS
Others 11% GPRS/ WAP Products 11% CRBT 37%

P2A SMS & Alerts 18% Voice Portals 23%

Source: Industry Estimates for calendar year 2010, Information Interviews

7 ‘The Indian Telecom Services Performance Indicators January – June 2010’, TRAI, October 2010 8 Industry consensus estimates, KPMG analysis

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18

New frontiers for growth
3G and BWA
The last 5 years have been transformational for Indian telecom industry and the next few years are expected to bring about more stimulating and aggressive changes. One of the key frontiers which would make the journey in coming years even more exciting is the launch of 3G and BWA technologies. The auction of 3G spectrum was concluded on May 19, 20109. While commercial usage is only permitted from September 2010 onwards, the auction laid the groundwork for faster internet connectivity and data transfer on mobile phones, boosting usage of data services in the cellular market. This was closely followed by auctioning of BWA spectrum which also exceeded revenue expectations of the government. The highly successful auctioning of 3G and BWA spectrums and entry of new telecom players in BWA auction has ensured that telecom market will see more exciting times going forward. Total revenues which the government earned from these two auctions stood at approximately, INR 1,063 billion10. The market is likely to witness a wide variety of value added services being offered, which were not possible over the current 2G/2.5G network. The ARPU is expected to get a boost given the increased revenue contribution from data and value added services. Potential challenges that 3G players could face would span across the value chain covering innovative Product development, Network deployment and management, Sales and Marketing etc. In the first wave, operators would be able to provide rich data services to HNI’s, working professionals, enterprise customers and youth. They would be specifically targeting current users of 2.5G and/or owners of 3G enabled handsets. At the same time operators would be actively looking at providing 3G services to other income groups, as this will help spread the investment in technology/license over a wider subscriber base. The Ministry of Communications had specified that BWA spectrum allocation would be technology neutral. High speed broadband on BWA spectrum also has the potential to provide connectivity for the growing small and medium enterprises (‘SME’) segment; and be utilized for the return path bundled with the DTH platform.

9 DoT press release dated, May 21, 2010 10 DoT press release dated, May 21, 2010 and BWA Auction- Final Results dated, July 12, 2010

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19

Regulatory and policy environment
Over the years, the Indian Telecommunication Policy and Regulatory framework has evolved into a well developed framework that facilitates effective policy formation and execution. The government has been making constant efforts to ensure that the regulatory framework is beneficial for the consumers as well as the licensed operators. The policy and regulatory framework for telecommunications in India consists of, among others, the following key bodies1: • The Department of Telecommunication (DoT): DoT is the central governing body for the telecommunication industry. It is entrusted with the task of formulating policies for the development of the sector, awarding telecom licenses and is also accountable for spectrum management. It also includes the Telecom Commission, which is an exclusive policy-making function • The Telecom Regulatory Authority of India (TRAI): TRAI is the Regulator for the sector and has a mix of mandatory and recommendatory powers. It mandates in areas related to tariffs, interconnection and standards for quality of service. TRAI has recommendatory powers in areas related to licensing, timing, licensing terms and conditions, license revocation, competition, facilitation • The Telecom Disputes Settlement and Appellate Tribunal (TDSAT): The TDSAT was set up to resolve all disputes between a licensor and a licensee; two or more service providers; and between a service provider and a group of consumers • Wireless Planning Commission (WPC): WPC is primarily assigned the task of spectrum management • Group on Telecom and IT (GoT – IT): This was formulated to take care of ad-hoc issues.

1 ‘Telecommunication Sector Report’, IBEF September 2009 ,

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21

National Telecom Policy (NTP)
The National Telecom Policy was instituted in 1994, to initiate and sustain aggressive growth for the telecom sector and ensure on-demand access to a telephone for every Indian. The policy’s key objective was to establish telecom infrastructure across all remote locations of the country. It also encouraged privatization of the telecom equipments industry to help India emerge as a telecom manufacturing hub. World class service quality and special redressal of customer complaints are the other essential pre-determined objectives of the policy2. A fresh round of reforms was introduced by the government in 1999 when it enforced the New Telecom Policy. This policy was an improvisation over the NTP 1994, to help achieve stronger growth by escalating the control to a regulatory body. The key objectives of the policy were3: • Availability of affordable telecom services for all. Ensure penetration of integrated multimedia services including ISDN services, remote database access, and government and community information systems • Ensure coverage of all areas including rural, for universal services. Services should encompass high-level services and endeavor to achieve economic development • Set up a modern integrated infrastructure which would enable the convergence of IT, media, telecom and consumer electronics • Build world-class telecom facilities in India by encouraging privatization and offering a level playing field • Safeguard the national security of the country.

A further addendum to NTP 1999 was made in November 2003. This amendment permitted a licensee to make available wireline and wireless services using any technology in a pre-determined license area after conversion to a Universal Access Service License (UASL). Key regulatory bodies
TRAI4 Telecom Regulatory Authority of India was established as an independent body under the TRAI Act of 1997 The act was later . amended in 2000. The entry of private players into the industry prompted the establishment of the act to effectively regulate the telecom players. TRAI safeguards the interests of the consumers through transparency, ensuring conformity with service quality benchmarks, enforcing measures to safeguard national security, fixing tariffs for players, counseling the government on matters relating to telecommunication development and tracking performance and efforts of all players within the industry. DoT5 DoT is accountable for policy formulation, monitoring performance reviews, ensuring international co-operation, overlooking research and development and granting licenses to operators, allowing them to provide basic and value added services in various cities and telecom circles as per the approved government policies. The Department also allocates spectrum and manages radio communications in close coordination with the International bodies. It is also responsible for enforcing wireless regulatory measures and monitoring the wireless transmission of all users in the country.

Regulatory evolution
ILDservices Calling Party Pays opened to (CPP) competition implemented BSNL established by DoT Go-ahead to the CDMA technology Attempt to boost Rural telephony Intra-circle merger guidelines established Proposed MNP implementation Number portability proposed MVNO guidelines for 3G as well as 2G disclosed 2009 2008

TRAI established as Private players Independent allowed in VAS regulator

Discussions on 3G spectrum bid process 2007

1994 1992 1997

1999 2000

2002 Internet telephony initiated

2003 Unified Access Licensing regime introduced

2004

2005 2006

2010

2012 2013 2011

National Telecom Policy (NTP) formulated

NTP-99 led to migration from high-cost fixed license fee to low cost revenue sharing regime

Reduction of licence fees Reference Interconnect order issued

FDI limit was from 49 to 74 Broadband percent policy 2004 formulated

Decision on 3G services (awaited) ADC abolished

DoT to release guidelines on VOIP

Proposed auction of 4G spectrum

Completed the auction of 3G and BWA spectrum

Reduction in IUC

Source: Press Search, KPMG Analysis

2 Department of Telecommunications website 3 New Telecom Policy 1999, TRAI Website

4 ‘About Us’, TRAI Website 5 ‘Annual Report 2009 – 10’, DoT

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22

Telecom FDI policy
India is the fastest growing telecommunications market across the globe. The urban teledensity has already breached the 100 percent mark5. Rural India, which has nearly 27 .76 percent teledensity as of August 2010, has shown impressive growth over the past6. India has achieved such aggressive growth primarily through urban areas, which account for only 30 percent of the total population. Rural India, which accounts for 70 percent of the population, holds immense potential and remains relatively untapped. This makes the Indian telecommunications sector one of the most attractive investment destinations for global players7. India’s FDI regime Sr. No. Sector/Activity

Recent reports revealed that during the first two months of this financial year, India’s telecommunication sector attracted almost USD 891 million in FDI, the highest amongst all sectors. On the other hand, during the same period last year, the sector attracted USD 612 million worth of FDI8. Overall, this sector has attracted FDI of about USD 9.98 billion (from April 2000) as of June, 20109. The regulations governing Foreign Direct Investments have gone through different phases of transition to ensure market attractiveness for globally recognized players along with safeguarding the interests of the Indian counterparts. The well-defined regulatory policy has been the fundamental reason for the inflow of huge international investments into the Indian telecommunication sector.

FDI Cap/Equity 74% (including FDI, FII, NRI, FCCBs, ADRs, GDRs, convertible preference shares, and proportionate foreign equity in Indian promoters / Investing Company) 74%

Entry route

1

Basic and cellular, Unified Access Services, National/ International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS) Global Mobile Personal Communications Services (GMPCS) and other value added telecom services

- Automatic upto 49% - FIPB beyond 49%

2

ISP with gateways, radio-paging, end-to-end bandwidth a) ISP without gateway* b) Infrastructure provider providing dark fibre, right of way, duct space, tower (Category –I) c) Electronic mail and voice mail Manufacture of telecom equipments

- Automatic upto 49% - FIPB beyond 49% - Automatic upto 49% - FIPB beyond 49%

3

100%

4

100%

- Automatic upto 49% - FIPB beyond 49%

Source: ‘FDI Policy’, DoT Website * The government has revised guidelines for ISP’s on 24-8-2007 and new guidelines provide for ISP licenses with 74 percent FDI only.

6 7 8 9

‘The Indian Telecom Services Performance Indicators’, TRAI, January - March 2010 ‘India Telecoms - Positives priced in, tougher road ahead’, JP Morgan, August 16, 2010 ‘Telecom most favored FDI sector’, Press Trust of India, September 01, 2010 ‘Fact sheet on FDIs’, Department of Industrial Policy & Promotion Ministry of Commerce and Industry, August 2010

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23

New and upcoming regulations
The Indian Telecommunication sector has seen remarkable growth and is designated as one of the fastest growing markets in the world. It is also the second largest wireless network across the globe, after China10. The aggressive growth has resulted in saturation of the urban markets and the Indian telecommunication authorities are looking to introduce new technologies to sustain the market growth rate.

education, finance and healthcare in rural areas.

MVNO
The Indian Government is in the process of reviewing the draft guidelines for the introduction of MVNO. TRAI had issued a draft proposal for MVNO in August, 2008 and the DoT had accepted the proposal in February, 2009. The present landscape is considered to be ripe for MVNOs to be introduced in India since it will allow the telcos, who did not manage to win any 3G spectrum, to offer these data services via the MVNO route. A few companies have already made inroads into the MVNO market by leveraging the franchise agreements.

3G Services
The government recently concluded the 3G and BWA auctions in June, 2010. The auctions were initially estimated to raise INR 350 billion and help the government contain the fiscal deficit11. However, the government received approximately INR 1,060 billion as spectrum fees for 3G and BWA, cumulatively. 3G technology has been highly anticipated over the past few years and is expected to drive the next round of sustainable growth for the Indian telecom market through convergence of entertainment, infotainment and voice communications into one single device. The anticipation around 3G services can be gauged from the fact that the 3G auctions was concluded after 183 rounds of bidding over a period of 34 days12. Inspite of a huge amount being generated through the auctions, none of the participating operators were able to win a pan-India license. Many of the spectrum winners have announced that they will be ready to roll out 3G services within the next few months. The key drivers for the growth of 3G in India will be innovative content, improved customer services and increased affordability of handsets as well as availability of VAS. These drivers will help ensure growth of 3G not just in urban areas but in rural areas as well. The rural expansion will help in the progression of tele-density and broadband penetration which will in turn have a positive impact on the overall economic growth of the country.

VoIP
The growing telecommunication industry has necessitated the demand for low cost domestic and international calls. This is where Voice over Internet Protocol (VoIP) will make its impact with a technology that allows the exchange of voice over internet protocol packet switches. The primary requirement for this low cost option to deliver impeccable quality is high bandwidth. This technology can be used to effectively communicate between two personal computers, a personal computer and a conventional phone as well as between two conventional phones. Recent reports reveal that the internet subscriber base in India has risen from 13.54 million in March 2009 to 16.72 million in June 201016. These numbers suggest a 23 percent growth in internet subscriber base, which also implies greater propensity to utilize VoIP based services. The only major deterrent for the adoption of these services will be the costs involved in setting up these services, especially in rural areas across the country. VoIP has received significant regulatory attention over the past decade. In 2002, TRAI had recommended to DoT to open up this sector in a restricted manner. In 2005, DoT permitted unlimited internet telephony to all access providers in India. In 2006, limited access was also given to internet service providers, who were asked for 6 percent of their revenues as license fee and were restricted from termination and carriage in India17.

Broadband Wireless Access (BWA)
The auction of the BWA spectrum helped the government raise as much as INR 385 billion after 117 rounds of bidding that lasted 16 days. At the end of the auction, only one company managed to successfully bid for a pan-India license13. Broadband Wireless Access is expected to provide an effective solution to the challenge of low broadband penetration. The launch of this technology is expected to bring India closer to the achieving the target broadband connectivity to Gram Panchayat level by 201214. Presently, India has a broadband subscriber base of only 10.08 million15. BWA is expected to bridge the urban-rural digital divide and help address concerns of delivering essential services like
10 11 12 13 14 15 ‘Annual Report 2009 – 10’, DoT ‘3G sale nets Rs. 67 ,710 cr.’, The Hindu, May 20, 2010 ‘3G Auction - Final Results’, DoT Press Release, May 21, 2010 ‘BWA Auction- Final Results’, DoT Press Release, June 12, 2010 www.indiatelecom.org ‘Telecom Subscription Data as on 31st August 2010’, TRAI, October 2010

16 ‘The Indian Telecom Services Performance Indicators’, TRAI, April - June 2010 17 DoT; TRAI; ISPAI; ‘VoIP Market-India’, Research on India, August 2009

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New security requirements
On July 28, 2010, DoT released a set of amendments to the telecom licenses, under which certain specific obligations were imposed upon the operators in the interest of the national security of the country. This move was intended to address the security concerns that were raised by the Home Ministry, regarding the telecom equipment being imported from other countries. Some of the key points covered in the notification were18: • Security Policy: Within thirty (30) days of the date of the Notification, the telecom operators were asked to submit their organizational policy on security and security management to DoT • Network Audit: Telcos were asked to engage international accredited agencies to conduct audit and certify core equipment such as routers, switches, firewall, intrusion detection and prevention systems and all software associated with telecom operations and services. Operators are also required to ensure that such audit agencies should not be from the same country as that of the vendors of the telecom operators • Minimal dependence on foreign engineers: Telcos were asked to ensure that dependence on foreign engineers would be made minimal and/or almost nil within a period of two (2) years from the date of the Notification • Location Details: Operators would be required to ensure upgradation of existing equipment within one year from the date of notification, in order to ensure that the telecom operators are able to provide location details of mobile customers within a precision of upto fifty meters • Security and Business Continuity: DoT has approved the template of a Security and Business Continuity agreement which will need to be executed by the telecom operators and their vendors. The agreement requires the vendors to transfer their intellectual property to a third party. The telecom operator and the vendor are required to enter into an agreement with an escrow agent authorized by Controller of Certifying Agencies (CCA) or the National Informatics Centre, Department of Information Technology, Government of India. As per the terms of the agreement, CCA will create an encryption key for the escrow materials and the decryption key will remain with the escrow agent. If the vendor fails to provide support and DoT feels it is necessary to release the source code they may obtain the same from the agent.

18 ‘Amendment to UAS license agreement for security related concerns for expansion of telecom services in various zones of the country’, DoT Press Release, July 28, 2010

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25

Broadband for all
Various studies have credited broadband as a catalyst for economic and social development of a country. Availability of broadband services at affordable price levels contribute to higher GDP growth rates1, provide for a larger and more qualified labor force, and make that labor pool more efficient. It has been proven that the multiplier impact of broadband growth on GDP is significantly higher than mobile telephony growth.

Growth effects of ICTs: Percentage point increase in GDP per capita for every ten percentage point increase in ICT penetration, 1980-2006
1.6 1.4 1.21 1.2 1 0.8 0.6 0.4 0.2 0 Fixed Mobile Internet Broadband 0.43 0.73 0.6 0.81 0.77 1.12 1.38

High-Incom e Econom y

Low -Incom e Econom y

Source: Qiang and Rossotto, World Bank, Information and Communication for Development Report 2009

The successful auction of 3G and BWA spectrum has laid a good foundation for a push towards achieving pan India broadband infrastructure; which will lead us to the dream of providing “Broadband for all” This vision demands a synergetic push . across technologies (DSL, Fiber, Cable, and wireless), amongst telecom operators (public and private) and across the broadband value chain (device manufacturers, service providers, content providers & regulators); so as to provide this “universal service” to residents living anywhere in the country (urban or rural) and to the match the customer expectations across all segments (Enterprise, Government and Retail).

1 Consultation Paper on National Broadband Plan, TRAI, June 10, 2010

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27

The key challenges in broadband adoption
The broadband penetration in India has been low despite the presence of 104 broadband service providers. The broadband penetration is less than 1 percent2, which is low compared with overall tele-density of 59.63 percent3. Of the approximately 17 million (fixed) internet subscribers only 10.08 million are broadband users3. This implies that India still has some way to go in terms of achieving the original target of 20 million broadband subscribers by the end of 2010, as set by the Broadband Policy 2004. The number of broadband additions is only 0.1 to 0.2 million compared to 16-18 million per month for mobile additions2. Uptake of broadband has been limited so far on account of multifarious factors:

Quality of Service (QoS)
Broadband growth has been partly constrained owing to poor QoS in terms of throughput speeds experienced by customers. The contention ratio4 (number of subscribers accommodated in a given bandwidth) in India is high i.e. service providers provision an average 130 subscribers in 52 Kbps bandwidth, whereas internationally the same ratio is not more than 50. Due to this phenomenon, bandwidth per subscriber reduces dramatically, especially when several subscribers log in at the same time. Contention ratio (number of subscribers accommodated in given bandwidth)
140 120 100 80 130

Inadequate wireline infrastructure
Inadequate wireline infrastructure has resulted in the “last mile” challenge in providing access. The absence of local loop unbundling (LLU) further restricts competition in this space by not allowing a regulatory framework wherein alternative service providers can use the existing local loop of licensed service providers to offer broadband services. Both these factors have predominantly undermined the growth of fixed broadband services currently being provided using DSL technology. Global examples suggest that the DSL penetration has been significantly higher in countries adopting LLU:

60 40 20 0

50

45

50

48

Czech Republic

Slovakia

UK

Ireland

India

Czech Republic

Slovakia

UK

Ireland

India

Note: The contention ration specified are for download speed of 512 Kbps except for Slovakia for which 1.5 Mbps has been considered Source: TRAI, CRISIL Research, May 2010

DSL Coverage2 Country France Germany Italy Netherlands UK Australia Canada Japan United States Year of LLU 2001 1996 1998 1997 2000 1999 2001 2001 2003
1

percentage 98.5% 95.0% 95.7% 100.0% 100.0% 91.0% 89.3% 98.6% 82.0%

Source year End 2008 End 2008 End 2008 End 2007 End 2008 June 2008 End 2007 Sept 2008 End 2007

Broadband penetration (Dec 2009) 30.4 30.3 20.5 37 .1 29.5 23.3 29.6 24.8 26.4

GDP per capita (USD PPP 2008)3 , 43,453 43,484 37 ,936 50,868 42,275 44,223 42,945 39,081 46,008

Source:1 OECD, Working Party on Telecommunication & Information Services Policies, Developments in Local Loop Unbundling, 2003 2 OECD, Indicators of broadband coverage, 2010 3 OECD, December 2009

2 Consultation Paper on National Broadband Plan, TRAI, 10th June 2010 3 ‘Monthly Telecom Scenario – August 2010’, DoT, October 2010 4 TRAI, CRISIL Research, May 2010

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Support for efficient broadband infrastructure deployment
Right of Way (RoW) procedures and charges are fairly complicated and have concerned the service providers to venture into creation of new infrastructure (especially optical fiber cables) for broadband and telephony services. Lack of adequate power supply (or alternative energy sources) especially in the rural areas has also been one of the key factors for the sluggish penetration.

Growth of internet and broadband users (in Millions)
180 160 140 120 100 80 60 40 20 0 Mar-

9.47 8.77 6.62 4.38
Sep-

10.5 9.5 8.5 7.5 6.5 5.5 4.5 3.5

6.62

7.21

7.82

4.9

5.52

3.87
Jun-

Dec-

Mar-

Jun-

Sep-

Dec-

Mar-

Jun-

08

08

08

08

09

09

09

09

10

10

Cost of customer premise equipment (CPE)
The relatively higher cost of CPE is another hindrance for broadband penetration. Also, the PC penetration in the country, especially in the rural sector, is low. In the wireless space, while CDMA operators have launched EVDO based services that provides high speed access, the uptake has been limited due to expensive end user device.

Fixed Internet Subs Fixed Broadband Subs

Wireless Internet Subs

Source: Indian Telecom Services Performance Reports, TRAI, 2008-2010

Key drivers of broadband acceleration
It is broadly accepted and proven internationally, that Broadband growth depends on availability, affordability and perceived useful applications or usage.

Notebook sales in India (in thousands)
3000 2500 2000 1410 1500 1000 500 0 55 22 155 2004-05 377 2005-06 318 532 2006-07 2007-08 Househol ds 1027 795 770 1099

Availability

747 2008-09

2009-10

E st abl i shment

Source: IT Industry Performance Annual Review: 2009-10, MAIT-IMRB, 28th July 2010

Applicability

Affordability

The falling prices of laptop and greater availability in terms of features and pricing has led to a 65 percent growth in sale of notebooks. In 2009-105, the household users accounted for a modest 56 percent of the sales; while the rest was contributed by business users. Also, the consumption in household users has grown by 83 percent. This is expected to have a continued positive impact on uptake of broadband services.

Availability – broadband services at the right places
Although 70 percent of Indian population lives in rural areas; broadband facility is limited to metros and major cities. Availability of broadband is critical for development of rural areas as much as it is for the urban areas. Out of total 10.08 million broadband subscribers6, mere 5 percent are rural subscribers. The low broadband penetration in rural areas is attributed to unavailability of transmission media connectivity up to village level. Due to high initial investment and expected low returns, operators are hesitant to invest in small cities/ villages or remote areas. Considering the enormous power of broadband, it is essential to concentrate on availability of the broadband to every citizen.

5 ‘IT Industry Performance Annual Review: 2009-10’, MAIT-IMRB, 28th July 2010 6 ‘Monthly Telecom Scenario – August 2010’, DoT, October 2010

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Affordability – Broadband tariffs at the right price
The entry level tariff7 for broadband services has come down drastically from INR 1,500 per month in 2004 to INR 200 a month in 2007 which is still higher than most countries. , The ICT Development Index report of the International Telecommunications Union (‘ITU’) indicates that the Broadband rates are higher at 7 percent of GNI as compared .7 to the price basket for mobile telephony which stands at 2.2 percent. High Cost of PC and other access devices commonly known as CPEs is one of the major impediments in spread of broadband. Economical options like use of thin client, recycling of old PCs / Laptops will make CPEs more affordable for the masses. One of the measures to make CPEs more affordable may be to provide incentives through fiscal policies. Incentives could be in the form of reduction of taxes and levies on CPEs and financial incentive in terms of rebate in income tax to encourage affordability of CPEs. The broad objectives of providing fiscal incentives are to make CPEs affordable to the consumers and to stimulate investment for the domestic manufacturers for boosting indigenous production. Growth of internet and broadband users (in Millions)
United States Canada UK Netherlands Japan India France Brazil Russia

Internet is largely in English and to an extent in Hindi, and is not customized as per local needs and diversity. The content in Indian vernacular languages will increase relevance and consequently interest of the local population in broadband uptake and utilization. Therefore considering specific regional requirements, content development in vernacular languages needs to be encouraged. Large numbers of softwares are available to translate the content from one language to the other. Conversion from speech to text and text to speech is also available for different languages. Though the accuracy of such software depends on the product and actual requirement, there is sufficient scope to further work on these areas to boost the development of the content in Indian vernacular languages. Given India’s strengths in IT and the recent trend in the traditional entertainment industry, infotainment can be a big booster for broadband. Entertainment content can be targeted to boost broadband demand. This can be a high growth driver which may require some initial nurturing but may enhance broadband demand especially to the non English literate subscribers. Accessibility to applications - Increasing the scope of broadband from just e-mail to more value added applications, effective use of broadband in automation of operations and functions, innovative use of technology in imparting education and increasing literacy is likely to drive the penetration of broadband in India. Few of the areas/applications which hold significance to the broadband popularity and growth are:

Mobile cost as %age of per capita GNI

8 7 6 5 4 3 2 1 0 0 2 4 6 8 10 12 Broadband cost as %age of per capita GNI Significant difference in broadband cost and cellular cost for India Overall telephony cost (as a %age of GNI) high in Brazil

High Uptake/Popularity

Email

Internet Surfing

Broadband and Cellular costs are similar for most of the developed markets

Voice Clips Moderate Voice Chat Video Gaming Voice & Video Chat Tele-Education Tele-Medicine 0 64 Kpbs 256 Kpbs 512 Kpbs Video Streaming HD Video 2 Mbps >4Mbps

Low

Source: ‘ICT Development Index Report’, ITU, 2009

Minimum Bandwidth Required

Applicability – broadband services supporting the right applications
Localized Content - India poses a unique challenge in terms of diversity in spoken languages. Though Hindi and English are principal and secondary official language respectively, there are 22 official languages recognized by the Constitution, and hundreds of additional languages and dialects spoken across the county8. To ensure end-to-end local language delivery, applications as well as content need to be provisioned in local languages. The content that is available today on the

• Education: In education, virtual classrooms (Tele Education), where students do not have to travel distances to schools and colleges, will be in demand. Online courses, tutorials and examinations will be necessary for empowering universal education where broadband can be used to impart knowledge. Video conferencing is a very useful tool, however initial equipment cost is still viewed as prohibitively high. In keeping with the “Right to Education Act” of the Government of India that came into force on April 01, 2010, broadband can help in bridging this scarcity of adequate schools and teachers to provide effective education at affordable costs

7 Consultation Paper on National Broadband Plan’, TRAI, June 2010 8 ‘Constitution of India’, National Portal of India, http://india.gov.in

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• Healthcare: Another sector which can be benefited from broadband penetration is healthcare. A significant problem plaguing the nation’s health care system is the fact that there are significant disparities in availability of reliable health care facilities between urban and rural areas. Rural India, for example, experiences higher mortality rates due to non-availability of expert advice and timely treatment. A lot of development is taking place within the e-health field. Many gadgets are now available, which can assist in remotely capturing vital parameters of the body which can be utilized by people living in rural areas to provide information and seek timely expert advice of doctors available in any corner of the world at a fraction of the costs • E-Banking & E-Commerce: Broadband is also useful for various utility services like online banking, bill payment, rail ticket booking, online application filing and trading. It allows job seekers to effectively search for employment opportunities. New content creation and distribution systems have enabled millions of people to distribute their contributions online with least expenditure. There are significant financial as well as social benefits of online shopping. It helps ensure the cheapest deal and also helps to save time when using price comparisons on the web. Broadband services in rural and remote areas can also be a very cheap and effective medium for providing banking services to the “unbanked” population of India and further the financial inclusion agenda of the Government • Entertainment: There is dramatic increase in consumer behavior towards real-time applications i.e. “experience now” Share of real-time entertainment traffic (video and . audio streaming, Flash media, peer casting, place shifting) is increasing. Thus, entertainment seems to be key driver for generating huge demand for broadband especially in rural and computer literate population • Utility: Remote management of security for homes and business premises, and an increasing number of household appliances and machines communicating over IP networks, is expected to drive the demand for broadband • E-governance: For any technology to go main stream and find maximum applications and utility, one of the biggest customers is the government. Broadband can be an important lever in helping government realize its objectives laid out under “National E-governance Plan” . With e-governance being the new mantra, it has significant potential to bring about convenience, transparency and efficacy in government functions and take these services to the doorstep of the citizens.

Hence, the scope of broadband can be enhanced from just e-mail to more value added applications. Effective use of broadband in automation of operations and functions, innovative use of technology in imparting education and increasing literacy will drive the penetration of broadband in India.

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Achieving the vision of “Broadband for All”
Despite the historical challenges identified so far, the regulator as well as the government has shown willingness to reignite the broadband growth, and provide a platform to support “Broadband for all” .

The rural push
To support the broadband infrastructure roll-out in the rural areas, the Department of Telecommunications (DoT)11 has also proposed to offer a slew of freebies at the panchayat level. This includes giving three broadband connections to every gram panchayat free of charge for three years along with free installation of computer and printer; three telephone connections and one cable TV connection without any charge. The incentives will cost about INR 2,000 crore, which will be funded through the Universal Services Obligation Fund.

National broadband plan
TRAI has suggested the roll-out of a national optical fiber cable network which will act as a backbone to broadband services across the country. The robust national infrastructure would be scalable to cater to our future requirements not only in urban areas but also in the villages. For making all villages broadband-enabled, an option is being explored to take optical fiber cables to 3.74 lakh villages having a population of 500 or more (basis Census 2001 data). The regulator has suggested that funding for such a project could be considered from the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) for non-skilled work and from the Universal Services Obligation Fund (USOF) for material and equipment cost9. India is taking a step in the right direction as global references suggest that developed countries like Japan, Singapore and Australia have taken similar initiatives to proliferate high-speed broadband services to their masses.

Conclusion
Broadband is the much needed catalyst to bring about the socio-economic growth in the country. India, therefore, needs a National Broadband Plan encompassing initiatives across various ministries which would provide a platform for provision of quality broadband services across the country. It would take a holistic view covering various aspects like customer requirements (demand drivers), customer segment (urban as well as rural), technologies (wireline as well as wireless); nature and type of CPE; regulatory aspects. The regulators as well as the government and the industry players across the value chain need to join hands so as to provide the best possible support to this national vision of “Broadband for All” .

3G/BWA spectrum auction
India is poised to see both 3G and BWA services before the close of 2010, BWA services like WiMax (or LTE) has an opportunity of reaching out to the rural masses in a costeffective manner. WiMax and 3G will help in delivering the government’s target of achieving 100 million broadband subscribers by 2014. Wireless Broadband technologies by leveraging (or sharing) the existing wireline infrastructure (available to the public and private operators) can immensely contribute to the broadband proliferation in the country.

Low cost tablet PC
Indian government (Ministry of HRD) has unveiled a prototype tablet computer that would sell for an affordable INR 1,500 or USD 3510. This highly affordable touch-screen device would in times to come, play a critical role in providing high-quality consumer broadband experience across the country. The tablet also comes with a solar-power option that could make it more feasible for rural areas. The Linux-based Tablet PC features most of the basic functions one might expect in a Tablet: Web browser, multimedia player, PDF reader, Wi-Fi, and video conferencing ability.

9 ‘Consultation Paper on National Broadband Plan’, TRAI, June 2010 10 ‘An IIT, IISc-designed laptop for just INR 1,500’, Times of India, 23rd July 2010 11 ‘Special purpose vehicle planned for broadband push’, Hindu Business Line, 24th July 2010

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Broadband infrastructure
Out of the total telephone subscriber base (wireline and wireless) of over 706 million and total internet connections of approximately 17 million, India has only 10.08 million broadband connections. Hence, availability of broadband services in India is still at a nascent stage, and enormous opportunity exists in provisioning broadband services to current telephone users1. Unlike telephony that has primarily ridden on mobile telecom infrastructure, broadband has traditionally been driven by wireline infrastructure. India is a vast country and rolling out wireline broadband network expeditiously in a cost effective manner is a significant challenge. Some of the challenges are unavailability of last mile connectivity, unavailability of Right of Way (RoW), land charges, requirement of multiple permits and clearances. Considering these impediments, the Government of India (GoI) is supporting increased penetration of wireline and broadband connectivity in rural and remote areas through its Universal Service Obligation Fund (USOF) activities. In 2009, it signed an agreement with BSNL to provide 861,459 wireline broadband connections to individual users and public institutions over a period of next 5 years2. Wireless broadband has emerged as an exciting alternative to wireline primarily due to the fact that nearly 25 percent of the country’s over 650 million wireless subscribers have successfully transitioned to become mobile internet customers. The interest in wireless broadband has now gained further momentum given the auction and allocation of 3G and BWA spectrum to private operators. These operators are expected to roll out 3G services by Q4 FY 2010 and BWA services after another 12 to 18 months3. GoI expects wireless broadband to significantly grow the broadband connections to 100 million by the end of 20154.

1 ‘The Indian Telecom Services Performance Indicators January – June 2010’, TRAI, October 2010 and ‘Telecom Subscription Data – August 31, 2010’, TRAI, October, 2010 2 ‘DoT USOF website 3 Bharti Airtel, Tata DOCOMO Press Releases, 2010 4 ‘National Broadband Plan Consultation Paper’, TRAI Release, June 10, 2010

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Current state of telecom infrastructure
Network architecture
A broadband infrastructure consists of three layers of network i.e. core, access and last mile network. The last mile network consists of Customer Premise Equipments (CPE) such as wireless or wireline routers, modems, switches and the medium of transmission between the base station and subscriber. In case of wireless medium, radio frequencies are transmitted from the base station through the antennae hosted on the towers. Hence, tower infrastructure is a critical component of last mile wireless network. The access network consists of equipments such as the base station, base station controller, gateways, mobile switching center and is responsible for managing and routing the traffic within a zone or a circle. The core network typically consists of the backbone network, which is primarily responsible for interconnection and switching traffic across multiple access networks/zones/ circles.

Optical fibre connectivity
Given the factors of capacity and cost effectiveness, OFC has emerged as one of the preferred medium of transmission globally. On the last mile network, various countries have adopted different OFC based deployment methodologies, primarily to serve the growing capacity need of customers. In the US, Verizon Communications provides a Fibre-to-theHome (FTTH) service to select high ARPU markets within its existing territories. AT&T leverages Fibre-to-the-Node (FTTN) service with twisted pair to the home. Japan, South Korea and most recently China have emerged as countries having largest deployments of FTTH services. The above countries are also extensively using OFC for broadband access network. Various standards such as Ethernet Passive Optical Networking (EPON), Broadband PON (BPON) and Gigabit PON (GPON) have been adopted and are supported by standards organizations such as International Telecommunication Union (ITU) and Full Service Access Network (FSAN). India is a unique market with both affordability and capacity being the key drivers for demand of services. Emergence of DTH and IPTV services, e-governance initiatives of state governments and impending launch of 3G services are drivers that are expected to shoot up the demand for bandwidth. OFC based transmission is expected to emerge as the primary solution and India is expected to witness large scale FTTN/ FTTH deployment going forward. In fact, India and China currently account for about one-third of the global optical fibre demand. However, cost effectiveness of such large scale OFC deployment needs to be ensured, especially for last mile network. In this regard, wireless infrastructure especially for last mile network could be a viable alternative for offering broadband.

Technologies
The capacity and coverage requirement for the network increases manifold with the rise in consumer interest for rich data usage. The choice of technology further takes account of parameters such as cost efficiency, coverage, and the availability of resources like frequency spectrum and optical fibre. Hence, operators are opting for new technologies across the core, access and last mile networks for offering broadband. Transmission in core network is shifting towards packet based technologies such as IP/Ethernet/optical primarily on Optical Fibre Cables (OFC), which results in efficient handling of vast amount of voice, video and data. In case of access network, the traffic is presently handled on both wireline (OFC, DSL) and wireless (RF Microwave) media, and like the core , network, it is also moving towards packet based technologies. The last mile connectivity is provided either through wireline (OFC, DSL) or wireless (RF satellite) media, but is currently , dominated by the former. In wireline network, OFC is replacing DSL as a more efficient solution, but is saddled with the usual challenges of deploying wireline infrastructure. Given the above, it is clear that OFC and wireless based technologies are emerging as preferred medium for data transmission.

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Wireless infrastructure
Given that wireless broadband network shall be overlaid on an existing 2G footprint, most of the existing wireless infrastructure is expected to be used for broadband deployment, thus reducing time-to-market and improving affordability of services. Operators have rolled out approximately 140,000 and 159,000 BTSs in FY 2009 and FY 2010 respectively, driven by factors such as growth in 2G wireless subscriber base and new circle rollouts by incumbent operators, coverage rollout by new operators and the launch of 3G services by BSNL and MTNL5. Moreover, few operators have already deployed 3G-ready infrastructure (i.e. BTS, dual-port antennae) in their recent 2G rollout, which would further expedite deployment of wireless broadband. Operator-owned tower companies, operator owned alliances and independent tower companies have rolled out around 337 ,000 towers as of March 31, 2010, to support 2G subscriber growth momentum. Going forward, these tower companies are expected to discipline the roll out of new towers as they expect large sharing of future BTSs (including those from wireless broadband) to be hosted on existing infrastructure. This sharing is not expected to get constrained by tenancy capacity and mix of RTT (Roof Top Tower) and GBT (Ground Based Tower) and types of tower. Moreover, such infrastructure sharing shall help operators reduce their capital expenditure and operating expenses.

Cumulative BTS rollouts (FY08-10E)

Source: B&K 2007 Citi 2007 IDFC 2009, Industry discussions, KPMG Analysis , ,

Nonetheless, operators are overcoming deployment issues by exploring unique business models to reduce the cost of serving the rural consumers, such as increased adoption of active and passive infrastructure sharing and also forming strategic alliances with TEMs.

Coverage
All the operators together have around 1.15 million route km of wireline deployed, which is largely OFC based and covers almost all the inter and intra cities and towns in India. However, there is limited availability of last mile OFC based network in villages and it is estimated that an additional quarter of the existing wireline network would be required to cover 80-90 percent of these villages. GoI’s ‘Broadband for All’ project involves laying optic fibre backhaul network to ensure that broadband connectivity reaches every panchayat in the country by 20126. India’s wireless operators have managed to provide coverage to a vast majority of the country7, indicating that wireless infrastructure is now available almost everywhere in India. However, there still exists a significant urban-rural difference in terms of return on investment (RoI); it takes approximately twice the time to achieve positive ROI from rural areas vis-àvis urban areas, primarily driven by lower subscriber uptake8. Other reasons for a lower ROI in rural areas include escalation in costs and delays in setting up infrastructure in rural areas due to slow process of leasing and purchasing land from local panchayats, irregular and non-availability of power supply.

Outlook for evolution of wireless broadband
Technologies such as WiMax and/or LTE in the BWA spectrum and CDMA-EVDO, HSPA+ in 3G are expected to enable wireless broadband. The coverage led roll out from operators based on such new technologies will drive the roll out of active and passive infrastructure in the near future. Within the technologies, 3G is expected to provide wireless broadband access to mobile users in the coming 12 – 18 months. Cumulative BTS rollouts (FY08-12F)

5 6 7 8

‘GIL Annual Report 2010’, GIL company website, March 2010; KPMG Analysis Common Service Center Scheme, Government of India website ‘Bharti Annual Report 2010’, Bharti Company Website, March 2010 ‘5th Telecom Summit’, Assocham 2009

Source: B&K 2007 Citi 2007 IDFC 2009, Industry discussions, KPMG Analysis , ,

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Out of c. 260,000 BTSs that are expected to be added in FY 2011 and FY 2012, 3G is expected to contribute to c. 100,000. Few of the private operators in India plan to launch 3G by the current year end. It is expected that most of the 3G BTSs would be deployed in metros and key towns of Circle A and B categories, primarily to service coverage requirements of operators. Post FY 2012, capacity requirements for 3G and coverage requirements for BWA are most likely to drive the BTS demand9. This wireless broadband rollout is expected to follow 100 percent tower infrastructure model, similar to the one followed in recent 2G rollouts. Also, since operators get a huge discount, more than 70 percent on the infrastructure fee for dual tenancy on a particular tower, they are likely to co-locate their 3G and BWA BTSs along with 2G10. Hence, wireless broadband is not expected to drive building of new towers, at least in the first few years of its launch. However, to make broadband available for all, the economics of wireless broadband rollout may have to be made further favorable through India-specific initiatives focusing on reducing cost of delivery. Operators have identified reduction in energy consumption as a primary way to reduce total cost of operation. According to industry estimates, there is a lot of scope for energy rationalization at tower sites. Given the power outage in India, each tower currently consumes an average of 4,000 litres of diesel every year, implying the telecom industry consumption of about 1.8 billion liters of diesel every year11. Hence, operators are sharing telecom sites and influencing tower companies to build innovative Energy Management (EM) products and solutions based on renewable sources of energy that can bring down the energy consumption. TEMs have also taken the lead in this area by supplying outdoor BTSs in India, which do not require air conditioned environment. These companies have recently deployed low-power/next generation green BTSs in countries such as China, and one can expect them to come out with similar solutions for India. Operators have faced and would continue to face significant challenges in penetrating rural markets, despite their attractiveness. In this regard, GoI initiatives such as USO Fund and push for infrastructure sharing were claimed to be instrumental in increasing the coverage of telecom services in the far flung areas. The fund has already provided support for setting up and managing 6,956 towers spread across 500 districts in 27 states. Also, BTSs are being commissioned and mobile services started in a phased manner. Given the fund’s support, BSNL has already rolled out 1,000 WiMax BTS and is in process to deploy 7 ,000 more BTS in rural area12. The government is also giving due consideration to offering USOF support to the BWA spectrum auction winners to support the business case and provide a level playing field in the rural area13.

Conclusion
India is one of the most compelling telecom markets in the world. Due to its exponential growth, large scale and affordability, the country’s telecom business model is a model of efficiency in global telecom industry. The continued success in wireless telephony has helped the country build adequate telecom infrastructure. While broadband would require some amount of network upgrade and deployment of active infrastructure, existing telecom infrastructure would expedite rollout of affordable wireless broadband. Moreover, ongoing cost reduction initiatives and expanding rural coverage would further enable operators to increase affordability and provide broadband to all.

9 10 11 12 13

IDFC 2009, Industry Discussions, KPMG Analysis Industry Discussions, KPMG Analysis ‘GIL Annual Report 2010’, GIL Company Website, March 2010 ‘BWA winners likely to get USO Fund support’, CIOL, May 2010 ‘Universal Service Obligation Fund Implementation Status’, Department of Telecom, September 2010

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Broadband - catalyst for convergence
Convergence is generally defined as the ability of different networks to carry similar kinds of services (e.g., voice over Internet Protocol (IP) or over circuit switched networks, video over cable television or Asynchronous Digital Subscriber Line (ADSL). It can also be defined as the ability to provide a range of services over a single network, such as the so-called “triple play. ” Convergence opportunities have seen a major growth as existing networks are modified to offer new services (e.g., upgrade of telephone networks to offer ADSL, rollout of urban optic fibre networks, and the modification of cable networks to offer interactive services). Convergence is also possible with wireless broadband technologies. As a result, different network infrastructures provide a plethora of services as depicted in the table below. Cable television providers can offer consumers voice, Internet access, and broadcast services over the same network as one bundled package of services at a fixed monthly rate. Likewise, a mobile service provider may be able to offer a subscriber data and video services, along with traditional voice services, and digital television (DTV) providers can offer interactive services. Viable business models with convergence Operators Broadband and DSL Operators (e.g Airtel Telemedia) using Copper line DTH and Cable Operators (e.g Hathway, Comcast) Converged services IPTV, Multi-player Games, Music, Ringtones, Ringback tones, Internet Internet Services, Digital and Analog TV, Interactive Services like (Movies, Ticket-booking, etc), time-shift TV Mobile TV, Mobile Radio, Music Download, Mobile Gaming, Video Calling, Internet Services, ecommerce, pushed content, mobile ticketing, news content, Ringtones, Ringback tones VOIP IP Phones, Internet Services ,

Wireless Operators (e.g Vodafone, Airtel, NTT Docomo)

Fixed Wireless Operators (e.g AT&T, Covad Wireless)

Source: Telecommunications Management Group, Inc, Press Reports

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International scenario convergence
In Europe, the focused efforts of incumbent and second-tier operators in developing the bundled services has significantly expanded the triple play model in last 2 years thereby reducing the churn as well. To meet the increasing demands of triple play, the network capacity to carry these services has been improved through upgrades using ADSL2+, hybrid VDSL/fibre and DOCSIS 3.0 technologies. France has been one of Europe’s key markets for telecom convergence. The consolidated cable sector is now dominated by Numericable, which manages an upgraded network capable of competing effectively with DSL offerings. As of end 2010, in North America, the fastest deployment of convergence is expected to be Videotron’s announced 120 Mbit/s download / 30 Mbit/s upload service in Quebec City1, followed closely by existing 107 Mbit/s deployments in the USA. The U.S. Federal Communications Commission (FCC) urged U.S. providers to make 100 Mbit/s a standard speed available to 100 million households before the end of the decade.

Data over Cable Service Interface Specification (DOCSIS) is an international telecommunications standard that permits the addition of high-speed data transfer to an existing Cable TV (CATV) system. It is employed by many cable television operators to provide Internet access over their existing hybrid fibre coaxial (HFC) infrastructure, effectively provide internet services at speed upwards of 100Mbps.

Converged services in India
Indian Multi System Operator (MSO), Hathway Cable and Datacom Ltd were the first Cable ISPs in India. Hathway provides broadband services through its cable network on subscriber’s PC or Corporate LAN using a cable modem / router. Hathway uses its fibre-optic backbone and internet nodes and data centres to provide 365X24X7 high speed internet service. Based on the DOCSIS (Data over Cable Services Interface Specifications) protocol, it provides a level of security equal to or better than that provided by dedicatedline network access services, like the telephone, ISDN or DSL. Hathway’s customer service is localised to each city and always on call. The helpdesks are manned and active round the clock. Bharti Airtel and Radio Mirchi have envisaged possibilities of convergence targeting FM Radio listeners over mobile phone (20 percent of the listeners) and come up with Mirchi Mobile which provides Airtel customers 12 regional Radio Mirchi stations irrespective of where they live in the country. This service has been based on IRS figures of diverse population base in some particular states like Karnataka. According to IRS, out of the 46 million people in Karnataka, 2.1 million have Marathi as their mother tongue, 2.4 million Telugu and 1.16 million Tamil. We felt the need for entertainment in these languages. The IRS figures have been synchronized with STD calling patterns on Airtel network and thus Karnataka Radio Mirchi Pune, Radio Mirchi Hyderabad and Radio Mirchi Chennai are put up for offering for Karnataka Airtel subscribers. Similarly, Big FM has partnered with VAS provider OnMobile Global to launch the radio experience on its mobile platform called BIG Mobile Radio.

Indian scenario - leveraging existing cable TV networks
As discussed in the previous chapter, better access of broadband infrastructure in the country is needed to provide converged offerings such as triple play. The number of broadband connections in the country is approximately 10.08 million. With the continued growth in the mobility market, the relative focus on fixed line investments has been limited. In this scenario, significant progress can be made in increasing the quantum of broadband connections by focusing on the relatively large cable television market (CATV) in India. In India, the cable homes are currently numbered at 83 million as on 20092. Multi System Operators (MSO) like Hathway Cable and Datacom Ltd use DOCSIS standard and control about a fifth of their subscriptions’ last miles – with the rest controlled via franchise deals with independent local cable operators (LCOs). Though, the MSOs are steadily upgrading their directly owned networks to offer cable-modem services, still the services could be made available to only 20-25 percent of cable TV homes in the near term. However, this still equates to a potential cable-modem market of about 15 million homes – which would give the MSOs a sizeable market for converged services with relatively lesser investment.

1 Press Reports 2 KPMG Analysis

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Convergence network requirements
Typically to provide such converged services of voice and data on the same network, it would require transition from separate circuit-switched voice networks and packetswitched data networks, to a single packet-switched network, supporting both voice and data protocols. The use of multiple communication modes in a single network offers convenience and flexibility which is not possible with separate infrastructures. Packet switching has always excelled at handling messages of different lengths, as well as different priorities whilst providing required quality of service (QoS) attributes. However, packet switching was designed for data. Today, using the IP protocol, packet networks are becoming the norm for voice as well as video. IP-based packet switching is expected to be the next generation transport for converged traffic, including voice and video. For voice conversations especially, analog and digitalbased circuit switching waste as much as 75 percent of the bandwidth due to one person listening and pauses in speech. Towards incorporating the requirements of converged services, Next Generation Networks (NGN) have been defined by ITU as a packet-based network that can provide services including Telecommunication Services and able to make use of multiple broadband, Quality of Service-enabled transport technologies and in which service-related functions are independent from underlying transport-related technologies. It offers unrestricted access by users to different service providers. In the cable access network, NGN convergence implies migration of constant bit rate voice to CableLabs PacketCable standards that provide VoIP and SIP services. Both services ride over DOCSIS (as explained in the previous section) as the cable data layer standard.

Regulatory challenges
Some of the potential regulatory issues facing converged services are: • Single Regulator - Establishment of a single Regulatory authority to oversee converged services spanning Telecom, Broadcasting, Media and IT Advertising: Targeted advertising and Next generation business models for advertising Time shifted TV: Legal framework to support content storage, redistribution and super-distribution (for example, access from multiple devices) Privacy: Protect privacy of user content (with consideration for lawful intercept) Piracy: Provide a framework for detection and prosecution.

• •

• •

It is amply clear that the market and customers are moving towards a converged scenario which necessitates requisite changes in regulatory oversight framework. The need for a converged regulatory framework is highlighted by the following illustrations. For example, Voice over Internet Protocol (VoIP), in some countries is considered as a data services and regulatory frameworks are built around that whereas in some, it is considered a basic voice service. However, arguably, neither category is completely satisfactory because VoIP has elements of both. Regulators have had to interpret VoIP to fit within one of these categories, or create a different category specific for VoIP . In Australia, telecom industry representatives under the NGN Future Operations Group have discussed and analyzed issues relating to NGN implementation such as VOIP and submitted , a policy report on regulatory considerations for new and emerging regulatory frameworks for converged services.

Conclusion
While, India is one of the most compelling telecom markets in the world, better telecom infrastructure is needed towards achieving the wide availability of converged services in the country. In this chapter, we reviewed the successful rollout of converged services in Europe, utilizing a wide range of infrastructure such as DSL and fibre, as well as upgrading infrastructure such as analogue cable networks. In India too, true convergence would require significant upgrade of existing infrastructure and deployment of affordable wired and wireless broadband, including already available infrastructure such as cable networks with optimum policy and regulatory oversight and interventions.

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Value added services in India
The importance of VAS as a part of the telecom ecosystem may by measured from the trend that the largest global device manufacturers have tweaked their business models to address the diverse and growing need for a variety of content. In India, elements of this trend manifested in ways such as in-sourcing of VAS by operators not just to drive EBITDA, but also to differentiate themselves as a service provider of choice. As the mobile subscriber base has grown by over 50 percent over last year, the growth opportunity for the VAS industry in India has remained relatively intact in 2010. This aggressive increase in the subscriber base is one of the significant reasons that helped maintain the momentum in mobile VAS revenues. This year also saw a strong interest in 3G and BWA auctions by both domestic and global investors, raising hopes for an increase in demand of data and content based services. Even so, VAS operators in particular have faced the growing challenge of reducing revenue shares as a direct fall out of pressure wielded by telecom operators. The entry of a number of new 2G telecom license holders in 2008 and 2009 took tariff wars to a whole new level, with MNOs frantically trying to garner customer base through nation wide advertising campaigns of potentially attractive plans and freebees. In addition, a variety of other factors have become critical for VAS service providers to become successful, key among which include innovation, scale, value chain supremacy, insight into the evolving VAS user base and creating real pull factors. In a post convergence paradigm, the value chain at an industry level may need to transcend towards content, broadcast mediums and distribution platforms. In addition to the above success factors, in the long run, VAS service providers may need to evaluate their strategy in terms of higher focus either on platform or on content, in order to remain sustainable and ahead of the competition.

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Illustrative: Platform agnostic value chain

The Mobile VAS business is more B2B in nature, thus a significant share of revenue is retained by telecom Operators (55-75% of revenue). On the other hand, purchase of application / content through platforms such as internet or device tends to be more B2C in nature, thus the VAS provider is able to garner a greater share of revenue (9095% of revenue). In a platform agnostic scenario, mobile

VAS businesses would focus on developing and aggregating content which can be streamed across a multiplicity of platforms. These businesses would also undertake requisite technology platform development so as to be able to deploy the content. In order for VAS companies to create relevance, the mobile would need to become one of the numerous channels on which they have the capability of streaming content

Illustrative: Content agnostic value chain

Presently, Most VAS players focus on a niche set of technology or content to provide services to MNO’s. For instance few players are focusing on services based around music and entertainment content, while others may be focusing on m- advertising or enterprise VAS etc.

A content agnostic value chain is a resemblance of what some industry protagonists have termed a “managed services model” Such a scenario is relevant if companies in the VAS . space intend to continue to restrict themselves to the mobile delivery platform. Under this circumstance, businesses may need to become proficient in delivering all forms of content under each VAS mode of delivery i.e. whether it be Music delivered through IVR or SMS or Games and Data delivered via GPRS or 3G or BWA, each facet must fall under the same umbrella thereby making VAS players a one-stop-shop for MNOs.

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Market size and growth
The overall non voice services revenue has grown over the last year primarily fueled by increase in subscriber base and a greater share of non voice services in the overall telecom revenues. While the subscribed base has increased significantly over the last one year, a significant portion of new subscribers are from semi-urban / rural areas with relatively lower ARPUs. In addition, the growth in overall non voice services has been offset by decline in revenue shares for non SMS based VAS providers. Despite of lower ARPUs and lower revenue shares, the share of Non SMS VAS of the overall telecom revenues has continued to remain stable at around 50 percent. Thus the addressable market for Mobile VAS players remained relatively stable at around INR 16 billion between 2009 and 2010.

Non voice revenues as % of telecom revenues

Non voice revenues break-up

Source: “Indian Telecoms – Positives Priced in, tougher road ahead” JP Morgan Research, 16, August 2010 ,

In the wake of continued tariff pressures and falling margins, revenue shares of VAS service providers have continued to

decline. The industry as a whole may have gained impetus, however the addressable market for Mobile VAS players came under pressure.

Comparison of average revenue per minute

Mobile tariff’s across incumbents have declined significantly over the last couple of years as a result of price wars thus putting pressure on revenues and profitability

Source: “India Wireless Sector” Macquarie Equities Research, 17 May 2010 ,

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Revenue share of mobile VAS players

Revenue shares for Mobile VAS players have also continued to decline as a result of pressure on MNO’s

Source: “OnMobile – Market leader now spreading its wings abroad” Deutsche Bank , – Global Markets Research , 26 Feb 2009 “OnMobile Global” IIFL, 4 Aug 2010 ,

Although relatively stable, the non-SMS VAS market in India continues to be dominated by Music – Ring-tones (RT) and Caller Ring Back Tones (CRBT). Together, RT and CRBT continue to account for over 40 per cent of non-SMS VAS.
Source: “OnMobile Global” IIFL, 4 Aug 2010 ,

Growth drivers
A number of factors are expected to provide a fillip to the sector in the coming months, some of which include: • Buoyancy in subscriber additions • Importance of m-commerce and m-advertising • Service innovation driven by consumer preferences.

World over, consumers are beginning to transition towards using their mobile devices for retail purposes i.e. m-commerce. KPMG’s global Consumers and Convergence 2010 survey noted that the percentage of consumers surveyed that say they used an online retailer’s site from their mobile phone jumped 18 percentage points, from 10 percent in 2008 to 28 percent in 2010. The Asia Pacific region emerged a leader, with 41 per cent of the surveyed population saying they had used their mobiles to buy a product/service. Another key finding of the survey was that age plays a significant role in outlining the success of m-commerce, younger consumers in all parts of the globe readily engage with retailers through their mobile phones. Given the growing penetration of mobile devices, there is a significant opportunity for businesses to use this medium as a mode to increase awareness around their brand and product portfolio. It has also been noted that consumers in BRIC economies are far more amenable to getting mobile ads in exchange for a wide range of cheaper or free mobile content or services1. These trends may perhaps auger significant service innovation thereby enabling players to address the market opportunity.

Subscriber additions
India continues to remain one of the fastest growing mobile markets globally. Subscriber additions have followed an exponential trend over the last five quarters and recently the subscriber base has crossed the 650 million mark. As the enduser base for Mobile VAS companies continues to expand, the addressable population and thus product penetrations may benefit.
Source: Press Release, TRAI , September 2010

Service innovation driven by consumer preferences
One of the biggest challenges being faced by the industry today revolves around understanding customer preferences in terms of the type of VAS they would be most likely to consume. Presently, the telecom operators lack the information on customer preferences. This coupled with poor understanding of customer preferences leads to generic VAS products instead of targeted products for different customer groups. Certain independent research bodies have put significant effort to assess the same; however, significantly greater research is required so as to generate a greater customer pull for VAS.

Importance of m-commerce and m-advertising
Mobile commerce, outside of mobile banking transactions, and mobile advertising continue to represent growth opportunities in the Indian market. If global experiences are anything to go by, then India does possess the necessary characteristics for these services to succeed.

1 KPMG Consumers and Convergence IV 2010 - global survey findings

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Agents of change
The larger challenge lies in identifying the players in the value chain who would deal with this particular issue. It would be fair to assume that in a walled-garden MNO led VAS scenario a certain degree of this research may be commissioned by them. However, given the tariff war and a race to add incremental subscribers MNO’s may rather initiate marketing spend in garnering additional subscribers as against trying to understand what type of VAS will sell. For the VAS industry to develop targeted products for end user there is a need for partnering between MNOs and MVAS providers to conduct research/ maintain database on consumer preferences for gaining an insight on the customers preferences. Given the above, the onus of creating relevance from a customer perspective lies with the aggregator/developer and technology enabler community in the value chain. These businesses may need to set-up innovation cells and invest in adequate customer research so as to produce products and services which can create stickiness of the customer for the MNO’s. In such a scenario not only could revenue shares improve, MNO’s may also be willing to put more advertising dollars behind relevant services. A constant need to sustain and grow business in this space is forcing VAS service providers to think innovatively to stay ahead of the curve. These strategies are interesting because they are seemingly aimed at de-risking the fundamental business issues. Some incumbents have set-up their own developer networks whereby they provide the seed capital for niche product centric businesses thereby allowing them to grow and eventually leverage the incumbent’s operator relationships to make products/services successful. Although nascent from an India perspective, this business model shift does auger well for the creation of intellectual property that may bring in the necessary balance in the revenue sharing regime. A number of incumbents have also started to explore geographies outside India as an avenue for growth. In this respect, Africa and the Middle East are among the geographies that are being examined closely by Indian business houses. As their platforms have matured in India, VAS service providers may reap benefits by deploying them in other markets as well. Targeting the Indian diaspora with local content is another strategy that these players are examining to achieve an immediate footprint in the new geographies.

Non voice revenue mixes of Indian operators remain low in comparison with global peer. Thus new geographies may provide a larger addressable market for MVAS providers.

Source: “Indian Telecom Services” Motilal Oswal, April 2010 ,

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Service led innovation strategies
Globally, consumers are increasingly turning to their mobile devices for a number of activities and perhaps this trend shall be repeated in one of the world’s largest markets especially with the advent of 3G and BWA. Usage of mobile devices Activity Chatting or instant messaging Talking (e.g. Skype) Accessing maps/Directions Reading a book Playing games Accessing news and information Social networking E-mailing Banking/personal finance Browsing the web Watching TV/Movies/ Video’s Shopping 2007 6% 6% 1% 3% 7% 1% 2008 5% 4% 7% 2% 1% 2% 5% 2% 2010 29% 29% 23% 21% 17% 13% 11% 10% 8% 6% 5% 5%

Impact of 3G
With 3G mobile services expected to make their presence felt in India, the mobile data service market is set to grow. 3G is expected to enrich media experience, such as; enable video calls and high-speed data transfer, potentially giving birth to a whole new set of revenue streams. On the other hand, MOU’s in India currently stand at an average of about 385 minutes per subscriber per month2. Incumbents however, operate at MOUs of over 400 minutes per subscriber per month3. Taking into account that a typical cell site at full capacity may support up to 350 minutes per subscriber per month (working on the industry average of 1,150 subscribers per site), this strain on the networks may directly result in poor Quality of Service (QoS). Therefore whilst, Video on demand and other live streaming services may gain prominence amongst the high ARPU customers, enhanced bandwidth may also simply lead to increased usage of existing mobile VAS services and a consequent augmentation of voice capacity.

Source: KPMG Consumers and Convergence IV 2010

Some of the aforesaid trends have already started to play out in India as well – social networking and the increased bundling of applications on mobile phones is becoming more and more “standard” The advent of instant messaging services . by handset manufacturers especially in smart phones segment is revolutionizing the types of VAS that individuals are consuming. Rollout of 3G and BWA based services in India may also witness the increase in VAS services such as video streaming as well as increased usage of GPS based applications.

2 “Quarterly Performance Indicator”TRAI, 13 Oct 2010 , 3 “ India Wireless Sector, Macquarie Equities Research, 17 May 2010

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Connecting rural India
As one of the world’s fastest growing economies, India has been growing at a consistently high rate over the past decade. Inspite of the rapid industrialization and aggressively growing services industry, 70 percent of the population still lives in rural areas, spanning 590,000 villages, and is predominantly dependent on agriculture for survival1. Further, rural India contributes close to 45 percent of India’s total GDP2. Thus the significance of development of rural India cannot be underestimated in the pursuit of the achievement of socio-economic growth targets for India. This necessitates increased government focus to enhance rural development. In the union budget for 2010-11, the government allotted close to INR 401 billion for the Mahatma Gandhi National Rural Employment Guarantee Scheme. The government also set aside INR 480 billion to enhance rural infrastructure under the Bharat Nirman Program. Another INR 100 billion was set aside under the Indira Awas Yojana to create rural employment. In terms of telecom connectivity, the urban teledensity across all metros has crossed 100 percent3 and the market for voice services is tending towards saturation. However, the rural teledensity is still below 30 percent4 and the rural market is expected to drive the next round of aggressive growth. The government has set a target for 40 percent teledensity by May 2014 for this market5. This rural teledensity target seems achievable but a lot more needs to be done to reduce the widening urban-rural telecom divide. A number of initiatives have been undertaken by the government to improve the telecom penetration in rural India. Government’s Bharat Nirman programme is aimed at intensifying rural infrastructure development. The subsidy support for mobile towers in the rural areas through the Universal Service Obligation Fund (USOF) is another example of the Indian government’s commitment to rural telecom.

1 2 3 4 5

‘India Telecoms - Positives priced in, tougher road ahead’, JP Morgan, August 16, 2010 ‘India Market Strategy’, Credit Suisse, June 17 2009 , ‘Monthly Telecom Scenario – August 2010’, DoT October 2010 , ‘The Indian Telecom Services Performance Indicators’, TRAI, April - June 2010 ‘ nnual Report 2009 – 10’, DoT A

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Rural vs. Urban Population

Rural vs. Urban (Private Consumption)

Source: ‘The Indian Telecom Services Performance Indicators’, TRAI, April – June 2010, KPMG Analysis, ‘India Telecoms - Positives priced in, tougher road ahead’, JP Morgan, August 16, 2010

Rural - urban telecom divide
The Indian telecom sector has seen aggressive growth over the past decade. The urban market in India is tending towards saturation in terms of voice based services. The operators have been constantly reducing tariffs to enhance penetration which has resulted in multiple connections being held by a single customer to take advantage of the various innovative pricing schemes offered by operators. Presently, the operators are awaiting the launch of 3G and WiMAX to ensure sustainable growth in the urban markets through data services. The rural market too, has shown tremendous growth over the past decade with rural teledensity going up from 1.21 percent in March 2002 to 27 percent as on August 31, 20106. .76 Despite this growth, the rural market still remains largely under-penetrated7. According to TRAI, 91 percent of the villages in India are covered by at least one operator. Overall, 51 percent of the villages in India are covered by three operators and 31 percent of the villages are covered by four operators8.

Rural vs Urban Market – Key Indicators (As of August, 2010) Total population Urban population Rural population Total subscribers Urban subscribers Rural subscribers Total teledensity Urban teledensity Rural teledensity Rural subscribers Rural wireline Rural wireless 4.35% 95.95% 30.00% 70.00% 67 .70% 32.30% 1,183.39 millions 355.02 millions 828.38 millions 706.37 millions 476.17 millions 230.20 millions 59.63 percent 134.08 percent 27 percent .76 230.20 millions 10.01 millions 220.19 millions

Source: TRAI, DoT, Monthly Telecom Scenario – August 2010

Rural vs Urban teledensity

Source: Monthly Telecom Scenario – August 2010’, DoT, October 2010

6 ‘Monthly Telecom Scenario – August 2010’, DoT October 2010 , 7 ‘ nnual Report 2009 – 10’, DoT A 8 ‘India Telecoms - Positives priced in, tougher road ahead’, JP Morgan, August 16, 2010 © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Key challenges in rural penetration
In spite of the rural market being a key growth segment for the telecom industry, there are several challenges that operators need to overcome to leverage the potential of this segment.

Lack of distribution network
India is the seventh largest nation in the world9 and has a population base which is large enough to be spread across the entire expanse. Considering that 70 percent of India still lives in rural areas10, which may not be as well connected as the metros and tier-1 cities, there is a critical requirement for a well designed distribution network to penetrate into the market segment which holds the maximum potential in the future. Currently, the lack of infrastructure and delays in regulatory approvals has been the key reasons for the sluggish growth of this network. However, the government has been concentrating efforts for rural upliftment and is making considerable contributions from the union budget every year for the same.

Inadequate telecom infrastructure
One reason for the relatively low rural penetration has been the lack of telecom infrastructure in these areas. Operators have to incur higher costs to set up infrastructure which tends to decrease the financial attractiveness of this segment. Setting up the infrastructure requires acquisition of land, which is a slow process as most of the land is owned by the government or gram panchayats. There is also difficulty in laying down the fibre cable network due to ‘right of way’ issues. Further, lack of amenities such as water and electricity tends to increase the cost of maintenance for the tower sites in these areas. Having a battery backup to overcome the problem of power shortage further increases the cost of providing the connection per user, which at times may not feasible in terms of the revenue generated per user. Lack of availability of skilled labor is an additional challenge in supervising these sites effectively.

Wide variation in population density
The population density across India is extremely speckled, making it less viable for the telcos to setup infrastructure across the sparsely populated areas. The return on the infrastructure might not be feasible in terms of the APRUs generated through the customers in these areas. The table below gives a snapshot of the population density across this country.

Lack of education and awareness
The uptake of data services is relatively slow in rural areas because of the illiteracy that prevails amongst the majority. The government and private sectors’ efforts will have maximum impact once the rural communities can understand and effectively use all the information available through their mobile phone. The literacy rate in India is relatively low; hence, it is important to develop applications which are easy to understand and operate by a local user based in a remote village of India. It is therefore, important to develop content in vernacular language and design the application software such that it is user-friendly and menu driven, with innovative graphics to overcome the limitations of illiteracy.

Population density across states in India Density Greater than 1,000 person per sq.km Greater than 500 person per sq.km Greater than 100 person per sq.km Less than 100 person per sq. km
Source: Census India Report 2001

No. of States 5 4 21 5

Lack of vernacular and customized content
India’s diversity in terms of culture and language creates a need for regional content in order to ensure penetration of telecom services among the masses. Most operators have already begun to cater to regional needs through caller ringback tones, devotional messages and other vernacular content. Operators are also looking to offer regional and national news, weather forecasts and market prices for crops in regional languages to help improve mobile uptake in rural areas.

Population density across villages India Village Density Between 1,000 - 2,000 Between 500 - 1,000 Between 0 - 500
Source: IMA India Report, 2006

No. of Villages 129,000 144,000 219,000

9 ‘Presentation by Ministry of Environment and Forests, India’, September 02, 2009 10 ‘India Telecoms - Positives priced in, tougher road ahead’, JP Morgan, August 16, 2010

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Sustained government efforts to enhance rural connectivity
The government has been making conscious efforts to connect rural India to the world at large. However, the limitations of low population density and difficult topographical and climatic conditions have been the key reasons for the slow penetration of telecom services. There are several other reasons which are adding to the scarcity of communications infrastructure in such areas; irregular supply of power, few fixed-line telephones and low income levels are some of the key factors. The advent of wireless technologies has made it possible to overcome a part of these difficulties. While launching wireless technologies in rural India, operators are required to focus on service availability, affordability, acceptability and awareness. Operators need to create and implement business models capable of driving profitable growth through a rural expansion strategy. While the voice connectivity is important, the real value addition will be in the form of tailored local solutions like applications and value added services made available in local language. Business models will therefore have to focus on providing various packages of voice/VAS-services that are user-friendly for the rural consumer. Mobile operators will have to focus on exploring options of satisfying the costconscious and value-conscious rural customers looking to reduce their call charges. Operators also need to develop innovative ways to provide post-sales support for rural customers. The government also setup the Universal Service Obligation Fund in April 2002, to allow people in the rural and remote areas to access telegraph services at affordable/reasonable prices. The ultimate intent is to offer basic telegraph services to all. The fund has already extended tremendous support towards the growth of telecommunication in India, as discussed later in the report. The Ministry of Commerce & Industry along with the Ministry of Communications & IT, has been instrumental in setting up the Telecom Equipment and Services Export Promotion Council, to aggressively promote the export of telecom equipment and services from India. The council will be involved with organizing seminars and facilitate the participation of India exporters in various overseas exhibitions. It also makes necessary recommendation to the government to make necessary changes in various policies and procedures for promotion of Exports and Services.

Rural telecom snapshot • • • Target of 80 million rural connections by 2010 was achieved in 2008 As on August 31, 2010, rural India accounted for 230.30 million fixed and WLL connections 5,70,000 uncovered VPTs (Village Public Telephone) were setup by June, 2010 covering 96 percent of the Indian villages More than 3 lakh PCOs have also been installed in rural areas 40,694 villages out of 40,705 villages having more than 2,000 population have been provided rural community phones Mobile Gramin Sanchar Sewak Scheme (GSS) – a mobile PCO service is also being provided at the doorstep for villagers. As of March 31, 2010, there were 2,772 GSSs covering 12,043 villages across the country Sanchar Dhabas (Internet Kiosks) have been provided in more than 3,500 block headquarters out of the total 6,337 existing blocks in the country Under the Bharat Nirman Programme, 61,186 villages have been covered out of the remaining 62,302 as on December 31, 2009 Infrastructure sharing scheme is required to set up 7 ,436 towers spread over 500 district across 27 states in India

• •

Source:‘India Telecom Sector Brochure’, DoT Website; ‘Annual Report 2009 – 10’, DoT

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Potential areas that can grow significantly through combined wireless and wireline based telecom connectivity in rural sector
Telecom and network connectivity have widely been seen as enablers of a nation’s socio-economic growth. Provision of mobile as well as broadband services is not only seen as a wealth enabler but also as a step towards creating a revolution in the field of education, heath and technology. The government looks forward to provide access to services and information which otherwise will be unavailable in rural areas.

Healthcare
80 percent of doctors, 75 percent of dispensaries and 60 percent of hospitals in India are situated in urban areas, whereas a large majority of India’s population still lives in villages. Mobile broadband services could be used to empower more than 50,000 Primary Health Centers and 6,000 Community Health Centers available in rural areas11. Telemedicine can possibly transform the Indian health care sector as India faces a scarcity of both hospitals and medical specialists. Mobile services are also playing phenomenal role in healthcare industry. It allows people to easily disseminate locally-generated and locally-relevant health information to rural masses. M-health is another promising area that allows organization to treat patients through mobile phones through online chat using mobile phones.

Successful broadband wireless projects • In a pilot project of The Byrraju Foundation, the wireless network created using smartBridges radios currently connects 12 villages. The Bhimavaram network potentially impacts 500,000 lives in 32 villages in the Bhimavaram district. The Ashwini Centers established in each village provide video-conferencing and Internet access for all the villagers IGNOU has started SMS service to send SMS alerts to students about various developments

Pilot projects for healthcare • In late 2007 as a part of Gramjyoti project, Ericsson , in partnership with Apollo hospitals provided ECG, blood pressure and heart beat measurements, teleconsultation and basic medical check ups, including live interactive check ups and reporting. A Real-Time Bio-surveillance Programme was piloted in the Sivaganga District of Tamil Nadu. The aim of the program is to use sophisticated analytical tools on data sent on mobile phones by village level nurses, there by harnessing mobile technology for disease reporting, surveillance and health strategy planning in Tamil Nadu

• •

Education
The importance of mobile medium in education is slowly but steadily being realized by players in the telecom industry, who are now developing the necessary applications to work towards mobile education (m-education or m-learning). Several operators have started offering m-education services such as English lessons, dial-in tutorials, school syllabi, question sets, vocabulary general knowledge tutorials, exam tips, exam result alerts and education for the physically challenged. These operators usually partner with VAS companies to develop the applications. Some such applications are m-Gurujee, English Seekho service and Learn English. Additionally, mobile broadband can help expand tertiary education especially among low and middle-income students. With increased 3G network coverage and decreasing cost of mobile broadband access, tele-education will likely see greater adoption both in rural and semi-urban areas. Video conferencing also allows the qualified teachers based in towns or cities to teach several classrooms simultaneously, thereby bringing quality higher education to the village level.

Financial services
India has one of the most expansive banking systems in the world. A combination of scheduled commercial banks, regional rural banks and specialized financial institutions cover a large section of society in India. Despite these focused efforts, only 31 percent or little over 20,000 of the total bank branches in India are in rural areas. Access to basic financial services remains elusive to millions of Indians in rural areas. In rural areas, a larger number of people subscribe to mobile services than banking services; thus mobile phones can be used as platform to provide a variety of services such as long distance remittances, micro payments and informal airtime bartering schemes. Mobile banking will likely also help in bringing down costs for other channels, such as microfinance, since utilizing mobile phone technology significantly lowers transaction costs while expanding outreach to rural areas.

11 ‘Telemedicine takes world-class healthcare to rural India’, ZDNetAsia, June 2008 © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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However, while mobile phone banking has the potential to extend financial services through virtual accounts to millions of poor people globally, there are a also number of challenges and risks involved in universal adoption such as reasonable affordability of GPRS based internet cost, IT and other security risks such as Trojans and viruses, lack of support for all handsets, regulatory restrictions on limits on transactions and lack of mass adoption. The success of rural mobile banking initiatives in other countries also bodes well for India’s aspirations to make it a success in the country’s rural areas. M-Pesa and G-Cash are two universally known mobile banking initiatives undertaken in Kenya and Philippines respectively. These initiatives helped counter the infrastructure, banking and technology constraints in these nations, due to which large sections of the country had remained ‘unbanked’.

Agriculture
Deficits in physical infrastructure, problems with availability of agricultural inputs and poor access to agriculture-related information are the major constraints in the growth of agricultural sector in India. As mobile penetration continues to increase among rural India, rapid growth of mobile telephony and the recent introduction of mobile enabled information services provide a means to overcome existing information asymmetry. It also helps, to bridge the gap between the availability and delivery of agricultural inputs and agriculture infrastructure. Mobile services could help farmers to access real-time information on crop choice, seed variety, weather, plant protection, cultivation best practices, market information such as market prices, demand and logistics. It helps to provide consistent and reliable information as compared to other information sources such as TV, radio and newspapers. Mobile broadband will further help to widen markets, create better information flows, lower transaction costs and substitute for costly physical transport. It would help rural regions to integrate with other parts of the country in numerous ways. Mobile broadband can also facilitate in increasing the penetration of rural internet kiosks based services such as ITC’s e-choupal, which are currently available over limited geography mainly due to lack of wireline infrastructure.

Mobile applications for rural India • A USA-based mobile-payment service provider, has entered into an alliance with Bangladesh based Grameen Solutions, a subsidiary of the Grameen Bank to deliver mobile banking services to the economically marginalized people in Bangladesh and India. The project aims at providing affordable financial services like cross border remittances, credit and savings accounts and money transfer to the poor people. One of the leading service providers has partnered with Indian Farmers’ Fertilizer Cooperative Limited (IFFCO) to set up IFFCO Kisan Sanchar Limited in Rajasthan. In this initiative, the cooperative department will provide mobile handsets to farmers at marginal price through its outlets in the rural areas. These handsets would be loaded with green SIM cards, which will flash daily updates on agricultural practices and weather forecast free of cost. New Delhi-based Ekgaon Technologies too has developed a system for tracking transactions made by self-help groups. It has partnered with the likes of CARE, WorldVision and the World Bank to conduct a pilot, which it plans to extend to 14 Indian states.

Successful Rural Projects

As per research done by ICRIER, ITC’s echoupal led to productivity gains between 10–40 percent primarily due to adoption of hybrid seed varieties and new farming practices by farmers. In addition, by providing the farmers access to information about prices not only in their local mandi but across the region, the echoupal saves the farmer approximately INR 250270 per ton through reduction in transportation, baggage and commission costs. mKRISHI, an initiative that provides personalized information and expert advice to rural farmers by answering unique queries that farmers face and also provides up to date weather and pricing information through text-messaging on cell phones.

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Government services
Mobile technology can help drastically improve the access to government services in developing countries. According to an estimate provided by Department of Information Technology, Government of India, approximately 50 to 60 percent of government services in India can be delivered through mobile channels. 12Launch of mobile broadband will allow citizens to access government services virtually in any place covered by high speed mobile network. By leveraging connectivity, the government can process Government to Citizen (G2C) transactions such as the filing of tax returns, death and birth registration, land records, as well as receive feedback helping enhance the level of Governance.

Successful Rural Projects • In July, 2008, HDFC bank setup a BPO centre at Tirupati in Andhra Pradesh through its subsidiary Atlas Documentary Facilitators. The centre employs 550 people who are entrusted the task of data capturing and indexing of customer details. This same job was being handled by more than 1,000 people in Chennai and Mumbai. The Tata group company, Tata Chemicals, has also setup two BPOs at Mithapur in Gujarat and Babrala in Uttar Pradesh. The centre in Babrala functions as a back office logistic support for Tata Indicom customers in Uttar Pradesh.

Media/Entertainment
Broadband wireless access (BWA), using technologies like WiMAX/LTE, provides high-speed internet access, IP telephony, TV services and other voice and data multimedia services in regions where there is no suitable wireline alternative. The high speed broadband access will enable value added services tailored to local rural needs and requirements. The characteristics and orientation of Indian rural populace towards consuming print, audio and visual communication is regional and localized in nature. For the vernacular industry to take-off, there is a need for digital content that is designed to serve daily and important informational needs of rural population in their own language. Research and development efforts are also needed to provide predictive translation initiatives such as context-specific literal translation as well as advanced solutions such as Optical Character Recognition (OCR) and Text-to-Speech. Content, application and infrastructure would determine how easily vernacular content would penetrate the masses. Infrastructure comprises access points, such as kiosks, public access, mobile phones and enabling devices such as keyboards and peripheral devices. To ensure an end-to-end local language delivery, applications as well as content also need to be provisioned in localized language.

Employment
The Business Process Outsourcing (BPO) creates employment by allowing rural citizens to participate in the economic growth brought by outsourcing of manufacturing and back-office functions to low cost regions which is currently driving the economy of India. Availability of reliable, quality and cheap telecom connectivity is an essential requirement for setting up BPO operations in rural India.

12 ‘m-Government: The New Frontier in Public Service Delivery’, World Bank, 2007

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Telecom manufacturing
The year 2009 was a tough year for telecom equipment manufacturers globally, with the infrastructure and handset segment registering a decline of 3.6 percent and 9.9 percent, respectively1. India too, has witnessed slower growth in telecommunication equipment, especially compared to the aggressive subscriber growth that has been observed during the previous year. While the equipment market’s growth stood at 20 percent in 2008, it declined to 18.6 percent during 2009. However, compared to global peers, this was still a positive reflection on the sector considering the impact of global recession as well as the loss of incremental growth due to delay in the roll out of 3G services2. Over the past year India has shown tremendous growth in terms of subscriber numbers. This aggressive growth has laid the path for development of the telecommunication equipment industry in India as well3. Several home-grown handset manufacturers have begun to take control of the market and these incumbents have been playing a crucial role in promoting the use of mobile VAS among people in lower income groups. These players at this point in time control close to 14 percent2 of the handset market. The numbers suggest that the home grown manufacturers have registered explosive growth during the past year4. The recently concluded 3G auctions are likely to further enhance the role of mobile VAS to compliment the growth of the handset market in India. Many multinational corporations have already or are in the process of setting up a manufacturing facility in India. The success of the 3G auctions may also encourage international as well as domestic players to start manufacturing 3G mobile communications infrastructure within the country as well. The government has also made tremendous efforts to establish India as the hub for telecom manufacturing through incentives as well as supporting R&D efforts through low cost labor.

1 ‘World Telecom Equipment Market and expected USD 370 billion in 2013’, Cellular News, June 30, 2010 2 ‘India’s telecom equipment industry grew 18.6% last fiscal’, The Economic Times, June 10, 2010 3 TRAI Subscriber Numbers, KPMG Analysis 4 ‘India: the next mobile manufacturing hub’, Telecom Yatra, July 20, 2010

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Key milestones
The foundations of developing the telecom equipment manufacturing industry in India were laid in 1999. • 1999: Opening up the industry to private sector participation • 2005: FDI ceiling across telecom services was raised from the existing 49 percent to 74 percent The Union Ministry of Communications and Information Technology initiated the process to promote India as a viable option for setting up manufacturing units. This was strongly supported by its fast growing telecom market, its talent pool and the success of the Business Process Outsourcing (BPO) industry.

Along with this growth there is growing emphasis on export of telecom equipment from India as well. With multinationals setting up base in India, India is emerging as a manufacturing hub which aims at enhancing its telecom exports each year. In 2006-07 India exported equipment worth INR 18.98 billion , and as of 2009-10 this number has gone up to INR 135 billion; a growth of almost 600 percent5. These numbers clearly highlight the significant growth potential of this sector. Considering the aggressive growth of telecom subscribers in India, the pace of growth for the telecom manufacturing is expected to further accelerate over the next three years. As per DoT estimates it is said telecom equipment worth INR 3,500,000 million – 5,000,000 million will be required by 2015.

Telecom equipment production

• 2006: Policy reforms and government initiatives such as 100 percent Foreign Direct Investment (FDI) in the sector through the automatic route • 2008: Allowing service providers to share active infrastructure • 2010: The Union Budget decided to eliminate the Special Additional Duty of Customs (SAD) of four percent on parts imported for manufacturing mobile handsets from July 06, 2010 to March 31, 2011 The Budget also implemented a tax concession for mobile accessory manufacturing in India. The twenty four percent import duty on components/raw material imported for manufacture of batteries, chargers and other part and accessories was also removed.
Source: TEPC

-

These positive and proactive decisions by the government have set the momentum for the growth of the telecom manufacturing in India. The government has also setup Telecom Export Promotion Council (TEPC) for promoting the export of telecom equipment and Telecom Centre of Excellence, through public private partnership mode for promoting innovation and research in telecom. In the past greater emphasis was being laid upon import of telecom equipment. However, lately the trend has been initiated to build in-house expertise for indigenous growth within the telecom manufacturing sector. In 2002-03, India produced telecom equipment worth INR 144 billion. This number has swelled up to INR 520 billion as of 2009-10. This implies a growth of 260 percent5.

Telecom equipment exports

Source: TEPC

5 TEPC

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India – progression towards global manufacturing hub
India is fast emerging as a hub for global telecom manufacturing. The production and exports of telecom equipment have been on a steady rise in the last few years. As per industry estimates, India is expected to gain a third spot by capturing 8.5 percent of Asia-Pacific’s telecom equipment production revenue of INR 12,465 billion by 2014 as compared to that of 5.7 percent share of INR 8100 billion in 20096. India is likely to be the fastest growing telecom equipment production market in this region over the next five years. This is evident from: • A large and booming domestic telecom equipment market of over INR 450 billion with Indian operators reaching out to the global market providing wider access to Indian telecom companies7 • Anticipated investment of INR 450 billion in telecom infrastructure is needed every year to cater to fast growing telecom subscriber base • High skills and strong management experience in critical functions such as supply chain management, high tech manufacturing systems, operational management, value chain with EMS companies, captive facilities of MNCs (Continuously investing in India), auxiliary component manufacturing base (e.g., for cables, cabinets, shelves, power electronics, tooling, bare PCBs, etc.) • Strong talent base of highly experienced technical and R&D experts from various multi-national companies in India as well as abroad. Large IT service companies doing telecom projects, strong academic and research labs • Skilled and trained shop floor workforce for electronics circuit assembly, testing and integration from Industrial Training Institutes and Polytechnics • Capability to move up the value chain by offering design capabilities and not merely low cost facilities • Cost arbitrage arising from competitive labor costs and lower cost of establishing a manufacturing plant in India • Easy availability of capital from a well established financing industry as well as private equity network. The Telecom Equipment and Services Export Promotion Council (TEPC) have set the following milestones to achieve by the year 20148. • Exports to grow at 25 percent CAGR to reach over INR 450 Billion • Domestic telecom products to grow at 18 percent CAGR • Employment generation (direct and in-direct) of more than 20 million
6 IBEF Telecommunications Report, July 2010 , 7 TRAI, Presentation - 2010 8 TEPC, Policy recommendation to increase domestic telecom growth in exports of telecom equipment and services

• Meeting at least 70 percent of Indian domestic telecom demand from Indian manufactured products • At least a few IPR-driven, billion dollar Indian product companies. Indian government has been taking initiatives and doing timely policy changes to ensure the achievement of the above ambitious targets. The long term goal of the government is not only to become a global telecom manufacturing hub but also focus on the inclusive growth for the country by focusing on areas like employment generation. In order to attract more investment in the country, Indian government has recently announced the exemption of basic duty, countervailing duty (CVD) and special additional duty (SAD) of about 24 per cent on components/raw material imported for manufacture of batteries, chargers and other part and accessories in budget 2010-119.

Friendly government policies – case study
Indian government has been taking various initiatives to transform India as a global manufacturing hub. A case-in-point is Sriperumbudur in Tamil Nadu. It is India’s leading initiative to become a global telecom manufacturing hub. Due to the government’s progressive policy, Sriperumbudur is reported to be today producing more mobile phones than Shenzhen in southern China. This is not a small achievement, considering Shenzhen makes one out of eight handsets sold anywhere in the world. The government is promoting SEZ units in Sriperumbudur which need to be supported with suitable tax breaks, worldclass public infrastructure such as expressways, railway links and an airport, and private amenities, including hotels, apartments, shopping malls and entertainment sites. After the tax breaks announced on the mobile accessories in budget 2010-11, both Indian and international component manufacturers have begun work in Sriperumbudur to make parts and components for the cell phone industry. Approximately 20,000 people are estimated to be working in the area10. Globally, it has been proved that SEZ model has supported manufacturing industry. The governments have encouraged a strong R&D infrastructure to facilitate the growth in this sector. They have introduced special fiscal measures, tax breaks and incentives such as subsidies, easy credit, and use of bilateral trade to attract foreign investment and provide boost to the domestic manufacturing industry.

9 Voice & Data, “Finally, TRAI pushes telecom manufacturing” February 27 2010 , , 10 TEMA press release, “Telecom Equipment Production to Cross Rs. 50,000 Crores in 2008-2009” November 20, 2008 ,

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Indian government has also been promoting its export sector by establishing special economic zones (SEZs), which led exports grow by 33 percent in 2008-2009 as compared to just 4 percent elsewhere in India. Thus, in recent times SEZs has been one of the primary drivers for India’s increasing manufacturing capability11. Indian government has been facilitating more and more telecom specific SEZs to promote India as a hub for telecom manufacturing. Moreover, it has also allowed 100 percent FDI in manufacturing sector under automatic route. This has resulted in foreign players investing more than INR 450 billion as FDI in Indian telecom sector in last 10 years. Going forward, looking at the large geographical diversity and spread of India, India may adopt the phased and planned expansion strategy. Private SEZs in strategic locations will foster an enabling environment for global and domestic manufacturing majors to set up plants. High quality infrastructure at SEZs will further provide the necessary push which the telecom equipment manufacturing majors require.

• In 2005, Elcoteq had started manufacturing facility in Bangalore. It is one of Elcoteq’s three volume manufacturing plants in the Asia-Pacific region and the first one in India • In 1994, Ericsson India established a manufacturing unit at Kukas, Jaipur (Rajasthan), producing AXE Digital Switching System, EDGE Based GSM Radio Base Station • Many other major companies such as Foxconn, Aspcom, Solectron, etc. have decided to set up their manufacturing bases in India

Advantage India – emerging as a manufacturing hub
India has seen a tremendous growth in the last two decades. Though, it has witnessed faster growth in urban areas, as compared to rural areas. Thus, in order to attain inclusive and balanced growth across the country, the Indian government had adopted a theme of ‘faster and more inclusive growth’ in its eleventh five year plan that runs from 2007-2012. Inclusive growth is understood by different people in different ways. For growth to be inclusive it should involve key attributes such as: • Creating new and varied opportunities to earn a livelihood • Provide ways to enhance capabilities to exploit varied opportunities • Providing security against a permanent loss of livelihood Telecom manufacturing is one such industry that could contribute in providing this inclusive growth that India is looking for. Manufacturing units in rural area would help provide employment and income generation opportunities thereby aiding in reducing the dependence of people on agriculture. This would help rural people to access better education facilities for their children and in turn is likely to improve country’s literacy rates and employability. Better telecom connectivity and other innovative applications can play a vital role in extending health care services to the remotest part of the country. For instance, a hospital can employ telemedicine to assist doctors in rural areas as they analyze and treat patients. Apart from benefiting the rural areas, telecom manufacturing can also bring a lot of positives for the country as a whole. Employment generation – Telecom manufacturing industry will enable the ancillary and other related components industries to grow. Currently, telecom sector employs over 1 million directly and is estimated to employ another 4 million people indirectly.13

Telecom manufacturing in India11: some key milestones
• In October 2010, Huawei confirmed its plans to set up an INR 22,500 million state-of-the-art telecom equipment manufacturing facility near Chennai. It has invested approximately INR 6,750 million per year over the past decade. The company employs more than 6,000 people, while creating indirect employment for 20,000 additional people through its partner ecosystem12. • In 2010, Wynn Telecom plans to set-up a facility at Himachal Pradesh, that will churn out 1.2 million handsets every month • In 2008, Motorola started manufacturing facility at Sriperumbudur, Chennai. It manufactures products that includes GSM and CDMA mobile devices and networking equipment such as base stations and system controllers • In January 2006, Nokia had earlier started manufacturing facility near Chennai. It has increased employee base from 500 to more than 8000 today. This facility has reached a milestone of production volumes of 350 million handsets in April 2010. It exports to more than 70 countries now. The current production in this facility caters to the demand of both the domestic market as well as that of countries in the Middle East and Africa, Asia, Australia and New Zealand, besides North America and Europe • In 2005, LG has set up plant of manufacturing capacity for 20 million GSM mobile phones near Pune.

11 TRAI, Presentation - 2010 12 Press Release - The Economic Times, January 2010 13 TEPC, Policy recommendations to increase domestic telecom growth in exports of telecom equipment and services © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Large export potential – Apart from the strong domestic demand, telecom equipment industry offers a tremendous potential for increasing India’s exports. Indian players or MNCs based in India have exported telecom equipments to other countries at a CAGR of more than 22 percent over 2008 - 2011.14 Creation of Intellectual property (IP) – Heavy investment in R&D by players in telecom manufacturing sector creates the opportunity for Indian IP rights which can in turn lead to value additions and innovations in other related industries such as components and semi-conductors. Self-reliance in Strategic sectors – Increased capabilities in telecom manufacturing will help India to become a self reliant in strategic sectors such as defense and internal security, e-governance, education and research, and others.

Increased competitiveness – Growing Indian telecom manufacturing industry will not only make telecom services affordable in India but also make this industry competitive across the globe. This will in turn helps in bridging the rural urban divide and reduce the socio-economic barriers of the country. The competitive industry will also enable new related industries to emerge and provide employment

Conclusion
India’s telecom equipment production as well as its exports has been on the steady rise for the last few years. Various favorable policies and initiatives implemented by the Indian government over the last few years have gone a long way in promoting the country’s indigenous telecom manufacturing sector.

14 TEPC, Policy recommendations to increase domestic telecom growth in exports of telecom equipment and services; KPMG Analysis

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Telecom research & development
Government of India has set an agenda in terms of pre-eminence of India as a technology solutions provider. India has the potential of converting its strong R&D infrastructure into a global research, design and development platform.1 This includes R&D and installation of comprehensive security infrastructure for telecom networks. Moreover, as India gears up for access to next generation networks, R&D on advanced testing mechanisms is another focus area to ensure interoperability amongst these networks, related services and devices.2 Modern technology inductions are being promoted by the Government of India. Pilot projects on the existing and emerging technologies have been undertaken including WiMax, 3G and those having the potential to improve rural connectivity.

Telecom centres of excellence
To boost R&D infrastructure in the telecom sector and bridge the digital divide, cellular operators, top academic institutes and the Government of India together have set up the Telecom Centres of Excellence (COEs). The main objectives of the COEs include: secure information infrastructure that is vital for country’s security, reduce rural-urban digital divide to reach out to masses and management of National Information Infrastructure (NII) during disaster, amongst others. The seven COEs have been established in a Public Private Partnership (PPP) mode involving leading telecom companies and educational and research institutions across the nation. Associate institute IIT Kharagpur

S. No. 1

Sponsor Vodafone Essar

Areas of focus Next Generation Network (NGN) & Network Technology Telecom Technology & Management Information Security & Disaster Management of Infrastructure

2

IIT Delhi

Bharti Airtel

3

IISc Bangalore

Aircel

4

IIT Kanpur

BSNL

Technology Integration, Multimedia & Computational Mathematics

5 6

IIT Chennai IIT Mumbai IIM Ahmedabad

Reliance Communication Tata Teleservices Idea Cellular

Telecom Infrastructure & Energy Rural Applications Policy, Regulation, Governance, Customer care & Marketing

7

1 ‘India Vision 2020’, Planning Commission, Government of India, December 2002 2 ‘Indian Telecom Sector’, Department of Telecom (DoT) Targets, 2010

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Apart from application oriented research, the centres have been designed to assist and offer training to corporate managers for the management of networks and services as well as decision makers of telecommunication entities to manage sector reforms. Each centre has a focused area of excellence, thus the seven centres cover all aspects of telecom from technology to disaster management of telecom infrastructure to customer care and business model innovation. Projects currently on across the COEs include use of non-conventional sources of energy and energy efficient power conversion and devices for rural applications, promoting broadband wireless access, rural education and livelihood related applications, VAS such as mobile based video conferencing and development work on next generation networks. In addition, the TCOE at IIT Chennai has been accepted by ITU-R as an evaluator for International Mobile Telecommunication- Advance (IMT-A) proposal for 4G networks.

Indian IT companies have considerable number of engineers working in VLSI design and embedded systems as well. The focus of embedded system R&D has shifted from products to end-to-end solutions, associated services and applications. These companies have begun to solve key issues related to security in telecom equipments, energy efficiency, and convergence across devices, networks and services, and also the availability of VAS on mobile devices including handsets, tablets and net books.

Designed for India
The unparalleled growth of the Indian telecom market, innovative telecom business models, and challenging environmental conditions, make it ideal for innovation and a focus area for global telecom original equipment manufacturer R&D. The idea of ‘reverse innovation’ from India has started with vendors starting to believe that the knowledge gained from the Indian market is invaluable, and gives them a significant edge, improving their product offerings to global customers. Telecom vendors in India are able to increase scalability and add newer functionalities on existing platforms without the need to replace legacy equipments. This lowers the total cost for the solution, which makes them a valuable proposition to be deployed in other telecom markets. For example, products developed with the Indian market in mind are capable of expanding their capacity fourfold simply by swapping the platform’s line cards. In response to India’s harsh environmental and climatic conditions and the resulting local and international standards, vendors have begun applying anti-sulphur coating to cards deployed in India to protect them from chemicals in the country’s ambient polluted air. In addition, the chip packaging for critical components is upgraded to industrial-grade to sustain a wider range of temperature levels ranging from -5 C to 80 C degrees. Hence, the reliability and flexibility that these solutions bring will help increase a vendor’s success around the globe offering operators the same benefits of scale and adaptability dictated by the India market. Vendors working in India believe that their presence here and relationship with Indian companies will eventually benefit all of their customers globally. Multinationals are increasingly taking notice of India beyond just its talent pool and viewing it as a key development ground for their R&D efforts.

Contract R&D: Laying the foundation
There is a rising trend for contract R&D moving out of the headquarters of Telecom Equipment Manufacturers (TEMs). This is because of companies looking for more cost effective, faster and innovative models of product development, and to leverage the expertise available elsewhere, in order to achieve cheaper, faster and unique product differentiation. India has come out as a favorable R&D destination for many of such companies. The Economist Intelligence Unit3 (EIU) global survey in September 2004 has defined India as an R&D hotspot: a place where companies can tap into existing networks of scientific expertise; which has good links to academic research facilities; and provides an environment where innovation is supported and easy to commercialize. Moreover, India is a large country where English is spoken, wages are modest and western education is available. The availability of quality talent is bolstered by the presence of numerous higher educational technological institutes and a large network of government research labs. The best results for outsourced R&D have been most evident in the technology – VLSI and embedded systems. These outsourced R&D initiatives have enabled TEMs, its suppliers, and mobile device players to effectively target their global markets Within the technology sector, VLSI design or design of chips is an area where multinationals came to India a long time ago, and it remains a growth area for R&D outsourcing. Many large semiconductor companies, including Texas Instruments, National Semiconductors, Intel, Freescale, ST Microelectronics, Cadence, and Motorola have established R&D facilities in India.

3 ‘Contract Research for Global Firms Creates Hotspots for IT Telecom & Biotech’, , Knowledge Wharton, November 2005

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Emerging trends and technologies
Over the past decade, the Indian telecommunication sector has witnessed growth at an impressive rate. The sector has contributed, in a very real way, to the Government’s agenda of inclusive growth. Not only has the sector contributed to the generation of millions of jobs, it has also made essential services like banking and healthcare available to the remotest parts of the country. What has made the Indian telecom sector an incredible growth story is the fact that inclusive growth has been achieved and the growth momentum is being sustained even though urban market is increasingly getting saturated, with the urban teledensity already at 134.08 as on August 31, 20101. The industry has witnessed an aggressive tariff war in the previous year, with the maximum correction happening in Q3, FY 2010 and Q4, FY 2010. There has been a 30 percent decline in tariffs and as a result the aggressive growth has not been reflective in the profit margins2. With the changing landscape of the sector in the form of rural expansion, increasing competition and the ever-declining ARPUs, operators are experiencing rate erosion and are now finding it difficult to sustain the profit margins they enjoyed over the last few years. Coupled with the Government’s vision of providing quality telecom services to the remotest parts of the country and facilitating its social agenda through widespread availability of broadband services, the time is now ripe to explore and evaluate next generation technologies which will help drive the next phase of growth for the sector. Due to the euphoria surrounding the 3G rollout, the Indian consumer has awakened to the advantages offered by these advanced technologies in the form of improved quality and reliability at reduced costs, and is eagerly waiting for their introduction in the country.

1 ‘Monthly Telecom Scenario – August 2010’, DoT October 2010 , 2 ‘India Telecom Sector – Overview’, Centrum, September 14, 2010

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Global technology evolution
Globally, mobile technologies have matured significantly over last two decades. Mobile phones have evolved from being simply voice call enablers to personal devices providing advanced facilities like internet access on the go and location tracking. The inception of wireless telephony was initiated through the introduction of 1G, a wireless analogue standard that came in as early as 1980. The 1G standard was replaced by the 2G standard in 1991. The key difference between the two standards was that 2G network allowed digital encryption of the communication. In the run-up to transition to 3G technology, the 2G standard went through two rounds of development. The 2.5G standard, commonly known as GPRS, was introduced mainly for voice services and slow data transmission. However, with a constant demand for improvement, 2.75G (EDGE) was introduced to ensure faster data transmission speeds. EDGE and GPRS were initially being propagated as 3G technologies but considering the present speed of 3G services they have been earmarked as 2G transitional technologies. The constant demand for innovation resulted in launch of 3G technologies across the globe. This technology would allow simultaneous flow of data as well as voice services. It was expected to revolutionize the wireless broadband space because of the extremely high data speeds capabilities that it possesses. The development of 3G has also resulted in the inception of LTE and WiMax, are often referred to as 4G technologies, but none of them meet the criteria of International Mobile Telecommunications-Advanced (IMT-A) requirements. LTE is a 3.9G technology and WiMax is categorized as a 3G transitional technology. These technologies are still within the growth phase and the transition towards 4G has already begun. 4G will induce flexible and wider bandwidth channels; peak stationary data rates of 1 gigabits per second and global data rates of 100 megabits per seconds; better link and system spectra efficiencies in the downlink; better interoperability and smooth handoff between different networks; seamless connectivity and high quality of service for bandwidthintensive web applications. In other words, 4G will quadruple data speeds for the end consumer.

3G - The technological revolution
With margins and profitability under strain, operators are increasingly embracing 3G technology as a means to sustaining the current growth trends. 3G technology is viewed the world over as an efficient enabler for not only reducing costs associated with delivery of voice and data services, but also for enhancing the delivery and uptake of value added services. Industry estimates suggest that the growth rate of 3G subscribers worldwide could be greater than 10 percent over the next three years.3 After some delays, 3G reached the Indian shores with the successful completion of the 3G auctions earlier this year. Recognizing the potential of 3G services, bidding for spectrum was aggressive enough that not a single operator was able to win a pan-India license. While some private players have indicated plans to roll out 3G services by the end of the year, government-owned BSNL and MTNL successfully launched their services last year. 3G uptake and future growth will be driven primarily by the development of innovative, locally relevant and vernacular content, faster internet access enabling audio and video streaming, and increased affordability of 3G-handsets. 3G handsets from established brands are available in the sub 50 USD categories now, infact; a handset market leader in India has recently launched the cheapest 3G handset costing INR 4,700 only4. Additionally, the rapid growth in sale of 3G-enabled handsets, which accounted for 16.7 percent of total handset sales in 2010, promises a strong latent demand for 3G services in the country5.

3G rollout is expected to enable operators penetrate rural market and bridge the urban-rural digital divide at a fast pace. It is also expected to revolutionize the mobile VAS industry in India. It will enable operators to provide high data transfer rates, efficient bandwidth usage, map and positioning services and multiplayer gaming services. This technology will help the subscribers to access entertainment, infotainment and voice communications through a single device.

WiMax and LTE – The key to reducing the digital divide6
The Indian Government has successfully concluded BWA auctions in June 2010 in order to enable operators to offer broadband services in Indian market. Both WiMax and LTE are now being evaluated as deployment options on the BWA spectrum. This will further the Government’s vision of providing broadband connectivity to the remotest parts of the country.

3 ‘3G Market Forecast to 2013’, RNCOS Industry Research, February 2010 4 ‘Nokia Launches Nokia 2730 Classic: Cheapest 3G handset in India’, Press Release, February 16,2010 5 Indian Mobile Handset Sales, Gartner, July 29, 2010 6 Press Search; KPMG Analysis

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Broadband connectivity will fulfill the growing demand for high quality e-Governance services, online commerce, online banking, online insurance, online financial market transactions and other such services. WiMax (Worldwide Interoperability for Microwave Access) is a telecom protocol providing both fixed and mobile internet access. WiMax can be effectively used to provide last mile broadband connectivity since it is a scalable wireless access technology which can provide high throughput over long distances. This essentially translates into cost savings while increasing coverage to large areas. This feature of WiMax can be leveraged by countries like India to enhance broadband penetration in rural and sparsely populated inaccessible areas. Wimax is India’s best answer for it to overcome sluggish broadband growth, considering it helps overcome the limitations of wireline infrastructure.. WiMax reportedly has more than 5 million subscribers worldwide and is expected to reach 92 million subscribers by 20157. LTE (Long Term Evolution) is an alternate telecom technology which provides wireless broadband services for voice and data transfers. LTE does not transmit signals through microwaves, but instead uses a radio platform for transmission. This technology provides peak download rates of upto 100Mbps and is also considered an effective alternative to cable and DSL networks. LTE is expected to grow at a phenomenal rate of 404 percent to reach 136 million by 20148, as per industry estimates.

5G Technology
5G development is currently at a nascent stage globally. However, the Indian government has already started taking proactive steps in terms of testing and competing for newer technologies as compared to many developed nations.

Technology

Description 1G networks use analogue signals and is modulated to higher frequency, typically 150 MHz and up 2G is a digital network built mainly for voice services and slow data transmission 2.5G (GPRS) is a technology between 2G and 3G cellular wireless technologies offering cellular services combined with enhanced data transmission capabilities. Offers data rates from 56 kbit/s up to 115 kbit/s and can be used for WAP MMS , services, as well as Internet access 2.75G (EDGE) is an upgradation of the 2.5G offering higher data-rates of up to 236.8 kbit/s International Mobile Telephonicommunications-2000 (IMT--2000) is better known as 3G or 3rd Generation. Application services include wide-area wireless voice telephone, mobile Internet access, video calls and mobile TV. 3G allows simultaneous use of speech and data services, and offers peak data rates of at least 200 kbit/s as per IMT2000 specifications

1G

2G

WiMax and LTE have the potential means to bridge the urban-rural gap and help in effectively delivering essential services like education, finance and healthcare in rural areas.

3G

4G – A comprehensive IP solution
4G encompasses a comprehensive IP-based solution providing features like IP telephony, ultra-broadband Internet access and streamed multimedia at data rates that are higher as compared to previous generations of technology6. Industry reports estimated that 4G rollout could translate into 150 million subscriptions by 20149. Not resting on their laurels, the Indian government has proactively started exploring 4G technology, soon after the success of 3G auctions. TRAI has already floated consultation papers regarding 4G and this technology is likely to make headway into India by 2013.10

3.5G and 3.75G, also provide mobile broadband access of several Mbit/s to laptop computers and smartphones. Pre-4G systems like LTE and mobile WiMAX have also been introduced across different parts of the globe. The 3GPP Long Term Evolution (LTE) standard does not comply with the ITU 4G requirements called IMT-Advanced. LTE is not backwards compatible with 3G, but is often referred to as a pre-4G or 3.9G technology, and sometimes branded “4G” by the service providers 4G refers to the fourth generation of cellular wireless standards. It is an all-IP packet-switched networks, mobile ultrabroadband (gigabit speed) access and multi-carrier transmission

4G

Source: Wikipedia 7 ‘WiMAX Poised for Portable Broadband Success’ , Yankee Group, Nov 11, 2009 8 ‘LTE’s Five-Year Global Forecast: Poised to Grow Faster than 3G’, Pyramid Research, May 2009 9 ‘2012 Will Be a Bellwether Year for 4G’, ABI Research, May 13, 2010 10 ‘Consultation Paper on National Broadband Plan’, TRAI, June 10, 2010; KPMG Analysis

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Green telecom
Since the late 1900s, the Telecommunications industry has played a major role in shaping how we live, and today it is the backbone of the global economy, with total revenues in excess of INR 84 trillion1. The growth in the industry is led by the increase in wireless subscription expected to continue and cross 82 billion by 2020 from current subscriber base of 4.61 billion globally. With increase in demand for telecom services, the energy consumption has also grown significantly and poses an environmental challenge in terms of larger carbon footprint of the telecommunication industry. The total global carbon footprint of the ICT industry as a whole is in the order of 8003 million ton CO2 which is approximately 2 percent3 of global emissions. Of this, the contribution from global telecommunication systems - mobile, fixed and communications devices are around 2303 million ton CO2 or approximately 0.7percent3 of global emissions. The Greenhouse Gas (GHG) emissions from the mobile industry arise mainly from sources like: • Energy consumed by the network operation • Emissions of the embedded network equipment, • Energy consumed by mobile handsets and other devices, when they are manufactured, distributed and used

Direct emissions of the mobile industry4

1 2 3 4

Market Trends: Global Telecommunications Market, Gartner, July 2010 GSMA, 2009 TRAI Pre-Consultation on- Green Telecom Inputs, Alcatel-Lucent, 2010 Mobile’s Green Manifesto, GSMS, 2009

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Additionally the discarded mobile phones are among the fastest growing waste streams worldwide and the rate of increase is about 6505 million units per annum. Mobile phones and the various network devices contain substances that are potentially hazardous which may be released into the environment if they are mismanaged at the end of their life cycle.

industry consumption of c. 1.8 billion litres of diesel every year9. With each liter of diesel used, 2.488 kg of CO2 is emitted and for every KWH of electricity consumed 0.848 kg of CO2 is emitted leading to emissions of around 5 million tons of CO2 due to diesel consumption and around 8 million tons of CO2 due to grid power per annum • Operators spend around 25 percent5 of their network operating costs on energy. The high transportation cost of diesel in remote areas, where the physical infrastructure like roads is underdeveloped, adds to the overall operational expenditure. Also there is significant pilferage of fuel in these remote areas • Economic viability of renewable sources of energy is very less especially in remote areas where the ARPU is less than INR 90. For example the initial investment for a solar solution will be around INR 40-455 lakh per site depending on power supply required as compared to the DG set which costs lesser.

Green telecom – India perspective
India is ranked 5th6 amongst the countries in the list of global GHG emission, contributing 4.7 percent6 of the global emissions. In December 2009, the Minister of State for Environment and Forests announced the Indian Governments commitment to reduce 20-25 percent6 of carbon intensity from 2005 levels by 2020. Indian Government is already providing various incentives for the initiatives involving the use of renewable energy resources. Government has also offered the Universal Obligation Services Fund (USOF) support to encourage operators to opt for green energy and Bio- fuel as an alternative for powering base stations. Telecom Regulatory Authority of India (TRAI) has also initiated a consultation process in May 2010, requesting inputs from players across the telecom value chain to provide recommendations on framework and implementation for Green Telecom in India. Besides the governmental efforts, green telecom initiatives in the form of efficient power management is becoming a business necessity for mobile operators in Indian market where margins are nose diving as a result of tariff wars, reducing the profitability of the service providers. At present the energy expenses (opex) is nearly 25 percent5 of the total network operating costs. It is all the more imperative that efficient power management mechanism be adopted to reduce the operating costs.

Current initiatives by the telecom industry
Mobile operators and players across the value chain are working on a number of initiatives to develop energy efficient networks and energy-efficient handsets. Examples of these activities include: • Designing low energy base station sites • Deploying base-stations powered by renewable energy • Implementing infrastructure sharing • Reducing mobile device life cycle emissions through recycling • Other initiatives – Community power and low power handsets.

Challenges in India
Low energy base station sites
The significant challenges for the India telecom industry are: • A large part of the country (rural areas) is power-starved, especially regions like Uttar Pradesh, Bihar, Orissa, North East, and Rajasthan. As per GSMA, India has only 56 percent electrification rate. With increasing coverage of mobile services in off grid areas, the cost of network operations through alternate energy (diesel and battery) is very high • India has over 300,0007 telecom towers with an average power consumption of 5-68 KW and average 88 hrs of diesel generator running to provide back-up during power outages. Each tower currently consumes an average of c. 4,000 litres of diesel every year, implying the telecom
5 Green Telecom – Indian Perspective, COAI, 2010 6 Ministry of Environment and Forest, Government of India 7 Green Telecom Way Forward in ICT Sector, Indus Towers, 2010

Considerable improvements in energy efficiency of base stations have been realised in recent years. For example10, Ericsson has reduced the annual direct CO2 emissions per subscriber in the mobile broadband base stations from 31 kg in 2001 to 17 kg in 2005 and eventually to 8 kg in 2007 . Nokia Siemens Networks in 2009 developed a new cabinetbased BTS with a power consumption of 790 W, versus 4,100 W in 2005. Alcatel-Lucent has also developed innovative techniques such as the dynamic power save feature for mobile network, which reduces power consumption when the traffic drops with no impact on service quality. This enhancement reduces average power consumption by 25-30 percent.

8 ACME 9 ‘GIL Annual Report 2010’, GIL Company Website, March 2010 10 Mobile’s Green Manifesto, GSMA, 2009

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Cooling systems are an integral part of the telecoms infrastructure and consumes significant amount of power. In the past, the operating temperature of the BTS equipments was required to be around 25°C. But now BTS are deployed having passive cooling components as opposed to air conditioning, thereby reducing the power requirement. Examples11 include: • Airtel has also been rolling out its “Green Shelter” concept leading to major savings in energy consumption by its network in India • Ericsson has developed the Ericsson Tower Tube, which uses natural convection cooling, to greatly reduce feeder loss, resulting in a reduction of up to 40 percent in power consumption. Furthermore, the Tower Tube is designed so that backup-batteries can be placed below ground, thus lowering their operating temperature and increasing their lifetime significantly • Swisscom has successfully implemented its “MistralMobile” cooling system at 30 of its BTS, leading to a reduction of up to 80 percent in the energy needed for cooling mobile network equipment.

• China Mobile has one of the world’s largest deployments of green technologies to power its base stations. China Mobile had 2,135 base stations powered by alternative energy in 2008. Of these, 1,615 are powered by solar energy, 515 are powered by solar and wind energy and 5 are power by alternative sources • In Vanuatu, an island nation located in the South Pacific Ocean east of northern Australia, Digicel is working with the GSMA Development Fund to assess and develop commercial scale roll outs of green power technology. There are currently 24 live sites in the Digicel Vanuatu network running on green power, including eight missioncritical backbone sites carrying up to 60 percent of Digicel’s traffic • In India, Idea Cellular and Bharti Infratel have started deploying solar and bio-fuel resources on trial basis for their base stations.

Base stations powered by renewable energy
With increase in price of diesel and environmental concern about GHG emissions, operators have begun experimenting with solar and wind powered base stations in both remote offgrid areas and in on-grid areas prone to blackouts. There are various technology options for reducing dependence on diesel generators as an alternative source of energy and thereby reducing the carbon footprint. These include: • Solar Energy - Solar energy can be used to power telecom towers. Solar energy solutions would be the optimal choice for alternative energy in remote sites that are not connected to the power grid directly, thereby reducing the need for prolonged use of diesel generators • Wind Energy – There are solutions under various stages of development which convert wind energy into electrical energy which could power telecom towers • Fuel Cells – One of the widely emerging alternate energy solutions is the use of fuel cells for powering telecom towers. These cells rely on hydrogen and other hydrocarbons and have close to zero emissions • DC Based Generators – DC generators save a significant amount of energy by reducing conversion losses. These generators come with a variable speed engine that delivers major fuel and carbon saving options at lower loads Examples11 for use of renewable energy resources include:

11 Mobile’s Green Manifesto, GSMA, 2009

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Infrastructure sharing
Infrastructure sharing provides excellent opportunity for mobile operators to reduce their costs and their emissions. There are two levels of infrastructure sharing: passive and active. Passive sharing is becoming increasingly common and reduces the environmental footprint of mobile networks by cutting the number of tower sites required by each company. In March 2009, Telefonica and Vodafone announced that they would share network infrastructure in Germany, Spain, Ireland and the UK. Active sharing, which shares the site electronics, can have a much larger impact on the networks’ carbon footprints, but it has only been implemented in a few mature markets to date. Active sharing agreements include T-Mobile and 3 Group in the UK, Telstra and 3 Group, as well as Vodafone and Optus, in Australia, Tele2 and Telia in Sweden. In India the average tenancy for the tower has currently increased to 1.5 tenants per tower from about 1.2 two years back leading to cost saving including the energy cost.

• Vodafone has phone and accessory collection schemes in place across virtually all of its markets, which resulted in collectins of 1.8 million devices in 2008-09. Many of these schemes are linked to charitable donations, including a scheme in Italy where the proceeds from selling refurbished phones funds installation of solar panels for schools • Nokia has launched a recycling initiative in India and many other countries by placing kiosks at public places. The kiosks are used to collect old phones to be recycled and also act as a convenient, automated facility for customers to drop-in phones for service. Nokia plants a tree for every phone dropped and provides the consumer with a unique URL and instructions with which to view their tree through Google Earth.

Other initiatives – community power and low power handsets
As per GSMA estimates, nearly 639,000 off-grid base stations will be rolled out across the developing world including India by 2012. This presents both challenge and opportunity for the mobile operators to sustain their growth in these off grid areas. The opportunity exists for mobile operators to provide electricity beyond the base station to the local communities for small needs like charging up mobile handsets, household batteries and rechargeable lanterns by the excess power generated at the base stations. Implementing handset charging for local communities off-grid areas is not only important for community welfare but it is also strategic to operators. As per the GSMA’s report on ‘Charging Choices’ the availability of off grid charging options can increase mobile operator ARPUs by 10-14 percent. Many operators globally have implemented mobile handsets charging options on their base stations, but very few are running on green power. For example Grameenphone Community Power Site based on biomass at Gazipur, Bangladesh is operated by a third party providing electricity to local community as well as the Grameenphone BTS. Going forward, with increased implementation of renewable resource of energy in remote areas, operators can develop similar operating model leading to better economic viability for the operator and benefit for the local community. India’s rural markets pose unique challenges to handset vendors. Most areas in rural India do not have a continuous supply of electricity. Multiple vendors have recognized this peculiarity with respect to rural India and have taken steps to address them. For instance, all the handsets vendors have developed phones to work around the challenge. The new handsets available in the market especially the low cost handsets are designed to have long battery life requiring less frequent charging and save power thus indirectly contributing to reduction of carbon footprint.

Mobile device life cycle emissions
Mobile Phone Partnership Initiative (MPPI) was created in 2002 under the framework of Basel convention. The MPPI aims to address the issue of environmental impact of the management of end-of-life mobile phones. Several major initiatives through MPPI are underway to reduce emissions from mobile devices. These include a universal charging solution; production of green handsets; and improved industry recycling. The GSMA and 23 leading mobile operators and manufacturers have committed to implementing a crossindustry standard for a universal charging solution for new mobile phones. This will enable the mobile industry to adopt a common format for mobile phone charger connections and energy-efficient chargers, resulting in an estimated 50 percent12 reduction in standby energy consumption, the potential elimination of up to 51,00012 tonnes of duplicate chargers every year, and the enhancement and simplification of the end-user experience. A number of mobile operators and vendors have launched initiatives to encourage consumers to increase handset recycling. Examples12 include: • Telenor has teamed up with the Red Cross to recycle mobile phones. For each user returning a mobile phone, the user will receive 50 free SMSs and the Red Cross will plant 25 trees in Asia. Of the phones collected, those damaged will be recycled and those that can be repaired will be sold in Asia with the proceeds going to the Red Cross

12 Mobile’s Green Manifesto, GSMA, 2009

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Mobile services to enable significant GHG emission reductions in other sectors
The mobile industry is enabling significant reductions in GHG emissions and costs across a range of sectors of the economy, using Machine-to-Machine and other communications to deliver smart solutions like smart grid, teleconferencing, smart logistics and transportation. “Carbon Connections” a report released by Vodafone in 2009, assessed initiatives related to dematerialization (teleconferencing, teleworking), smart grids, smart logistics, smart transportation and smart manufacturing, in which existing mobile technologies are abating GHG emissions in Europe. As per this report, such existing technologies can be put in use to reduce GHG emissions in multiple sectors of the economy and estimates that 113 million ton CO2 can be saved by 2020 through these set of initiatives. As per the report, in India, 25 percent of electricity is lost during transmission and distribution. Potential savings through smart grid using mobile technology can be significant. Smart grid opportunities in India could achieve a total potential abatement of more than 80 million ton of CO2 and projected savings of around EUR 6 billion.

With high growth of Indian telecom industry and corresponding environmental challenges there is urgent need to tackle the increasing carbon emissions and manage environmental sustainability (e-waste management). Many players across the telecom value chain already are taking several initiatives including their corporate social responsibility program for green power and e-waste management. However enabling the industry with sustainable frameworks through effective government policy and regulatory interventions will generate a larger interest in stakeholders to move to the next step in achieving carbon reduction and reducing the harmful environmental impacts on a larger scale towards addressing this critical issue.

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Investment opportunities after broadband rollout
The Indian broadband landscape of 2010 with a large addressable population and around 10.08 million broadband subscribers is quite similar to the Indian cellular market of 1997 with a large addressable population and only 340,000 subscribers1. , In the backdrop of broadband penetration in excess of 25 percent in the developed world and an overall global penetration of around 7 percent, India ranks significantly low with less than one percent broadband penetration. The growth opportunity in India from a broadband perspective is clearly defined, with the country having only about 10.08 million broadband customers as against over 650 million mobile subscribers. In the last few years, nearly 25 percent of the country’s wireless subscribers have successfully transitioned to become mobile internet customers, thus bearing out the opportunity for these services in India2. The recently concluded BWA auctions witnessed a significant quantum of capital being committed towards furthering the broadband agenda in India. The process caught the attention of both Indian and global investors with diverse strategies, looking to offer wireless broadband services in the country. Worldwide, mobile network operators (‘MNO’) have historically taken a lead in rolling out BWA networks in order to tap an additional stream of revenues. In India as well, almost all incumbent MNOs participated through the stages of the auction process highlighting the need for spectrum and quality of service (‘QoS’) in one of the world’s fastest growing telecom markets.

Company Infotel Broadband Qualcomm

Circles 22

Investment (USD Million) 2,733

4

1,045

Bharti Airtel

4

705

Aircel Tikona Augere

8 5 1

731 225 27

Source: Press release BWA Auction - Final Results, Department of Telecommunications, June 12, 2010 – USD 1 = INR 47 KPMG Analysis ,

1 Subscriber Database, COAI 2 Quarterly Performance Indicator, TRAI, October 13 2010

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Opportunities for investment
Having committed capital to the sector, service providers will now consider rolling out operations relatively quickly, to garner high value customers and gain leadership positions in their respective circles. Industry analysts peg the cost of a panIndia BWA roll-out at around INR 90 billion3. This may translate into an extremely high roll-out cost per circle, thereby implying a consolidated funding requirement of about INR 178 billion across all operators. Investments may also be in the form of joint developmental and go-to-market strategies by operators, device manufacturers as well as value added service providers to build a sustainable ecosystem around technologies, customer acquisition and services.

Transaction activity4
• Subsequent to the conclusion of the auction, Reliance Industries acquired 95 percent equity stake in Infotel Broadband Services for a consideration of approximately INR 45 billion • Earlier this year, Qualcomm divested a 26 percent holding to Global Holdings (shareholders in GTL) and Tulip Telecom for around INR 2.8 billion. This transaction is a global first wherein a technology developer (Qualcomm) has partnered with telecom infrastructure players (GTL and Tulip Telecom) for kick-starting an operator model.

3 Estimated based on analyst commentary with respect to RIL BWA network Capex, ’s ’India Telecoms – The night is darkest before dawn’, Credit Suisse, July 2010

4 RIL – Infotel: Reliance Industries, BWA Analyst Presentation, June 12 2010; ‘Qualcomm seals stake sale deal’, The Telegraph,, July 31, 2010

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Critical success factors
Unlike the developed world, where first broadband services got introduced as part of 3G technology, followed by the advent of WiMax and LTE technologies for high speed mobile data access; India is likely to witness a concurrent roll-out of all these services. As a result, while WiMax networks have been launched across 149 countries worldwide, covering a population of around 621 million, the overall subscriber base on these WiMax networks globally is pegged at around 9 million subscribers, representing a penetration of approximately one percent5. The India story may however, turn out to be fundamentally different if some of the following factors are considered: • Non-voice services still contribute a much lower share of revenues in India compared to the global average. Whilst 3G and BWA may be key drivers for rapid growth of advanced data services, it may be expected that BWA will have a decisive competitive edge due to significantly high data speeds as compared to 3G networks. Further, in India, pushing voice services may also continue to be a priority for MNOs on 2G and 3G networks • Growth in broadband connections may witness an exponential trend given the availability of BWA spectrum and related services rollout • The extension of fixed BWA to mobile BWA through the manufacture of compatible mobility devices – Partnerships between broadband service providers and device manufacturers may thus become critical to the success of the platform • Launch of services in areas where costs of laying a fiber network outweighs returns. For example, rural connectivity through fixed BWA may be appropriate to enhance penetration. From an urban perspective, tariff plans and speed of data download may become integral to defining BWA’s acceptance over traditional cable broadband services already being offered by numerous operators • Effective use of BWA networks as a substitute for telecommunications back-haul may be very relevant in the Indian context, given the large number of new MNO’s that need to still create sufficient back-haul infrastructure for the rising traffic requirements beyond plain vanilla voice traffic needs • Aligning content providers, aggregators and platform developers towards the BWA paradigm may also prove important from a profitability perspective. BWA operators may need to tailor value added services and content from a customer-pull perspective in order to generate usage and traction in the urban environment.

Government initiatives
In order to fuel the success of new entrants and foster a favorable investment climate, the Government, through various agencies, has undertaken a number of initiatives in the broadband space. Some of these include subsidy schemes (on active infrastructure components) under the USOF to further the development of rural wireless broadband infrastructure6. • Intends to provide 888,832 broadband connections in rural areas by 2014 • Considering subsidized broadband services along with subsidized computing devices to enhance rural broadband penetration • The USOF has identified 5,000 villages which have no terrestrial connectivity and is in the process of developing a scheme to connect these villages • The USOF is expected to extend financial support to encourage active infrastructure sharing • USOF has also taken the initiative to strengthen the OFC network in rural and remote areas. Additionally, the Department of Information Technology intends to setup over 1 million internet enabled Common Service Centres (CSC) across India as per the National e-Governance Plan (NeGP). The Department of Education has also embarked upon an initiative under the National Mission for Education through Information and Communication Technology, to provide broadband connectivity to 20,000 colleges in the country for enabling the use of e-content for education. Heightened transaction activity, immense scope for expansion and a hitherto underdeveloped market coupled with aforesaid Government initiatives would create an environment suitable for development of innovative services, new content and integration of devices. The market may witness a coming together of tailored devices with specific content that may be monetized via a BWA platform. An environment driven by convergence and backed by a strong government focus may lead to enhanced transaction activity in near future.

5 ‘Monthly Industry Report’, Wimax Forum, October 2010; Maravedis - 4G Counts, October 2010 6 Government Initiatives, DoT

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International best practices
This chapter will entail key initiatives, best practices, exemplary developments and milestones achieved in telecom sector largely in developing countries for the growth of the telecom services especially among economic backward section of the society and remote areas. Through various case studies we would bring up the context and reasons why these initiatives have been successful and its overall impact. There have also been a large number of pilot and commercial initiatives globally to deliver the wide spectrum of benefits of mobile based services with green and renewable power resources at the base.

Bridging digital divide: Delivering mobile broadband services in semi-urban and rural areas
The evolving telecommunication revolution has essentially been an urban phenomenon till now. In India, the urban centers and especially metros are approaching over 100 percent penetration levels, while the rural penetration levels are still single digits in most of the villages with several thousand villages yet to see the connectivity. Even with thousands of subscribers being added every day in rural areas which are getting connectivity, there is still a wide disparity in the telecom penetration levels. Sri Lanka’s leading mobile operator has leveraged HSPA mobile broadband technology for bringing affordable internet access to bottom of the pyramid. To address the bottom of the pyramid in the villages where PC penetration is extremely low, the operator started the Last Mile initiative ‘Easy Seva’1 developed in partnership with Qualcomm, the US Agency for International Development, the Sri Lankan National Development Bank and Synergy Strategies Group. Through shared-access Easy Seva centres, the operator has been able to bring data services to remote villages. Operator and its partners provide local entrepreneurs assistance to set up internet cafes. Each Easy Seva centre has multiple PCs, IP handsets, a router, and a 3G modem that utilizes HSPA for fast broadband connectivity. The franchisees are selected following an extensive review process to make sure that Easy Seva is the right fit for the local community and businesses. They then receive comprehensive training, marketing support, 24/7 help desk and preferred data pricing. The Easy Seva partnership also provides loan and lease facilities for the franchisees to help purchase the equipment and pay for the lease on the premises. The low hardware and operational costs ensure that prices for end users, who are the ultimate beneficiaries of the project. Users have access to information on jobs, educational tools and micro-loans.

1 Mobile Broadband Case Study, GSMA, 2008

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Similarly in South Africa, the community in Alexandra (Sub urban area in Johannesburg) now has access to fast, reliable internet access through HSPA network from an innovative Internet cafe concept. One of the largest operators of South Africa founded a community payphone kiosk, which offers the very poor community access to voice telephony services, and for the first time, cheap access to the Internet. The kiosk belongs to local entrepreneur with support from local operator, and the GSM Association’s Development Fund. The Alexandra Community Payphone2 site is part of a nationwide project, to bring broadband to low-income townships, boosting education and healthcare and providing a platform for entrepreneurship. The community Internet cafe enterprise offers convenient access to health and education information as well as job vacancies and advice for finding employment. It is supported by a dedicated online portal developed by local operator, which features a wealth of valuable, up-to-date local information.

Thus, the increased use of mobile technology can help reduce health care costs by improving efficiencies in the health care system and houses the idea that there exists a powerful potential to advance clinical care and public health services by facilitating health professional practice and reducing health disparities.

Education
In the Philippines, a local mobile operator is helping public elementary schools access educational materials through the ‘Text2Teach program’4. Text2Teach is a project that focuses on the 11 to 13 year old age group. In the first phase, Text2Teach enables teachers to simply use the mobile phone to order video clips, which are then delivered via satellite, stored in the media master, and viewed on TV. The second phase, the teacher were able to just plugs the mobile phone pre-loaded with educational videos to a TV set and plays the video lesson. New videos are accessed by downloading them through the mobile phone.

Proliferating citizen and governance services through mobile
Healthcare
While the health community debates whether a specialized field of ‘M-Health’ exists and how to define it, most people will agree that individuals around the world are using mobile technologies to access health services and information and that health professionals are formally and informally integrating mobile technologies into public health and clinical activities. As mobile phones and other mobile devices become part of everyday life, people become better equipped to respond to emergencies, consult with peers and health professionals about health issues as they arise, and access health services that are increasingly being delivered through mobile phone based systems. Government of Uganda spends a substantial amount of the health budget in finding a cure for diseases like AIDS. A new healthcare awareness program, ‘Text to Change’3 (TTC) was recently introduced. The program is spearheaded by a local mobile operator, a Dutch non-profit organization, sponsored by the UN’s Department of Economic and Social Affairs and Uganda’s Ministry of Health. The program offers text message based multiple choice interactive quizzes which are administered to mobile phone subscribers in the rural region. Free airtime is offered to the users to encourage them to participate in the program; this was determined to be a powerful incentive since users were allowed to exchange the airtime with other subscribers as a type of currency.

Agriculture
Google Trader4 is a marketplace mobile application used in Uganda to buy and sell goods and services using SMS. This application was developed in response to challenges faced by the Uganda’s rural producers and consumers in reaching out to the markets, due to inefficient transport network and lack of knowledge of market conditions. This application ensures transparency and enables small producers to realize higher prices when dealing with larger traders, thus increasing their incomes. Google Trader is primarily in English but also responds to the primary commands in three local languages. The initial pilots of Google Trader in banana-producing regions of Western Uganda appealed to small producers, who felt more confident about their ability to reach buyers and receive better compensation for their produce. The widespread adoption of the application is expected to lead to lower transaction costs, greater efficiencies and higher price transparency across various markets; resulting in increased incomes to small farmers as well as other traders and buyers in the value chain, enabling them to save time and transport costs, which will result in greater wealth for all involved.

M-Commerce
In 2007 only one out of five people in Kenya had access to , banking facilities, mainly due to the high transaction fees and a scarcity of bank branches. In March 2007 Vodafone launched , an M-commerce system in Kenya with its local partner Safari. com called M-PESA4. The service enables its users to deposit and withdraw money, transfer money to other users and nonusers, pay bills, and purchase airtime through a network of agents that includes airtime resellers and retail outlets acting as banking agents. Teaming up with Kenya Commercial Bank and Western Union, M-PESA has become a market leader, acquiring just under six million users — one in six Kenyans — since its launch. M-PESA is so popular that more than 10

2 Mobile Broadband Case Study, GSMA, 2008 3 mHealth For Development, United Nations Foundation, 2009 4 Mobile Government: 2010 and Beyond, European Union Regional Development Fund, January 2010

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percent of Kenya’s GDP passes through it. Following on the success in Kenya, the M-PESA solution has been replicated in Tanzania through its partnership with Vodacom and was recently launched in Afghanistan as well.

Mobile solutions for making enterprises more efficient
Leveraging on the developments in Telecommunications Media and technologies (TMTs) and Information and Communication Technologies (ICTs) also emerged as one of the most cost-effective solutions for corporate houses where Collaboration lies at the heart of their business. In China, China Southern Power Grid8 (CSG) has installed an automated meter reading solution from China Mobile, Huawei, and Hongdian, in order to improve efficiency in meter reading. Given its vast infrastructure, meter reading for utilities players has typically been an arduous, inaccurate and expensive process. However, with the automated system, which uses 1 million remote monitoring devices, CSG is now able to track end-users’ electricity usage in real-time, allowing it to accurately bill customers and optimize demand planning. CSG is also using mobile technology to monitor other parts of its electricity network. By connecting the communications module to additional equipment, such as cameras or monitoring equipment, CSG can obtain real-time information to support remote troubleshooting and maintenance. The automated solution has provided to CSG significant benefits: reduced data collection, maintenance and troubleshooting costs; improved data accuracy through automation; easier deployment; a more reliable power network; and considerable carbon reduction through automated meter reading and fault detection. In Bangladesh, Grameenphone’s CellBazaar9 is one popular success story; it allows users to buy and sell goods and services through SMS, WAP or the internet using their mobile phones. This platform allows traders to find others, and post information about their businesses. This service also provides regular market information about price, quantity and suppliers on a pay-as-use basis. Grameenphone users can buy any agricultural product, such as rice, fish, or chicken, as well as large-scale purchases like an apartment, land, or car, and consumer goods such as a television or refrigerator. The service is run by the customers: they post items for sale, delete items after they are sold, adjust prices if items fail to sell, and do much more besides. CellBazaar has grown rapidly over the years; it now has 1.5 million users and averages 90,000 hits a day (including page views and SMS messages). Its registered seller base is 51,000 and its unregistered user base is thirty times that size.

M-Governance
A part of a broader phenomenon of mobile-enabled development or leveraging the mobile revolution to enable development impact is attributed to M-governance. The process takes electronic services and makes them available via mobile technologies using mobile phone devices. These services bypass the need for traditional physical networks for communications and collaboration. M-Governance is a subdomain of e-governance which simply extends the reach of e-governance. • In Finland, SMS5 tickets can be used for Helsinki’s public transport system. These tickets can be ordered by sending a text message and the user is billed through his or her regular mobile phone bill. The ticket itself is also delivered to the commuter via SMS. • Philippines – PAYBIR6: The Bureau of Internal Revenue in the Philippines offers a service called “PAYBIR, where ” a taxpayer can file his or her income tax returns by SMS. Through the PAYBIR service, taxpayers can now pay their tax of R 10,000 (USD 281) and below through a text message. The BIR has forged a partnership with Land Bank of the Philippines as the accredited agent bank and Globe Telecom as the taxpayer agent. Globe Telecom uses its G-Cash facility to make tax payments on behalf of its subscribers. • Dubai eGovernment’s SMS service : Dubai Public Prosecution has adopted Dubai eGovernment’s SMS service. This SMS integrated service allows clients, including the transacting public, lawyers and prosecutors, to inquire about cases, times of sessions, resolutions, and the status of proposals and requests drafted by the Public Prosecution.
7

5 m-Governance-Leveraging Mobile Technology to extend the reach of e-Governance, 2009 6 Mobile Government: 2010 and Beyond, European Union Regional Development Fund, January 2010

7 http://www.mdubai.ae/ 8 Asia Pacific Mobile Observatory, GSMA, 2009 9 Case Study, Mobile World Congress, 2009

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Green power for telecom
The future growth of the highly competitive Indian telecom sector will come from the relatively untapped and uncovered rural market and the key issue influencing roll-out in rural areas is power. Decentralized and distributed power generation technologies based on renewable energy (RE) resources are considered as emerging alternate power solutions for the telecommunications networks. Operationally, network ‘uptime’ is an important Quality of Service parameter from the point of view of consumer choice and it is the single most important factor driving the use of RE applications in both urban and rural India. Orange won a major telecom industry award at the Global Telecoms Business Awards 201010 for its solar base station program in emerging markets. After successful trials at numerous sites in Senegal, Orange replicated the program in other countries in 2008. This program became Orange’s engineering blueprint for the creation of off-grid radio sites in Africa and the Middle East. The Orange solar deployment program now covers more than 900 base stations across 13 countries. The Orange solar base station development program is the most iconic part of a wider green strategy committed to achieving 20 percent reduction of CO2 emissions by 2020 and 15 percent reduction of the company’s energy consumption. India can use these excellent examples to deliver government and citizen services, targeted particularly at the bottom of the pyramid which have revolutionized the speed and effectiveness of service delivery in the area of healthcare, education, financial services, agriculture and overall government administration to bridge the digital divide. The adoption of various mobile based enterprise applications leading to better services delivery with better efficiencies also gives an equal edge to India Inc. Also, with increased focus on green power, mobile operators and vendors are using new and innovative ways to improve energy efficiencies and reduce their carbon foot print.

10 Press Release, Orange, June 2010

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Conclusion
The Indian telecom sector has proved to be an international success story. Nearly all major international telecom operators have made significant efforts towards making inroads into the Indian market in order to tap the immense potential offered as well as to leverage on the low cost outsourcing model which has been pioneered in India. The sector has witnessed a commendable growth over the past 2 years. At present there are 15 operators in the market offering the lowest mobile tariffs across the globe. With an overall subscriber base of 706.3 million and a teledensity of about 60 percent, the sector continues to growth from strength to strength.1 With the urban teledensity crossing 100 percent, the market has been showing signs of maturity, especially in case of the uptake of voice-based services. The urban markets may continue to add more users; however, usage of multiple SIMs, multiple tariff corrections and swelling competition continues to exert immense pressure on the operator margins. Rural India is the key target market likely to drive the next round of growth, particularly for voice-based services. 3G and BWA are expected to reinvigorate the maturing urban markets and help the telcos to achieve margin enhancement. The aggressive growth observed by mobile services is yet to be replicated in case of broadband services, where the subscriber base currently stands at 10.08 million as on August 31, 20101. However, the broadband sector can expect tremendous growth in the future, considering that there are more than 650 million potential customers waiting to be tapped. The successfully concluded auction of the BWA and 3G spectrum will enhance the wireless broadband penetration across the country and help connect the remotest locations across India. The government appreciates the importance of broadband for India and how this technology can help the rural population across the country to leverage the advantages of modern education, healthcare, commerce and banking. To further this agenda, the government has setup a robust regulatory environment to work towards the development of the sector. This proactive regulatory environment will also be the harbinger for the next phase of development for the telecommunications sector.

1 Telecom Subscription Data as on 31st August 2010, TRAI, October 05, 2010

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About KPMG in India
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 146 countries and have 140,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. Each KPMG firm is a legally distinct and separate entity and describes itself as such. The Indian member firms affiliated with KPMG International were established in September 1993. As members of a cohesive business unit they respond to a client service environment by leveraging the resources of a global network of firms, providing detailed knowledge of local laws, regulations, markets and competition. We provide services to over 2,000 international and national clients, in India. KPMG has offices in India in Mumbai, Delhi, Bangalore, Chennai, Hyderabad, Kolkata, Pune, Kochi and Chandigarh. The firms in India have access to more than 5000 Indian and expatriate professionals, many of whom are internationally trained. We strive to provide rapid, performance-based, industry-focused and technologyenabled services, which reflect a shared knowledge of global and local industries and our experience of the Indian business environment.

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About Department of Telecommunications (DoT)
The Department of Telecommunications of the Government of India is responsible for telecom policy formulation, telecom licensing, wireless spectrum management, universal service obligation, promotion of International co-operation in telecommunications, promotion of private investments in telecom sector, standardization and research in the field of telecommunications and administration of: • Indian Telegraph Act, 1885 • Indian Wireless Telegraphy Act, 1933 • Telecom Regulatory Authority of India Act, 1997

About Federation of Indian Chambers of Commerce and Industry (FICCI)
FICCI, set up in 1927 is the largest and oldest apex business organization of Indian business. With a nationwide membership of over 1500 corporates and over 500 chambers of commerce, FICCI espouses Indian businesses and speaks directly and indirectly for over 2,50,000 business units. FICCI maintains the lead as the proactive business solutions provider through research, interactions at the highest political level and global networking. FICCI organizes a large number of exhibitions, conferences, seminars and business meets for promoting business.

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Contact Us
Department of Telecommunications Ranjan Khanna
Director Room No.303, Sanchar Bhawan Ashoka Road, New Delhi -110 001 Tel: 91-11-2303 6730, 2337 2598 E-mail: ranjan.khanna@gmail.com Website: www.dot.gov.in

The Telecom Regulatory Authority of India Mahanagar Doorsanchar Bhawan
Jawaharlal Nehru Marg New Delhi: 110 002 India Tel: 91-11-2321 1934, 2323 3466, 2322 0534, 2321 3223 Fax: 91-11-2321 3294 Website: www.trai.gov.in

Telecom Disputes Settlement & Appellate Tribunal
Room No.482 & Room No.478, Hotel Samrat Chanakyapuri, Kautilya Marg New Delhi - 110 021 India Tel: 91-11-2687 6882, 2687 3411, 2410 2563 Fax: 91-11-2410 5171, 2687 6882 Website: www.tdsat.nic.in

Telecommunication Engineering Centre
Gate No. 5 Khurshid Lal Bhavan, Janpath New Delhi – 110 001 India Tel: 91-11-2371 7138 Website: www.tec.gov.in

Centre for Development of Telematics (C-DOT)
C-DOT Campus Mandi Road, Mehrauli New Delhi-110 030 India Tel: 91-11-2680 2856 Fax: 91-11-2680 3338 Website: www.cdot.com

Federation of Indian Chambers of Commerce and Industry Sarika Gulyani
IT & Telecom Division Federation House, Tansen Marg, New Delhi -110 001 Tel: 91-11-2373 8760-70, 2373 6190 E-mail: ficcitelecom@ficci.com Website: www.ficci.com

KPMG Sean Collins
Global Chair - Communications and Media seanacollins@kpmg.com Tel: 91-65-6213 7302

Romal Shetty
National Head - Telecom romalshetty@kpmg.com Tel: 91-80-3065 4100

Arpita Pal Agarwal
Head - Telecom R&C arpita1@kpmg.com Tel: 91-124-307 4588

© 2010 KPMG, an Indian Partnership and a member firm of the The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed in India KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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This knowledge document has been developed by KPMG and FICCI for providing an overview of the Indian telecommunications sector. It is meant to be used for the limited purpose of ‘India Telecom 2010’ only. It may not be considered, in any form, as a policy/legal document of the government, directly or indirectly.

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