Telecom Industry

Business Environment Domain Study
By Anjana (36), Prachi (16), Puneet (51), Sandeep (50) PGPM 508 Under the guidance of Dr. Pallavi Mody S. P. Jain Institute of Management & Research

Telecom Industry

Executive Summary
The rapid growth in Indian telecom industry has been contributing to India’s GDP at large. Telecom industry in India started to set up in a phased approach. Privatisation was gradually introduced, first in value-added services, followed by cellular and basic services. Telecom Regulatory Authority of India (TRAI), was established to regulate and deal with competition (the service providers). This gradual and thoughtful reform process in India has favoured industry growth. Upcoming services such as 3G and WiMax will help to further augment the growth rate. The Indian telecommunications industry is one of the fastest growing in the world and India is projected to become the second largest telecom market globally by 2010. This is evident from the facts of Telecom Industry for example, India added 113.26 million new customers in 2008, the largest globally. The country’s cellular base witnessed close to 50 per cent growth in 2008, with an average 9.5 million customers added every month. This would translate into 612 million mobile subscribers, accounting for a tele-density of around 51 per cent by 2012. It is projected that the industry will generate revenues worth US$ 43 billion in 2009-10. In this report we have tried to capture most of the areas of Telecom Industry. Major highlights of the report are History of Telecom Industry, Current Industry Analysis, Role of TRAI, Spectrum allocation, FDI Regulation, Competitive advantages, Outsourcing in Telecom, Emerging Technologies, Latest Innovation, and Growth Trends, Mergers and Acquisitions.

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Table of Contents
Executive Summary....................................................................................................................................... 2 1 Indian Telecom Industry ....................................................................................................................... 6 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 History ........................................................................................................................................... 6 Quick Facts .................................................................................................................................... 6 Telecom services ........................................................................................................................... 6 Industry Sectors ............................................................................................................................ 7 Growth Avenues ........................................................................................................................... 8 Industry Revenue (2002-2010) ................................................................................................... 10 Subscriber Growth ...................................................................................................................... 11 Major Players .............................................................................................................................. 11 Wireless Service Providers (Market share) ......................................................................... 12 Handset Manufacturers (Market share) ............................................................................. 12

1.8.1 1.8.2 1.9 1.10 1.11 1.12 2

Major Investments ...................................................................................................................... 13 Rural Telephony .......................................................................................................................... 13 Exploring the rural telecom opportunity .................................................................................... 13 Policy Initiatives .......................................................................................................................... 14

Telecom Regulatory Authority of India (TRAI) .................................................................................... 15 2.1 2.2 2.3 2.4 2.5 Mission ........................................................................................................................................ 15 Role of TRAI ................................................................................................................................. 15 Recommendatory Functions ....................................................................................................... 15 Mandatory Functions .................................................................................................................. 15 Other functions ........................................................................................................................... 16

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Spectrum Auctions in India Vis-à-vis Worldwide ................................................................................ 17 3.1 3.2 3.3 3.4 Spectrum Auction Scenario in India ............................................................................................ 17 Gaps in Indian Spectrum Auction Licensing Scenario ................................................................. 18 3G Spectrum allocation policy in India in 2009........................................................................... 19 Comparison-Spectrum Allocation Policy in UK ........................................................................... 20

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India’s Competitive Advantage ........................................................................................................... 21 4.1 4.2 4.3 Stable Economic Outlook ............................................................................................................ 21 Large Market Potential ............................................................................................................... 22 Large Talent Pool ........................................................................................................................ 22 3

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4.4 5

Low Labour Cost.......................................................................................................................... 23

The Road Ahead .................................................................................................................................. 25 5.1 5.2 5.3 5.4 5.5 5.6 Gradual Progression in Telecom Sector ...................................................................................... 25 Acquiring New Subscribers through expansion in Rural India .................................................... 26 Selling More to Existing Subscribers ........................................................................................... 26 Government Initiatives ............................................................................................................... 26 The reasons for the increasing importance of MVAS can be classified as:................................. 26 Defining VAS................................................................................................................................ 27 Basic definition of a VAS ..................................................................................................... 27 Definition as per TRAI ......................................................................................................... 28

5.6.1 5.6.2 5.7 5.8

Mobile VAS in rural market ......................................................................................................... 28 Access devices for MVAS ............................................................................................................ 29 GPRS Handsets .................................................................................................................... 29 3G Handsets ........................................................................................................................ 30

5.8.1 5.8.2 6

Key trends in telecom industry ........................................................................................................... 31 6.1 Mobile Number portability (MNP) .............................................................................................. 31 The Inhibitors ...................................................................................................................... 31 MNP Implementation globally ............................................................................................ 32

6.1.1 6.1.2 6.2 6.3 6.4 7

Wimax v/s 3G .............................................................................................................................. 33 Mobile Virtual Network Operator (MVNO) ................................................................................ 34 IPTV ............................................................................................................................................. 35

Industry Updates................................................................................................................................. 37 7.1 Consolidation in Industry. ........................................................................................................... 37 Idea Cellular’s Acquisition of Spice Telecom....................................................................... 37 Vodafone’s entry into India ................................................................................................ 37 Telenor-Unitech Deal .......................................................................................................... 38 TTSL – DoCoMo Deal. .......................................................................................................... 38 Bharti-MTN deal (in talks). .................................................................................................. 38

7.1.1 7.1.2 7.1.3 7.1.4 7.1.5 7.2 7.3

FDI Investments in the Telecom Sector in India: ........................................................................ 40 Outsourcing by Telecom Service Providers in India .................................................................... 41 Hutchitson Essar (now Vodafone) and Nokia Deal: ............................................................ 41 Bharti Airtel’s IT Outsourcing to IBM: ................................................................................. 41 4

7.3.1 7.3.2

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7.3.3 7.3.4 8

Bharti’s Outsourcing to Alcatel-Lucent: .............................................................................. 42 Bharti Outsourcing Deal with Nokia & Ericsson .................................................................. 42

Future Technology Trends .................................................................................................................. 43 8.1 8.2 8.3 IP Multimedia Subsystem (IMS) .................................................................................................. 43 High Speed Downlink Packet Access (HSDPA) ............................................................................ 44 4G or Fourth Generation Networks ............................................................................................ 44

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Conclusion ........................................................................................................................................... 46 References ...................................................................................................................................... 47

Appendix A .................................................................................................................................................. 48

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1 Indian Telecom Industry
1.1 History
1851 1947 1980’s: The Beginning        Introduction of Telegraph services Foreign Telecom Companies nationalized to form PTT Tele-density in 1980-81: 0.3% Introduction of public pay phones Private Sector allowed DoT, MTNL and VSNL formed Telecom policy 1994 - Basic telephony service to private operators - 49% FDI - 8 licensees began operations in Aug 1995 Birth of a regulator: TRAI NTP 1999 (New Telecom Policy) CAGR of around 85% since 1999 FDI: 74% (2005) having the world's lowest call rates the fastest growth in the number of subscribers (45 million in 4 months), the fastest sale of million mobile phones (in a week), the world's cheapest mobile handset the world's most affordable colour phone

Early to Mid 90’s: A Messy Affair

Late 90’s

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2000+ 2007-2009

1.2 Quick Facts
Total telecom subscribers : Wireless subscribers : Wire line subscribers : Tele density : India’s service providers revenue in Q1 (2009): India’s Rural Mobile Phone Users : 429.72 million (March 2009) 391.76 million 37.94 million 36.98 per cent $8.2 billion 100 Million

1.3 Telecom services
Telecommunication sector in India is primarily subdivided into two segments, which are Fixed Service Provider (FSPs) and Cellular Services. Telecom industry in India constitutes some essential telecom services like telephone, radio, television and Internet. Telecom industry in India is specifically emphasizing on latest technologies like GSM (Global System for Mobile Communications), CDMA (Code Division Multiple Access), PMRTS (Public Mobile Radio Trunking Services), Fixed Line and WLL(Wireless Anjana, Prachi, Puneet, Sandeep 6

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Local Loop ). India has a prospering market specifically in GSM mobile service and the number of subscribers is growing very fast.

Internet PMRTS VSATs Radio Paging GMPCS Basic Services Mobile Services

1.4 Industry Sectors

Network Infrastructure Companies: Alcatel-Lucent, Cisco, Ericsson

Telecom Service Providers: BharatiAirtel, Vodafone, Idea, Reliance.

Telecom

Telecom Equipment Manufacturers: Nokia, Motorola, Samsung

Telecom Solutions Providers: TechMahindra, Aricent, IBM Indi Wipro, Sasken

From holistic point of view telecom industry can be divided to four sub-sets. The major forces in Indian telecom industry are Service providers. All major telecom equipment suppliers have their R&D centers in India. In last 5 years, global giants in mobile devices have set up their manufacturing facitilities in India. The discussions in this document is mainly restricted to only Telecom Service Providers.

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1.5

Growth Avenues

Managed services is another segment that is attracting telecom companies. On account of the rapidly growing subscriber base, service providers find it difficult to manage their infrastructure and network management operations. In such cases, they completely or partially outsource their infrastructure or network management operations. To reduce their network deployment costs, many service providers are considering infrastructure sharing offers the following advantages:       Improved service quality Increased affordability for customers Faster roll out of services in rural and remote areas Significant reduction in initial set up costs Increased environmental aesthetics Lower operating costs for service providers

Enterprise Telecom Services includes key services, such as voice over Internet protocol (VoIP), dedicated telecom communication systems; IT infrastructure enabled unified communication services, etc. Telecom service providers are increasingly targeting enterprises by providing dedicated services and is expected to witness major developments in near future.

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Virtual Private Network is a private data network that provides connectivity within closed user groups via public telecommunication infrastructure. Competition is likely to heat up in the VPN segment as DoT has relaxed the norms for private players. 3G The Indian government plans to auction the spectrum for 3G services by inviting bids from domestic as well as foreign players, and creating a competitive environment that offers better services to consumers. Therefore, the 3G spectrum is among the major investment opportunities and growth drivers of the telecom industry.  The immense potential for 3G is reflected by the 30–40 percent annual growth in ValueAdded Services. Cell phone manufacturers are striving to develop USD 100 priced 3G handsets for the Indian market.

India expects to replicate its 2G growth in 3G services.  WiMAX has been one of the most significant developments in wireless communication in the recent past. Since this mode of communication provides network access in inaccessible locations at a speed of more than 4 Mbps, it is expected to be a major factor in driving telecom services in India, especially wireless services. Thus, it will lead to the increased use of telecom services, Internet, value-added services and enterprise services. WiMAX is expected to accelerate economic growth and assist in providing better education, healthcare and entertainment services.     It is estimated that India will have 13 million WiMAX subscribers by 2012. Aircel is the pioneer in WiMAX technology in India. The state-owned player, BSNL, aims to connect 74,000 villages through WiMAX. Bharti, Reliance and VSNL have acquired licenses in the 3.3GHz range to utilise the opportunities offered by this domain.

Value Added Services:The VAS industry was worth USD 632 million in 2006–07. The industry is estimated to grow by 60 percent in 2007–08 and become an USD 1,011 million opportunity.

The VAS industry is currently focussing on the entertainment sector, such as the Indian film industry and cricket; however, there is scope for growth in other avenues as utility-based services, such as location information and mobile transactions.  Rural Telephony: As the government targets to increase rural teledensity from the current 2 percent to 25 percent by 2012, rural telephony will require major investments. This segment will boost the demand for telecom services, equipment, Internet services and other value-added services; thereby, offering great market opportunities for telecom players.

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1.6 Industry Revenue (2002-2010)
According to a Frost & Sullivan industry analyst, by 2012, fixed line revenues are expected to touch US$ 12.2 billion while mobile revenues will reach US$ 39.8 billion in India. India has become the second country in the world to have more than 100 million CDMA-based (code division multiple access) mobile phone subscribers after the US, which has 157 million CDMA users. The Indian telecommunications industry is on a growth trajectory with the GSM operators adding nearly 9 million new subscribers in April 2009, taking the total user base to 297 million, a growth of 3.11 per cent over the additions made the previous month. The figures, however, do not include the GSM subscriber additions made by Reliance Telecom. Year 2002-03 2003-04 2004-05 2005-06 2006-07 2008-09 2009-10(forecasted) Revenue(US$ billion) 9 10 11 15 20 32 43

Revenue(US$ billion)
Revenue(US$ billion) 43 32 15 20

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1.7 Subscriber Growth
India added 130 million new customers in 2008-09, the largest globally. The country’s cellular base witnessed close to 50 per cent growth in 2008, with an average 9.5 million customers added every month. By April 2009, the total number of telephone connections reached 441.47 million. With this growth, the overall tele-density reached 37.94 at the end of April 2009. According to Business Monitor International, India is currently adding 8-10 million mobile subscribers every month. It is estimated that by mid 2012, around half the country's population will own a mobile phone. This would translate into 612 million mobile subscribers, accounting for a tele-density of around 51 per cent by 2012.

Source: www.trai.gov.in

1.8 Major Players
Bharti-Airtel leads the wirless market with 24% market share. The company recently achieved the magic figure of 100 million subscribers. However, Bharti-Airtel expects a bloodbath in the Indian telecom market in the near future, and is looking to spread its risks by entering new geographies (Bharti-MTN deal is discussed in Industry Update Section). With 12-13 players present in the market there would be a severe pressure on margins. Be it an Aircel or Etisalat, the new operators would not remain fringe players in the Indian market, but would try and rock the applecart of existing operators. The growth in Indian market could start tapering off very soon. According to an industry expert the subscriber base will not expand beyond 800 million in coming years from current number 400 million. Also, ARPUs in India have steadily falling($5-$6). There have been talks about 3G and IPTV pushing growth, but it all seems far-fetched. The third generation of mobile services (3G) will be used by telcos to gain more spectrum. Besides, the services will be used only in urban areas.

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1.8.1 Wireless Service Providers (Market share)

As on June 30th 2009
Bharti Airtel 18% Vodafone Essar 24% BSNL IDEA Aircel 18% 11% 11% Reliance GSM MTNL Loop Mobile Tata Teleservices

8% 1% 1% 3% 5%

Source: www.coai.com

1.8.2 Handset Manufacturers (Market share)
India's telecom equipment manufacturing sector is set to become one of the largest globally by 2010. Mobile phone production is estimated to grow at a CAGR of 28.3%, totaling 107 million handsets by 2010. Nokia Leads the market with whopping 60% share. Korean giant Samsung currently at number there is looking forward increase its market share to 20% through aggressive marketing.

Handset Market

5% 6% 7% 8%

15%

Nokia Sony 60% Samsung Motorola LG Others

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1.9 Major Investments
The booming domestic telecom market has been attracting huge amounts of investment which is likely to accelerate with the entry of new players and launch of new services. Buoyed by the rapid surge in the subscriber base, huge investments are being made into this industry.

     

The Russian government is likely to pick up equity amounting to US$ 670 million-US$ 700 million in Sistema Shyam TeleServices Ltd (SSTL), a joint venture between Russia-based telecom major Sistema and Shyam Group in India, by the end of this financial year. SSTL is also planning to invest US$ 5.5 billion over the next 5 years in India. Norway-based telecom operator Telenor has bought a 60 per cent stake in Unitech Wireless for US$ 1.23 billion. Japanese telecom major NTT DoCoMo acquired a 27.31 per cent equity capital of Tata Teleservices for about US$ 2.6 billion in November 2008. Bahrain's Batelco has signed a deal to buy 49 per cent in Chennai-based S-Tel, a GSM service provider, for US$ 225 million. BSNL, India's leading telecom company in revenue terms, will put in about US$ 1.16 billion in its WiMax project. Vodafone Essar will invest US$ 6 billion over the next three years in a bid to increase its mobile subscriber base from 40 million at present to over 100 million. Telecom operator Aircel, which launched GSM mobile services in Bangalore in February 2009, plans to invest US$ 220.58 million over the next year to set up base stations across the state.

Some deals are discussed in detail in industry consolidation section.

1.10 Rural Telephony
Rural India had 76.65 million fixed and Wireless in Local Loop (WLL) connections and 551,064 Village Public Telephones (VPT) as on September 2008. Therefore, 92 per cent of the villages in India have been covered by the VPTs. Universal Service Obligation (USO) subsidy support scheme is also being used for sharing wireless infrastructure in rural areas with around 18,000 towers by 2010.

1.11 Exploring the rural telecom opportunity
It is believed that of the next 250 million people expected to go mobile; at least 100 million will come from rural areas. Though the rural mobile penetration is highest in Punjab (20.69 per cent), followed by Himachal Pradesh (17.09 per cent), Kerala (10.63 per cent) and Haryana (10.20 per cent), most companies are now sweating it out by hard selling their products and services in the rural areas of the region. As a result, the geographical coverage of mobile telephony in India has gone up from 13 percent, a couple of years ago, to 39 percent now.

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1.12 Policy Initiatives
The government has taken many proactive initiatives to facilitate the rapid growth of the Indian telecom industry.
    

100% foreign direct investment (FDI) is permitted through the automatic route in telecom equipment manufacturing FDI ceiling in telecom services has been raised to 74% Introduction of a unified access licensing regime for telecom services on a pan-India basis Plan to introduce mobile number portability in a phased manner The government is implementing a program of connecting 66,822 uncovered villages under the Bharat Nirman programme. The government will invest US$ 2 billion to set up 112,000 community service centres in rural India to provide broadband connectivity in 2008-09. The Department of Telecommunications (DoT) has stated that foreign telecom companies can bid for 3G spectrum without partnering with Indian companies. Only after winning a bid, would they need to apply for unified access service licence (UASL) and partner with an Indian company in accordance with the FDI regulations.

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2 Telecom Regulatory Authority of India (TRAI)
2.1 Mission
To ensure that the interests of consumers are protected and at the same time to nurture conditions for growth of telecommunications, broadcasting and cable services in a manner and at a pace which will enable India to play a leading role in the emerging global information society.

2.2 Role of TRAI
One of the main objectives of TRAI is to provide a fair and transparent policy environment which promotes a level playing field and facilitates fair competition. In pursuance of above objective TRAI has issued from time to time a large number of regulations, orders and directives to deal with issues coming before it and provided the required direction to the evolution of Indian telecom market from a Government owned monopoly to a multi operator multi service open competitive market. The directions, orders and regulations issued cover a wide range of subjects including tariff, interconnection and quality of service as well as governance of the Authority. The functions of TRAI can be divided as : Recommendatory function and Mandatory Function.

2.3 Recommendatory Functions
   

Need and timing for introduction of new service provider Terms and conditions of licence to a service provider Revocation of license for non-compliance of terms and conditions of license Measures to facilitate competition and promote efficiency in the operation to facilitate growth in industry Technological improvement in services by service providers Inspection of type of equipment used by service provider Measures for Technological development Efficient Management of available spectrum

   

2.4 Mandatory Functions
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Ensure compliance of terms and conditions of license Fix the terms and conditions of their inter connectivity between service providers Ensure Technical compatibility and effective inter-connection between different service providers

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Regulate arrangements for sharing of revenues amongst service providers Lay-down the standards of QoS to be provided by service provider,ensure this by periodical survey Lay-down and ensure time period for providing local and long-distance circuits of telecommunication between different service providers Maintain inter-connect agreement register Ensure compliance of USO(universal service obligation)

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2.5 Other functions
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Levy fees and other charges as determined by regulations Perform administrative functions as entrusted to it by Central government or as per TRAI act Notify in Official Gazette the service rates and message rates within and outside India

Snapshot of TRAI functions

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3 Spectrum Auctions in India Vis-à-vis Worldwide
Spectrum auctions have been used with significant success in many developed countries. From a regulatory and policy perspective, spectrum auctions ensure the efficient use of spectrum by allocating it to those entities that value it most, while also generating revenues for governments. But auctions may lead to unexpected outcomes due to unanticipated problems with their design leading to unexpected bidder behavior such as collusion and over-bidding. The key challenge before regulatory agencies is to design auctions in such a way as to meet the objective of fostering competition while at the same time ensuring that bidders can effectively use the spectrum for their business. With private initiatives increasing in telecom and broadcast service provision, demand for spectrum has increased. Digital technology has increased the scope of applications and created new areas of service provision. Cellular telephony and wireless Internet are examples of such services. Despite technological changes that reduce the demand for spectrum, availability of spectrum continues to be a constraint. In order to allocate spectrum amongst competing service providers, regulatory agencies often use auctions. From the regulatory and policy perspective, spectrum auctions ensure efficient usage by allocating it to those entities that value it most, while also generating revenues for governments. But auctions may lead to unexpected outcomes as, for example, when regulatory agencies have inadequate market information, there may be a mismatch between expected and actual bidder behavior, or auctions may be poorly designed. The key challenge before regulatory agencies is to design auctions in such a way as to meet the objective of fostering competition while at the same time ensuring that bidders can effectively use the spectrum for their business.

3.1 Spectrum Auction Scenario in India
While India was one of the early adopters of spectrum auctions, its success in service provision has been low. Despite this early start, services have been slow to roll out. In India, telecom licences were auctioned for basic and cellular services from 1991 by the Department of Telecom (DoT), the incumbent government policy maker, regulator and service provider. For service provision, the entire country was divided into roughly 20 circles, categorized as A, B, or C depending upon their revenue potential. The circles were mostly co-terminus with the DoT’s administrative boundaries and the states. Potential service providers were required to seek foreign partners, as it was felt that no Indian company had the requisite financial strength and technical know Source: www.telenor.com how. For all licenses, bidding was a two-stage process, the first being a pre-qualification based on the evaluation of financial net worth (linked to the category of circle and service bid for) and experience in service provision and the second stage involved Anjana, Prachi, Puneet, Sandeep 17

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evaluation of bids. The bids were single stage, with the award going to the highest bidder drawn from those that satisfied the pre-qualification conditions. For cellular licences, Global System for Mobile Communications (GSM) was the chosen technology and for basic services, a combination of fiber optic and wireless in the local loop (WLL) was selected. For cellular services, there were separate licenses for the four major metros of Kolkata (Calcutta), Chennai (Madras), Mumbai (Bombay) and New Delhi. The licenses for the circles containing the metros excluded these cities. For metro licenses, the financial bids were to be evaluated on the rental to be charged to the customer for the first 3 years.(The airtime tariffs were fixed by DoT.) The licensee fee was a flat amount for the first 3 years and then was linked to the number of subscribers, subject to a minimum amount. Subsequent to the bid opening, the rentals were fixed at Rs. 1561 based on the amounts specified by the winners, even though some winning bids had zero out in metros, and bidders were evaluated on an annual license fee for the duration of the license, converted to its net present value at a specified discount rate. The second highest bidder had to match the highest bid in order to obtain the license. Despite these initiatives, service roll out continued to be slow. The government then set up a group on telecom (GOT), that consisted of top-level bureaucrats, industrialists and professionals to evolve a future policy framework for the sector. This was presumably effected outside the DoT as the government felt that the DoT might not be able to conceive a radically different roadmap or might thwart the involvement of the private sector or produce a regulatory framework crafted in the DoT’s vested interest. The GOT drafted the National Telecom Policy in 1999,2 (NTP 99) which presented a roadmap for resolving the impasse. All existing license holders could ‘‘migrate’’ to a new regime that involved a one time payment as entry fee and an annual revenue share with the government, provided that all operators withdrew their court cases against the government on a variety of issues such as delays in clearances. The entry fee was based on a percentage of the total amount of the original bid. This change greatly facilitated private sector participation and several operators subsequently commenced services. As a part of the package,the operators also agreed to allow the government to increase the number of players in their service areas.

3.2 Gaps in Indian Spectrum Auction Licensing Scenario
The absence of clear separations in DoT’s responsibilities for policy, regulation and operations led to several delays and lowered the credibility of the government. Like all incumbents, it saw its position threatened by impending private participation and set impediments in the service roll out, whereas in its role as a policy maker, it was required to design the auctions to facilitate service provision. Confusion in DoT was also evident from the manner in which it handled the interconnect issues. Managing the caps on the number of circles or delays in clearances after the bids were opened showed a lack of adequate preparation in the auction design process. The establishment of TRAI and NTP 99 brought about major changes to the licensing process and converting the licence fee to a revenue sharing regime signaling the governments changing perspective and willingness to bear a part of the market risk. Subsequently, an interconnect framework has been put in place (although problems persist) and service provision has accelerated. Anjana, Prachi, Puneet, Sandeep 18

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3.3 3G Spectrum allocation policy in India in 2009
In the conducive business environment, India Inc. awaits the rollout of 3G services. The Indian government plans to auction the spectrum for 3G services by inviting bids from domestic, as well as foreign players and creating a competitive environment that offers better services to consumers. Therefore, the 3G spectrum is among the major investment opportunities and growth drivers of the telecom industry.     The immense potential for 3G is reflected by the 30-40 per cent annual growth in value added services The global revenue for 3G is 60 per cent higher than that of other services Cellphone manufacturers are striving to develop US$ 100-priced 3G handsets for the Indian market India expects to replicate its 2G growth in 3G services. The Indian market is well poised to leverage the 3G service offerings in content categories such as sports, games and music. In the present context, 3G technology is extremely relevant for India. It offers voice capacity that is four to five times higher than that of 2G services. Therefore, it is an ideal platform for low-cost cellular services It can fulfil the need of fast developing mobile penetration in rural areas It can meet the demand for high-speed data and content rich services in the urban landscape It can play a vital role in augmenting the competitiveness of the country’s large BPO segment It can be a way forward to achieve the Government’s broadband objectives.

    

In addition, it will be a good solution for education, telemedicine, etc. Even if 2 per cent of the 180 million cellular subscribers adopt 3G technology as soon as it is launched, it is likely to create an initial subscriber base of 3.6 million. The market is slated to capture more than 11.3 per cent of all mobile subscribers by 2010, i.e., 21.3 million people. Therefore, it would not be incorrect to assume that 3G is poised to create the next mobile revolution in India. In the race towards lowering the entry barrier for 3G services, companies plan to offer bundled service packages with subsidised handsets.With regard to its business potential, many national players have already completed 3G trials. BSNL has charted out a plan for launching 3G services in 250 cities. Private players, such as Bharti, Reliance and Idea, are also ready to offer this service in 10-20 major Indian cities. However, Airtel and MTNL are very keen on leveraging their first mover advantage in this field. In June 2009 the DoT (Department of Telecom) in India has announced the radio spectrum that will be made available when 3G licenses are eventually auctioned off.It could be the case that just 4 Operators are given radio spectrum around Delhi - given that two incumbents (BSNL and MTNL) already have some licenses in each zone, then that would be just the possibility of two new Operators coming to play. In other areas, there is apparently going to be more provision for private players - meaning up to 11 ‘Operators’ could enter business. The greater availability of spectrum in these other zones is due to the Defence Ministry giving up some of its Spectrum. Anjana, Prachi, Puneet, Sandeep 19

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There is still much to-ing and fro-ing to be done though over the 3G licenses themselves - currently there are disputes over how many Operators can exist per zone, and whether the relevant spectrum is sold in tranches, or in one go. Hopefully something will be resolved soon, as India is beginning to really lag behind in 3G technologies, particularly as many other countries are already at HSPA (3.5G) level, and going to HSPA+ (3.75G) soon.

3.4 Comparison-Spectrum Allocation Policy in UK
The UK 3G auction took the necessary steps to design the auction appropriately,keeping in mind the past discrepencies. In the UK, there were already four established mobile players that had 2G licenses covering nearly 97 percent of the area and 90 percent of the population. Incumbents who won a 3G license, could provide roaming services over the existing 2G network to new 3G customers. In contrast, a new entrant needed to establish a roaming arrangement with the incumbent 2G providers. The incumbents could thwart competition by denying or delaying roaming facilities to the new entrants. The government felt that new entrants needed certainty regarding their ability to be able to provide roaming over the existing networks and, therefore, mandated that incumbents would have to provide roaming to the new entrants. Such a mandate necessitated a change in the existing licenses that was undertaken for the dominant providers. The incumbents sought several changes to the originally proposed roaming conditions which would be to their advantage. The FCC, the Radio Communications Agency that conducted the 3G auctions in UK and Oftel (the UK regulator) went through a detailed public discussion involving industry, academia and other interested parties in designing the auctions. This allowed regulatory agencies in these countries to auction spectrum for all services rather than having to choose allocation mechanisms separately for various services.

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4 India’s Competitive Advantage
An analysis of the Indian telecom industry under the Porter’s Diamond Model reveals that India offers a competitive advantage for firms operating in the country. India is the fastest growing free market democracy in the world. It has a mature and dynamic private sector, which accounts for 75 per cent of India’s GDP, and a market with enormous potential due to its large size and diversity. It is also expected to achieve the highest growth rate among the BRIC countries (Brazil, Russia, India and China). India offers significant business opportunities to the services, as well as the manufacturing sectors. This is because India offers benefits such as cost advantage in product development and back-office processing and the large-scale availability of skilled English-speaking professionals. The middle class population is also a significant market for any business entity. AT Kearney ranked India as the second-most attractive democracy in its FDI confidence index. The success of MNCs is a proof that India is an attractive investment destination. India’s huge domestic market and buoyant economic growth have always attracted foreign investors. Some of the key advantages of investing in India are outlined below.

4.1 Stable Economic Outlook
A decade of reforms has opened the country to greater competition and spurred industries to become more efficient. India is currently the fourth-largest economy on PPP basis and is well positioned on a continuously increasing growth curve. India’s emergence as a leading destination for foreign investment is a result of positive indicators such as a stable 6 per cent annual growth, rising foreign exchange reserves of over US$ 266.18 billion(July 24th 2009) and Foreign Direct Investment (FDI) of US$ 15 billion. Goldman Sachs had earlier predicted that India will become the third-largest economy in the world. However, it has now revised its previous estimates and claims that by 2050, India will even surpass the US and become the second-largest economy after China. The country’s economic growth has become more attractive due to the rising share of the services sector in the GDP.

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4.2 Large Market Potential
Around 30-40 million people in India join the middle class every year. The country’s upper middle class spends 6 percent of its earnings on telecom services. India is one of the largest consumer markets in the world. Due to rapid economic growth and rise in disposable income, the spending power of consumers is increasing rapidly. It has been forecasted that 15 years down the line, Indians will be approximately four times richer than they are today. As per this forecast, Indians will purchase five times more cars and consume three times more crude oil than they do today.

According to the 2001 census, about 54 per cent of the country’s total population was below 25 years of age. By 2013, another 200 million people will be joining the league, representing an exponential growth in the ‘consuming class’. India will become a large consumer of world resources - be it natural or manmade, thereby offering numerous opportunities to marketers around the globe. Approximately 33 per cent of India’s population will be residing in urban areas by 2026, as against 28 per cent in 2001.

4.3 Large Talent Pool
The working age population is expected to rise by 83 per cent by 2026. India has over 380 universities and about 1,500 research institutes, which churn out approximately 200,000 engineers, 300,000 post graduates, 2,100,000 other graduates and around 9,000 PhDs. This large base of skilled manpower offers unparalleled advantages to the companies operating in India. As a result, many multinational companies have either established operation hubs in India to leverage this sizeable talent pool, or they have outsourced their work to a third party in India. The numerous BPOs and KPOs flourishing in India are a direct consequence of companies choosing the latter option.

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4.4 Low Labour Cost
CII estimates that manufactured product outsourcing accounted for US$ 10 billion in 2007. The value will escalate to US$ 50 billion by 2015. India has one of the lowest labour costs among the developing countries, which is the foremost factor for attracting multinational giants in every sector. The Ministry of Commerce, Government of India, has estimated that off shoring operations to India can provide a cost benefit of up to 40 to 60 per cent, as compared to developed countries. The country has also emerged as a major R&D hub with more than hundred Fortune 500 companies based in India. An apt example is Nokia, which has set up its manufacturing operations in India considering the long term sustainable demand for mobile telephony. The company believes that this initiative will help the company in reducing time to market and respond better to customer requirements. It has pumped in US$ 150 million into its Chennai facility.

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Intensive competition in the country has made it possible for service providers to offer the services with lowers fare in the world, profitability, Many new handset have been launched.

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Chance

Firm strategy structure and rivalry.

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India has a large middle class of 300 million, Growing affordability and lifetime free schemes have care a market at the bottom of the pyramid. Low teledensity (~18%) offers huge future potential.

Factor Conditions

Demand conditions

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Presence of skilled labour pool. Rapidly developing robust telecom infrastructure. Increasing disposable income of consumers. Increasing demand due to changing lifestyles and growing attraction for mobiles with new features. -

Government

Related and supporting industries

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Competent handset manufacturers have produced the lowest priced handsets for the Indian market. Handset players are setting up manufacturing bases in India for better operation management. Many telecom and equipment and software companies are based in India.

-The government extends full support to industry through reform processes. - Policies are in place to safeguard the interests of service providers, as well as those of consumers.

Porter’s Diamond Model – Indian Telecom Industry
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5 The Road Ahead
The target for the 11th Plan period (2007-12) is 600 million phone connections with an investment of US$ 73 billion. Apart from the basic telephone service, there is an enormous potential for various valueadded services. In fact, the real potential for telecom service growth is still lying untapped. According to the CII Ernst & Young report titled 'India 2012: Telecom growth continues', revenue from India's telecom services industry is projected to reach US$ 54 billion in 2012, as against US$ 31 billion in 2008.

India is the world’s largest untapped mobile market

5.1 Gradual Progression in Telecom Sector
The progression chart below depicts the major regulations and events driving the extra ordinary growth of Telecom sector from year 1999 to 2008. In order to capitalize this opportunity of meeting the consumer needs in highly competitive market the operators have reduced the tariffs to attract consumers with low purchasing power primarily in semi urban and rural India. In fact lucrative offers like being paid for incoming calls have transformed the scenario completely. Through these changing regulations and events, the Industry players are aiming to achieve the following   Acquiring new subscribers by expanding in Semi Urban and Rural India Selling more services to existing subscribers

The recent TRAI recommendation permitting PC-to-phone calls where ISPs can offer cheaper STD calls and even free local calls. This would result in further reduction of voice tariffs. This would lead to increased focus on MVAS by mobile operators.

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5.2 Acquiring New Subscribers through expansion in Rural India
Acquiring customers have always been a great challenge for companies. Given the current level of saturation in Metros and Urban Market and cut throat competition among operators , increasing subscriber base in urban market would be all the more challenging. Therefore a lot of operators with adequate support from Government are eyeing the rural market for future growth. Big operators like Airtel have claimed that soon mobile connections and recharge vouchers etc will be available at all such places from where people buy match boxes. This certainly explains the future penetration of these services in remotest of villages.

5.3 Selling More to Existing Subscribers
This is relatively easier as compared to acquiring new customers. Also since now the new subscriptions will largely happen at the bottom of the pyramid therefore the new subscriptions will further lower the average revenue per user. In such a scenario mobile VAS sector is a potential long-term revenue stream as it will be easier to sell more to the existing customers.

5.4 Government Initiatives
Government also has supported the growth of this sector by coming out with a number of initiatives for the low end subscribers of rural India, and Universal Service Obligation (USO) fund was one such initiatives. The USO fund was an initiative taken up by the government to increase rural teledensity. In recent developments, BSNL and two private operators will erect 427 towers in remote areas offering over four lakh mobile connections. All the towers are expected to be erected and commissioned by December 2008. Under the second phase, DoT aims at erecting 11,000 towers throughout the country to offer over 11 million mobile connections ADC was levied by Telecom Regulatory Authority of India (TRAI) in 2003 to provide support for BSNL's rural telephone obligation. Telecom Regulatory Authority of India (TRAI) has recently given orders for the withdrawal of the ADC (Access Deficit Charge) and the subsequent passing of the benefit to the consumers by the telecom operators.

5.5 The reasons for the increasing importance of MVAS can be classified as:
Decrease in ARPU despite increase in MOU: Though the subscriber base is growing at a rapid pace and has positively impacted industry revenues, operator margins also have shrunk owing to competition and lower “Average Revenue per User” (ARPU) as the major growth is coming from bottom of the pyramid. As ARPU declines and voice gets commoditized, the challenge is to develop alternative revenue streams and retain customers by creating a basis for differentiation in high-churn markets. Need for differentiation: There is a greater need among the telecom operators to differentiate themselves from each other.  Number of Licensees: With increasing number of licensees (98 UASL, and 37 cellular licenses) in the telecom space the average numbers of operators in many circles have increased to 5-6 operators offering more choices to the consumer. Thus the competition among the operators has increased tremendously. Therefore it is very important for them to differentiate themselves from the others. Now that voice has got commoditized these operators are using MVAS for their

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 

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differentiation and marketing these services heavily for creating awareness among the consumers. Decreasing Call Rates: In order to attract consumers with relatively low purchasing powers primarily from Semi Urban and Rural India the operators have drastically reduced the call rates making it affordable to even the lower segment of society. The tariff in India is one of the lowest at Rs.1 per minute as compared to the tariff in developed nations like USA and UK where the call rates are Rs.13 and Rs7-8 respectively. 3G bidders who are non operators: The arrival of new technologies will give rise to greater competition as many non operators are also bidding for the 3G licenses. Department of Telecom has planned to allow five 3G operators in each circle depending on the availability of spectrum.Therefore there would be a greater need to differentiate one self in order to attract new customers and retain the existing ones. Saturation in Metro and Urban Market: The metro/urban areas offer high level of penetration and have significant mobile subscribers. In such a highly saturated market with the entry of MVNO’s the competition will get fierce. Therefore capitalizing on value added services will give operators opportunity to increase ARPU by providing premium services.

Increasing need and demand from consumers: In addition to the above supply side reasons the ‘pull effect’ from consumers asking for more than just basic telephony is also a key driver for MVAS services. Today most of the consumers are seeking more from their communication device apart from just mobility and desire to stay connected. As we have seen, Telecommunication has moved beyond providing just basic voice calls. The mobile phone has evolved from a mere communication device to an access mode with an ability to tap a plethora of information and services available in the ecosystem. This is the reason why it is now being referred to as the ‘fourth screen’, after Cinema halls, Television and PC.

5.6 Defining VAS
But the fundamental question that remains is how VAS is defined. A clear MVAS definition is not only required to clear the air among the MVAS providers but it will also have an impact on the dynamics of the Value chain. A detailed definition of VAS might have an impact on the licensing issues surrounding VAS. Let’s look at different VAS definitions floating in the market.

5.6.1 Basic definition of a VAS
Value Added Service (VAS) in telecommunication industry refers to non-core services, the core or basic services being standard voice calls and fax transmission including bearer services. The value added services are characterized as under: Not a form of core or basic service but adds value in total service offering.  Stands alone in terms of profitability and also stimulates incremental demand for core or basic services  Can sometimes be provided as stand alone.  Do not cannibalize core or basic service. Anjana, Prachi, Puneet, Sandeep 27

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 Can be add-on to core or basic service and as such can be sold at premium price.  May provide operational synergy with core or basic services. A value added service may demonstrate one or more of these characteristics and not necessarily all of them. In some cases, the value added service becomes so closely integrated with the basic offering that neither the user nor the provider acknowledge or realize the difference. A classic example is of P2P SMS. Some of the operators do not consider P2P SMS as part of their VAS revenue.

5.6.2 Definition as per TRAI
In the Unified Access Service License (UASL), VAS is defined as follows“Value Added Services are enhanced services which add value to the basic teleservices and bearer services for which separate licence are issued” The Government of India issues licenses for the following Value Added Services: Public mobile trunking service  Voice mail service  Closed users group domestic 64 kbps data network via INSAT satellites system  Videotex service  GMPCS  Internet  Audiotex  Unified messaging service

5.7 Mobile VAS in rural market
The next wave of Telecom growth will come from the bottom of the pyramid. For majority of the population in the rural segment, the mobile phone is the first communication device. Rural should not always be interpreted as poor and therefore some categories of MVAS might apply directly to them. But whether the statement can be extended to MVAS depends on some key factors. One is to clearly identify the need of the rural segment, second is to communicate the services to them i.e. generate awareness and thirdly, to provide an easy and cheap access mode to the rural consumers. All these 3 are quite big challenges and therefore needs to be addressed adequately for MVAS to take off in Rural India. Apart from the identification of rural consumer needs and development of relevant content, communication of these services to the rural population would be a bigger challenge. One way to do this is to communicate through regional SMS for which a separate SMS gateway needs to be installed. Literacy level of the geographical area will be another limitation. Therefore the better communication option is Voice in regional languages. The challenge with regional voice is not only investment but also blockage of the already scarce spectrum. Marketing the content in rural market is going to be all the more challenging. This would require right packaging and pricing of MVAS. Providing cheap access mode to end consumer would be another key booster to rural MVAS. Current voice MVAS charges are expensive from a rural consumer perspective

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therefore that also would need to be addressed for e.g. the ‘sachet model’ could prove to be successful here. MVAS is going to address two main needs of rural consumers- connectivity and entertainment mode. Connectivity will provide Information VAS on Agriculture necessary for the farmer’s livelihood e.g. mandi rates, weather, etc. Health, finance, job opportunities etc are potential areas. Mobile also has the potential to evolve as a key entertainment mode considering lack of other entertainment options in rural areas. The industry has witnessed some type of content being downloaded more in small towns of UP and Bihar rather than in metros like Delhi and Mumbai. Therefore by leveraging on these two aspects MVAS can be a success in rural area.

5.8 Access devices for MVAS
5.8.1 GPRS Handsets
Currently the penetration of GPRS enabled handsets are close to 26% in India as against 99% in South Korea and 76% in Japan. Of the total mobile subscribers in India 65 million possess GPRS-enabled handsets. Of all those who posses GPRS enabled handsets only 20-25% of them have got the GPRS activated and only about 15% use it. Even in case of developed nations like South Korea and Japan not more than 50% of the subscribers owning GPRS enabled handsets use it.

This clearly indicates that the consumer today engage more in text based services than the web based applications. Therefore for MVAS to grow to its full potential the handset manufacturers will have to look at ways to manufacture GPRS enabled phones which are affordable and user friendly. Moreover they would also need to increase its awareness and educate the consumers on how to use GPRS.

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5.8.2 3G Handsets
The market for 3G in the country is expected to be huge with over 65 million wireless subscribers, who use their handsets to access data services on the Web. These subscribers are currently using mobile handsets which are internet-enabled and are potential broadband subscribers with the deployment of advanced wireless technologies such as 3G. According to Indian Cellular Association (ICA) about 5% of mobile users already have handsets that can work on 3G spectrum. In addition, out of all those possessing the 3G enabled handsets the number of people who would use 3G services would be determined by the quality of content available. Unlike most other countries, we are looking at 3G services not only as premium services but also as an extension of 2G. Since our broadband penetration is abysmal, 3G would provide a much required boost to it. Given that mobile phones are much cheaper as compared to PCs, the demand for broadband on mobile is expected to be much greater. More importantly, 3G will solve problems more in rural India. Therefore the shift towards 3G would depend on affordability of handsets along with the quality of content available.

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6 Key trends in telecom industry
6.1 Mobile Number portability (MNP)
One of the most frequent definitions that prevail in the telecom circles for number portability is: "Number portability is a circuit-switch telecommunications network feature that enables end users to retain their telephone numbers when changing service providers, service types, and or locations." Why mobile number portability (MNP)? When fully implemented nationwide by both wireline and wireless providers, portability will remove one of the most significant deterrents to changing service, providing unprecedented convenience for consumers and encouraging unrestrained competition in the telecommunications industry. In short, this is the best method to increase the efficiency of the service provider by increasing the competition, thereby ensuring better services in all respects. From the subscribers’ perspective, this is a deceptively simple and very welcome change, because they can change wireless service providers without worrying about notifying friends, family and business contacts that their wireless number is changing. In addition, being able to ‘port’ a number from one provider to another eliminates the hassle and expenses of changing business cards, stationery, invoices and other materials for businesses. From the wireless carrier’s perspective the change is anything, but simple. Virtually all of wireless carriers’ systems are affected. Especially any system that relies on mobile identity numbers (MINs) or mobile directory numbers (MDNs) will be affected. Examples of critical systems and processes that would be affected are: billing, customer service, order activation, call delivery, roamer registration and support, short messages service center, directory assistance, caller ID, calling name presentation, switches, maintenance and CSC systems, home location registers (HLRs), and visiting location registers (VLRs).

6.1.1 The Inhibitors
Huge Costs: One of the most common barriers in MNP implementation, within any country, has been the implementation cost. Service Providers have been constantly bargaining for time, based on the cost factor, from their respective governments. Referring to the recent example of the US, where each of the large carriers would need to spend $50–60 million to institute the service and an equivalent sum to maintain it. The FCC on this plea gave wireless carriers in the US another year, i.e., till November 2003, for resolving implementation issues. The experience of developed countries exhibits that local number portability for fixed wireline was introduced within two to three years of introduction of competition to incumbent state telcos. The cost estimate for the implementation of WNP in developed nations like the US can be very helpful for the other countries, who wish to think on the lines of number portability. To add on increased marketing costs are to be realized as the carriers look to lock up their current base before number portability is implemented, and then aggressively pursue the customers of other carriers thereafter.

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Customer Retention/Increased Competition: Every subscriber in a race to retain its customer would like to offer its customers best services so as to save them from porting. It’s like a blessing in disguise for the customers, as they would get better service irrespective of the carrier, albeit with the same number. Infrastructure Upgrade: To support WNP, a company has to upgrade both its hardware and software capabilities, which will amount to some cost. Softwares need to be upgraded to provide proper routing of calls. The carriers need to upgrade their networks to handle portability requests. The provider, which has its portability compatible would be expected to attract maximum customers and will emerge the winner. Cost Recovery and Bill Reconciliation/Query Processing: When a customer plans to shift, the old service provider (OSP) has to perform a query to identify if there are any billing amounts pending, which they need to recover before the subscriber moves to the new service provider (NSP).

6.1.2 MNP Implementation globally
Globally, Singapore was the first country to implement MNP in 1997, followed by Hong Kong in 1999 and Australia in 2001. Off late, many countries have adopted the MNP model to prevent market doldrums and putting pressure on service providers to furnish more services at a competitive price level. However, it has not been able to produce any significant results in these markets. While it has worked in markets like Hong Kong and Australia, it failed to bear fruit in the UK, France, Germany, Pakistan, Ireland, Malta, among others. MNP worked in Hong Kong due to the speedy porting process and the availability of already implemented solution (for fixed-line services). In Australia, the regulator effectively promoted number portability and was able to maintain the maximum porting time of just under three hours. Furthermore, in Finland, where initially the implementation was viewed as a success due to dearth of minimal contract periods and high migration incentives, operators failed to sustain the momentum.

The failure in most markets where MNP was implemented is attributed to factors like half-hearted implementation, issues related to contract, lack of consumer awareness, overboard of paperwork, technical difficulties and poor customer service. Anjana, Prachi, Puneet, Sandeep 32

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The neighboring country Pakistan, the first country in Southeast Asia to introduce MNP in March 2007, experienced less than 1% portability. One of the reasons for such poor response is the pitiable customer service and time consuming process during porting the number. Pakistan has over 90 mn cellular subscribers with approximately 95% of them pre-paid. According to experts, disaster recovery and business continuity are also critical elements for MNP providers and hence, it is essential to have a backup center connected over secured redundant leased lines. This center should also be located on a different seismic area. There is no doubt that if implemented successfully, MNP can be a big boon for Indian cellular subscribers. However, considering the overall market dynamics and past experiences, the approach of the government and gaps in implemetation planning, its success can be strictly questioned in the long run. The regulators therefore need to build their fundamentals. To make MNP utilitarian for consumers, the government needs to have a clear roadmap, strategic policies and should define strict guidelines and timelines for the service providers.

6.2 Wimax v/s 3G
The WiMAX vs. 3G cellular showdown is poised to become one of the next great market battles in the telecom industry. Fortunes will be made and lost in this battle, and the user experience of the Internet will be irreversibly changed in the process. 3G scores for voice; Wimax may lead to increased broadband penetration. With the Department of Telecommunications gearing up for simultaneous release of 3G and WiMax spectrum, analysts expect the two emerging wireless technologies to battle it out for supremacy. WiMax or Worldwide Interoperability for Microwave Access is a telecom technology that enables wireless transmission of data. The technology is available as IEEE 802.16D (fixed) and IEEE 802.16E (mobile). It offers downloads of up to 70 Mbps as compared to the 15 Mbps that 3G provides. Mobile WiMax offers download speeds of around 20 Mbps. In India, companies like Tata Communications Internet Services, Intel, Bharat Sanchar Nigam Ltd, Bharti Airtel and Reliance Communications are the proponents of WiMax. Most of the companies have had beta-runs of the technology. According to a top official with a service provider, telecom service providers are in various stages of WiMax implementation. Some companies have commercially launched fixed WiMax services in certain cities. While opponents of WiMax say currently it cannot be used for mobile applications, the first mobile WiMax network was introduced in Italy this July. Another reason for the industry pinning its hopes on WiMax is its ability to increase the broadband penetration. WiMax makes huge sense for companies as it enables them to provide cheaper mobile internet and broadband services, in turn, increasing the internet penetration. However, this will adversely impact services like GPRS and e-mail on mobile as

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users might move over to WiMax-enabled devices for data, even though they might stick with 3G or 2G spectrum for voice. The Telecom Regulatory Authority of India has set a target of 20 million broadband connections by 2010 from the current 4.3 million. The industry expects WiMax to bridge the gap. According to a consultant of Ernst & Young service providers would mainly use the technology for gaining traction with the customers, as providing the last mile over the conventional digital subscriber lines would be timeconsuming and costly.
3G Spectrum Price To be auctioned WiMax DoT has recommended 25% of reserve price of 3G spectrum Simultaneous Evolving technology New technology 70 Mbps 20 MBPS Result Advantage WiMax

Spectrum Allocation For Voice services Equipment/Standard Data download speeds (fixed) Data download speeds (mobile)

Simultaneous Best technology Evolved over the years 15 Mbps 15 Mbps

Neutral Advantage 3G Advantage 3G Advantage WiMax Advantage WiMax

Operators will have to use 3G spectrum to revive voice services that are being choked by a dearth of 2G spectrum, Patel added. The WiMax customer premise equipment (CPE) is priced at Rs 5,000-10,000, while the CPEs for 3G would be cost Rs 10,000 and above. The industry will know the winner in the next six months, when the spectrum allocation is complete.

6.3 Mobile Virtual Network Operator (MVNO)
Mobile Virtual Network Operator (MVNO) is a GSM phenomenon where an operator or company which does not own a licensed spectrum and generally with out own networking infrastructure. Instead MVNOs resell wireless services under their brand name, using regular telecom operator's network with which they have a business arrangements. Usually they they buy minutes of use from the licensed telecom operator and then resell minutes of usage to their customers of MVNO. Currently MVNOs are emerging in fast pace in European markets and beginning in USA also. Slowly MVNO phenomenon catching up in Asia and other parts of the world also. An example for MVNO is Virgin Mobile. Virgin Mobile plc is a mobile phone service provider operating in the UK, Australia and Canada, and the US. The company was the world's first Mobile Virtual Network Anjana, Prachi, Puneet, Sandeep 34

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Operator, launched in the UK in 1999. It does not maintain its own network, and instead has contracts to use the existing network(s) of other providers. In the UK, Virgin Mobile uses the T-Mobile network. In the US, the Sprint network is the carrier. In Australia, Virgin Mobile operates on the Optus network. In Canada, it uses the Bell Mobility network. These networks use different technology (GSM in the UK and Australia and CDMA in the US and Canada). Usually MVNO's do not have their own infrastructure, some providers are actually deploying their own Mobile Switching Centers (MSC) and even Service Control Points (SCP) in some cases. Some MVNO's deploy their own mobile Intelligent Network (IN) infrastructure in order to facilitate the means to offer value-added services. In this way, MNVO's can treat incumbent infrastructure such as radio equipment as a commodity, while the MVNO offers its own advanced and differentiated services based on exploitation of their own IN infrastructure. The goal of offering value-added services is to differentiate versus the incumbent mobile operator, allowing for customer acquisition and preventing the MVNO from needing to compete on the basis of price alone. MVNO's have full control over the SIM card, branding, marketing, billing, and customer care operations. While sometimes offering operational support systems (OSS) and business support systems (BSS) to support the MVNO, the incumbent mobile operators most keep their own OSS/BSS processes and procedures separate and distinct from those of the MVNO. In the future a cell phone user may be able to subscribe to a network operator plus multiple MVNOs for specific data services over the same phone. One MVNO could provide sports news, another weather and traffic and still another could provide instant messaging capabilities. In this way, each MVNO and the network operator could focus on their own niche markets and form customized detailed services that would expand their customer reach and brand.

Regulation of MVNO’s So far MVNOs have not been regulated in any country. The ITU has received several requests to study the issue, specifically to provide input on whether government intervention is necessary to allow MVNOs to offer services and applications at a lower price to consumers. This would help to ensure a more efficient use of the spectrum but some incumbent providers argue that the market is already competitive and intervention is not necessary.

6.4 IPTV
IPTV (Internet Protocol Television) delivers television programming to households via a broadband connection using Internet protocols. It requires a subscription and IPTV set-top box, and offers key advantages over existing TV cable and satellite technologies. IPTV is typically bundled with other services like Video on Demand (VOD), voice over IP (VOIP) or digital phone, and Web access, collectively referred to as Triple Play. Because IPTV arrives over telephone lines, telephone companies are in a prime position to offer IPTV services initially, but it is expected that other carriers will offer the technology in the future. IPTV Anjana, Prachi, Puneet, Sandeep 35

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promises more efficient streaming than present technologies, and therefore theoretically reduced prices to operators and subscribers alike. However, it also adds many advantages that may play into market pricing. One of the advantages of IPTV is the ability for digital video recorders (DVRs) to record multiple broadcasts at once. According to Alcatel, one leading provider, it will also be easier to find favorite programs by using "custom view guides." IPTV even allows for picture-in-picture viewing without the need for multiple tuners. You can watch one show, while using picture-in-picture to channel surf! IPTV viewers will have full control over functionality such as rewind, fast-forward, pause, and so on. Using a cell phone or PDA, a subscriber might even utilize remote programming for IPTV. For example, if a dinner function runs longer than expected, you don't have to miss your favorite program. Just call home and remotely set the IPTV box to record it. However, the real advantage of IPTV is that it uses Internet protocols to provide two-way communication for interactive television. One application might be in game shows in which the studio audience is asked to participate by helping a contestant choose between answers. IPTV opens the door to real-time participation from people watching at home. Another application would be the ability to turn on multiple angles of an event, such as a touchdown, and watch it from dual angles simultaneously using picture-in-picture viewing. One can also receive Web service notifications while watching IPTV for things such as incoming email and instant messages. If you IPTV is packaged with digital phone, Caller ID might pop up on screen as your telephone rings. IPTV is already growing in the international market, with providers in many countries including Japan, Hong Kong, Italy, France, Spain, Ireland, and the United Kingdom. In the United States SBC, reportedly purchased a software delivery system for IPTV services from Microsoft in 2004 for $400 million dollars. Alcatel is working with Microsoft to develop a "global solution" for IPTV services, and Verizon has also made a deal with Microsoft for IPTV software.

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7 Industry Updates
7.1 Consolidation in Industry.
Telecom players are looking to tap into global funds to finance their aggressive growth plans. This will result in partnerships joint ventures and equity sellout to foreign players. New license holders will continue to look to sell their stake at a premium. New policies will seek to curb this license arbitrage. Smaller players with operations in only a few circles will find in difficult to compete with the nationwide players. The industry may see consolidation with these smaller operators being acquired by the larger ones. “Unbundling of the corporation” will continue as companies will seek f or economies of scale and lower startup cost by infrastructure sharing. 3G and WiMax license will spur M&A and partnership activity.

7.1.1 Idea Cellular’s Acquisition of Spice Telecom
There were three transactions as part of this acquisition; acquisition of shares of Spice, a non-compete fee and a capital infusion of about Rs 7300 crores received from TM International Bhd (TMI). With respect to shares, Idea acquired 40.8% stake of Spice Communications at Rs 77.30 a share for Rs 2,716 crore. There was a share swap in which Spice shareholders got 49 Idea shares for every 100 Spice shares held. An additional Rs 544 crore was paid to the promoters of Spice group as 'non-compete fee'. The deal was strategically important for Idea Cellular as it was looking forward to transfer itself into a pan-India telecom service provider. The spectrum auctioned by GoI is a scarce resource nowadays and cost a premium. Also there’s restriction by TRAI with respect to number of operators per telecom circle. So it makes sense to acquire a small telecom operator. Small players like Spice Telecom operating at only a few circles(Karnataka and Punjab) will find difficult to compete with the nationwide players in the long run. So it was a win-win deal for both companies.

7.1.2 Vodafone’s entry into India
Vodafone paid a discounted price of $10.9 billion in cash for acquiring the 52% stake held by Hutchison Telecom International (HTIL) in Indian mobile firm Hutch-Essar. HTIL declared a special dividend of 6.75 HK dollars per share following the completion of the formalities. The final price was a reduction of $180 million from the originally agreed price of $11.08 billion. Vodafone is the largest mobile telecommunications network company in the world. The deal gave them access to one of the fastest growing mobile markets in the world.

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7.1.3 Telenor-Unitech Deal
Norwegian Telecom major Telenor is in the process of acquiring controlling stake of 67.25% in Unitech wireless via equity infusion. The enterprise valuation of Unitech Wirelsss is about Rs 10,900 crore. As per the deal, Telenor will infuse cash in four stages and at each phase, by increasing its stake in Unitech Wireless. In the first phase, they got 33.5% ownership in Unitech Wireless. In the second phase they completed the acquisition for a 49 per cent stake in Unitech Wireless by paying Rs 1,130 crore for a further 15.5 per cent stake in the company. The acquisition is expected to be completed by end of this quarter.

7.1.4 TTSL – DoCoMo Deal.
Japanese carrier NTT DoCoMo acquired 26 per cent stake in Tata Teleservices (TTSL). The Tata DoCoMo-branded GSM service has already started in Southern India and gradually will be expanded nationwide. DoCoMo’s international expansion plans have not always proven successful, with the firm historically preferring to take small stakes in firms and then try to influence their strategy. It has been less prepared to take majority stakes and impose its will, as other leading carriers have chosen to do. The difficulties faced by the firm in spreading its domestically successful i-mode service internationally typify the obstacles it has faced overseas. With Tata, DoCoMo had said “participating proactively in TTSL’s management by providing human resources and technical assistance to help realise improved network quality and the possible introduction of leading-edge, value-added services.”

7.1.5 Bharti-MTN deal (in talks).
Recently Bharti Airtel has re-started its audacious merger bid with MTN that could create a $61-billion transnational telecom goliath with combined revenues of $20 billion and over 200 million subscribers across Africa, Asia and Middle East, will be among the world's 10 biggest telecom companies. The deal could be win-win for both parties. Bharti is under pressure in its home country due to severe competition and looking forward to spread its risk across geographies. Meanwhile, the African telecom operator is also encountering some of the problems that its counterpart in India is confronting. MTN may have higher ARPUs (in the range of $12-20), but they are also falling fast. 7.1.5.1 Strategic benefits to both players Synergies would be sought from a number of areas, including procurement, operational best practice, R&D and international network sharing. The two companies will not overlap in each other’s business operations: Bharti Airtel will be the primary vehicle for Bharti and MTN to pursue further expansion in Africa and the Middle East.

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With both Bharti and MTN operating in high-growth geographies, it would be imperative for them to incrementally expand into untapped areas. Collaborating with each other would seem the logical way ahead. The most important, and visible fallout of the deal, if it materializes, will be the advantage of economies of scale for the new entity. In recent times, companies are more amenable to mergers and acquisitions. Of late, companies are finding it tough to obtain easy funds for expansion, which calls for more collaboration if corporate intend to expand. Bharti would not be involved only in MTN’s day-to-day activities, but it would also have a say while making bigger strategic decisions, such as those pertaining to investments in other geographies or sourcing of equipment. The high subscriber base and financial muscle will give Bharti-MTN the desired edge while dealing with vendors. Once the merger happens, the economies of scale of the complete outfit (Bharti-MTN) would be taken into account. For instance, even if the company places an order worth just $1 million, the vendor would not hesitate to lap it up, as there could be orders worth a billion dollars in other projects. This would offset whatever concerns there may be with respect to the small population size in countries where MTN operates. 7.1.5.2 Takeaways for Bharti  The biggest takeaway for Bharti is in the form of access to new geographies with high growth potential. Without a partner, Bharti would have to embark on a Greenfield project, which would be time-consuming and capital intensive.  Besides, without local knowledge (with respect to the market and government regulations), Bharti could be on a sticky wicket. The Indian telco does not have the expertise in running multicountry operations.  MTN has operations in 21 countries across Africa and the Middle East and is one of the largest emerging market mobile operators globally. While Africa has one-third of the world’s population, its telephonic density is just 30 per cent. This offers plenty of room for expansion. The fact that 95 percent of Africa is prepaid, which ensures all cash operations, fits perfectly into Bharti’s plans.  The options for Bharti were to go either the Greenfield way or with an experienced partner. MTN’s strong foothold in some growing markets such as South Africa, Botswana, Iran and Nigeria ensures that when the growth in India starts to slow down, Bharti would be ready to take off in other geographies. Besides, there is a lot of potential in Africa as three-fourths of the continent is still untapped.  Africa is quite like rural India and from that perspective; Bharti could learn how to roll out infrastructure in rural India.

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In addition, MTN is strong in the value-added services (VAS) and mobile commerce space. So, as and when mobile commerce picks up in India (after RBI’s approval), Bharti would be able to tap this market through MTN’s expertise. MTN has a vast experience in running multi-country operations and overcoming regulatory hurdles. By working with MTN, life for Bharti will get a lot of easier.

7.1.5.3 Major Challenges for the merger

  

One of the major challenges would be the integration of the company on the ground. It is tough for intercontinental companies to merge seamlessly because of cultural divide. Alcatel-Lucent for instance is still trying to adjust to cultural divide. Although Nokia-Siemens has bridged this divide faster, it was because both the companies were European. The Black Empowerment Act could pose a challenge, as it is meant to safeguard the rights of the black population. As per this Act, blacks are ensured a minimum shareholding management seats and voting rights. The country’s strong trade union, Congress of South African Trade Unions (COSATU), which has influence over President Jacob Zuma, had almost wrecked the Vodafone-Vodacom deal.

7.2 FDI Investments in the Telecom Sector in India:
The Indian telecom industry has always allured foreign investors. In fact, the cumulative FDI inflow, from August 1991 to March 2007, in the telecommunication sector amounted to US$ 7,513.22 million. This makes telecommunication the third-largest sector to attract FDI in India in the post liberalization era. The investment was majorly in handset manufacturing and telecom service provider.

FDI in Telecommunication Sector (US$ million)
2345.38 1275.65 521 680 129 116

2008-09 2007-08 2006-07 2005-06 2004-05 2003-04

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With stable macroeconomic impetus and numerous other advantages, India has the potential to become the electronics manufacturing hub of the world. Excited by the record-breaking industry growth, investors have outlaid US$ 1.5 billion in the past two and a half years in the Indian telecom sector. India will receive an additional US$ 2 billion investment in the next one year. With the world now recognising India’s manufacturing potential, the Indian telecom handset manufacturing market is likely touch US$ 7 billion by 2010. An example is Nokia. The company has already produced 25 million handsets in its Chennai facility. It will pump in an additional US$ 150 million to this set up. The company exports around 20 per cent of its volume to South-east Asia, the Middle East and Africa. Local manufacturing allows companies to avoid 4 per cent countervailing duties on imported handsets, thereby further reducing the cost.

7.3 Outsourcing by Telecom Service Providers in India
Managed service is another segment that is attracting telecom companies. On account of the rapidly growing subscriber base, service providers find it difficult to manage their infrastructure and network. In such cases, they completely or partially outsource their infrastructure or network management operations.

7.3.1 Hutchitson Essar (now Vodafone) and Nokia Deal:
A case in point is Nokia which is managing the network for Hutchison Essar Limited in 19 circles in India. Having successfully capitalised on the business potential of managed service, Nokia is already earning 30 per cent of its total revenue from this segment. The company has also shifted its first Global Network Solutions Centre (GNSC) to India. The company manages 39 cellular networks in 30 countries. Its Indian centre will act as a global hub for other Nokia operation centres. Advantages of Managed Service • Smooth management of technological complexity • Opportunity to strengthen core competency • Reduction in financial outlay • Touching base with new processes and technologies

7.3.2 Bharti Airtel’s IT Outsourcing to IBM:
Another dimension of managed service is telecom, communication and network management solutions for enterprises. Bharti Televentures and IBM, together offer telecom and IT solutions in India. The solutions and services portfolio comprises of the remote monitoring of servers, security operations and network operations,providing data centre services (including server hosting,server management and storage management), IT help desk services and end-to-end connectivity and fulfilling all telecom and communication requirements.This information technology outsourcing deal with infotech major IBM is estimated to be in the range of $700-750 million for a ten-year period.

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The deal involved outsourcing of BTVL's hardware, software and IT service requirements to IBM.The agreement specifies that payments made to IBM India will be linked to the percentage of revenue generation by BTVL and pre-defined service level agreements. The percentage-linked revenue payment is modelled to decrease with BTVL's increase in revenue.The deal includes all customer-facing IT applications like billing, customer relationship management and data warehousing. In addition, Internet, e-mail and online collaborations are included in it.On the infrastructure front, IBM will consolidate BTVL's data centre, IT helpdesk and enhance its disaster recovery centre capabilities, he said.

7.3.3 Bharti’s Outsourcing to Alcatel-Lucent:
Telecom major Bharti Airtel has a $500-million deal to Alcatel-Lucent for outsourcing the management and servicing of its broadband and fixed line network for five years.The deal involves the creation of a joint venture with Alcatel-Lucent holding 76 per cent of the equity, and Bharti having the remainder 24 percent.The joint venture will help accelerate performance as Bharti migrates to the next generation networks for the broadband and telephone customers.

7.3.4 Bharti Outsourcing Deal with Nokia & Ericsson
Bharti Airtel awarded a $400m contract to Nokia for expanding its managed GSM networks in eight circles. This also marks Bharti’s third major deal with Nokia in the last two years. Bharti would have 100% ownership of the networks supplied by Nokia, with the actual payment being linked to utilisation of capacity and fulfillment of agreed quality of service parameters. This comes close on the heels of Bharti’s recent signing of a $1bn three-year service contract with Ericsson towards design, planning, supply, installation, commissioning and upgrading of its network in 15 telecom circles. This emphasises Bharti’s policy towards outsourcing all operational activities, including customer services to global majors. This has enabled Bharti to focus on its core areas: product innovation, value added services, marketing, branding and pricing. It has enabled Bharti to concentrate on customers, finances and regulation. As per the three-year contract, Nokia will provide managed services and expand Airtel’s GSM/GPRS/EDGE networks in eight circles of Mumbai, Maharashtra & Goa, Gujarat, Bihar, Orissa, Kolkata, West Bengal and Madhya Pradesh. The network monitoring operations will be carried out from Nokia’s state-of-the-art Global Network Services Center in Chennai. The deal also envisages Nokia to deploy its WAP solution across Bharti’s national network to enhance its mobile packet core network capabilities. This will make usage of data services easy, thereby increasing the consumption of content on the Bharti network.

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8 Future Technology Trends
In this section we have listed down the future technologies which are in roadmap and are speculated to make an impact on current business model of telcos.

8.1 IP Multimedia Subsystem (IMS)
IP Multimedia Subsystem (IMS) is a generic architecture for offering multimedia and voice over IP services, defined by 3rd Generation Partnership Project (3GPP). IMS is access independant as it supports multiple access types including GSM, WCDMA, CDMA2000, WLAN, Wireline broadband and other packet data applications. IMS will make Internet technologies, such as web browsing, e-mail, instant messaging and video conferencing available to everyone from any location. It is also intended to allow operators to introduce new services, such as web browsing, WAP and MMS, at the top level of their packet-switched networks. IP Multimedia Subsystem is standardized reference architecture. IMS consists of session control, connection control and an applications services framework along with subscriber and services data. It enables new converged voice and data services, while allowing for the interoperability of these converged services between internet and cellular subscribers. IMS uses open standard IP protocols, defined by the IETF. So users will be able to execute all their services when roaming as well as from their home networks. So, a multimedia session between two IMS users, between an IMS user and a user on the Internet, and between two users on the Internet is established using exactly the same protocol. Moreover, the interfaces for service developers are also based on IP protocols. Some of the possible applications where IMS can be used are:          Presence services Full Duplex Video Telephony Instant messaging Unified messaging Multimedia advertising Multiparty gaming Video streaming Web/Audio/Video Conferencing Push-to services, such as push-to-talk, push-to-view, push-to-video

Effectively, IMS provides a unified architecture that supports a wide range of IP-based services over both packet- and circuit-switched networks, employing a range of different wireless and fixed access Anjana, Prachi, Puneet, Sandeep 43

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technologies. A user could, for example, pay for and download a video clip to a chosen mobile or fixed device and subsequently use some of this material to create a multimedia message for delivery to friends on many different networks. A single IMS presence-and-availability engine could track a user's presence and availability across mobile, fixed, and broadband networks, or a user could maintain a single integrated contact list for all types of communications. A key point of IMS is that it is intended as an open-systems architecture: Services are created and delivered by a wide range of highly distributed systems (real-time and non-real-time, possibly owned by different parties) cooperating with each other. It is a different approach to the more traditional telco architecture of a set of specific network elements implemented as a single telco-controlled infrastructure.

8.2 High Speed Downlink Packet Access (HSDPA)
High Speed Downlink Packet Access (HSDPA) is a packet based technology for W-CDMA downlink with data transmission rates of 4 to 5 times that of current generation 3G networks (UMTS) and 15 times faster than GPRS. The latest release boosts downlink speeds from the current end-user rate of 384 kbps (up to 2 Mbps according to standards) to a maximum value according to standards of 14.4 Mbps. Real life end-user speeds will be in the range of 2 to 3 Mbps. HSDPA provides a smooth evolutionary path for Universal Mobile Telecommunications System (UMTS) networks to higher data rates and higher capacities, in the same way as Enhanced Data rates for GSM Evolution (EDGE) does in the Global System for Mobile communication (GSM) world. The introduction of shared channels for different users will guarantee that channel resources are used efficiently in the packet domain, and will be less expensive for users than dedicated channels.

8.3 4G or Fourth Generation Networks
4G or Fourth Generation is future technology for mobile and wireless comunications. It will be the successor for the 3Rd Generation (3G) network technology. Currently 3G networks are under deployement. Approximatly 4G deployments are expected to be seen around 2010 to 2015. The basic voice was the driver for second-generation mobile and has been a considerable success. Currently , video and TV services are driving forward third generation (3G) deployment. And in the future, low cost, high speed data will drive forward the fourth generation (4G) as short-range communication emerges. Service and application ubiquity, with a high degree of personalization and synchronization between various user appliances, will be another driver. At the same time, it is probable that the radio access network will evolve from a centralized architecture to a distributed one. The evolution from 3G to 4G will be driven by services that offer better quality (e.g. multimedia, video and sound) thanks to greater bandwidth, more sophistication in the association of a large quantity of information, and improved personalization. Convergence with other network (enterprise, fixed) services will come about through the high session data rate. It will require an always-on connection and a revenue model based on a fixed monthly fee. The impact on network capacity is expected to be Anjana, Prachi, Puneet, Sandeep 44

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significant. Machine-to-machine transmission will involve two basic equipment types: sensors (which measure parameters) and tags (which are generally read/write equipment). It is expected that users will require high data rates, similar to those on fixed networks, for data and streaming applications. Mobile terminal usage (laptops, Personal digital assistants, handhelds) is expected to grow rapidly as they become more user friendly. Fluid high quality video and network reactivity are important user requirements. Key infrastructure design requirements include: fast response, high session rate, high capacity, low user charges, rapid return on investment for operators, investment that is in line with the growth in demand, and simple autonomous terminals. The infrastructure will be much more distributed than in current deployments, facilitating the introduction of a new source of local traffic: machine-to-machine.

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9 Conclusion
The Indian Telecom Service provider industry is gearing for a revolution. The customer is driving this revolution and will see more unique and sophisticated offerings coming his way. The 3G which will pave the way for 3.5G, 3.75G and the next big thing-4G and the VAS services will keep the customer asking for more. The rural areas which have remained untapped will see an insurgence of services. Also the easing of the regulations by TRAI ,the ease of spectrum licensing, the FDI influx will make the telecom space in India a must watch in the coming years.

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10 References
[1] IBEF report 2007-08 : Telecommunication - MARKET & OPPORTUNITIES. [2] Cellular Statistics – Cellular Operator Association of India [3] IAMAI & eTechnology Group@IMRB: MOBILE VALUE ADDED SERVICES IN INDIA- A Report. [4] Telenor Entering India: Investment Update [5] Voice and Data(May 2009): Mobile Number Portability - Poaching with Portability. [6] Business India : Telecom Takeover, Bharti-MTN deal [7] Moneycontrol.com: Idea Spice deal [8] Business Standard: Vodafone Hutch deal [9] IntoMobile: India’s 3G License Plans Updated. [10]World Bank Report: Spectrum auctions in India: lessons from experience

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Appendix A
SNAPSHOT (Data As on 31st March 2009) Telecom Subscribers (Wireless +Wireline) Total Subscribers 429.72 Million % Growth During Quarter 11.68% Urban Subscribers 309.43 Million (72%) Rural Subscribers 120.29 Millions (28%) Overall Teledensity 36.98 % Urban Teledensity 88.66 % Rural Teledensity 14.8 % Wireline Subscribers Total Wireline Subscribers 37.96 Million % Growth During Quarter 0.15% 27.38 Million Urban Wireline Subscriber (72.13%) 10.58 Millions Rural Wireline Subscribers (27.87%) Village Public Telephones (VPT) 5.61 Million Public Call Office (PCO) 6.20 Million Wireless Subscribers Total Wireless Subscribers 391.76 Million % Growth During Quarter 12.93% Urban Wireless Subscribers 282.05 Million(72%) Rural Wireless Subscribers 109.71 Million (28%) 297.26 Million GSM Subscribers (75.88%) 94.50 Million CDMA Subscribers (24.12%) Internet & Broadband Subscribers Total Internet Subscribers (including Broadband) % Growth During Quarter Broadband Subscribers Wireless Data Subscriber

13.54 Million 5.30% 6.22 Million 117.82 Million

Source www.trai.gov.in

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