December 2013

CRISIL Opinion

Data services to set operator cash registers ringing

 CRISIL Opinion

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Data services likely to set cash registers ringing for operators
Voice services have been the bread-and-butter of Indian wireless telecom operators ever since the
introduction of wireless services in 1994-95. After growing at a sizzling pace for several years, this segment
has got commoditised and is now set to enter a more moderate phase of growth. Consequently, operators
are now focusing on value-added services, particularly data services, to drive future growth. CRISIL
Research expects the VAS market to grow exponentially over the next five years and India’s high-speed data
subscriber base to cross the 200 million mark by 2017-18.

Saturation of voice market, marketing push of operators fuelling data services

growth
After the saturation of voice market, data services is the next turf that operators are battling for. Besides
offering scope for differentiation in services, data services can help operators offer a unique value
proposition to their subscribers, particularly their high-ARPU subscribers.

On their part, operators have been trying to increase subscriber adoption of these services through:

Marketing & promotional strategies for creating awareness among subscribers about the availability and
affordability of such services.

Continuous addition and expansion in the number of cell-sites, particularly 3G cell-sites, for enhancing
their offerings.

Bundling of branded smartphones with data plans, as done by Idea Cellular, for example. Recently,
Reliance Communications and Bharti Airtel also offered bundled data plans for two years on the
purchase of high-end handsets (iPhone).

In addition to player initiatives, a natural progression by subscribers to using data services is also helping the
expansion of the data user base.

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 CRISILOpinion

Number of data subscribers

Operator Sep-13 Mar-13 Sep-12
Airtel 50.6 43.5 40.6
Idea 33.6 26.2 18.9
R Comm 34.0 29.4 26.0
Vodafone 42.5 37.3 32.0
TOTAL 160.7 136.4 117.5
* Numbers in million
Source: Company reports, CRISIL Research

Rising data usage is good news for ARPUs

Recent data disclosed by operators clearly indicates a considerable increase in data usage every quarter,
which in turn has pushed up operator ARPUs (of data subscribers).

Data usage trends

(billion MBs)
Operator FY13Q1 FY13Q2 FY13Q3 FY13Q4 FY14Q1 FY14Q2
R Comm 15.8 17.4 22.5 27.2 31.1 37.6
Airtel 12.6 15.9 19.8 23.9 27.3 33.6
Idea 7.2 8.7 10.0 11.4 13.8 17.5
Vodafone 7.8 10.4 12.2 14.1 17.8 22.5
Total 43.4 52.4 64.5 76.7 89.9 111.1
Grow th (q-o-q) 20.7% 23.1% 19.0% 17.2% 23.6%

Source: Company reports, CRISIL Research

Trends in data ARPU and realisations

(Rs.) (paisa)
80 36.0
70
34.0
60
32.0
50
40 30.0
30
28.0
20
26.0
10
0 24.0
FY13Q1 FY13Q2 FY13Q3 FY13Q4 FY14Q1 FY14Q2

Airtel data ARPU Idea data ARPU

Airtel data ARMB (RHS) Idea data ARMB (RHS)

ARMB – average realisation per MB

Source: Company reports, CRISIL Research

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The improving ARPUs are no doubt good news for the industry that has witnessed severe price wars in the
past. The glitch here is while most of the content that is available at present is in English, only a small
proportion of the subscriber base is conversant with using it. For further acceleration in data adoption,
availability of relevant non-English, vernacular content is critical.

Share of data in non-voice revenues go up

Following robust data adoption and increase in the usage of OTT applications (over-the-top traffic, which
travels directly through the internet, bypassing an operator network; examples: WhatsApp, BBM and Skype)
for messaging, the share of data in the non-voice revenues of operators has increased, while the share of
messaging has shown a corresponding decline. However, the share of non-voice revenues in total wireless
revenues is lower in India (about 16 per cent) than in developed telecom markets (more than 30 per cent).
This indicates huge untapped potential. Operators can enhance their share of non-voice revenues by coming
up with more offerings in this segment, particularly in segments such as education, healthcare, agriculture,
etc.

Split of non-voice revenues

Bharti Airtel
Sep'13 Mar'13 Sep'12
Non-voice revenues 16.5% 17.4% 16.8%
of which
Data 9.2% 6.5% 5.2%
Messaging & VAS 6.7% 9.1% 10.1%
Others 0.6% 1.8% 1.5%

Idea Cellular
Sep'13 Mar'13 Sep'12
Non-voice revenues 16.1% 15.2% 15.6%
of which
Data 8.7% 6.6% 5.4%
Messaging & others 7.4% 8.6% 10.2%

Reliance Com m unications

Sep'13 Mar'13 Sep'12
Non-voice revenues 23.1% 23.4% 24.5%
Source: Company reports, CRISIL Research

High-speed data usage gathering pace; subscriber base to cross 200 million by
2017-18
Despite a slow start, the number of 3G subscribers has increased significantly in the last one year. The four
larger operators (Airtel, Idea, R Comm and Vodafone) saw their number of 3G subscribers nearly double

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 CRISILOpinion

from 14.6 million for the quarter ended September, 2012 to 27.8 million for the quarter ended September,
2013, which constitutes nearly 17 per cent of the total data subscriber base.

Number of 3G subscribers
Operator Sep-13 Mar-13 Sep-12
Airtel 8.0 6.4 4.0
Idea 6.2 5.1 3.7
R Comm 9.1 7.2 4.8
Vodafone 4.5 3.3 2.1
TOTAL 27.8 22.0 14.6
* Numbers in million
Source: Company reports

To expand their coverage and reach of 3G services, operators have also been putting up 3G BTS’ (cell-sites)
at a rapid pace. The share of 3G BTS’ (Base Transceiver Station) in total BTS’ of an operator is expected to
continue rising.

Split of BTS’
Quarter ending Sep-13 Mar-13 Sep-12

Airtel 3G BTS'
26,616 24,573 20,333
Total BTS'
135,412 133,778 129,411
Proportion of total BTS' 19.7% 18.4% 15.7%

Idea 3G BTS'
18,031 17,140 14,467
Total BTS'
114,001 107,234 100,246
Proportion of total BTS' 15.8% 16.0% 14.4%

R Comm 3G BTS'
11,659 11,659 11,239
Total BTS'
86,792 86,792 86,582
Proportion of total BTS' 13.4% 13.4% 13.0%
Source: Company reports, CRISIL Research

According to CRISIL Research estimates, the number of high-speed data subscribers is expected to
increase exponentially over the next five years and cross 200 million by 2017-18, from 26 million in 2012-13.
While adoption is expected to remain steady in the initial years, it will gather momentum in the latter part of
our forecast period.

Some factors that will drive growth are:

• Availability of cheap 3G enabled handsets: Prices of 3G enabled handsets have been on the decline,
which has made them more affordable for potential subscribers. Aggressive marketing by domestic

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 handset manufacturers such as Micromax, Karbonn and Lava has aided the increased adoption of
such handsets.

• Popularity of social networking websites and OTT: The ever-increasing popularity of social
networking websites and OTT messaging applications are also boosting the volume of data usage.
Some operators have tied up with certain OTT application providers (Reliance Communications with
Twitter; Tata DoCoMo with WhatsApp among others) to facilitate the usage of such applications by
their subscribers free of any additional data charges.

VAS to grow rapidly over the next five years; high-speed data services to drive
growth
Led by rapid data adoption, we expect the VAS market (excluding SMS revenues) to grow rapidly to about
Rs 440 billion in 2017-18 from Rs 93 billion in 2012-13, at an annualized rate of 36 per cent. By 2017-18, we
expect contribution from VAS to increase to nearly one-fourth of total wireless revenues, up from 9 per cent
in 2012-13. Availability of cheaper data-enabled services, rapid adoption of 3G services and the gradual
spread of 4G services will be the engines for growth.

VAS as a % of wireless revenues

30%
25.2%
25%
20.0%
20%
16.1%

15% 12.7%
10.1%
9.0%
10%

5%

0%
2012-13 2013-14P 2014-15P 2015-16P 2016-17P 2017-18P

Source: CRISIL Research

On the other hand, some pressure on realisations is expected, as operators may resort to intermittent tariff
cuts to boost usage. However, such cuts would be more than offset by the phenomenal growth expected in
data usage. This will enable an improvement in the operating metrics of operators, who, at present, rely
predominantly on voice services. With the contribution from voice revenues expected to slow down, future
growth for telecom operators is all set to come from data services.

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 CRISILOpinion

Analytical Contacts:
Ajay Srinivasan Jayashri Dasgupta Satish Ganesan
Director, CRISIL Research Associate Director, CRISIL Research Manager, CRISIL Research

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