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Barriers to entry: High

1) Decreasing Average Revenue per Minute: Call tariffs (price per minute charged for an outgoing call) have declined from Rs 15.5 per minute in 1999 to Rs 0.5 per minute in 2010. Tariff / Average Revenue Per Minute
15.5 15.5 7.3 4.3 3.8 3.5

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1.1

1

0.8

0.6

0.5

0.5

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

2) Declining Minutes of Use: Minutes of Use (MOU) have been falling for the last four years. Usage of incremental connection is quite low and is not compensated by an increase in usage of existing connections.
Minutes of Usage per Subscriber in India
321 388 448 465 444 392 369 350

204

284

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

3) Decreasing in ARPU: Aggressive fall in tariff coupled with reducing minutes of usage has resulted in an alarming decline in Average Revenue per User (ARPU). GSM & CDMA Average Revenue Per User Month
362 256 196 316 261 176

220 111 144 82 105 68 100 ARPU GSM 66 ARPU CDMA

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Mar-11

4) Rising level of Indebtness: Mobile operators have huge debts to pay for investments like rolling out network in rural areas, paying for the 3G/BWA licenses, and rolling out 3G/BWA network.

3 Idea Reliance 5) Rising Network Operating Expenses as % of Revenue: The network expenses are increasing due to the overall high inflationary environment and due to the network expansion activities taken up by operators.3 2. .Net-debt to EBITDA Ratios 6 4 2 0 Mar-09 Mar-10 Dec-10 1. Network Operating Expenses as % of Revenue 60% % of Revenue 50% 40% 30% 20% 10% 0% FY2007 11% 12% 7% 12% 25% FY2008 13% 16% 12% 13% 25% FY2009 19% 21% 29% 18% 18% FY2010 21% 29% 48% 24% 45% FY2011 23% 31% Bharti Airtel Idea Cellular Reliance Communications Vodafone Aircel 6) High Capital Requirement High Cost of Spectrum: There has been a 7 fold hike in the price of each MHz of spectrum between 2001 and 2010.58 crores (Tamil Nadu) 2010 Rs.7 MHz Lowest per MHz spectrum price in a circle up to 6. 37.51 crores Rs. 2001 Rs.6 2. 2500 crores. 16 lakh(West Bengal) Rs.e.6 crores (Jammu & Kashmir) Rs 187.9 5. a player may require up to 10.38 crores (Tamil Nadu) Spectrum price per MHz for 22 circles up to 6. 267. 7.7 MHz High Cost of Setting up towers: Typical cost of setting up a tower is about Rs 20 to 25 lakhs.9 2.7 MHz Lowest per MHz spectrum price in a circle up to 6.8 1. i. For a pan-India rollout.5 crores Rs. 1769.000 towers. Rs.

Vodafone.6 billion in FY2010. PAT Margin for Telecom Operators FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Vodafone 17% 11% 0% -3% 0. Reliance. which means it will be difficult for new entrants to raise capital. Annual advertisement cost in Rs million FY 2011 FY 2010 FY 2009 FY 2008 . FDI in Telecom Sector in India. ROCE FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Vodafone 11% 13% 8% 7% Idea Cellular 13% 16% 10% 10% 9% Aircel 6% 14% 3% -11% Reliance 8% 8% 7% 2% Bharti Airtel 29% 29% 30% 25% 19% MTNL 9% 7% 3% 0% 9) Slowing Foreign Direct Investment (FDI) : FDI in Telecom was USD 1.01% Idea Cellular 11% 16% 10% 9% 5% Aircel 35% 9% -8% -66% Reliance 21% 18% 30% 4% -6% Bharti Airtel 23% 24% 23% 26% 20% BSNL 20% 8% 2% -6% 8) Low Return on Capital Employed: Return on Capital Employed (RoCE) values for operators are extremely low. Idea have established a huge brand identity by extensive advertisement and promotion. USD Million 2558 2554 1665 FY 2009 FY 2010 FY 2011 10) Low Switching Cost for Consumers:  Low cost of new connection: The consumers can get a new connection for as low as Rs 100.7 billion in FY2011. down by almost 35% compared with USD 2. 11) High Brand Identity and Advertisement Cost: Incumbent players like Airtel.7) Decreasing Net Profit Margins: Hyper-competition and interest payments associated with high levels of indebtedness have severely impacted the net profit margins of operators.  Mobile number portability: With MNP consumers can easily switch telecom operators at Rs 19 within 7 working days. indicating that the telecom operators are not able to earn enough returns to recover their investments.

spread over four phases.  Private operators will have to enter into an arrangement with fixed-service providers within a circle for traffic between long-distance and short-distance charging centres  Seven years time frame set for rollout of network.25 million. The revenue sharing agreement would be to the extent of 6%. 3) Restrictions:  FDI must not exceed 74%. Supreme Court cancelled all the 122 licenses issued.200 million. Any shortfall in network coverage would result in encashment and forfeiture of bank guarantee of that phase.  Private operators to pay one-time entry fee of Rs. 2G spectrum was illegally allotted to telecom companies at 2001 spectrum prices. Foreign investors have lost confidence in India and foreign firms like Telenor. DTS which takes care of the rules and regulations 1) High License Fee and Other Taxes Regulatory Charges % of Revenue Service Tax 12. Promoters must have a combined net worth of Rs.36% License Fee 6% to 10% Spectrum Charges 2% to 6% USO 5% included in license fee 2) 2G Spectrum Scam: In 2008. Batelco have decided to quit India. On Feb 2. 2012.Airtel Idea Reliance 7215 3848 678 5508 4066 1515 6228 4265 2040 5664 3224 4303 Government Actions & Regulatory Environment The government has created bodies like DOT.25 million plus a Financial Bank Guarantee (FBG) of Rs. TRAI. . Licenses will now be issued through auction at higher prices.