Telecom Industry

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Telecom Industry ± Sectors

From a holistic point of view telecom industry can be divided into four segments. y Network Infrastructure companies: Alcatel-Lucent, Cisco and Ericsson y Telecom service providers: Bharti-Airtel, Vodafone, Idea, Reliance y Telecom Equipment Manufacturers: Nokia, Motorola, Samsung y Telecom solution providers: Tech-Mahindra, IBM 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 facilities in India. The discussions in this document are restricted to only Telecom Service Providers. Composition of the Industry: Growth Trends ‡ 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. ‡ Contribution to GDP1.6% ‡ Total Telephone subscriber base reaches 494.07 Million As on August 2009. Teledensity reaches 42.27. Key Players and Market Share (as on August 2009) The Telecom Subscriber base in India is 494 million (August 2009) and the Major players can be segmented into the below three categories: y State owned companies - BSNL and MTNL y Private Indian owned companies - Reliance, Tata Teleservices y Foreign invested companies - Vodafone-Essar, Bharti Tele-Ventures, Idea Cellular, Loop Mobile, Spice Communications


1. 3G (Third generation technology): 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. y The immense potential for 3G is reflected by the 30±40 percent annual growth in Value- Added Services. y Cell phone manufacturers are striving to develop USD 100 priced 3G handsets for the Indian market. 2. WiMAX (World-wide Interoperability for micro-wave Access): It 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. 3. Mobile number portability: It is a standard where a customer wishing to port his/her number is required to contact the Donor to obtain a Port Authorisation Code (PAC) which he/she then has to give to the Recipient. Once having received the PAC the Recipient continues the port process by contacting the Donor. This form of porting is also known as 'Donor-Led' and has been criticised by some industry analysts as being inefficient. It has also been observed that it may act as a customer deterrent as well as allowing the Donor an opportunity of 'winning-back' the customer. This might lead to distortion of competition, especially in the markets with new entrants that are yet to achieve scalability of operation. 4. Infrastructure sharing: 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

‡ Lower operating costs for service providers ‡ Increased environmental aesthetics 5. Value Added Services (VAS): 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 utilitybased services, such as location information and mobile transactions. Government Regulations and Initiatives The government has taken many proactive initiatives to facilitate the rapid growth of the Indian telecom industry. 1. FDI in telecom services has been raised to 74% 2. Introduction of unified access licensing for telecom services on a pan-India basis 3. 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 4. 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. 5. TRAI¶s role is to monitor the telecom sector providers, to check if they are following the policies and regulations issued by DoT. Major Telecom Policies of DoT 1. National Telecom Policy ± 1994: The new economic policy adopted by the government aims at improving India's competitiveness in the global market and rapid growth of exports. Another element of the new economic policy is attracting foreign direct investment and stimulating domestic investment. Telecommunication services of world class quality are necessary for the success of this policy. It is, therefore, necessary to give the highest priority to the development of telecom services in the country. 2. New Telecom Policy - 1999: This focused on the balance between universal service to all uncovered areas, including the rural areas, and high-level services capable of meeting the needs of the country¶s economy, Strengthen research and development efforts in the country and provide an impetus to build world-class manufacturing capabilities, Achieve efficiency and transparency in spectrum management, Protect the defense and security interests of the country Enable Indian Telecom Companies to become truly global players.

3. Addendum to NTP ± 1999: Government has decided that there shall also be the following categories of licenses for telecommunication services: (i) Unified License for Telecommunication Services permitting Licensee to provide all telecommunication/telegraph services covering various geographical areas using any technology (ii) (ii) License for Unified Access (Basic and Cellular) Services permitting Licensee to provide Basic and /or Cellular Services using any technology in a defined service area. 4. Broadband Policy - 2004: Recognizing the potential of ubiquitous Broadband service in growth of GDP and enhancement in quality of life through societal applications including tele-education, tele-medicine, e-governance, entertainment as well as employment generation by way of high speed access to information and web-based communication. 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 functions and Mandatory Functions. 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

Mandatory Functions: ‡ Fix the terms and conditions of their inter connectivity between service providers ‡ Ensure Technical compatibility and effective inter-connection between different service providers ‡ Regulate arrangements for sharing of revenues amongst service providers ‡ Lay-down the standards of quality of services 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) Globalization Telecommunication has paved way for Globalization in India. The two most important factors that facilitated globalization was the low cost in transportation and communication. During the mid 1980¶s, Rajiv Gandhi had envisioned the growth of IT and Telecom in India. And with the technical expertise of Sam Pitroda they were able to devise plans for the Telecom sector that were brought to effect during Prime Minister Narasimha Rao¶s rule. Globalization in turn has a direct effect in the telecom sector in India. We see many international companies setting operations in India. Service providers like Vodafone-Essar; Idea Cellular (was a 33% joint venture between Aditya Birla, Tata teleservices and AT&T. In 2005 AT&T left the joint venture and in 2006 Tata left so now Idea is owned fully by Aditya Birla) and Spice Communications. Companies like Huawei (China), Cisco (California) and Lucent that provide Network components and companies like Motorola, Ericsson who provide Hardware components. Privatization Private operators have contributed very largely to the post1998 growth primarily in mobile services due to cost and fast deployment advantages. In 1998, the subscriber base in the public sector was 17.8 million and it was 79.5 million in 2008. Whereas, in the private sector, it was 0.88 million in 1998 and 220.94 in 2008. The growth of subscriber base in the private sector has been multi-fold. Privatization was in a phased approach. We could see the privatization of the Value-added services initially and then the Cellular and basic services. Foreign Direct Investments

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 providers. India has 100% FDI allowed in the networking components and 74% FDI in telecom services. Examples of some recent FDI are given below: a) 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. b) 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. SWOT analysis Strengths 1. Enormous customer base in the wire less segment: The Telecom subscription data as on 31st August 2009 is as follows: y The number of telephone subscribers in India increased to 494.07 Million at the end of August 2009 from 479.07 Million in July 2009 y 15.08 Million new additions in the wireless segment y Growth rate of 3.13% 2. Decline in Tariffs: There has been a substantial decline in tariffs over the years.

Local call tariff for mobile @ Rs 15.00 is now less than Re 1.00 One minute STD call between Delhi and Mumbai at the rate of Rs.37.00 now cost Re 1.00 i.e. at the rate of local call ISD call to American continent @ Rs. 75.00 now costs less than Rs 7.00

3. The adoption of new technology has been a major factor that has helped service providers reduce the tariffs considerably. 4. Rural Public 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. It is believed that of the next 250 million people expected to go mobile; at least 100 million will come from rural areas. 5. India is the fastest growing free market democracy in the world. India¶s emergence as a leading destination for foreign investment is a result of:

y Stable Economic Outlook y Large Market Potential y Large talent pool y Low Labour Cost Weaknesses 1. Weak Infrastructure - Huge initial fixed cost for service providers 2. Limited spectrum availability: 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 behaviour, 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. Huge costs for advanced technologies like Mobile Number Portability (MNP) 4. Indian companies do not have the expertise in running multi-country operations Opportunities 1. Emerging Technologies: 3G,WiMax 2. Rural telephony: It is believed that of the next 250 million people expected to go mobile; at least 100 million will come from rural areas. 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). 3. World¶s largest untapped mobile market: Although the telecom sector in India is growing strong as compared to other sectors, on a worldwide perspective India seems to be the largest untapped mobile market as can be seen below. 4. Enormous potential in VAS: There is enormous growth potential in the value added services (VAS) as can be seen below in the case of penetration of GPRS (General Packet Radio Service). The penetration of GPRS enabled handsets are close to 26% in India as against 99% in South Korea and 76% in Japan. Consumers 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. They also need to increase its awareness and educate the consumers on how to use GPRS. 5. New players and services bring in huge investments 6. Tier-2, tier-3 cities can accommodate more players Threats 1. Conflict between DoT and TRAI: 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. TRAI had earlier told DoT that 3G auction should be restricted to existing operators on the grounds that new players would find it difficult to roll out services quickly. TRAI had argued that the existing players were best placed to roll out 3G services at affordable rates given that they already had a full fledged operations running. 2. Wire line subscriber base declined (37.41 m in July2009 - 37.33 m August2009) 3. Integration during Mergers is challenging 4. Unhealthy Competition: MTNL had refused to allow its spectrum to be used by other service providers for about 2-3 years and finally came to a compromise in 2001. Recent Events 1. License allotment: There were many licenses that were allotted to service providers in 2008. a. Unitech : license to operate in all 22 circles b. Etisalat DB (Swan Telecom) : license to operate in 15 circles c. Sistema Shyam TeleServices Ltd (SSTL) : license to operate in 21 circles 2. The Bharti ± MTN deal was a failure. The positive aspect of this is that it ruled away the possibility of the uncertainty involved in the merger. But the negative aspect is that we lost an opportunity to make an impact in the global arena because MTN is the second largest telecom provider in South Africa and it plays a substantial role in the global arena. 3. The revenue statement misappropriation by RComm: RComm had overstated its profits to the shareholders and understated the profits to TRAI. By doing this they were able to evade a license fee of about 315 crores (the license fee and the spectrum charges paid to TRAI is a percent of the profits made by the telecom provider). 4. TRAI¶s announcement of µPer second billing¶ caused much anxiety and the stock prices of telecom companies plummeted. Then the TRAI chairman JS Sarma announced that the µPer second billing¶ strategy was optional. Currently TTSL under the brand name Tata DoCoMo and SSTL under the brand name MTS, are the service providers operating with the per second billing strategy. In September, TTSL has emerged as the top operator for the second consecutive month beating Bharti. TTSL has added 4.1 million subscribers in September µ09 and Bharti added 2.5 million subscribers. One disadvantage that the telecom service providers face is that more than 90% of the subscribers are on a prepaid

connection and hence there is no loyalty to any operator. About 40% of mobile users change their operator every year as they move to new offerings just to try them out. Future Growth 1. Managed services: Completely or partially outsource infrastructure or network management operations. 2. Infrastructure sharing: Reduce their network deployment costs 3. Enterprise Telecom Services: a. Voice over Internet protocol (VoIP) b. Dedicated telecom communication systems c. IT infrastructure enabled unified communication services d. Virtual Private Network: Private data network that provides connectivity within closed user groups via public telecommunication infrastructure 4. WiMAX: Worldwide Interoperability for Microwave Access. It provides network access in inaccessible locations at a speed of more than 4 Mbps. It is estimated that India will have 13 m WiMAX subscribers by 2012. 5. Value Added Services: a. Entertainment news (movies, cricket) b. Location information c. Mobile transactions d. 3G: Offers better services to consumers 6. 4G or Fourth Generation Networks (deployment expected : 2010 ± 2015) 7. Rural Telephony: Government targeting to increase rural teledensity to 25 percent by 2012. Recommendations 1. 2. 3. 4. 5. Acquiring new subscribers by expanding in Semi Urban and Rural India Selling more value added services to existing subscribers at cheaper prices Tap volume and revenue potential of next generation services Technological improvement in services by service providers Technical compatibility and effective inter-connection between different service providers 6. Efficient Management of available spectrum 7. Increase FDI cap in the telecommunication sector Establishing operations in International markets

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