Competitive Evolution

India Telecom Overview

byNiraj K. Gupta

forIndian School of Business

December 2004

Data used here is only approximate and indicative. This presentation is only for discussion and not to be quoted.

2 © copyright 2004: Niraj K Gupta. All rights reserved.Presentation at ISB December 2004

Business of Telecom: 3 Pillars

Technology

Policy & Regulation Business Strategy


The Great Chapter 11 filings Telecom Crash

Banks and investors lent $1.3 trillion to telecom companies since 1996…

most of which was lostin Chapter 11 filings

Worldcom

Global Crossing

360Networks

Winstar Comm.

PSI

FLAG

Teleglobe many others…

Trillions of Dollars lostin market caps

Over half a million telecom jobs lost

Technology Hype: The Great Telecom Crash


3Gover 100 billion US Dollars

paid in 3G licence fees

Managing Technology: The 3G Hype

WiMaxWCDMA

CDMA1xEV-DO

ContentKiller

Applications

HANDSETSavailabilty

4G

?

?

?

?

Technology obsolescence => Need to recover invetment fast


Cellular Industry in India


History

Phase 1 1994: cellular service licenses were first awarded 2 operators each in the four metro cities of Mumbai, Calcutta, Chennai and Delhi => based on GSM technology

Phase 2 Licenses were awarded to 2 operators per telecom circle in rest of the country => based on the license fees quoted

Cellular companies committed to high license fees based on projections of future revenues, fell far short of estimates => most operators unable to meet their license fee obligations

July 1999: the license fee structure changed to a one-time entry fee and a revenue share arrangement. Simultaneously the maximum tariff allowed was reduced significantly=> market has continually grown ever since

January 2001: fixed line (CDMA technology-) providers allowed to provide limited mobility services => no roaming

Phase 3 March 2001: Government owned operators - BSNL and MTNL - entered the market as the third cellular mobile operator

Phase 4 July 2001, 4th GSM license was awarded in various circles

Recently, wireline (CDMA technology-) operators allowed to provide full mobility and move towards a unified license i.e., fixed+mobile access services can be provided using one license


Telecom Indicators

Telecom Services Revenue (2003) US$ 10.9 Billion

Fixed Telephone Lines (Dec’03) 42.5 Million => now 44 M

Fixed Line Growth – CAGR (1997-2003) 15.6% per annum now very small

Wireless Subscribers (Jan’ 04) 29.9 Million => now 44.5 M

Wireless Growth – CAGR (1997-2003) 77.0% per annum now 100%

Public Payphones 1.1 Million

Teledensity (2003) 7.0 per 100 now over 8%

Internet Users (2002) 16.6 Million

Internet Subscribers (June’03) 3.77 Million

TV Households (2002E) 78 Million

Cable TV Subscribers (2002E) 40 Million

Source : International Telecommunication Union; Analyst Reports

Oct 2004

$12.25 billion (2003-04)

Oct 2004

now

Mobile subs 44.51M Fixed 43.96M44M

(Oct04)


Telecom Scenario Analysis 2003-04

India´s communications industry

Tele-density:7.12 on 31 March 20045.35 on 31 March 2003

Revenue Growth FY 2003–04 Rs 56,367 crore ($12.25 billion) 20 % FY 2002–03 Rs 47,121 crore ($10.24 billion) 5 % Cellular services:- The cellular grew by around 72% in revenue terms and 135% in terms of subscribers. - The star => will continue to grow fast for few years. - contributed more than a quarter of the overall revenues.

Key factors for excellent growth:- low pricing and the - calling-party pays (CPP) regime. If low tariffs continue, India will overtake other giants on the numbers frontQuality of service (QoS) is still far below TRAI´s benchmark.

Source: DoT, TRAI, V&D and other media.


Telecom Indicators: Targets

Mobile

&

Fixed

Source: Association of Unified Telecom Service Providers of India 3rd Dec 2004

250 million

Dec 2007 MobileFixed

175 mn 75 mn

Oct 2004 MobileFixed

44.5 mn44 mn

Additions by 2007

161.5 mn

Monthly additions required

Over 4 mn

Today’s level ~ 2 mn


Mobile

TRAI expects to achieve this growth rate since the current mobile network coverage in India is only 20% of the population but this coverage is likely to increase to 75%, as shown, in next two years.

Dec 2007 fcst=> 175 Mln


Cellular Telephony

Mobile subs 44.51M (Oct04)

Source: COAI, ABTO, TRAI, V&D


0.1 0.4 0.9 1.2 1.93.6

6.4

12.7

29.9*

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Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Jan-04

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illio

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0%

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Subscribers (millions) Annualised Growth rate

Cellular industry growth

Since the shift in the license fee structure in July 1999 the industry has been growing at a high rate

* January 2004 subscribers includes both GSM and CDMA subscribers

(Source: Cellular Operators Association of India and Association of Basic Telecom Operators )

Mobile subs 44.51M Fixed 43.96M

(Oct04)


India is amongst the fastest growing wireless markets

81.1

60.0

12.7

53.0

206.6 140.8

49.7

38.634.8

25.932.3

8.0%

43.0%

10.0% 7.0% 7.0%19.0%21.0%

98.0%

11.0%7.0%3.0%

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Ger

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crib

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As of January 2004, the wireless subscribers in India were approximately 30 Million showing an annual growth rate of 120% over the last 12 months

(Source: International Telecommunication Union)

2001-02 >>


Mobile Growth: Milestones

Source: TRAI


Mobile Penetration

65.5%

43.7%

32.0%

21.0%18.3%

6.2%1.8%

0%

20%

40%

60%

Korea Malaysia Thailand Philippines China Indonesia India

Countries like Japan, China, Brazil, South Korea and Mexico have more mobiles than fixed lines. Czech Republic: 96.5% (mobile subs 9.75 M => thrice of fixed lines). Spain: 91.6% (mobile subs 37.5 M => twice of fixed lines).Taiwan: 111% (25 million subs). China : 21.4 %India : 4% => now growing at about 2 million new subscribers every month.Source: TRAI

Source ITU 2002

The wireless penetration has since increased to over 3% as in January 2004 with wireless forming 40% of the total telecom subscribers=> crossed fixed in Oct 2004


Mobile 2003-04

Top Mobile Service Providers in Terms of Revenue (FY 2003–04)

Rank Company/Group 1 Bharti Tele-Ventures 2 Hutch Group 3 Reliance Group 4 BSNL 5 Idea Cellular 6 BPL Group 7 Spice8 Aircel*9 Escotel# 10 Tata Teleservices Group 11 MTNL 12 Hexacom** 13 HFCL Infotel 14 Shyam Telelink

*Includes RPG Cellular revenues#Escotel has been bought over by Idea and from FY 2004–05 it will have a combined turnover**Hexacom has been bought over by Bharti and from FY 2004–05 it will have a combined turnover Group revenues include GSM as well as CDMA services revenues, wherever applicable

Reliance Infocomm made history by getting a subscriber base of 6.9 million subscribers taking the overall tally of its cellular subscribers to 7.2 million.

Reliance Group #1 in numbers, Bharti #1 player in revenue (Rs 3,261 crore).

Hutch increased its service areas.

The Subscriber Surge:Mobile subscribers swelled from 14 mln in March03 to 33 mln in March04 => 135% explosive growth


Mobile Market Shares 2003-04

Top 5 => 80% of Rev


Mobile Subs Oct 2004

GSM Cellular Fixed CDMA (F + Mob)

No. of Subs.

Wireline WLL F Mobile Total No. of Subs.

Reliance 27 984 8387 9399K

Bharti 9062K

BSNL 7941K

Hutch 6566K

Idea 4419K

BPL 2402K

Aircel 1512K

Spice 1457K

Reliance 964K

MTNL 442K

Tata Tele 390 1336 657 2384K

Bharti 749 27 - 776K

HFCL 127 40 45 213K

Shyam 94 21 26 141K

Total 34770K Total 1388 2409 9116 12914K


ARPU

Average Revenue Per User (ARPU) of cellular consistently declining over the past few years due to quest for quick subscriber growth

58 % down from 2001 to Rs 469 in 2004.

Reasons for steep decline:- Entry of CDMA players intensifying competition in the mobile communication space. increasing pressure on voice tariffs (voice 90% of the traffic)- Dominance of the pre-paid user.

Prepaid Vs. Postpaid:- TRAI July 2004 data: almost 75% of GSM subscribers are pre-paid (which has seen the most rapid growth in the past 5 years). - Growth: While the pre-paid segment has grown by almost 27 times, post paid has growth of just 5.4 times. - Tata Teleservices had highest ARPU, at Rs 650, with is largely post-paid mobile subscriber base. - Among the GSM-only operators, Hutch has the highest ARPU in the industry, at around Rs 534. In its stronghold Mumbai (higher incidence of post-paid customers) the ARPU was as high as Rs 608.- State-run BSNL and MTNL have lower ARPUs : Less applications => less non-voice usage. BSNL had a large subs base in the B- and C-class cities where even the voice usage is relatively low.


Wireless Data

SMS services have been very successful in India in line with the trends in rest of the of the World

SMS accounts for approximately 3-5% of the total wireless revenues

GPRS/EDGE services have been launched in India

Data services offered by operators are E-Mail, instant and group messaging, MMS Downloads Internet access, Internet chat Mobile banking Fax and data services Web directory access through SMS Information services such as news, stock quotes, airline and train schedules,

cricket scores and horoscopes Games


SpectrumSpectrum allocation for 2/2.5 G cellular mobile services 800 MHz International allocation* 824–849 MHz paired with 869–894 MHz

Indian allocation 824–844 paired with 869–889 MHz (Used to provide WLL (M) and CDMA-based mobile services)

900 MHz International allocation* 890–915 MHz paired with 935–960 MHz (880–890 MHz paired with 925–935 MHz E-GSM band)

Indian allocation 890–915 paired with 935–960 MHz** (Used by 1st, 2nd, and 3rd cellular operators for GSM)

1800 MHz International allocation* 1710–1785 MHz paired with 1805–1880 MHz

Indian Allocation 1710–1785 Mhz paired with 1805–1880 MHz (Used by 4th CMSP and for additional allocations to 1st, 2nd, and 3rd CMSPs)

1900 MHz International allocation* 1850–1910 MHz paired with 1930–1990 MHz (North American PCS band)

Indian allocation 1880–1900 MHz is earmarked for micro cellular technologies based on TDD

*SOURCE: ITU-R Recommendation M.1073-1 & NFAP 2002 / TRAI Consultation Paper


Spectrum

GSM:900MHz to start withmetros 6.2 MHz after 600K subs entitled for additional=> +1.8 MHz 8.0 MHzafter 1 mln sub entitled for additional=> +1.8 MHz 9.8 MHzExamples:Delhi:Bharti 1.5 mln subs => 10 MHzidea now 600K => applied for next 1.8 MHZ

after 9.8 Hz, given in 1800 MHz band

CDMA:given 5.5 MHz 800 Mhz band => enough for over 1 mln subs


Spectrum

SPECTRUM POLICY TO ADDRESS 1900 MHZ BAND ALLOCATION ISSUE

Telecom Regulatory Authority of India “the spectrum policy to be announced this month will address the controversy between GSM and CDMA operators over allocation of radio frequency for third generation services (3G) services in the 1900 Mhz band. The policy on 3G has to be evolved with caution while at the same time building flexibility in allocation offrequency and making it affordable. The policies would have to be dictated by standards laid down by the International Telecommunications Union (ITU) and the availability of equipment”.

Both CDMA and GSM operators have been clamouring for the 1900 Mhz spectrum. While GSM operators say that allowing CDMA services in 1900 Mhz would create interference in their cellular network, GSM operators are also opposing the entry of CDMA players in the 1900 Mhz on grounds that internationally the band has been reserved for thirdgeneration services.

CDMA players say that there is no equipment available for any other frequency. On the other hand, CDMA operators highlight the fact that globally there are only two other countries where CDMA networks arerunning on frequencies other than the 1900 Mhz band.


Spectrum

DoT MAY DELICENSE MORE FREQUENCY BANDS TO PUSH BROADBAND

To accelerate the penetration of broadband and internet, Department of Telecom is planning to delicense certain spectrum frequency bands.

"With a view to accelerating penetration of broadband and Internet, the 5.15-5.35 Ghz band is also being delicensed for the indoor use of lowpower Wi-Fi systems. For outdoor use, the band of 5.25-5.35 is under active consideration for delicensing in consultation with the existing operators in the band" - Nripendra Misra, chairman, Telecom Commission.He said alternative spectrum frequency bands which are not in high use for other applications could also be deployed for broadband services. The process of siting clearance by the clearing agency SACFA as also the grant of wireless licences has been simplified to some extent and further simplification is on the anvil. A transparent scheme is being outlined separately for time-bound frequency as well as siting clearance and wireless licensing by removing the cumbersome procedure.

2.4 GHz band already free bandfor WiFi


This year’s 2004 telecom services brand ranking

1 BSNL (usurping the top spot from last year’s leader Reliance IndiaMobile)2 Reliance3 Airtel (# 3 in 2003 too) 4 Tata Indicom (# 4 spot belonged to BPL Mobile in 2003)5 BPL (??)6 Hutch inches up one rank taking over # 6 position from MTNL 7 MTNL 8 Idea (# 8 in 2003 too)

Overall services list: three out of the top 10 service brands are telecom brands (last year there were two)

3 BSNL (late entrant into the mobile telephony market)6 Reliance India Mobile (last year # 3)7 Airtel (# 15 last year, Airtel could well be on its way into the top five next year)20 Hutch (Orange in Mumbai- has seen the highest ascent in its category, and overall, jumping 14 places from No. 34 to No. 20 this year)

Source: The Economic Times 15 Dec 2004 RINGING IN A NEW ORDER

Brand Rankings


Growth factors in the Indian market

Overall growth of the Indian economy and increasing demand for telecom services

Increased competition – driving down tariffs

Decline in tariffs – for both wireless and long distance services

Reduction in prices of the handsets (In India, operators have not been subsidising sales of handsets)

Prices of handsets has reduced from US$ 1,140 – 1,430 in 1995 to as low as US$ 60 – 80

Introduction of pre-paid services – estimated to account for over 60% of the market

Productive tool/security: Increasing familiarity with the utility of mobile services


Technology trends: 3G

Wideband CDMA (WCDMA) is an approved 3G standard that uses 5 MHz channels for both voice and data, offering excellent voice capacity and a peak data rate of 384 kbps. NTT DoCoMo launched the first WCDMA service in 2001 and now has millions of 3G subscribers.WCDMA (UMTS) is also the 3G technology of choice for many GSM/GPRS operators, with dozens currently trialing the technology and more than 100 having licensed new spectrum with the intent to launch services in the next few years.


Telecom FDI

RS 41,000 CRORE TELECOM FDI PROPOSALS CLEARED IN 13 YEARS In the telecom sector since 1991 (total of 930 FDI proposals) between August 1991 and September 2004. Number of proposals Delhi (208), Maharashtra (134), followed by Karnataka with 63 and Tamil Nadu with 53.

'INDIA NEEDS $70 BN FOR TELECOM GROWTH’

The Indian telecom industry will require about $70 billion in the next couple of years to achieve new target of 250 million subscribers by 2007-08 (against present 85 million).

As the second largest telecom market in the world after China, India has also emerged as one of the fastest growing markets, adding around two million fixed-cum-mobile phones per month. The government allowed 49 percent FDI (foreign direct investment) in the telecom sector, only $2 billion had come through the FDI route so far.

There is demand for increasing the FDI limit to 74 percent => being considered by the present government.


Telecom Scenario Analysis 2003-04Long distance

LD continued southward in FY 2003–04 too. From a negative growth of about 20% in FY 2002–03, it has come down to about 14 percent.

NLD NationalLarge infrastructure of about 572,675 Rkm . => need to promote broadband services (triple-play).

ILD InternationalDATA: good growth in data => growth est 65%. VOICE: good growth in voice minutes 22 percent, but a drop in prices led to fall in revenues


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http://www.telecombynirajgupta.com

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Competitive Evolution

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