Telecom Sector Analysis

Private Equity Pulseon Telecom

November 2009

Private Equity Pulse on Telecom

PageContents

Executive Summary

Opportunities for PEs in Emerging Mobile Telecom Landscape - by Neeraj Jain, KPMG

3G - The Next (r)evolution in Indian Telecommunications - by Prashant Chopra and Sandeep Gill, Deloitte

Opportunities in Mobile VAS Space - by T C Meenakshisundaram, IDG Ventures India

Cable TV - The Money's in the Last Mile. - by Nithin Kaimal, New Silk Route

Development of Indian Cable Industry - Potential for Growth via Consolidation and Triple Play - by Kunal Bajaj, BDA

Legal and Regulatory Challenges facing the Telecom Sector in India - by Rajesh Begur, ARA Law

Listing of Investors with Special Focus on Telecom

Listing of Advisory Firms with Special Focus on Telecom

Entrepreneurs' Perspective

Private Equity and M&A in Telecom

What PE/VC Investors Think

2

3

5

8

12

13

17

21

29

36

45

47

24

T industry perspective. he telecom story in India has been a

phenomenal case study on the benefits of Prashant Chopra and Sandeep Gill of Deloitte

private competition to all stakeholders insist in their article that 3G has great potential to

and the economy as a whole. Telecom has also alter the dynamics of the Indian telecom market.

been a “game changer” of sorts for the Private Besides the expected adoption in the metros, the

Equity industry in India with the stupendous poor infrastructure on the fixed line side means

returns delivered by Bharti Airtel for its Private that an increasing number of consumers are

Equity investors (who sold their stakes in 2004 & going to rely on their mobile phones for data

2005) serving as a key catalyst in channelling driven services, leading to a massive uptake as

huge dollops of global capital towards PE and when the infrastructure becomes available.

investments in the country. Additionally, as companies expand their

operations to semi-urban and rural areas, In recent months, despite record mobile revenue from enterprise clients stands to gain subscriber additions month-on-month and 3G significant ground as their dependence on mobile licensing round the corner, several experts services will become critical.believe the Indian telecom industry has reached a

key inflection point. They point out how intense Mobile Value Added Services (MVAS)

and rising competition levels, declining Average companies, which have thus far been struggling

Revenue Per User (ARPU), high costs of 3G in the shadows of the largely voice-focused

licenses and the impending introduction of mobile operators, are looking forward keenly to

Number Portability, place significant challenges the advent of 3G which promises an opportunity

before the industry. This concern is also reflected to enhance their revenues including via new

in the Venture Intelligence survey of leading types of services. In this context, TC

Private Equity (including Venture Capital) Meenakshisundaram of IDG Ventures India

investors who have invested over $5 billion in analyses the emerging scenario in which VAS will

telecom services and related companies over the get its rightful priority in the operators’ focus to

past five years. maintain or increase their ARPU and profitability.

On the positive side, almost 70% of the investors

surveyed felt that Indian telecom operators would

be able to find and profitably serve the next 100

million mobile consumers from rural areas. A

majority of investors are also willing to bet that the

introduction of 3G services can be a game

changer for various players in Indian telecom.

While the appetite for investments into mobile

operators is still high, investors are scanning for

“downstream” opportunities including Mobile

VAS, Telecom Software and other service

providers to telcos.

In his article, Neeraj Jain of KPMG points out the

various opportunities and challenges ahead for

PE investments across various segments within

Telecom. He concludes that while the industry

will continue to provide attractive returns that PE

investors seek, the landscape is likely to remain

dynamic and somewhat uncertain over the

foreseeable future from market, regulatory and

Executive Summary

3

The Venture Intelligence investor poll reveals that

a majority of investors, given the unorganized

nature of cable TV distribution in the country,

believe that several opportunities still exist in this

space. In his article, Nithin Kaimal of Private

Equity firm New Silk Route Advisors (NSR),

highlights how the battle over the "last mile" in

cable TV networks is hotting up with the entry of

Direct to Home (DTH) services. He feels the

success of the cable model over DTH in other

markets as well as the performance of organized

cable players like Asianet and Ortel provides

ample evidence of the economic attractiveness of

this model. The next step is for these companies

to roll out multiple services like digital TV,

broadband and value-added services by

leveraging their last mile access, lower cost and

higher bandwidth.

Telecom-focused consulting firm BDA weighs in

with a meaty analysis of the various technology

options and investment scenarios for the cable

TV sector.

In his article on the legal and regulatory

challenges facing the telecom industry, Rajesh

Begur of ARA Law outlines the regulatory

framework and rules relating to foreign

investments, M&A-related issues as well as

recent developments like spectrum allocation

and 3G licensing.

For the convenience of entrepreneurs, the report

provides a listing of PE/VC investors who have a

special focus on telecom as well as advisory firms

who provide value-added intermediation

services.

Executive Summary

4

35

30

25

20

15

10

5

0

2000

1800

1600

1400

1200

1000

800

600

400

200

0

20052006200720082009-H1

PE Investments in Telecom - By YearAmount (US$ M) No. of Deals

1%2%6%

7%

35%

49%

By Sector - Value*

* Jan '04 - June '09

Telecom Infrastructure

Mobile Services

Hardware

Broadband

Mobile VAS

Communications Tech

By Sector - Volume*

2%4%4%

43%25%

16%6%

8

7

6

5

4

3

2

0

1600

1400

1200

1000

800

600

400

200

0

20052006200720082009-H1

PE Investments in Telecom InfrastructureAmount (US$ M) No. of Deals

US$ M

illions

2.5

2

1.5

1

0.5

0

1400

1200

1000

800

600

400

200

0

20052006200720082009-H1

PE Investments in Mobile ServicesAmount (US$ M) No. of Deals

US$ M

illions

14

12

10

8

6

4

2

0

140

120

100

80

60

40

20

0

20052006200720082009-H1

PE Investments in Mobile VASAmount (US$ M) No. of Deals

US$ M

illions

5

4

3

2

1

0

140

120

100

80

60

40

20

0

20052006200720082009-H1

PE Investments in Communications TechAmount (US$ M) No. of Deals

US$ M

illions

10

9

8

7

6


Others

5

M & A Action in Telecom

Top PE Investments in Telecom*

Company Business Description Amount(US $ M)

Investor (s) Date

Bharti Infratel Telecom Infrastructure 1,000Temasek, Macquarie,(Towers) Goldman Sachs, AIF,

India Equity Partners, Others

Idea Cellular Mobile Services 966Providence, Sequoia Capital, Oct-06ChrysCapital, Spinnaker Macquarie, 2i Capital, TA Associates, Spinnaker, Others

Aditya Birla TelecomMobile Services 428Providence May-08

Tata Teleservices Mobile Services 360Temasek Mar-06

Reliance TelecomTelecom Infrastructure 338New Silk Route, Aug-07 Infrastructure (Towers) Galleon Group,

Fortress Capital, HSBC Principal Investments, GLG Partners, Quantum Fund

Dec-07

Source: Venture Intelligence PE Deal Database; * Jan 2005 to June 2009 – by Investment Size

M&A in Telecom - By Year

18

16

14

12

10

8

6

4

2

0

20042005200620072008H1-2009

8

2

5

16 16

10

Source: Venture Intelligence M&A Deal Database


6

Top M&A Deals in Telecom*

Target Co. Acquirer Sector Amount(US $ M)

Date

Source: Venture Intelligence M&A Deal Database; * Jan 2004 to June 2009 – by Investment Size

Hutchison Essar Vodafone Mobile Services 11100 67Feb-07

Unitech Wireless Telenor Mobile Services 1430 67Nov-08

Aircel Maxis Mobile Services 1080 100Mar-06

BPL CommunicationsEssar Group Mobile Services 1000 64Jul-05

Idea Cellular Aditya Birla GroupMobile Services 990 48Apr-06

Stake%

M & A Deals in Telecom - By Volume

5%

5%5%

5%

2%

9%

9%16%

25%

19%

Mobile VAS

Mobile Services

Telecom Infrastructure

Hardware

Telecom Services

Broadband

Cable Network

Communications Tech

ISP

Satellite Communications

*Jan 2004 to June 2009Source: Venture Intelligence M&A Deal Database

*Jan 2004 to June 2009; By VolumeSource: Venture Intelligence M&A Deal Database

Outbound

Domestic

Inbound

M & A in Telecom - By Deal Type*

46%

21%33%


7

Here are the key highlights of a poll conducted Investors chose Mobile VAS, Mobile Telecom

among Private Equity & Venture Capital firms for services, Mobile Broadband and Telecom

this report. Fund managers from over 50 firms Software companies, as well as companies

participated in the poll. providing services to telcos as among their

favourite sectors within the industry.


Most Attractive Sector for Investments14

12

10

8

6

4

2

0

Mobile VAS

Service Providers to Telcos

Mobile Telecom

Services

Mobile Broadband

Telecom Software

Telecom Tow

er

Cable / Satellite TV

Fixed Broadband Services

Mobile Recharge Services

Mobile Phones / Devices

Telecom Manufacturing

Telecom Hardw

are

Mobile Retailing

Fixed Telephony

How Investors Rated Each Sector100

80

60

40

20

0

Service Providers to Telcos

Mobile Broadband Services

Mobile VAS

Mobile Telecom

Services

Telecom Software

Cable / Satellite TV Networks

Telecom Tow

er Infrastructure

Fixed Broadband Services

Mobile Phone / Devices

Mobile Recharge Services

Telecom Hardw

are Equipm

ent

Telecom Manufacturing

Mobile Retailing

Fixed Telephony

20

40

60

80

100

120

% (<5)

% (>5)

8

Bullish on Rural Penetration

Most PE investors seem to feel expansion of

mobile telecom services into semi-urban and

rural areas will keep the industry in high-growth

mode for the next several years.

Almost 70% of investors surveyed felt that

telecom operators would be able to find and

profitably serve the next 100 million mobile

consumers from rural areas. Investors who are

positive on rural telephony insist that for rural

users, mobile services are a means to increase

their incomes and hence, there is a huge pent up

demand. Plus, they believe Indian operators have

worked out low cost operation models – including

especially via infrastructure sharing – that is

required to serve rural areas profitably.

PE investors are also bullish on the expansion of

Indian telecom operators into other developing

markets – something that leading players like

Bharti, Reliance and the Essar group have

embarked upon. Their experience in the highly

competitive Indian market (especially in handling

large volumes and a diverse consumer base),

combined with their low costs and ability to

continuously innovate, will stand Indian operators

in good stead while expanding into markets like

Africa.


NoOpinion14%

No18% Yes

68%

Will Rural India Deliver the Next 100 Million Subscribers Profitably?

NoOpinion30%

No14%

Yes56%

Will Indian Operators be Succesful in their Overseas Forays?

9


A majority of PE investors are however not so

bullish on the prospects for the New 2G licensees

as they feel the current players are too well

entrenched. Some investors however indicated

that new factors like infrastructure sharing and

the introduction of Number Portability as well as

the fact that the majority of Indian subscribers are

in any case pre-paid (who switch operators quite

often) are likely to favor the new entrants. While

consolidation might be inevitable in the long run,

given the overall market size, some of the new

entrants would be able to sustain – if not thrive –

as niche services or regional players.

When it comes to fixed broadband services,

investors seem to believe that over a period of

time, the integrated nationwide telecom

operators - given the scale advantages of their

combined offerings - will edge out independent

standalone broadband service providers.

However, here again, some investors see the

potential for at least a few independent

broadband service providers to do well as

regional players.

A majority of investors are also willing to bet that

the introduction of 3G services can be a game

changer for various players in Indian telecom –

especially since it presents an opportunity to

enhance revenues for value-added services

(including new types of services like gaming) and

other data services quite significantly.For

operators, 3G will help increase ARPUs

especially in the Metros and Category 'A' circles.

3G services can also truly enable mobile users

who do not have prior exposure to a PC to access

Internet-based services. Investors who disagree

that 3G will be a game changer cite the high costs

and lack of compelling applications as the main

reasons that will slow down adoption of 3G-

based services.

Will 3G Services be a Game Changer?

No32%

Yes52%

NoOpinion16%

Can Independent BroadbandServices Thrive?

No50%

Yes26%

NoOpinion24%

Will the New 2G Licencees be ableto gain significant Market Shares?

Yes20%

No54%

NoOpinion26%

10

A majority of investors believe that given the unorganized nature of cable TV distribution in the

One of the biggest concerns of investors in country, there are several opportunities still in this Telecom, the Venture Intelligence poll showed, is space – including in DTH, IPTV and other the regulatory uncertainty and “arbitrariness” of innovative distribution and business models. The government policies - especially when it comes to naysayers believe the market is too crowded and their big-ticket investments into mobile in the long run, the large integrated offerings – like operators, Cable TV, etc. those from the telcos - will prevail.

Interestingly, when it comes to investments into Mobile VAS companies, the main challenge perceived by investors is the “monopolistic behaviour” of the operators. Plus, the investors are not able clearly see an exit route for their investments into VAS companies.

A majority of the investors surveyed felt that the rich valuations being accorded to independent telecom tower infrastructure companies currently were not justified since these companies were likely to only provide “utility” or “lease rental” like returns over the long term.

Macro Challenges

Some opinions conveyed in the survey:


Are there Further Opportunitiesin Cable / Satellite TV?

No16%

Yes58%

NoOpinion26%

Are Telecom Tower Investmentsa Gamble on Valuations?

No32%

Yes52%

NoOpinion16%

11

"For VC deals in telecom, execution is a very important part. We have seen VC investments stagnating because the companies could not implement in a timely manner."

"High capital intensity, well entrenched incumbents and high spectrum and other charges will reduce returns on new investments. However, providers of innovative products and services will generate good returns making them attractive investment opportunities."

"Profitable ventures are high capex; lower capex ones are not supported in the current ecosystem."

Entrepreneurs' Perspective

EAddressing Investor Concerns

the IPO. “With a PE firm already on board, when ntrepreneurs who have already

the company goes for a listing it is quite familiar in partnered PE/VC investors, indicate the

dealing with investor expectations,” says relatively easy access to capital that will

help them grow to “industrial Quippo’s Sunil Kanoria.

scale” as one of the key

reasons for choosing to go in

for this type of financing. “We The poll conducted by Venture Intelligence

needed capital for growth among the PE/VC community indicated that the

and VC financing is the least “monopolistic” behavior of operators, intense risky capital from an competition and the lack of a clear exit route are entrepreneur's perspective” among the common concerns when it comes to says Anupam Mittal,

investing in the Mobile VAS segment. Founder of Mauj Mobile, one

Anupam Mittal of Mauj Mobile feels, in the of the biggest Mobile VAS (M-

absence of regulatory intervention, the best way VAS) companies in India.

for M-VAS companies to address these Entrepreneurs mention several value additions

challenges is to build “must-have” applications made by PE/VC investors besides their ability to

that would fetch them better provide quick access to “bargaining power” vis-à-vis capital. Sunil Kanoria, telecom operators. Probir Director of Quippo

Roy, Director & Co-founder Telecom Infrastructure,

of Paymate, feels says PE investors - with

entrepreneurial start-ups – their sectoral knowledge

and experience - add being nimble players due to

value to the organization on a regular basis. “VC their very nature - should

financing helps not only in terms of the money, view these issues as an

but also the kind of business perspective and the opportunity and come up board-level intelligence we get,” adds Chaitanya with disruptive innovations, applications and Nallan, CEO, mGinger.

business models. For its part, mobile advertising

firm mGinger circumvents telecom operators by Apart from their insights and

reaching advertisements directly to consumers experience in dealing with

diverse market spaces, who have opted in to receive these messages.

entrepreneurs consider the Another major concern mentioned in the polls by

credibility, international PE/VC investors was the overvaluation of deals in

exposure and contacts of the the telecom infrastructure space. Sunil Kanoria of PE/VC to be very valuable for Quippo feels this opinion stems due to a lack of both business development knowledge about the tower business. He feels and future fund-raising. The

that valuations should be viewed in the context of perspective of a PE/VC

the developing environment and not be partner also helps

entrepreneurs to time their IPOs appropriately compared to those in mature markets where

and deal better with investor expectations post there is not much growth.

Anupam MittalMauj Mobile

Chaitanya NallanmGinger

Sunil KanoriaQuippo Telecom

Probir RoyPaymate

12

W

Outsourcing

Infrastructure sharing

(refer chart 1). Hence, both the above trends ith 450 MN wireless subscribers in would lead to declining market for rollout services August 2009 and CAGR of 64% from resulting in vendor rationalization – private equity FY 2005-09, India is the second investors should size up the ability of target / largest and fastest growing market globally. The portfolio companies to sustain / grow their market is characterized by high competitive business based on quality of service, strength of intensity, falling ARPUs, low penetration and relationship and other softer parameters. impending entry of more wireless operators. All

these factors are likely to drive subscriber

additions – some estimates suggest a subscriber

base of 800 MN by FY12. This scorching pace of

growth presents unique challenges and

investment opportunities (of varying degree)

across the telecom value chain. Passive

infrastructure sharing, outsourcing of post rollout

functions and consolidation amongst mobile

operators are factors that are likely to have

significant impact on investments that are

consummated within the next 6-12 months with

an exit horizon of 4-5 years.

At the outset, it is pertinent to draw distinction

The level of infrastructure sharing has steadily between rollout-related and post-rollout

increased, starting with sharing of passive outsourcing. Whilst operators outsource

infrastructure to the current sharing of active / network rollout activities as an established

fiber networks and ongoing debate on spectrum practice, they are now increasingly looking to

sharing. Both incumbents and new operators outsource post rollout activities as well. Bharti

have embraced infrastructure sharing in a big has been a front-runner in applying the

way. With significant increase in tower tenancy outsourcing model, having outsourced several of

forecast by FY12 (from 1.2-1.3 in FY08 to 1.8-1.9 its processes including network maintenance,

by FY13), the level of infrastructure spend per customer service etc. Other incumbents have

BTS required in future is likely to be substantially increasingly begun adopting the outsourcing

lower compared to historical trends. model. Similarly, new operators, devoid of the

Furthermore, unless 3G BTS rollout kicks-off shackles of legacy processes / structures and

exponentially, the number of 2G+3G BTS rolled given the need to aggressively focus their energy

out post FY11 are likely to witness a steep decline on customer acquisition activities, have chanted

95

153145

171157

113

FY07A FY08A FY09A FY10E FY11E FY12E FY13E

No.

of

BTS

in '0

00

Chart 1: Total No. of BTS rolled out each year

160

140

120

100

80

60

40

20

180

60

Source: KPMG Analysis

by

Neeraj JainOpportunities for PEs

in Emerging Mobile

Telecom Landscape

Opportunities for PEs

in Emerging Mobile

Telecom Landscape

13

Opportunities for PEs in Emerging Mobile Telecom Landscape

the outsourcing mantra in a big way. Given companies to address the post-rollout

expected slackening in pace of rollout and opportunity would be important to maintain /

increased propensity of operators to outsource enhance shareholder value.

post rollout, capability of target / portfolio

Sr. No.Operator DescriptionVendor Area

1. S.Tel Reliance Communications

Passive infrastructure sharing

Covers 6 circles covering 10,000 sites and fiber optic network

2. Etisalat DB Telecom

RCom; Tech Mahindra

Passive infrastructure; IT applications

Reliance Infratel - involves sharing of 30,000 towers across 15 circles over a 10-year period, in a deal estimated at Rs 10,000 crore

Tech Mahindra - for providing system integration and managed services for 15 circles spread over a period of 10 years, valued as USD 400 MN

3. Sistema Shyam Teleservices

Aegis BPO; IBMCustomer care operations; datacentres

Entails the managing of both voice and back-office processes

4. Datacom Solutions

Tata Teleservices-Quippo, Aircel; Huawei

Passive infrastructure and transmission services

Tata-Quippo - leverage the existing and future tower and backbone infrastructure (25,000 towers across India)

Aircel - access to 5,000 mobile masts in a deal valued at approximately USD 400 million

Note: The above table is an indicative list of recent announcements by new operatorsSource: media reports

Consolidation rationalization and cost cutting measures by

operators, steep reduction in demand for telecom By FY11 the Indian landscape may be

infrastructure and outsourced services and an characterized by the presence of around 12

increase in bargaining power of operators. operators on average per circle, which is quite Companies with the 'right' mix of exposure to high a number compared to 4-5 operators in incumbent and new operators would be more mature mobile telecom markets. Despite the size

attractive than the ones solely dependant on new of the Indian market, both analysts as well as

operators or incumbents. This is so because industry participants concur that the industry is

while incumbents are more likely to continue likely to go through a consolidation phase in the

generating business post-consolidation, new medium term. Consolidation is likely to create a

operators could offer immense business ripple effect through the entire telecom value

opportunities in the near to medium term.chain as a result of implementation of

14

Opportunities for PEs wishing to exploit this potential opportunity

should critically examine the likelihood of Whilst a meaningful stake in telecom operators continuance of spectrum scarcity in light of for PE players may not be possible given multi-

ongoing discussions around spectrum farming / billion dollar valuations, there exist several

move towards technology agnostic spectrum opportunities across the value chain – tower

and impact of defence forces vacating spectrum companies, telecom ancillary providers, VAS

service providers etc – with investment size over the next 2-3 years

ranging from a few million to hundreds of million Overall, the telecom sector holds good potential

USD. and offers the opportunity for the kind of returns

Telecom towers - would benefit from rollout of PEs look for. However, the landscape is likely to new operators and from new service remain dynamic and somewhat uncertain over technologies e.g. 3G and WiMax. With most of

the foreseeable future from market, regulatory the new players in advanced stage of rolling out

and industry perspective. Private equity investors their network, investors should critically examine

need to evaluate the impact of key developments the ability of their target's assets to host multiple

and trends that may significantly alter the telecom tenants and more importantly their ability to win

landscape to make an informed investment / exit quality* tenants.

decision.Telecom ancillary (rollout and post rollout

Note: *operators who would roll out and not services providers for passive infrastructure) - become victims of consolidationCompanies with a sole focus on rollout could run

out of steam because of slackening pace of

rollout. Investors should critically examine the

capabilities of companies in this space to

increase their share of the market, diversify into

post rollout services space or into other sectors

(eg power, railways etc.)

VAS - would benefit from increased penetration,

increase in 2G base and increased sophistication

of applications post uptake of 3G services. Given

that VAS companies of scale are well funded, the

segment may have limited funding opportunities

of size that PE investors typically invest in. While

secondary deals and consolidation of smaller

companies are opportunities that PE players can

look at, VCs can target early stage companies

with innovative and scalable applications.

New operators – robust growth in subscribers

coupled with spectrum scarcity could result in

significant valuation increase for new operators

that have been allocated spectrum. Investors


15


Neeraj joined KPMG in June 2008 and leads the Telecom vertical for Transaction Services in India. He gained extensive experience in strategy consulting and due diligence work in London with Ernst & Young (2 yrs) and global strategy consulting firm -L.E.K. Consulting (2 yrs). Prior to that and an MBA, Neeraj worked for Siemens (Mobile division) in India, SE Asia and Africa for 8 years wherein he gained extensive exposure to both consulting and implementation of large infrastructure and telecom networks. Neeraj has an MBA from INSEAD (Dean's List), France and a B.E. - Electronics & Communication (Hons.) from C.R. State College of Engineering, India

Neeraj Jain

Director

Transaction Services

+91 90083 44446

[email protected]

About the Author

Vikram Utamsingh

Executive Director and Head

Private Equity Advisory

Vikram leads KPMG India's Private Equity Advisory business . His focus is to work with Private Equity firms through the life cycle of their investments. Vikram has a deep understanding of transaction issues, deal structuring and negotiation issues relevant to private equity transactions. Vikram is quoted on his views on the Private Equity industry in India in leading newspapers and international PE and deal magazines . He recently led KPMG India's Private Equity survey which was published in February 2008.

Head of Private Equity

Sanjay has been at KPMG for 18 years and has worked at the offices in London, Silicon Valley, Frankfurt and will soon be arriving in Mumbai to lead the Transaction Services business in India. He has significant experience in the Media, Telecommunications and IT sector having worked for clients such as Virgin Media, Bertlesmann's Avarto division and Logica. He also leads our relationship with Goldman Sachs Capital Partners across EMEA.

Sanjay Thakkar

Partner

Transaction Services

Head of Transaction Services

16

W

India: Mobile subscriber base vs. fixed-line 1users and internet users

continues to evolve, and content, rather than hen mobile phones were first hardware, becomes the driving force, mobile launched in India, it would have been phones are perfectly positioned to be the key almost unthinkable to imagine the access point for this content, whether it is crop transformational impact they would have on the prices for farmers, GPS for fishermen or the latest Indian telecoms sector. As a nation, we have movie trailers for the teen population in the embraced this technology as none before. metros. Once again, it's a perfect example of Whereas in other economies, the traditional

‘development curve’ has seen firstly a growth in

wireline usage and fiber to home connections,

followed by increasing usage of mobile devices,

India has leapfrogged a number of milestones on

this curve. Today, the number of mobile phones in

India is disproportionate large relative to

landlines, broadband connections, computers, or

any other form of communication in general. In

addition to this, mobile connections continue to

grow at a phenomenal rate, by far the highest in

the world.

leapfrogging, as it significantly bypasses the

evolution of increased wireline usage, fiber to As the communications value chain in India

home connections etc.

However, how will this happen? With current

mobile phone download speeds, sending and

receiving photographs can be painful, let alone

streaming videos or getting real-time traffic

information. The current penetration of data

services is extremely low, and growth has been

hampered by existing infrastructure limitations.

100%

80%

60%

40%

20%

0%

2006 2007 2008 2009 2010 2011 2012

Voice Data

India: Mobile voice vs. data revenue (2006 – 2012)

Num

ber

of s

ubsc

ribe

rs (

'000

)

1,200,000

1,000,000

800,000

600,000

400,000

200,000

0Mobile

Internet

Fixed Line 2006 2007 2008 2009 2010 2011 2012 2013

by

Prashant ChopraSandeep Gill

3G - The Next

(r)evolution

in Indian

Telecommunications

3G - The Next

(r)evolution

in Indian

Telecommunications

17

The obvious, and much clichéd answer, is 3G adoption in the metros, the poor infrastructure on

(and subsequently 4G). As 3G has been rolled the fixed line side means that an increasing

out over the world, it’s been a win-win situation number of consumers are going to rely on their for everyone. 3G has had a beneficial impact on mobile phones for data driven services, ARPU as 3G customers spend more than potentially leading to significant uptake as and 2G/2.5G customers. In fact, a number of global when the infrastructure becomes available. operators have realised considerable revenue Additionally, as companies expand their gains from the 3G rollout. Almost all have seen an operations to semi-urban and rural areas, uptick in data usage and in several cases (KDDI, revenue from enterprise clients stands to gain

DoCoMo, 3 UK, O2 UK etc.), data services significant ground as these clients’ dependence contribute more than 30% to overall ARPU. on mobile services will become critical. Handset manufacturers are able to sell higher

This provides the operators with great cross-sell value handsets, consumers are getting access to and up-sell opportunities and provides impetus better content and finally, the content providers for enhanced product development. It will also have a market that demands and pays for higher be the foundation for introducing the next quality and value.generation of wireless technology, such as LTE.

This remains by far the most cost effective lever to

manage ever increasing demand, something that 3G has great potential to alter the dynamics of the

Indian telecom market. Besides the expected would be of great short term help for all operators.

3G and India

3G - The Next (r)evolution in Indian Telecommunications

Objective:

Key considerations:

Identify at a granular level customer segments most likely to purchase the products and their usage of these products

- Consumer purchases of products is strongly correlated with spend and demographic characteristics

-The usage of products by business varies significantly based on business size, location and industry vertical

-Convergence of home, business and elsewhere domains determine unique usage

CUSTOMER

Objective:

Key considerations:

Detemine the competitive need for spectrum based on their business model

- Current spectrum holding and the need for additional spectrum

-Marketshare information

-New products contemplated

-Financial Strength

-Growth targets

COMPETITION

Objective:

Key considerations:

Identify the products that will be offered by incumbent and new entrants.

-Value of existing wireless products is different for incumbent wireless players than for new entrants.

-Ability of incumbent players to bundle existing products with new products

-Ability of new players to deliver new products e.g. integrated wired and wireless gaming and seamless handsets

PRODUCTS

VALUATION RANGES FOR 2.1 GHz / 2.3 GHz SPECTRUM

18

The 3G Spectrum Auction

The way forward

Will 3G lead to a spate of mergers, alliances,

acquisitions?

3G in India still remains

somewhat of a mystery. There is uncertainty Before 3G becomes a reality in India, there is the about its core customer base, usage patterns, small matter of the spectrum auction. Already adoption rates, pricing structure etc. There is delayed, the auction has become the cynosure of considerable appetite to share this risk, rather telecom related eyes in India. The Government is than face it alone.following a global auction route, allowing existing

and new entrants to participate, leading to The spectrum auction has the

potential to raise entry prices for 3G sky high. expectations of a high spectrum value

This has been seen in the past in some other However, new entrants are at somewhat of a markets. The network rollout and disadvantage as they have to pay large UASL marketing/sales costs are further added to this. fees, do not get any 2G spectrum, and face large For the bigger players such as Bharti, this is less capital expenditure as they have to ensure a of a problem, but for relatively smaller players, significant rollout (90% in metros, 50% in smaller with smaller pockets, it might make sense to cities) within 5 years, without the brand and scale partner and share the costs.advantages of the existing major players.

Additionally, there is increased possibility of the

Government blocking the sale of a major stake Though 3G presents tremendous opportunity for before network rollout, decreasing chances of all the players in the value chain, it also requires a investment based auctioning. very strong enabling ecosystem. Without this

ecosystem in place, the whole ball of wool can

unravel quite quickly. Here are some key points

for the concerned players to keep in mind:Entering and sustaining a strong position in the

3G market is something that requires a large Though it is easy to keep raising

the minimum price for spectrum allocation, it is amount of investment as well as technical and

also easy to kill the goose that lays the golden business know-how. For this reason, it is fair to

egg. Spectrum pricing must be fair so that there assume that the market might see more

can be a healthy level of competition among old transactions such as Tata-DoCoMo. Some key

and new entrants.determinants of these alliances/stake

acquisitions are as follows: Though it is easy to use the

allocated spectrum for 2G services, operators

must make a concerted 3G presents a natural opportunity for Indian and

effort to roll out the foreign players to work together. The technical

required infrastructure expertise of a more established foreign player

and services as soon as coupled with the market knowledge of a local

possible. Additionally, player presents great opportunities for synergy.

while the metros would The Tata-DoCoMo deal is a great example of this.

be the obvious starting Tata has already set up the network while

point, the semi-urban DoCoMo has great understanding of

and rural areas provide technologies, market development and

immense potential for competition. When Tata enters the 3G space,

3G adoption and usage.DoCoMo's expertise will add tremendous value.

Risk Mitigation:

Price/cost:

Government:

Operators:

Technical expertise and market experience:


19

Handset manufacturers:

Content providers:

There is a definite

need for out of the box thinking as far as

handset strategy is concerned. This could be

a result of closer collaboration between the

manufacturers and operators (subsidies,

shared go-to-market thinking etc.), enhanced

manufacturing capabilities or just pure pricing

plays by the manufacturers. In order to get

sufficient scale, 3G handsets have to be sold

at appropriate prices, ideally at an entry price

range of Rs. 4,000-5,000.

Once the hardware and

the access points are in place, the key remains

the content. Currently, operators take a major

share (60% and up) of content related

revenues, but as higher quality content gets

developed, it is essential to reach a fair

agreement so that there is enough incentive

for content developers to produce good

quality content. Without relevant content,

examples being entertainment and sports for

the metros and agricultural related information

for the rural areas, it will be hard for consumers

to understand the real value of 3G.

3G has the potential to completely transform

the way people use their phones – but needs

the right stars aligned to really gain traction,

and fully realize this potential.

Sandeep Gill is the Managing Director of

Deloitte Corporate Finance, India. He has

carried out financial due diligence on

several key telecoms transactions in India

and South East Asia.

e-mail: [email protected]

Mobile: +91-98200-25244

About the Authors

Prashant Chopra is a Director with Deloitte

Consulting in India, and leads the Telecom,

Media and Technology vertical for the

firm's Strategy & Operations offering. He

has spent his consulting career advising

global telecom clients on growth strategy,

M&A and sales and marketing

effectiveness.

e-mail: [email protected]

Mobile: +91-97119-77717


20

India is the 2nd largest and fastest growing offerings. The recent spate of price cuts to

mobile market in the world with over 440 1ps/second plans forced by the new operators

million connections as of September 2009. It does not give any scope for the ARPUs to go up

is expected to cross 500 million connections by from voice services in the next 3 years. It is

March 2010. anybody’s guess as to when SMS would also go

free. Given this background, it is expected that India has been predominantly a voice market with

VAS will get its rightful priority in the operators’ Value Added Services (VAS) contributing below

focus to maintain or increase their ARPU and 3% of revenues as against 15-25% of total

revenues in developed markets. However, this is profitability.

expected to grow fast to reach approx. 10% of Of the 100+ VAS services that have been

mobile operators revenue at Rs.20-25,000 crores launched in India in the past 10 years, only a

(US$ 4-5 billion) by 2012/13.handful have so far been very successful, namely,

Average Revenue per User (ARPU) for Indian SMS, Caller Ring Back Tones (CRBT), wall mobile telecom operators is one of the lowest at papers, ring tones, off-line games and limited full less than Rs.250 (US$ 5) per user per month, as

track downloads as part of VAS 1.0 under 2/2.5G. compared to US$ 30-60 per user per month in

Other than SMS and CRBT which were served as different developed markets. New additions at an

a service, other applications have not generated ARPU of Rs.100-150 (US$ 2-3) per user per

meaningful revenue for the operators and the month are further reducing the already low ARPU.

service providers, as wall papers, ring tones and

While Indian mobile telecom operators have games were downloaded from Internet and redefined the business model for delivery of shared freely amongst the users. However, the mobile telecom services at the lowest capital as

key success factors for VAS 2.0 in 3G will be very well as operating costs per minute, thereby

different from those for VAS 1.0.achieving 40% EBITDA on their low ARPUs, they

Currently there are only about 20 million users are very close to hitting the bottom in terms their who consume data services through their GPRS cost efficiencies and should now focus on

connection. This is expected to reach 75 millions increasing their ARPU to maintain if not improve

by 2012/13 accessing data through 3G and their profitability in the coming years.

GPRS connections.This increase in ARPU could come either from

I am discussing below some of the key enabling increase in usage pattern of the consumers in

voice markets or from consumption of VAS factors for the success of VAS 2.0:

by

T C MeenakshisundaramOpportunities in

Mobile VAS

space

Opportunities in

Mobile VAS

space

21

3G Roll-out timelines:

Operators’ focus/attitude:

Rich applications:

Revenue share dynamics:

Delivery:

Go-to-Market:

Despite the initial “unlimited” data plans and the mobile payments

infrastructure provides the ability to bill and euphoria and the demonstrated speed, the start

collect from the mobile users directly.date for 3G roll-out by private operators has

shifted from Mar 2010 to Sep 2010, assuming In the past 10

there are no delays to the 3G auction deadline of years, operators were quite busy with new

mid-Jan 2010. This will push the scaling of 3G customer acquisition that has seen the mobile

across category A and B circles to Apr 2011. Any user base crossing 400 million users. This focus

further delays will contribute to additional helped improve cost efficiencies and opex model

cascading with the unviability of the new for core infrastructure to manage the high cost of

operators to sustain their losses.network roll-out as well as complexities

In VAS 2.0 applications for associated with the same. This focus crowded

3G have to be feature rich and utilitarian or out the attention of the business heads towards

entertainment oriented such as Mobile TV*, multi- customer service and VAS as a revenue

player online games, mobile social net working, opportunity with VAS contributing <3% of the

mobile commerce, mobile enterprise total revenues. This is expected to change with

applications etc, with higher level of interactivity. the tapering of consumer growth after crossing

The applications should be easy to download and 500 million users, rapid drop in ARPU in the past 2 use with over-the-air update. years and limited scope to drive cost efficiencies

further, resulting in the operators focusing on *IDG Ventures India is an investor in Apalya additional revenue streams through VAS.Technologies, India’s #1 mobile TV service

provider connecting 8 mobile operators and 70+ A consequence of TV/Video content channels. operators’ apathy towards VAS was lack of their

appreciation of VAS business economics Most of the services will be delivered resulting in keeping a revenue share of 50-70% of on online basis from the Operator / Service VAS revenues, where the VAS providers were Providers’ servers. This will ensure that the treated as vendors to be squeezed instead of as products/services are not commoditized or

partners to help drive additional revenues and threatened by free distribution amongst the

profitability leaving very little to be shared users. Further, these applications will have to

between the VAS content providers/creators and leverage the OS environment to ensure that the

VAS aggregators. In developed markets downloaded applications are locked to the

operators retained between 25-40% of VAS phone/SIM to avoid piracy.

revenues, which led to a vibrant and profitable There is a mutual

VAS providers industry. interdependence between the mobile operators

With the expected focus on VAS revenues, VAS and VAS 2.0 service providers as VAS 2.0

providers will be treated as partners and the applications are expected to drive higher ARPU

operators’ revenue share climbing down to below and profitability while mobile operators need to

50% in the next 2 years, but substantial increase offer data heavy VAS 2.0 applications bundled

in absolute VAS revenues on larger audience. within their data plans to promote consumer

Early signs of this have been seen in VAS 2.0 usage. The VAS 2.0 service providers and content

services where the content and cost of delivering providers will have an opportunity to directly

market their offerings to the consumers only after them is appreciated with operators offering

higher revenue share to the VAS providers.most of the consumers have moved to

Opportunities in Mobile VAS Space

22

Billing:

Location Based Services and Advertising:

Privacy concerns:

VAS 2.0 applications being rich in

features with heavy data usage should have the

ability for tracking, reporting and billing data

usage under different billing plans for a

day/week/month. There should be an option to

bill “snack size” usage to attract the large pool of

pre-paid consumers.

As

the technologies for identification of the mobile

user’s location have become affordable, there

would be opportunities for leveraging this

information to offer new services. Advertising

based on the context of usage including user’s

location will be a new opportunity. However,

advertising is expected to take-off only after

critical mass of “paying users” is achieved.

While the VAS 2.0 will deliver

rich data on the users including their usage

patters, it increases the concern on privacy of

personally identifiable information. Applications

that address this concern adequately including

data security will be very critical for increase in

use of VAS 2.0.

In conclusion, VAS 2.0 to leverage the 3G

networks would change the Indian mobile

industry and bring VAS to the center of the

operators’ strategy for revenue and profitability

growth. Any aspirants to provide VAS services

should keep in mind some of the above points to

make a successful business out of VAS 2.0

opportunities.

Opportunities in Mobile VAS Space

T C Meenakshi Sundaram (TCM) is founding

Managing Director of IDG Ventures India, a

US$150 Million early-stage technology

venture capital fund backed by IDG, the

world’s largest IT-focused media company.

He currently serves on the Board of

Directors at Apalya Technologies, Aujas

Networks and ConnectM.

Previously, TCM spent three years with

Walden International’s India investment

team working on investments in companies

such as Mindtree Consulting, Venture

Infotek, Jobstreet and Webvisions, across a

range of technology sectors.

Prior to joining IDG Ventures India, TCM

served as Chief Financial Officer and

President - Corporate Services at Venture

Infotek, a leading payments processing

company in India. He also worked for

fourteen years with Wipro, India’s leading

global IT services firm.

TCM is a Chartered Accountant by

qualification.

Phone: +91 80 4043 4802

Mobile: +91 99001 81261

Fax: +91 80 4132 9226

Email: [email protected]

About the Author

T C MeenakshisundaramFounder & Managing Director

23

Indian Cable TV subscribers are estimated to competitor on his own turf. It explains why MSOs

with ample PE funds have shied away from have paid approximately Rs. 13,000 crores (USD

2.8 billion) in subscription charges in 2008. Over building a local organization to compete with the

80% of this is estimated to have been pocketed LCO. Instead, most MSOs have tried to co-exist,

by the local cable operator (LCO). The economics in an uneasy marriage with their LCOs. With an

for the average LCO are compelling: increasing number of suitors, LCOs have been

switching from one MSO to another, depending The LCO uses differential pricing to

upon the bait offered. Clearly, the large number of capture 70-80% of TV households in his locality

secondary subs that are claimed by major MSOs (have you ever asked your cook/maid how much

in India are broad estimates and could prove to be she pays for cable-note that she gets the same

ephemeral. A LCO could easily take his network product/service as you)of thousands of subscribers to another MSO,

His subscriber base is a black box – there almost overnight. is no formal record of who his customers are or

The fragmented India cable industry has tried to how many there are. Consequently, take a shortcut to quick profits by large scale programming cost payouts are low; with even acquisition of secondary subscribers and using more upside if multiple MSOs (Multi System carriage fees from broadcasters to subsidize the Operators) are vying for the LCOs loyalty in his losses incurred in their base cable TV business. marketHowever, even in this landscape, there have been

Minimal operating costs due to absence a few islands of excellence. A few operators have of basic customer service features like call taken the tougher road of building their own, centers, bills etc. standards based and fully owned last mile

networks. They have made steady progress Low corporate overheads and a cash towards building professional, corporate business with minimal taxes.structures and are trying to emulate world

Capex is a fraction of what a top quality leaders like Comcast in building a world class network would require with little adherence to customer centric communications company standards or licenses for legal Rights of Way. (Comcast, incidentally, reported EBITDA margins

of 40% in 2008).Good understanding of his local area

coupled with quick service; in many cases ready In this article, we lay out the expectations of TV to resort to muscle power and other unethical

households from their cable (or DTH/satellite) practices to defend his territory.

operator, compare different models being used

to deliver against this expectation, assess cable Needless to say, his P&L would show a very fat operators’ success in actually delivering against profit margin and this explains the presence of an these expectations and showcase a few players estimated 60,000 LCOs in the country. Though

who standout from the crowd on these metrics.derided by everyone, he has proven to be a tough

by

Nithin KaimalCable TV -

The Money's in

the Last Mile.

Cable TV -

The Money's in

the Last Mile.

24

What does the average TV household expect from his cable operator?

As more cable TV households start to own PCs/laptops, high quality broadband services are

A scan of various offerings being made to TV becoming an essential need for such households. households in India reveals the following However, the customer has various options to expectations/needs that a cable operator could choose his broadband service provider, and the fulfill: cable operator’s broadband offering would need

to be competitive to be considered the default In most cases,

choice.customers of the average cable operators have no identity – no customer ID, no bills, and no Cable TV offers receipts. Customer service is rudimentary with no a unique platform for operators to create content easy access to the cable operator’s personnel. tailored for the local population. Low capex/cost

content channels can be created catering to the No distortions, ghosts etc. while

local news, local language music and regional viewing channels he’s paying for. And no

language entertainment space. This not only downtime please.

creates a valuable differentiation versus DTH, but also enables the operator to earn additional advertising income. Digital customers make up

70% of Comcast’s cable TV customers. It may take a while to reach those levels in India; but

The trend towards early there is a clearly a large enough segment of

monetization of movies through alternate customers that value the benefits of digital TV,

mediums holds significant potential for operators and are even willing to pay higher ARPU for this

to enter into revenue sharing arrangements with feature (larger bouquet of channels, EPG, DVR

movie production houses. Similar opportunities facility etc.).

exist with education.

The customer needs more than cable TV:

Basic customer service:

Customers love local content:

Quality signals:

The customer needs more than plain vanilla analog cable TV:

Customers will pay for valuable value added services (VAS):

Cable TV: The Money's in the Last Mile

25

Who is best positioned to deliver against

these expectations?

Cable may be best ‘positioned’, but what

does it take for cable operators to ‘deliver’

against customer expectations?

a digital one capable of offering triple play:

Operators need to invest in quality equipment for

the head-end, network infrastructure all the way A comparison of the various business models to the customer’s premises, software for shows that cable operators with last mile

CRM/billing, capex for content creation, EPG etcownership are best positioned to deliver against

the chart below (Exhibit 1) Recruitment of trained and qualified

personnel (technical, managerial and However, converting the theoretical superiority of

administrative)the last mile cable model to a valuable customer

proposition is not easy to deliver.Creating a customer centric mindset

across the organization: All functions –

technology, maintenance, sales, operations etc.

– need to be trained to think from the customer’s

point of view and KPIs need to be framed

accordinglyAny operator who can deliver on the above is well

poised to deliver a compelling proposition for his Visionary and ambitious promoters / customers, thereby generating significant loyalty

entrepreneurs and investors who are prepared to and robust revenues and profitability as a reward.

think longer termHowever, delivering this would require:

Clearly, these have proved to be a steep ask from Ability (and willingness) to commit capital

to transition from a low quality analog network to most cable operators in India.

CustomerService

Digital TV

Broadband

Local Content

VAS

Direct Control overSubscriber

Cable-Last Mile

Direct Control overNetwork Quality

Able to providecable and

broadband on a single cable

Easy to aggregate andprovide local content

Return path exists

Direct Control overSubscriber

DTH

However, can bundlewith parallel

broadband rollout

Therotically possible,but economically

feasibility not clear

Complicated, need touse mobile / internet

for return path.

Difficult for MSOs tocontrol LCOs

Cable-Franchise

No control over LCOnetwork quality

Rollout easy, butconflict of interestmay exist between

MSO and LCO

Most LCO networksnot broadbandready. Need torollout parallel

network.

Can't use LCOnetwork for return

path

- Poor - Mediocre - Excellent

Exhibit 1: Comparison of alternate business models to delivercontent to TV homes

Signal Quality


26

Why haven’t most cable operators delivered

against customer expectations?

Will last mile have the last laugh?

Who are the exceptions and what can other

players learn from them?

last mile presence in over 15 locations by

adhering to the above design principles. Despite

the enormous challenges associated with Unfortunately for cable TV customers, most

entering new markets with the ‘last mile’ business LCOs are sub-scale and operate in near

model , the Company has stuck to its game plan monopoly situations. They never felt the need to

and used its superior value proposition to invest substantial capital and deliver a superior

customers to secure market share in these proposition to the customers (existing cash

locations. This business model has translated inflows were rich enough).

into healthy margins, short working capital cycle

and low customer churn, thereby providing rapid All national players in the cable industry (Master

MSOs or MMSOs) have chosen the (relatively) payback of capital deployed.easy way out and pursued a strategy of acquiring

or taking significant stakes in numerous

State/District level MSOs. MSOs have got sweet While DTH has gained subscribers on the back of deals as part of this race to acquire such stakes. oceans of red ink, it has demonstrated that the The battle between MSOs for LCO loyalty has Indian customer is looking for a high quality, value also resulted in ‘happy days’ for the LCOs – with

added cable service. The technological MSOs offering significant rebates on the amounts

advantages that the “last mile fat pipe” cable due from LCOs. In the meanwhile, MMSOs used

model provides over DTH is well established in carriage/placement fees from broadcasters to

several developed markets around the world. keep their ship afloat. In pursuit of immediate

Similarly, the performance of Asianet, Ortel and valuations, the customer (and thereby the more

other niche players who have stuck to the ‘last difficult though profitable route of ‘last mile

mile ownership’ model in cable is ample evidence ownership’) took a back seat.

of the economic attractiveness of this model on

the back of customer and supplier (broadcaster) The advent of DTH has, however, changed the

rules of the game. By providing high quality satisfaction and goodwill. The next step is for signals, variety of bouquets tailored to meet these companies to roll out multiple services like different segments, reasonable pricing, exclusive digital TV, broadband and VAS which fully utilize content (education channels) and value added their control of their customer’s homes and the services (movie on demand, temple darshan) lower cost and higher bandwidth that is available along with the trust associated with a national to them. brand, they have been able to wean away 15

The slowdown over the past 18 months is a million cable subscribers over to their side.warning to MMSOs about the ephemeral nature

of carriage fees. They have made progress in

deploying digital STBs in parts of their network

(albeit at no incremental ARPU). They are also While there are no national players who have likely to use part of the funds being raised through bothered with the ‘last mile ownership’ model, IPO/private placements to aggressively acquire select regional operators have been successful in LCOs across their network. MMSOs need to rolling out many elements of the above package, move rapidly to first match the product/service albeit in limited geographies. Asianet and Ortel offering provided by DTH and then upstage them are two examples of such players who have built by milking the benefits of the ‘fat pipe’ entering high quality networks that provide fat pipes to the customer’s premise. their customer homes and control all elements of

their service offering, end to end. There is no doubt that ‘last mile’ will have the last

laugh – the actions of the cable industry will Ortel Communications (a portfolio company of

decide whether the cable or DTH players will NSR) has successfully made the transition from a

laugh louder.single location LCO to an operator with a strong


27


Nithin has been with New Silk Route Advisors for close to two years and focuses on private equity opportunities in the Indian sub-continent out of the Mumbai office. He looks at investment opportunities in the consumer services, financial services and infrastructure verticals and is part of the Ortel deal team.

Nithin was previously an Engagement Manager with McKinsey & Company, Mumbai. During his tenure of five years, he served clients across several industries including infrastructure, oil & gas, power, media, metals & mining, telecom, automotive and food products. Before joining McKinsey, Nithin completed his MBA from the Indian Institute of Management (IIM), Calcutta. Nithin is also a qualified Chartered Accountant from the Institute of Chartered Accountants of India and a Bachelor of Commerce from Mumbai University.

Office: +91 22 6618 0953


About the Author

Nithin KaimalSenior AssociateNew Silk Route Advisors

28

Cable TV penetration in India is growing

rapidly; however, cable service providers

are not able to leverage its full potential due

to business model and other operational

constraints

Alternate solutions for both digital TV and

broadband services have started gaining

traction and thus are becoming a threat for

cable service providers in retaining their

subscribers and in leveraging their

infrastructure for broadband services

implemented; also high Capex requirements do

not make viable business case for LCOs to invest

independently. For MSOs, it does not make a

viable business case if LCOs continue to under-

report the subscribers.

All these constraints have resulted in loss of Cable TV has attained a fairly high penetration in existing cable TV subscribers to other India, with 86 mn households, representing 64% technologies such as DTH, particularly for those of all TV households. Leveraging high penetration customers who are quality conscious.and ownership of last mile connectivity, cable

industry players are well positioned to offer both

digital TV as well as broadband services.

However, these service offerings have been

constrained due to multiple business model and

operational issues existing in the value chain.

The primary challenge in the cable industry is

under-reporting of subscribers by LCOs. The With TRAI mandating implementation of CAS cable TV distribution in India is highly fragmented (Conditional Access System) in some parts of and unorganized. Currently, 15+ Broadcasters, 7 metro cities and major telecom service providers large MSOs and 60,000 LCOs under 7,000 head- launching DTH services, digital TV penetration in ends service around 86 mn households. The India has reached 19% in 2009. Though LCOs, who control the last mile up to consumers' implementation of CAS remained limited due to homes, enjoy virtual monopoly in most regions. subscribers reporting issues between LCOs and This results in under-reporting (estimated at 80% MSOs, DTH has started gaining traction with ~0.7 levels) of subscribers by LCOs and uneven mn households added per month in 2009 as revenue distribution between LCOs (83%), MSOs compared to ~0.3 mn households added per (13%) and Broadcasters (4%). month in early 2008.

Moreover, there exist issues related to insufficient In the broadband market, EvDO based data cards network infrastructure and lack of financing launched by Reliance Communications and Tata models to enable network upgradation. Existing Teleservices have started gaining traction. infrastructure owned by LCOs does not support Though the current installed base remains low, high bandwidth services (such as digital TV & launch of 3G in early 2010 will drive their

broadband) and both LCOs & MSOs are not penetration significantly. Given this growth trend

willing to commit the required investments. For of wireless broadband and existing wireline

LCOs, it results in loss of revenue share because broadband, if cable service providers do not act

soon enough, it would be difficult for them to get of the inability to modify actual subscriber

significant market share in broadband services.reporting once a conditional access system is

Development of Indian Cable Industry - Potential for Growth via Consolidation and Triple Play

by

Kunal BajajDevelopment of Indian Cable Industry - Potential for Growth via Consolidation and Triple Play

29


In addition, converged service offerings such as subscriber share, cable service providers can

bundle other premium services such as high IPTV, providing voice, data and broadband over

speed internet and voice along with their existing single connection, have also been introduced by

cable TV offering. Offering premium services not telcos such as Bharti and BSNL. Though current

only enables service providers to increase their adoption remains low because of limited reach

revenue, but also helps in retaining existing and unavailability of sufficient infrastructure, it is

customers. Also, cable service providers have the likely to gain traction especially among high

income households. Thus, if the legacy cable advantage of an existing customer base of 70 mn

technology and operating models continue, cable households (81% of overall cable TV households)

service providers are expected to lose market and established last mile connectivity which they

opportunity for both digital TV as well as can leverage to compete with other triple play

broadband services. service providers such as telcos.

A similar strategy has been adopted by players

internationally such as Comcast and Time Warner

Cable in the US to compete against DTH

providers such as DirecTV and telcos such as

Verizon. Offering triple play services in 2006,

Comcast increased its annual subscriber net The Indian cable TV distribution space is likely to

additions from 2.64 mn to 4.94 mn. Also, its cable witness steady growth in digital TV penetration.

video ARPU increased by 32% due to adoption of With consumers wanting to shift and services like

premium services such as video on demand DTH and IPTV becoming readily available, the

(Exhibit 1).LCOs have no other option but to move to digital

cable even though it results in increased However, the existing cable network

subscriber declaration and lower revenue share infrastructure in India cannot support such high

for them. end services. Both backend infrastructures with

MSOs as well as last mile network with LCOs Rather than upgrading their analog based cable

need to be upgraded before the network is ready system to only digital TV and competing head on

for such offerings.with satellite and other cable companies for

Going forward, bundling broadband and

voice with digital TV can be a potential

service offering for cable service providers

to retain their subscriber base and increase

their revenues

2003 2004 2005 2006 2007

2.52 2.67 2.64

4.94

6.50mn

Source: Analyst Reports, Company Website

Chart 1.1

2003 2004 2005 2006 2007

4750 53

5862

USD

Chart 1.2

Exhibit 1: Comcast’s Revenue Generating Units Net Additions (mn) (Chart 1.1) and Cable Video ARPU (USD) (Chart 1.2)

30

Cable services providers can select from

multiple technology solutions to upgrade

their network to support triple play services.

The business case for each technology

option depends upon the size of its

addressable market and the Capex

requirement

cable connection extending to the home.

Depending on the way the last mile connectivity is

offered, several technology options are available:

FTTH (Fiber-to-the-Home), FTTB (Fiber-to-the-

Building), FTTN (Fiber-to-the-Node) and HFC

(Hybrid Fiber Coax) (Exhibit 2). Adoption of a

There exist two models for MSOs / LCOs to offer technology option will depend upon the required

triple play services. In the first model (Pure Play investment in rollout and the size of addressable

Service Model), all three services (voice, data and subscriber base.

video) are offered through a single dedicated

network. While in the second model (Hybrid Capex per

Service Model), the cable TV connection is subscriber in FTTH technology is as high as USD

integrated with a broadband connection to 2,500 as fiber is laid until the consumer access provide interactive on-demand services, voice &

point and the roll out time is long due to delays in data.

getting municipal clearances for activities such as

trenching and digging. Thus building a business In a pure play service

model, both Digital TV and VoD services are case will require high ARPU customers and a

delivered using internet protocol over the fiber / dense urban rollout in premium localities (Exhibit 3).

FTTH (Fiber-to-the-Home):

Pure Play Service Model:

Source: BDA Analysis

Exhibit 2: Technology Architecture for Pure Play Service Models


MPLSRouter

Existing Core Network

MultiplayBRAS

OLT System

RPR L2 SwitchSwitch Gateway1:5 Aggregator

Passive Optical Network (PON)Optical Distribution Network (ODN)

(Splitters can be colocated or distributed)

1:4 1:8 ONU / ONT

CAT5 cableLast Mile NetworkMAN

Main Activities Main Activities

Digging ManholesDucting - Horizontaldirectional drilling (HDD)Blowing & SplicingBitumen and WBM cuttingReinstatement (HDD)

Digging & Ducting (Opentrench)Reinstatement (Opentrench)

30 - 40 Man-Days per km10 - 15 Man-Days per km

Official Clearance3-12 months

Official Clearance3-12 months

Capex / Sub (USD)

FTTH ~2,500

~1,400FTTB

~800-2,200FTTN

~200-900HFC

Access Sub network HomeNetwork

ServiceSub-network

Legend - Fiber - CATS

1. Official clearance time is in addition to deployment time, and can be done simultaneously for both network segments.

31

FTTB (Fiber-to-the-Building): HFC (Hybrid Fiber Coaxial):

Hybrid Service Model:

FTTN (Fiber-to-the-Node):

Capex per Capex per

subscriber in FTTB technology is ~USD 1,400, subscriber in HFC technology for fiber rollout and

lower than FTTH because fiber is laid until the other upgradation at both the MSOs and LCOs

building or complex and ethernet cable is used to ends is ~USD 900 for underground rollout of last

provide connectivity to individual houses. Also, mile coax. However, aerial rollout of coax reduces

FTTB rollout is not as time intensive as FTTH Capex per subscriber to ~USD 200, thus allowing

rollout, as digging within residential colonies is quick rollout for a large user base of existing cable

not required. However, addressable market for TV users. The last hop in case of HFC rollout is

FTTB also remains restricted due to limited also in range of 0 – 5 Km from consumer premise

building clusters in India outside cities such as (Exhibit 3).

Mumbai (Exhibit 3).In the hybrid service

model, cable TV is broadcast via analog cable or Capex per

subscriber in FTTN technology ranges from USD satellite (DTH). Delivery of other interactive triple

800 to USD 2,200 depending on the reach of the play services (voice, video and internet) is done

last hop and requirement of copper deployment. through a separate broadband connection. On-

Also, distance of last hop from consumer premise demand services requiring high bandwidth such

and the quality of copper determines the as Video on Demand are offered either by

throughput on the network. The closer the last preloading the content on a subscriber's digital

hop is to the end consumer premise, the better is video recorder for access when requested or

the throughput. The last hop in case of FTTN is in through on-demand stream & buffer in which the

the range of 0 – 5 Km from customer premise subscriber can begin to view the content when a

(Exhibit 3). sufficient amount has been buffered.

Technology SummaryCapacity(Mbps)

Time toRollout

Capex perSub

ExpectedARPU

OperationalIssues

AddressableMarket

FTTH

FTTB

FTTN

HFC

Favorability of Parameter: Very High High Medium Low Very Low

Exhibit 3: Comparison of Multiple Delivery Options for Pure Play Service Model



32

Interactive HITS + DOCSIS:

DTH / Unidirectional Cable + Broadband:

Capex per subscriber declaration restrict its adoption by

subscriber in HITS rollout is ~USD 144. Under LCOs. Also, delivery of services varies with the

HITS technology, LCOs access digital TV through type and quality of broadband connectivity. DSL

HITS platform and connect to an ISP gateway for or WiMAX connectivity is required for offering

voice and data and then offer triple play services bandwidth intensive services such as Video on

through a single coaxial cable extended to Demand and Video conferencing; 3G can only

individual home (Exhibit 4). support light data applications such as browsing

and simple interactive gaming.

Capex per subscriber in this technology will

depend upon the type of broadband connection.

Capex for xDSL ranges from USD 40 to USD 80

depending upon the loop length and copper Among all the pure play models, HFC has the best

quality, while for WiMAX and 3G connection, it is business case based on required investment,

greater than ~USD 200 and ~USD 370 rollout time and size of addressable market in

respectively (assuming 500,000 subscribers per India. Adoption of FTTx technologies is

city, bandwidth allotment of 10 Mbps per sub and constrained because of high Capex, limited

contention ratio 1/10) (Exhibit 4).addressable base and other operational issues.

Also, demand for hybrid service models will Though hybrid service models require less Capex

remain restricted because of limited adoption of as compared to pure play service models,

3G, WiMAX and DSL technology and limited constraints in delivery of wide range of services

including Time Shift TV and the requirement of service offerings on these networks.

Among all technology options, HFC rollout

has the best business case and market

opportunity for MSOs and LCOs in India

Exhibit 4: Comparison of Multiple Delivery Options for Hybrid Service Model



High Level Architecture Services Supported Deployment(Example)

InteractiveHITS + DOCSIS

Coax

ISP

HITSOperator

LCO

Over digital coax- Digital TV (SDTV & HDTV)- Video on demand- VAS

AT&T (USA)

WSNet (USA)

DTH + BB

DTHOperator

ISPDSL / 3G /WiMAX

Over DTH- Digital TV (SDTV & HDTV)

Over Broadband connection- Video on demand- VAS

Direc TV (USA)

Sky Brazil

UnidirectionalCable + BB

CoaxLCO

Over analog cable- Analog TV

Over broadband connection- Video on demand- VAS

ISP

CoaxMSO

33

HFC rollout will require investments by all players short term due to decreased share in revenue,

across the value chain for it to succeed (Exhibit 5). but, over the long term, it increases the net

Carriers need to invest to upgrade their existing revenue to LCOs due to the increased ARPU

infrastructure to scale up the network capacity associated with bi-directional interactivity

and link to MSOs / LCOs, MSOs need to upgrade available on digital cable. Possible investment

to digital headends, and LCOs need to upgrade scenarios include

their existing co-axial cable network to support In this

interactive services. Finally at the consumer end, scenario, LCOs and small MSOs consolidate

investments will be required for home wiring and under one MSO and the larger MSO will invest in

set-top-boxes.upgrading the network infrastructure to offer

digital TV. The scale achieved through

consolidation will lower the required investment

per subscriber for large MSO, the actual

subscriber declaration by LCOs and higher ARPU

will increase the revenue, thus making a viable Rolling out an HFC network can have multiple

business case. Developed markets such as US investment scenarios depending upon the LCOs’

witnessed such consolidation when Comcast willingness to invest. The LCOs have option to

acquired AT&T Broadband and other cable invest independently or consolidate under MSOs

operators in 2002. In India, small scale / telecom operators. However, having only a

consolidation has started recently with MSOs limited number of cable subscribers per LCO

such as DEN and WWIL partnering with smaller increases the Capex per subscriber for an LCO to

MSOs / LCOs and installing digital STBs for both invest independently. Partnership with MSOs or

telecom operators results in revenues loss in the analog and digital TV services.

LCOs can either invest independently for

HFC network deployment or partner with

telcos or MSOs in which case, the latter will

make the required investment.

Consolidation among LCOs and MSOs:

Exhibit 5: Business Case Components for a HFC Network Deployment



OpticalNode

HFC

OFC

From Broadcasters'Satellites

OFC

Voice

Internet

DigitalHeadend

STB

Network Vendor

RevenueElements

OpexElements

CapexElements

Revenue share to MSOfor broadcasr content

Revenue share toNetwork Vendor

Revenue share to carrierfor voice and data


Revenue Share to LCO


Voice revenueBroadband RevenueVideo SubscriptionInteractive services (eg.movies on demand)PVR Subscription

Home wiring

Network maintenanceSales and distributionCustomer careMarketing

Network maintenanceContent charges

Network maintenanceBilling

Customer acquisition(STB)STB installationMaintenance

Scaling up the networkcapacity

Up-gradation ofbackhaul and headendto digital / opticalsystems

Up-gradation of coaxialcable network to HFC tosupport interactiveservices

CarrierGateway

34

However, there exist certain challenges for MSOs developed markets. This can be built out by a to supplement their digital TV offering with voice large MSO or a consortium of MSOs who can and high-speed internet. MSOs will have to either aggregate multiple LCOs under their fold and obtain UASL and ISP licenses to offer voice and make the required investments in the back-end broadband or adopt a similar strategy of network. Consolidation of LCOs under telcos partnering with small players offering these may not be feasible given that the LCOs will not services. be inclined to let telcos ‘own’ their customers and

potentially bypass them in the future.

In this scenario, telecom operators Irrespective of which business model option partner with multiple LCOs to offer triple play becomes mainstream, the cable industry is services and incur the required investment. In expected to look significantly different from its India, BSNL / MTNL and Bharti Airtel offer IPTV current state in the next few years and could services, however, the reach is limited to only few become a formidable competitor to telcos for parts of Metros and Tier 1 cities. The partnership providing broadband and triple play offerings in will add last mile connectivity to the operators’ India.existing backend infrastructure thus enabling them to rollout their IPTV services faster and with a marginal upgrade to the cable network. Telecom operators can leverage their existing back end, core and edge network infrastructure in offering triple play services. However, lack of existing relationships with LCOs remains a key challenge for telecom operators to compete against MSOs.

In this scenario, LCOs make the investment. Though this option allows LCOs to directly compete with DTH and digital TV offered by telecom operators and MSOs without compromising on their current margins, limitations of scale increases the Capex per subscriber thus making the business case unviable especially for low ARPU customers. Also, similar to MSOs, LCOs will require UASL and ISP licenses to supplement their digital TV offering with voice and broadband, further increasing the required investment.

Given the constraints of high Capex requirements and limited subscriber base per LCO, the business case for LCOs making investments on their own to upgrade their network is not viable. Consolidation among LCOs and MSOs offers a viable business case - however, for offering triple play, UAS license and provision of toll quality voice-over-IP will be required, as in other

Consolidation of LCOs under telecom operator:

Independent investment by LCOs:

Similar to other developed countries, consolidation is expected to drive the future growth of India cable industry as business case of independent LCO operation is not viable in the long term.


About the Author

Kunal BajajManaging Director

Kunal Bajaj is Managing Director at BDA and leads BDA’s India operations. BDA is a strategy consulting and investment advisory firm based in New Delhi and Beijing, with primary focus on the Telecom, Media and Technology sectors. Prior to BDA, Kunal has advised on projects in India for TRAI, the World Bank, multi-national companies, venture organizations and start-up companies. Projects included consulting on spectrum management policy, rural telecom development, wireless broadband technologies, telecom infrastructure and investment advisory. Since launching BDA in India, he has advised a variety of global organizations in the TMT and investment industries on their core India strategies. He also has prior experience as an entrepreneur in the telecom and internet space in India and US. He is currently also the founding Co-Chair for the Mobile Marketing Association’s India Council.

Tel: +91-11-4700-3100E-Mail: [email protected]

35

Sector Overview:

Regulatory framework:

The Telecom Regulatory Authority of India

(TRAI):

The Telecommunication The Wireless Planning and Coordination Wing of

Sector in India has witnessed unprecedented the DOT deals with the policy for spectrum

growth in the past two decades owing to the management, wireless licensing, frequency

reform oriented policies of the Government. assignments, international coordination for

Currently India is well poised as the second spectrum management and administration of largest wireless network and third largest telecom Indian Telegraph Act 1885, for radio network (wireless and wire-line collectively)

communication systems and Indian Wireless globally. (Source: DOT Annual Report 2008-09).

Telegraphy Act 1933.

The Telecom Sector is Monitoring, vigilance and security is coordinated

governed by the Ministry of Communications and and administered through the Telecom

Information Technology (“MCI”). The most Enforcement, Resources & Monitoring (TERM)

significant and authoritative body of the MCI is Cells which function as the subordinate offices of

the Department of Telecommunications (DOT) the DOT. These Cells play a significant role in

which is responsible inter-alia for policy verification and authentication of mobile formulation, licenses and regulation of wireless spectrum related data which is important in the transmission and enforcement of telecom laws in

currently prevailing ‘subscriber based’ systems India. The role of DOT has been strictly that of a

for spectrum allocation i.e. allocation being regulator post divestment of its telecom services

dependent upon the number of subscriber a business into BSNL. DOT functions through

service provider records.various units including the Wireless Planning and

Coordination Wing, the Telecom Engineering

Centre, TERM, etc. TRAI is an independent regulatory body

set-up in 1997 under the Telecom Regulatory

Authority of India Act, 1997. DOT seeks

consultation of TRAI on various licensing issues

and policy formulation though TRAI’s

recommendations are non-binding in nature.

TRAI has been instrumental in most of the

telecom policy decisions including inter-alia

spectrum allocation and pricing, internet

telephony, unified licensing system, inter-

connections chargeability.

Ministry of Communication & IT

TelecomEnforcement, Resource and

MonitoringCells

TelecomEngineering

Centre

WirelessPlanning andCoordination

Wing

Public SectorUnits (BSNL,

MTNL, ITI Ltd.)

Department of Telecommunication

Legal and

Regulatory Challenges

facing the

Telecom Sector

in India

by

Rajesh Begur

Legal and

Regulatory Challenges

facing the

Telecom Sector

in India

36

Telecom Disputes Settlement & Appellate

Tribunal (“TDSAT”):

Types of licensing:

FDI Policy in Telecom Sector:

Annual Report 2008-09) notwithstanding the

recessionary trend faced by the economies Gauging the need for an

independent dispute resolution body, the judicial globally.

authority of TRAI has been divested to TDSAT However owing to the sensitivity of the sector, a

which adjudicates on disputes related to the foreign investor still requires prior FIPB consent

telecom sector essentially between the for acquiring majority control (>49%) in Indian

regulators, the services providers and telecom company other than telecom equipment

consumers. manufacturing entities. Under the said FDI laws,

Historically, the National foreign investments upto 49% is permissible

Telecom Policy, 1994 marked the beginning of under the ‘automatic route’ and beyond that and

the policy initiative on modernisation and upto 74% under the ‘approval route’ for telecom

privatisation of telecom services in the country services (i.e. Basic, Cellular, Unified Access

and the trend continues under the current Services, NLD/ILD, V-Sat, PMRTS, GMPCS and

National Telecom Policy 1999 (NTP 99). NTP 99 other value added Services) and for ISPs (with

specified various types of licenses which could gateways).

be issued to telecom service providers. NTP 99 FDI in Infrastructure Provider Category – I (IP-I)

was further revised in 2003 for categorising and ISPs (without gateways) is permissible upto

licenses under the head (1) Licenses for Unified 100% with FIPB approval however with a caveat

Access (Basic & Cellular) Services; and (2) for public divestment of 26% over a period of 5

License for Unified Telecom Services as depicted years in case the investor is listed on an overseas

in the adjacent table.exchange. DOT has discontinued licensing of

Infrastructure Provider – II Category (IP-II) of

licensing with effect from December 2005 and the

services provider under this category have been

subsumed into ILD/NLD licensing category as the

case may be.

Telecom sector always mandated that

investments even from alternative avenues

(portfolio investments, FCCBs, ADRs, GDRs,

With the advent of unified licensing system, no convertible preference shares) would be included

for calculating FDI into a telecom company. separate cellular and basic service licenses are

being awarded now by DOT. However, with the advent of the much debated

Press Note 2 (2009 Series) in February 2009, Telecom Sector indirect FDI on proportionate basis through has been one of the busiest sectors for strategic Indian promoters/investing companies has been FDI into the country. This is quite evident from the made redundant though it is unclear if fact that the sector has magnetized around INR consequential changes have also been 273,000 Million of FDI since August 1991 to inculcated in the licensing agreements required August 2008 with INR 14,568 Million itself coming to be entered into by telecom service providers in the period of April to August 2008 (source DOT with the Government.

Types of Licences

Unified AccessService Providers

Unified TelecomService providers

(All types oftelecom services)

Fixed Line ServiceProviders

Cellular MobileService Providers

Cable ServiceProviders

Legal and Regulatory Challenges facing the Telecom Sector in India

37

The recent changes in FDI laws also allows Telenor’s operations in not so friendly

indirect foreign equity participation in neighboring countries of India.

downstream Indian companies (without any The M&A market

sectoral caps) in the event the foreign investor for the telecom sector of India has been a volatile

holds less than majority stake/management market in the recent years. With the advent of

control in the holding company. This has opened global players in the Indian market and cross

up the back door entry route for FDI in telecom border acquisition by Indian telecom players, the

sector in downstream Indian companies. market seems to be well poised as a global

Depending upon the regulators' view point on leader. After China, India is the second fastest

this, the loop hole can be plugged by the telecom growing global telecom market. Yet, lack of full

authorities reiterating the earlier framework which exploitation of rural market leaves potential for

took into account indirect FDI on a proportionate further unprecedented growth.

basis. The leeway provided by the aforesaid On the regulatory front, the DOT has on April 22, changes in the FDI laws permits various 2009 issued revised guidelines on intra-service shareholding related structuring options to area mergers for service providers. Under the promoters and foreign investors of Telecom current M&A guidelines, other than pre-clearance companies and it needs to be seen if the from DOT, it is also important that mergers should regulators would raise a concern on indirect not result in a licensee acquiring more than 10% ownership of non-resident entities in the telecom shares (substantial equity) in another licensee sector companies. entity in the same circle. Some of other features

Apart from the above, it is also important to note that are key drivers for M&A transactions are: (1)

that the FDI laws mandate that the board of Indian Permissions for mergers are granted only after

telecom companies needs to be Indian controlled completion of three years from the date of issue of

with the Chief Security Officer and Chief Officer license. (2) market share (both subscriber based

(Network operations) also being resident Indian and revenue based) of the combined entity not to

citizens. Notably such security conditions are exceed 40% on the market share in the circle. (3)

applicable to all licensee companies irrespective merger should not result in the number of service

of the FDI level though it needs to be seen the providers falling below four in a circle. (4) the

extent to which such conditions are adhered to by combined entity to meet with the spectrum

companies seeking indirect FDI as explained allocation criteria within 3 months of approval or

above.else surrender the excess spectrum.

Applications made to FIPB for approval to invest

in telecom companies and/or appointment of

foreign nationals as key officials

(MD/CFO/Chairman/CEO) would also be subject

to prior clearance of the Ministry of Home Affairs.

This leads to timeline issues for FDI investments

into the country as was evident in the recently

approved Telenor investment in the joint venture

with Unitech. The MHA took time to grant its

approval as it had security concerns owing to

Merger and Amalgamations:


38

Apart from the telecom laws, M&A transactions spectrum allocation, reserve price and the

would also be required to meet the requirements number of circles to be auctioned, the new

of Competition Act, 2002, which has been timelines for auction have now been released on partially notified. The Competition Act is likely to

September 11, 2009 setting a fresh timeline for have significant impact on cross border

release of information memorandum by transaction given the size of transactions ($11.1

September 29, 2009. Reserve price, on which the billion for Hutch-Vodafone and $23 billion for

Ministries of Finance and Telecom had locked Bharti-MTN) in the telecom sector and the parties

would have to factor in the additional time horns, has finally been decided by the Group of

required (if the Competition Act provisions were Ministers recently and the price has been set as to apply) for clearances from the Competition

INR 3,500 crores for pan India 3G license and INR Commission, constituted under the Competition

1,750 crores for WiMax license. (Source: Act.

Business Line date August 28, 2009). If Another key legislation in the M&A sphere to

newspaper reports were to be believed, the watch out for would be the SEBI Takeover Code

telecom ministry believes that the auctions could that mandates an acquirer to make an open offer

draw around Rs 25,000 crores for the exchequer. to acquire minimum public shareholding prior to

the acquirer acquiring more than 15% stake in a In the first phase of the 3G auction, a maximum of

listed company. This assumes importance in light five licenses in each of 22 telecom areas is

of the called-off Bharti-MTN transaction that proposed to be auctioned apart from one slot

earlier received SEBI’s blessing that the Takeover

reserved for BSNL and MTNL. Similar auction Code would not be triggered on issuance of ADR/

GDRs. However, SEBI subsequently plugged the process is also being following for Wimax. It

loophole by revising the Takeover Code bringing seems that the criticism of ‘subscriber based’

the ADRs/GDRs under its ambit. systems for spectrum allocation from various

quarters, has forced the regulators to follow the

auction based mechanism for 3G and WiMax In technical terms,

3G (or 3rd Generation), is a mobile rollout.

telecommunications standard which offers users Experts believe that the WiMax rollout would help

a wider range of more advanced services with India to become the key market in the next five improved spectral efficiency. Whereas WiMax,

years. Such anticipation and also participation by (Worldwide Interoperability for Microwave

Access), provides wireless transmission of data foreign players in the bidding process is likely to

through various transmission modes, from point- make the 3G and WiMax to-multipoint links to portable and fully mobile

market highly competitive internet access.

for the local players.The DoT initially released guidelines for both the

3G and WiMax spectrum license auctions in

August 2008. After several postponements owing

to the ongoing inter-ministerial disputes on

Recent initiatives

3G & WiMax rollout:


39

Challenges faced by the telecom sector:

Mobile Number Portability (MNP):

Export Promotion Council:

Spectrum Allocation:

IPTV licensing:

Rural reach:

The resources for implementation of USO are

MNP allows the mobile subscribers to retain the raised through a Universal Service Levy (USL),

existing mobile telephone number but switching which is 5% of the Adjusted Gross Revenue

to other service provider, irrespective of (AGR) of all Telecom Service Providers.

technology, in a licensed service area. DOT has in

Notwithstanding the customer anxiety towards consultation with Ministry of Commerce set up

such developments, the implementation the Telecom Equipment & Services Export schedule has been delayed to December 31, Promotion Council (TEPC) in November 2008. 2009 owing primarily due to technicalities in

TEPC is meant to provide necessary support to customization and up-gradation of existing

the telecom equipment manufacturing and network. MNP has already been implemented by

services sectors for promoting exports.more than 50 countries globally. Introduction of

MNP in the Indian market is expect to help

increasing competition between the service Spectrum providers and acts as a catalyst for the service

management and allocation is based on the providers to improve their quality of service.

National Frequency Allocation Plan formulated The Ministry of

and monitored by the Standing Advisory Information & Broadcasting in September 2008

Committee on Radio Frequency Allocation issued guidelines for IPTV services in India. Under (SACFA), a high power committee of all major the said guidelines, Telecom service providers,

wireless user ministries. Further, in terms of ISPs or other telecom service providers

telecom penetration, India has been able to authorized by DOT have been permitted to

achieve a tele-density of 36.98% in March 2009 provide IPTV services. For providing such

as compared to 26.22% in March 2008 and as services, the telecom licensees will be required to

comply with the applicable guidelines issued by low as 0.8% in 1994 thanks to aggressive pricing

DOT as well as the Ministry of Information & by telecom service providers. However, this has

Broadcasting. also resulted in the telecom sector facing huge

concerns on ‘spectrum allocation’.Rural telephony and

accessibility of telephones to remote areas was Amongst other reasons, the efficiency of one of the benchmark set in NTP, 99. Under

spectrum usage by different technologies (GSM Bharat Nirman (program formulated for rural

vs. CDMA) aggravates the spectrum allocation reach), a target of providing Village Public

issue. The major bone of contention was that Telephones (VPTs) in 66, 822 uncovered villages

CDMA, being more efficient technology in was visualized. Out of this, 57, 181 VPTs have

spectrum usage, should not be treated at the been provided till March 2009 alongwith a tele-

same footing with GSM in ‘subscriber based’ density of 15.11%. (Source: DOT Annual Report systems for spectrum allocation which is 2008-09). Also, keeping in line with the NTP, 99,

currently prevalent. The GSM players also Universal Service Obligation (USO) Fund has

disputed the policy of technology neutrality been set up w.e.f. June 1, 2002 for the purpose of

permitting CDMA based service providers to also implementation of Universal Service Support

Policy aimed at funding non-viable sector reach. provide GSM services.


40

However, such disputes have been put to rest by

TDSAT in its judgements including the recent Based on the TRAI recommendations in

2007, the DOT had amended the licensing judgment in March, 2009 (COAI & Ors. v. UOI &

conditions thereby removing restriction on Ors), wherein the Tribunal upheld the technology

number of service providers in a service area. neutral system on the premise that the NTP 99

However the ‘no cap’ policy has once again come has already envisioned this for the telecom

under scrutiny by the telecom regulator, thanks to sector. In the judgement, TDSAT also

the ‘spectrum scarcity’ and consequential reprimanded TRAI and DoT for implementing the

observations made by TDSAT judgement (supra). ‘subscriber based’ systems for spectrum

In its judgement, TDSAT has questioned the allocation in a non transparent manner which

sanctity of ‘no cap’ policy given the ‘spectrum seemed to be biased towards CDMA service scarcity’ issue and comfortable number of providers transgressing to unified licensing players available in each circle. system.

DOT has on July 22, 2009 sought TRAI’s

recommendation in view of the judgement and at There have been multiple this stage has been advised by TRAI to keep in attempts by the Government in the past few abeyance issuance of any further licenses till the years’ to deal with the spectrum allocation issue. time the policy is reconsidered. This is surely to

However, the heavily criticized ‘subscriber affect adversely the service providers who have

based’ systems for spectrum allocation is likely to already applied for and await additional spectrum

be replaced by auction based system as TRAI allocations based on subscriber pattern and

having concurred that with advent of new possibly result in more litigation.

technologies and services (such as Mobile TV, Notwithstanding this, reinstatement of ‘cap’ on

broadband access services and 3G services) it number of service providers in a circle may result

would be difficult to segregate subscribers based in cooling off the price war which would be a

on each type of services. respite to the service providers.

The recently formed DOT committee has DOT has recently

proposed sweeping changes including replacing decided that the existing variable license fee

the existing system to auction-based system for which is based on the circle in which the service

spectrum allocation which the industry believes provider operates will be replaced with a uniform

may solve the crisis. The Committee has also license fee of 8.5% for all types of services.

recommended that no single operator to hold However, as reported in the leading newspapers.

more than 25% of aggregate spectrum available (Source: Economic Times) TRAI has objected to

in a circle. the change since it believes it would adversely

However, it needs to be seen to what extent and affect the exchequer as well as the service

when such recommendations would be providers and ultimately the consumers. TRAI has

implemented by the regulators. Time lag by the advocated that the current regime of variable

Government in formulating its view of this license fee be continued since the change would

controversial subject is likely to adversely affect adversely affect the margin of Circle ‘c’ service

the existing services providers who have queued providers. However, it is yet to be seen if the

upon for additional spectrum allocation based on regulator would change its decision based on

TRAI’s view point.their eligibility.

Entry of new players and ‘no cap’

policy:

‘Subscriber based’ systems for

spectrum allocation:

Uniform license fee:


41

Security threat facing the Telecom To conclude:

sector:

Infrastructure service:

The telecom industry of

DOT has made it mandatory for all mobile India continues to be one of the most dynamic

service providers to reject traffic flowing from industries globally with an evolving regulatory

handsets without IMEI (International Mobile environment. However, the challenges faced by

Equipment Identity) code. These codes are the telecom sector calls for greater innovation

issued by GSMA (Global Systems for Mobile and transparency in policymaking by the

Communications Association) worldwide. These Government. Notwithstanding such bottlenecks,

codes are mainly missing from low cost mobiles the recent changes in the regulatory framework

imported from China which poses a threat to the and active participation by private players (both

national security norms. However, rejection of domestic and foreign players) are likely to ensure calls would also mean loss of consumers and that the “Telecom Growth Story” is here to stay.revenue to the service providers. Considering

these factors, DOT has given the telecom service

providers and subscribers time till November 30,

2009 to comply with the national security norms.

However, it needs to be seen if the service

providers and the subscribers would be able to

meet with the extended deadline set by DOT.

Service

providers in this category are required to be

registered with DOT as ‘Infrastructure Provider

Category – I (IP – I) and the services include

providing assets such as dark fibre, right of way,

duct space and more specifically towers.

The Telecom Sector demands a robust

infrastructure for a geographically large country

like India. Optimum number of towers (cell sites)

allows service providers to maximize spectrum

utilization by permitting re-use of spectrum.

However, setting up towers has its own set of

limitation given the fact that governments are

contemplating to ban mobile phone towers in

school and hospital premises and directed

cellular firms to take permission from residents’

welfare associations before setting up base

stations in residential areas, in efforts to limit the

harmful effects of electromagnetic radiation

exposure.(Source: Economic Times). Though the

concern of the Government is genuine and

actions taken are a necessity, setting up towers

(and providing decent network coverage) at

places with high density of populations especially

metros becomes a challenging task.

ARA LAW is a vibrant and dynamic first

generation law firm established in February 1996,

in Mumbai. Firm’s niche practice areas are private

equity, capital markets, banking and finance,

mergers and acquisitions, real estate

infrastructure and telecom, media and

technology.

The Firm's sharp growth and excellent reputation

has been achieved in a short span of time and

bears testimony to the Firm's exceptionally high

standard of legal work, client service and

satisfaction. The Firm has a domestic and

multinational client base that includes

commercial banks, financial institutions, Fortune

500 companies, equity and venture capital funds,

government and public authorities and industrial

and commercial companies in a variety of

business sectors ranging from market leaders

and large corporate to fledgling operations and

start-up ventures.

Rajesh N. Begur

Managing Partner

Ph: +91 22 6619 9800



42

Winner Of :-

Rajiv Gandhi Shiromani Award (2008)

Indira Gandhi Sadbhavana Award (2008)

43

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New Silk Route Partnerswww.nsrpartners.com

540 Madison Avenue, 30th Floor, New York, NY 10022

+1 212 710 5238

+1 646 744 0331

Mumbai, Bangalore, Dubai

Rupa Ranganathan

[email protected]

Website:

Postal Address of Headquarters :

Tel:

Fax:

Other Office Locations:

Contact Person

& Email:

New Silk Route is a leading Asia-focused growth capital firm with over $1.4 billion under management. Target sectors include infrastructure, consumer services, financial services, engineering and telecom.

IDG Ventures Indiawww.idgvcindia.com

7B, 7th Floor, Sobha Pearl, No. 1, Commissariat Road, Bangalore - 560 025

Sudhir [email protected]+91 80 4043 4836

Manik [email protected]+91 22 6630 6009

T C [email protected]+91 80 4043 4836

Early and growth stage companies led by good management team and having revenue traction.

Website:


Contact Person & Email:

We are interested in -


45

Aureos India Advisers

303, Vaibhav Chambers,

Bandra Kurla Complex,

Bandra East,

Mumbai - 400 051.

+91 22 3068 5500

+91 22 3068 5504

[email protected]

[email protected]

www.aureos.com

Priyanka Kamble

Address:

Telephone:

Fax:

Email:

Website:

Contact Person:

BRV India Advisors

804, Maker Chamber 5,

Nariman Point,

Mumbai - 400 021.

+91 22 2283 7248 / 2284 2122

/ 2202 4184

[email protected]

www.brv.com

Sasha Mirchandani

Address:

Telephone:

Email:

Website:

Contact Person:

Jacob Ballas Capital India

1F, Commercial Plaza,

Radisson Hotel, Mahipalpur,

National Highway 8,

New Delhi - 110 037.

+91 11 431 53100

+91 11 431 53101

[email protected]

www.jbindia.co.in

Sandeep Goyal

Address:

Telephone:

Fax:

Email:

Website:

Contact Person:

New Enterprise Associates

Suite No. 212, 2nd Floor,

Prestige Omega, No. 104,

EPIP Zone, Whitefield,

Bangalore - 560 066

+91 80 4060 0802

[email protected]

www.nea.com

Ben Mathias

Address:

Telephone:

Email:

Website:

Contact Person:

Ventureast

5B, Ramachandra Avenue,

First Main Road, Seethammal

Colony, Alwarpet,

Chennai - 600 018

+91 44 2432 9864

+91 44 2432 9865

[email protected]

www.ventureast.net

Sarath Naru

Address:

Telephone:

Fax:

Email:

Website:

Contact Person:

Baring Private Equity Partners India

9th Floor, Infinity Tower A,

DLF Phase II,

Gurgaon - 122 002.

+91 12 4432 1100/ 11/ 22/

33/ 44

+91 12 4432 1155

[email protected]

www.bpepindia.com

Shalini David

Address:

Telephone:

Fax:

Email:

Website:

Contact Person:


46


Avendus Capitalwww.avendus.com

IL&FS Financial Centre, B Quadrant, 5th floor,

Bandra-Kurla Complex, Bandra (E), Mumbai - 400 051

91 80 6648 3600

91 80 6648 3636

Delhi, Bangalore, New York and London

Amit Singh

[email protected]

Website:


Tel: +

Fax: +


Contact Person

& Email:

Avendus Capital is a leading financial services firm offering mergers & acquisition, private equity syndication, structured finance, capital markets and institutional broking advisory to a large client base that include large and small corporations, listed & unlisted companies and ultra & high net worth individuals.

Deloitte Corporate Finance Serviceswww.deloitte.com

Maker Towers 'E', 4th Floor, Cuffe Parade,

Mumbai - 400 005

+91 22 6622 0500

+91 22 6646 6524

Gurgaon, Bangalore

Sandeep Gill

[email protected]

Prashant Chopra

[email protected]

Website:


Tel:

Fax:


Contact Person

& Email:

Deloitte provides strategy, operations and M&A based financial advisory services across the entire spectrum of the telecom industry, including operators, handset manufacturers and content providers.

47

KPMGwww.in.kpmg.com

Lodha Excellus , Apollo Mills Compound, NM Joshi Marg , Lower Parel, Mumbai - 400 011

+91 22 3989 6000

+91 22 3983 5040

Vikram Utamsingh

[email protected]

+91 98923 33385

Neeraj Jain

[email protected]

+91 90083 44446

Website:


Tel:

Fax:

Contact Person

& Email:

Providing advisory support to Private Equity and Corporate in Telecom transactions and M&A in India and globally.

Price Waterhousewww.pwc.com/India

Lovelock & Lewes\Price Waterhouse Building 8, 8th Floor

Tower B, DLF Cyber City, Gurgaon, Haryana - 122 002

+91 11 4135 0509

Global

Usha Rajeev

[email protected]

Website:


Tel:


Contact Person

& Email:

Our transaction services group helps telecom

companies make acquisitions, divestitures and

strategic alliances, and to access the global capital

markets. In each case we have the same overriding

objective: to help clients maximise the return on

their deal. With more than 2,400 dedicated

professionals in our global transaction services

business our clients include the world's leading

companies and private equity houses.


48

Resurgent Indiawww.resurgentindia.com

B-3, Bali Bhawan, 2nd Floor, Lajpat Nagar II,

New Delhi - 110 024

+91 11 2981 0219 (Kavish),

+91 11 2981 1303 (Manish)

+91 11 4135 4882

Kolkata

Kavish Sarawgi (Equity Solutions)

[email protected]

Manish Kedia (Debt Solutions)

[email protected]

Website:


Tel:

Fax:


Contact Person

& Email:

We have teams focusing on all segments of infrastructure, energy, real estate, life sciences, industrial goods, consumer products and services.


49

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Telecom Sector Analysis

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