Telecom Sector Mkt.

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TELECOM SECTOR IN INDIA - CHALLENGES AND

OPPORTUNITIES

External GuideMr. Sanjiv Jain

Director of Galaxy Rent A-Tel Pvt Ltd.

Submitted To

Sumanta Sharma

Submitted By:Prashant AgarwalFW/2004-06/PGPMarketing & H.R.

IIPM, New DelhiThesis ID: DEL/MKT/FW06703

Date: October 2006


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ACKNOWLEDGEMENT

It is well-established fact that behind every achievement lies an

unfathomable sea of gratitude to those who have extended their support and without

whom the project would never have come into existence, without their help the

present work would never have assumed its forms and completion.


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TABLE OF CONTENTS

TopicsPage

SYNOPSIS

Chapter 1

INTRODUCTION

OBJECTIVE

Chapter 2

RESEARCH METHODOLOGY

Chapter 3

CCRITICAL REVIEW OF LITERATURE

Chapter 4

DATA ANALYSIS AND PRESENTATION

RECOMMENDED MARKETING STRATEGIES

Chapter 5

CONCLUSION

RECOMMENDATIONS

REFERENCES

ANNEXURE


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LETTER FOR APPROVAL

Dear Prashant,I have received your synopsis as well as the confirmation that Mr.SanjivJain would guide you through the thesis.This letter is a formal approvalto the topic proposed by you Telecom sector in India - Challenges andOpportunities.Please go ahead with the thesis. Make it a comprehensive thesis byusing empirical data as the basis of the research.Remember to register your topic at the Library (B27) either by goingthere or by forwarding my mail to [email protected] and send methe id number for my records. Furthermore, you are required to send mea total of at least 6 thesis guidance response sheets (I will be mailing theformat once I receive your id number) before the coalescence of thethesis.

Regards,Sumanta SharmaAssociate Dean (Department of Projects)The Indian Institute of Planning & ManagementSatbari Campus

New Delhi 110074Phone: 011 26655080

Dear Prashantpls note down ur thesis id no-DEL/MKT/FW06703,and mail back to sumanta sir for his reference.Anuj Kumar(Librarian)
http://f3mail.rediff.com/bn/compose.cgi?login=prashant_agarwal82&session_id=3L9PK1KJKs8lTXF4BvIzZcavO3iR7IV&FormName=mail_to_individual&[email protected]://f3mail.rediff.com/bn/compose.cgi?login=prashant_agarwal82&session_id=3L9PK1KJKs8lTXF4BvIzZcavO3iR7IV&FormName=mail_to_individual&[email protected]


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SYNOPSIS

Details of the Student:

Name: Prashant AgarwalBatch: FW/2004-06/PGPSpecialization: Marketing & H.R.Phone No: 9891073410, 9818666438Email: [email protected]

Desired Area of Research:

Telecom Sector.

Title of the thesis:

Telecom sector in India - Challenges and Opportunities

Problem Definition /Hypothesis:

Internet services of VSNL and MTNL..

ISP policy.

The telecom sector suffers from poor technical performance.

Widespread equipment outage, low productivity, chronic unmet demand, and

rampant corruption.

Organization Identity for the Study:

Airtel, Hutch, Idea, Tata Indi-Com, Reliance and MTNL.

Literature relating to the Problem:

The secondary data will be collected from news paper, journals, telecom & business

magazines and internet.


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The primary data will be collected from structured questionnaires which are requiredto be filled up by the persons who are facilitating the services of this industry.

Objective of Thesis:

To understand what are the opportunities and scope of telecom sector. Moreoverwhat they are doing in order to serve their customers, clients as well as future

prospects in better and in most effective manner, which in turn help them inincreasing their market share, and profitability by providing value for money &desired quality of service to their customers. Moreover projection of customersneed well in advance and using proper medium to communicate & educate theircustomers to make maximum use of available services and offers..

Studying how telecom sector is generating revenue by providing various valueadded service such as GPRS, Caller tunes, ring tones, wallpapers, and other valueadded services. To study and review the various marketing strategies of various

players present in the telecom industry. Also to compare and contrast the profiles ofcompanies and market segment captured by them.

Scope of your thesis work:

The reason for selecting the topic is that I am working in the telecom sector &moreover this sector is one of the fastest growing sectors of service industry inIndia. This sector is growing very fast as compared to the other sectors, & at thesame time lot of opportunities, and expectation came from the customers to provideexcellent service in less cost.

Threats:

Increasing competition and decreased profit margins due to drastic reduction in thecall rates.

Information Source:

I will collect primary and secondary data for the thesis. I will collect primary data byvisiting various reputed organizations like Airtel, Hutch, Reliance, etc.

Research Methodology:

Qualitative Research Design.


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Primary Sources:

Questionnaires.

In-depth Interviews of cellular service providers.

Secondary Sources:

News papers.

Journals.

Articles.

Telecom & business magazines.

Internet.

Details of the External Guide:

Name of the concerned person: Mr. Sanjiv Jain

Qualification: Post Graduate Diploma in Marketing & Brand management.

Designation: Director of Galaxy Rent A-Tel Pvt Ltd.


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CHAPTER-1

INTRODUCTION TO THE INDIAN TELECOM SECTOR

1.1 History

The British government introduced telecommunications services in India in 1851

near Calcutta by as a means of providing defense, law and order, general

administration, and revenue collection. Since that time, telecommunications has

played a critical role in shaping Indias march toward progress, and the importance it

holds for the future of India cannot be overstated. Telecommunications in India were

introduced only 5 years after Alexander Graham Bell invented telephones in 1881;

British firms introduced POTS (plain old telephone services) into the colony. By the

time India was independent in 1947, the country had 321 switching centers

(telephone exchanges) in urban areas and a tele-density of 0.25 phones per thousand

people. During the state-led planned economic policies till the mid 1980s, the

government controlled all aspects of the telecommunications sector through the

ministry of Posts and Telegraph as a natural monopoly.. After the Public Accounts

Committee of the Lok Sabha recommended a complete overhaul of

telecommunications, which was working in a most unsatisfactory manner in 1985,

a long sought re-organization was undertaken in 1986 to split the public postal and

telecom operations into separate departments.

Until 1985 India's telecom sector was a typical PTT model. The Ministry of Posts

and Telegraphs and its department controlled the posts and telecom services and

infrastructure. The sector was mainly governed by theIndian Telegraph Act of 1885.

In 1985 postal services were separated from telecom, and the Ministry of

Communications and its Department of Telecommunications (DOT) were assigned

powers including manufacturing equipment, policymaking, providing services and

creating infrastructure.. The government did not give priority to the development of

this sector. The national five-year Plans show that until 1985, the government's

investment in the telecom sector was less than three per cent; it was only from 1992


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onwards that government spending increased to 11.9 per cent and more. It was only

in the early eighties, with technological advancements and international

developments, that the government took initiatives to move from the closed-

economy ideology towards more market-oriented reforms. The information

technology policy focused on the export of software and computers. To achieve this

goal, tariffs were lowered on imported goods and direct access to imported

equipment and technologies was allowed.

However, in the case of telecommunications, the government's approach was half-

hearted. The government was reluctant to break the dominance of DOT or let go of

its own powers. In 1984, overcoming resistance from DOT, the government was

successful in allowing private investment in the manufacture of customer premise

equipment. The government franchised public call offices and also set up two new

companies. Mahanagar Telephone Nigam Limited (MTNL), a mostly government

owned company which offered basic services in Delhi and Bombay, and Videsh

Sanchar Nigam Limited (VSNL), which offered international long-distance services.

Although these initiatives proved to be positive, they could not bridge the

overwhelming demand for infrastructure and services. Advancement of

technologies, international agencies such as the World Bank and trade blocks

(OECD), drew attention of the Indian government to the urgent need to develop the

telecom sector, as a means of overall economic development. The government

responded by constituting independent telecom reconstruction committees (for

instance, Artherya committee) for taking advice.

1.2 Recent Developments

India's 21.59 million-line telephone network is one of the largest in the world and

the 3rd largest among emerging economies (after China and Republic of Korea).

Given the low telephone penetration rate - 2.2 per 100 people of population, which

is much below the global average, India offers vast scope for growth. It is therefore

not surprising that India has one of the fastest growing telecommunication systems


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in the world with system size (total connections) growing at an average of more than

20 percent over the last 4 years.

The Indian economy is currently undergoing a structural shift. The production of

merchandise such as agriculture and manufactured products are contributing a

smaller share of economic output, while contribution of the service sector is

growing. The service sector in India today accounts for more than 48% of economic

activity and is likely to grow at the rate of 8% per annum. A majority of service

workers are engaged in the creation, processing and distribution of information. The

telecom sector therefore assumes major importance as an enabling infrastructure.

Accordingly, it is vital for the country that there be a comprehensive and forward

looking telecommunications policy which creates a suitable framework for

development of this service industry. The availability of infrastructure for

electronically transferring and accessing information is perceived as critical for

hastening the realization of economic, social and cultural benefits as well as for

conferring competitive advantage.

The telecom sector in India has witnessed rapid changes in the last five years. There

have been far reaching developments in Information Technology (IT), consumer

electronics and media industries across the globe. Convergence of both markets and

technologies is a reality that is forcing realignment of the industry. At one level,

telephone and broadcasting industries are entering each other's markets, while at

another level, technology is blurring the difference between different conduit

systems such as wireline and wireless. As in the case of most countries, separate

licenses have been issued in India for Basic, Cellular, Internet Service Providers,

satellite and cable TV operators, each with a distinct industry structure, terms of

entry, and varying requirement to create infrastructure. However, this convergence

that now allows operators to use their facilities to deliver some services reserved for

other operators, necessitated a re-look into the existing policy framework.

For the country to grow and create a place for itself in the international arena, it was

felt that the infrastructure needs to be built and maintained, wherein the role of


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telecom was indisputably very crucial. The government in this direction announced

the National Telecom Policy in 1994 (NTP 94). This provided for opening up the

telecom sector to competition in Basic Services as well as Value Added Services

like Cellular Mobile Services, Radio Paging, VSAT Services etc. It also set target

for provision of telephone on demand and opening up of long distance telephony.

This was followed by a New Telecom Policy declaration in March 1999 (NTP 99),

to remove some of the bottlenecks and move the liberalization process forward.

In Y2K, India has a population of over a billion, but only 27 million telephones. This

translates into a tele -density of 2.7 phones per 100 people. By 2005, the government

according to its National Telecom Policy 1999 (NTP99) wants to increase this tele -

density to 7 and double it to 15 by 2010. Currently just over 50 per cent or 374,695

villages out of a total 600,000 villages are connected to the world by the telephone. The

government wants to connect the rest by 2002 and increase rural tele -density eight-fold

by 2010, from the current 0.5 to 4 phones per 100 people. To this end, the Indian

government has given up its state monopoly and introduced competition to spur the

growth rate of telecom in all areas. Foreign companies have also been encouraged to

invest in the telecom sector and ownership guidelines have been liberalized. While

the ownership has been restricted to 49 per cent in the telecom services like basic

telephony, cellular, paging and Internet service providers (though companies like

Orange, the cellular operator in Mumbai have been able to get around this restriction

with ease: foreign companies are allowed to own up to 74 per cent in

communication satellite companies and wholly own manufacturing operations. The

initiatives form part of the economic liberalization policies followed by the

government since 1991 when a chronic shortage of capital, a ballooning fiscal deficit

and a precarious position of external reserves led to the start of Indias economic

reforms. The expectation was that new influx of private capital along with gains of

efficiency from competition would help accelerate economic growth. But results so far,

at best have been mixed. After the initial euphoria of liberalization, the Indian economy

slipped into recession by 1995. Annual GDP growth rates fell as the government, by and

large, withdrew as an investor in the economy while the private sector failed to step into


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fill the investment gap. It has only managed to recover since 1998 on the back of strong

agricultural growth and a pick up in industrial demand subsequently.

1.3 Existing Structure of Telecom Sector

Telecommunications was not perceived as one of the key infrastructures for rapid

economic development during the formative years of the Indian economy. The low

levels of investment in this sector have affected the quality, quantity and range of

services provided. In 1998, Indian Telephone density per 100 persons was 2.2 while

the world average was 14.26. For the provision of basic services, the entire country

is divided into 21 telecom circles, excluding Delhi and Mumbai. Department of

Telecom Service (DTS) provides basic services in the 21 telecom circles, while

Mahanagar Telephone Nigam Limited (MTNL) serves Delhi and Mumbai. Six

private licenses have been issued for the provision of basic services, out of which

only three have commenced services at present.

Private participation in the cellular mobile market, on the other hand, has been

comparatively more successful. Eight cellular licenses, two in each of the metros

were awarded in October 1994. Subsequently bidding resulted in the award of

licenses in 18 Circles. As many as 137 licenses (of which 93 licenses were actually

operational by December 98) have been issued for providing radio paging services

for which bids were invited in two stages, first for 27 large cities (which had a

population of over one million) and in the second round for 19 Telecom Circles. The

number of licensees selected for each area range from two to four.

1.4 Indian Cellular Market Overview

Indian cellular market is poised to grow at CAGR (compounded annual growth rate)

46 percent for next five years, the best in Asia-Pacific region and subscriber base

will touch 44 million by 2006.

Cellular Telephony will be frontrunner in the growth of Indian telecom sector,

which will be amongst those countries witnessing fastest growth till 2006. Telecom

services worldwide would witness growth of over 5 percent in 2003.


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Gartner predicted. Gartner said the growth rate would be even ahead of China in

percentage terms. The subscriber base currently pegged at 8 million will grow to 44

million by 2006. There will be entry of new players, which will not only lower the

price points but will also help broaden the market with innovative product offerings

and solutions. Basic services will continue to play a key role in increasing tele

density. Revenues from fixed telecommunication services will grow at a CAGR of

15 percent in the next 5 years from current $ 6.9 billion to $ 14 billion.

Cellular Operators Association of India (COAI) The Cellular Operators Association

of India (COAI) was instituted in 1995 as a registered, non-profit, non-governmental

society dedicated to the advancement of communication - in particular of modern

communication through Cellular Mobile Telephone Services. It seeks to establish

and sustain a world-class cellular infrastructure and deliver the benefits of affordable

mobile communication services to the people of India. Indian cellular subscriber

base has jumped 9-fold in four years. But they are still way behind in terms of

minutes of usage. Average market figures suggest that while the number of cellular

subscribers has increased 1817 percent between April '98-02, the minutes of usage

for post-paid cell users has risen by around 331 percent and that of pre-paid has

increased 220 percent. These are substantiated by Telecom regulatory Authority of

India (TRAI) figures, which suggest the growth of minutes of usage for post-paid

cellular users has gone up from 119 minutes per month per subscriber (MMS) in

April '98 to 394 MMS in April '02. A rise of about 331 percent. According to

Cellular Operators Association of India (COAI), the total number of cellular

subscribers has grown from 9, 13,869 in April '98 to 81, 70,575 in August '02, a

whopping 900 percent rise.

If current trend is any indication, penetration numbers may portray wireless

telephony as a pygmy compared to wireline (or fixed line) telephony, but looking at

incremental figures one gets the real picture of what's going on in the local

telephone market. India is fast going wireless. Wireless telephony, mobile and

limited mobility, is snatching a rapidly increasing share of incremental telephoneconnections in India. And the financial year ending March '03 may well be a


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watershed for wireless telephony. According to market sources, numbers indicate

that in '02-03, wireless may garner over 50% share of new connections.

So far, wireline has been much ahead of wireless in both new connections and, of

course, penetration. In the year gone by, year ending March '02, wireless got just

about 34% of new connections. Wireless penetration was just 15% of total phone

connections in India. A year before that, as on end-March '01, wireless penetration

was just under 10%.

The industry is considered as having the highest potential for investment in India.

The growth in demand for telecom services in India is not limited to basic telephone

services. India has witnessed rapid growth in cellular, radio paging, value-added

services, internet and global mobile communication by satellite (GMPCS) services.

This is expected to soar in the next few years.

Recognizing that the telecom sector is one of the prime movers of the economy, the

Government's regulatory and policy initiatives have also been directed towards

establishing a world class telecommunications infrastructure in India.


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CHAPTER-2

LIBERALIZATION OF THE TELECOM SECTOR2.1 Introduction

Like many other sectors, the telecom sector too continued to enjoy government

monopoly so long as the basic telephone services were under the control of the

government. It was the National Telecom Policy of 1994 that paved the way for

private-sector participation and funding to achieve the aim of universal coverage of

telephone services at affordable prices. Since then, a number of private companies

have been given the license to provide various value-added services in the country.

The TRAI (Telecom Regulatory Authority of India) was established to act as an

independent regulatory body to protect and promote the interests of consumers and

to ensure fair competition. The government also accorded the status of an

infrastructure sector to the telecom industry, making it eligible for all fiscal benefits

that are enjoyed by other infrastructure sectors. There are two major government-

controlled companies in the telecom business, namely MTNL (Mahanagar

Telephone Nigam Limited) and VSNL (Videsh Sanchar Nigam Ltd). The MTNL

provides basic telecom services in Mumbai and Delhi. Services in the rest of country

are provided by the DoT/DTS Department of Telecommunications / Department of

Telecom Services). The VSNL enjoys sole control over international telephony as

all incoming and outgoing international calls are routed through its gateways. The

VSNL also provides such value-added services as gateway packet data transmission,

electronic data interchange, online data search, Internet, Inmarsat (International

Maritime Satellite) mobile services, satellite uplinking, private leased channels, and

video conferencing. Because of its hold over international telephony, the tariff for

incoming and outgoing calls has remained high in the absence of any competition.

Contrary to these, international call rates are declining globally with rising tariff

volumes, increased capacities, and improved transmission technology. The telecom

sector is witnessing a breakdown of most of the monopolies in favor of market-

controlled players, as huge investments are needed to construct a backbone access


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network. The VSNL, according to an earlier plan, was to remain insulated from

competition until 2004. The governments decision to allow many foreign or

domestic companies would only result in lowering the international call rates due to

increased competition in the satellite gateways business. It is difficult to envisage

the impact of the governments decision on consumers in the short run. But what

would interest the common man would be improved services in basic telephony by

the introduction of competition, which ensures the fulfilment of universal service

obligation to one and all.

After the 1991 Economic Policy made a shift from a closed economic model to a

market-oriented model, private sector was invited to participate in reforming India's

telecom sector. However, the government took a half-hearted approach in

overhauling the legal and regulatory regime. Competition was allowed in cellular

and basic services. The Ministry of Communications and the incumbent Department

of Telecommunications (DOT) issued licenses to their competitors. Lack of

transparency in issuing licenses and unrealistic license fees derailed the reform

process and led to wasteful litigation. The courts did not support the regulator and

virtually made its role redundant. After the elections in 1999, the telecom sector

was the key sector in which major decisions were made. The DOT's service arm

was corporatized and the government decided to privatize its international long-

distance carrier, Videsh Sanchar Nigam Ltd. (VSNL), before 2002. It decided to

introduce more competition in cellular, basic and domestic long-distance services.

2.2 Private Sector Participation in Mobile Telecommunication

In 1992, competition was allowed in cellular mobile services. However, the

government failed to overhaul the legal and regulatory regime to suit the

competition process, and the antique 1885 Actwas left in place to govern the new

competitive era. The Ministry of Communications and the DOT became responsible

for issuing and regulating licenses to new entrants in Delhi, Mumbai, Chennai and

Calcutta. Two private operators were allowed to compete in these four major cities.

Although the liberalization process had a rough start, it was clear that the Indian


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market was huge and therefore had great potential to draw private investment. The

DOT, in May 1993, asked the leading Indian financial institution, Industrial Credit

and Investment Corporation of India (ICICI) to prepare a report on the development

of regulatory institution and to recommend terms and conditions for the private

sector entry in basic services.

In an emerging economy, great amounts of discretion lie with the sector

managers of the government, which, in India, lies with the Ministry of

Communications [in practice, coextensive with the DOT]. If such discretion is

unlimited or unrestrained and vests in a single person or office at any time, it is

unlikely to command the level of comfort which is mandatory for attracting

substantial private investment. The discretion should be so hedged that the

decision-making process becomes tolerably predictable and reliable. and

transparent. The investor would rather go by the written law. than be guided by

platitudes and pronouncements of the decision-maker. Thus, until the law is

formally changed. the value of the investment opportunity will be dismissed.

Subsequent to the announcement of the policies, auctions were held for cellular

licenses in 20 states in December 1994 and for basic services in January 1995 .The

first round of the basic service (wire line) auction attracted 80 bids for 40 licenses

from 16 companies. In 7 of the circles (Delhi, Haryana, Karnataka) Maharashtra,

Orissa, Rajasthan, and Uttar Pradesh West), the bids followed some level of

rationality. In circles where an unknown Indian company Himachal Futuristic

communications Ltd (HFCL) was the highest bidder, they realized that they were

subject to the well known winners curse. The total license fee for which HFCL

bid was much higher than any of the bids of the second placed bidders, and virtually

more than all the other bids put together. Thus, the government was forced to call

for a second round of bidding because HFCL backed out of following through on the

bids; also, many circles received either one bid or no bids. In January 1996, the DOT

initiated a fresh rounding of bidding for thirteen circles in the basic sector. Caution

among the players and the lack of credibility about the outcome of auction led toonly six bids. Further, because the more lucrative (grade A) circles had been


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awarded in the first round, the only circles left for bidding were the less lucrative

circles, and those in which HFCL reneged where the government specified a

minimum bid which was considered too high by the bidders. In seven circles the

earlier bids were too low or there were no takers. For six circles certain successful

bidders were eliminated by a subsequent change in DOTs policy of limiting

licenses to three circles for each bidder. Finally, bidders for 13 circles were selected

with eight circles drawing no takers. In the telecom sector, the total foreign direct

investment was 43.13 billion rupees in the period 1993 to June 2000 or less than a

billion US dollars. The reticence of the private sector, especially foreign companies,

to invest large amounts of capital into infrastructure sectors like telecom can largely

be traced to failings of government and regulatory policy. But moving from a

control mindset to a regulatory one has not been easy for the Indian government.

2.3 Critical View of the Liberalization Efforts

A large part of problems in liberalizing Indias economy have arisen from the states

inability even unwillingness - to give up control of the sectors it has liberalized.

Thus while more independent regulators have been set up in the last four years than

the number of general elections India has had, most regulators are independent only

in name.

The role of a regulator is to advise the ministry on policy, solve disputes among

service providers and ensure that the rules and regulations governing business are

followed. It is also the agency to intervene in case market failures take place and

protect consumer interests. The crux of the problem has been that the state and itsassociated agencies like the bureaucracy, long used to exercising control, have been

unable to build a regulatory structure that provides credible commitment against the

exercise of arbitrary discretion by the state and changes in regulatory environment.

The Indian government has devised various methods to keep control over a

particular sector, even after an independent regulator has been appointed.

Legislation governing these new institutions has been often poorly worded,

ambiguously framed and open to legal challenge by the state entities. The telecom


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sector has been in a mess till February 2000 because of inherent conflicts between

the Telecom Regulatory Authority Act, which was passed to create the independent

regulator for the sector, and the Indian Telegraph Act of 1885, which provides the

legal framework for the telecommunications sector.

In some sectors like capital market, decisions of independent regulators are appealed

to a government ministry. In the telecom sector, the state, that is, the Department of

Telecommunications, DoT, refused to submit to the jurisdiction of the regulator till

the judicial authority was removed from the regulator with the appointment of a

separate disputes and appellate tribunal. It did so by litigating against every decision

made by the regulator in the civil courts. The independent regulators are routinely

staffed with bureaucrats. None of the existing regulators are headed by anyone other

than former bureaucrats and judges, who help perpetuate the mind-set of control

over regulation. Besides, in areas like telecom and the Internet, keeping up with

technology changes is imperative, but there are few signs of technical experts or

private sector executives among the regulators. Many of the problems of the telecom

sector have arisen because of the multitude of roles played by the state. These

conflicts have been highlighted in the context of the sector switching from a regime

of government control to competitive and regulated one. The telecom sector, in

particular, has suffered from confused government policy and ineffective regulation,

not least because state-owned companies and departments remain the largest players

in this sector. These companies have not responded well to the threat of competition

and therefore policies have been seemingly framed or changed to further the

interests of the state. Though an independent regulator has been created, the

institution has already had a complete makeover because many of regulators

decisions went against the wishes of the state players. Indeed, at the end of a decade

of reforms, the state remains the largest player in the telecom industry and its role is

only increasing as state-owned companies enter new businesses like cellular

telephony, Internet access and broadband data networks. While many of the

problems associated with the telecom policy have been resolved with the NTP 99,

several questions about the role of the state-owned service provider cum policy


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maker remain. These uncertainties and lack of a strong regulatory infrastructure

mean that the spread of private telecom services has been limited only to the more

populous urban clusters in the country.

Moreover, government policy has segmented the telecom sector into a series of

different services like basic, cellular, ISP, paging, Internet and radio-trunking. This

goes against the grain of the sector where convergence of voice data images and

video technologies is forcing regulators in other parts of the world to take a holistic

view.

2.4 Competition in Services

After having a consultation process for allowing competition in basic, cellular and

long-distance service TRAI had recommended unlimited competition in basic and

domestic long-distance service. However, taking into consideration spectrum

limitations, it recommended a fourth cellular player be introduced in the 21 circles.

On August 15, 2000, the government accepted TRAI's recommendations foropening unlimited competition in domestic long-distance services. So far, apart from

the government's BSNL and VSNL companies, two private companies who received

a green signal from the government are Bharati Group and Reliance Industries

limited. These companies are dominant players in the basic, cellular and Internet and

are extensively deploying fiber optic infrastructure in various states.

2.5 The Role of the Private Sector

Many foreign telecommunications companies participated in the bidding for the

right to offer basic (wire line) telephony in India. The main attraction was the then

widely used number of 250 million middle class potential customers, and the

waiting list of more than 3 million. Companies that bid included multinational like

AT&T, US West, Bell Atlantic, Nynex (at that time a separate company), NTT, and

Bell Canada, and small ones like Bezeq of Israel, and Shinawatra of Thailand. Their

Indian partners included the Tatas, the Birlas, RPG, Reliance, BPL, Essar, ShyamTelecom and Himachal Futuristic Communications Limited (HFCL). However,


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disillusioned by the governments terrible handling of the telecom services

deregulation, several international telecom giants had by 1999, pulled out of India.

While Bell Canada and Swisscom have withdrawn from India for good, US

companies like AT&T and US West have frozen fresh investments blaming

unfriendly telecom policies, particularly high license fee outflows and the lack of

a powerful regulator. Moreover, many south East Asian telecom operators also

pulled out after 1996 in the aftermath of the South East Asian currency crisis, which

reduced their ability to invest in other countries.

It is difficult to say who is to blame for the auctions fiasco, where firms bid huge

amounts and then realized that these fees did not match with their predictions of

demand and usage. The DoT itself gave indications as to the size of the market,

especially in regard to basic telephones, because it alone had knowledge of how

demand grew and how much it would be in the light of its experience of over 100

years. Nevertheless, the Indian firms participating in the auction had no prior

telecom experience, while the foreign partners knew the business, but little about

Indian market conditions or the usage patterns of consumers. For the government of

India, despite the problems of the auctions and the unrealistic high bids, the cellular

licenses raised over $7 billion. However, this method of licensing though a single

sealed bid auction without any information of the selection criteria has led to many

problems in the cellular sector. There is little doubt that the bidders overestimated

revenues and demand patterns. However, the high license fees, which formed 50 per

cent of the total rollout cost for a cellular operator, led to high tariffs for the

consumers. This in turn impacted demand for these services. Moreover, the license

fees had to be paid up front every year. That is, it did not matter whether the new

operators had a network, subscribers, traffic or revenues, but they had to pay an up

front fixed fee to the government every year. Given the high sunken cost of initial

investment, the lower than expected subscriber base and the high license fees,

cellular operators in India, with the exception of those in Mumbai and New Delhi

markets have been posting losses from the outset. In 1999, the cellular telephone

industry was posting losses worth $92 million every month. Industry experts say that


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overestimation of market size and usage was the main culprit with companies, which

had projected 300 minutes of usage, could get subscribers to barely talk for 100

minutes in a month. Besides, average revenue per user was only $23 compared to

projections, which had ranged between $41 and $58 per month. As a result by July

1999 cellular companies and the six basic services license holders owed almost $900

million in license fees to the government and many had decided to exit the business

completely. One main problem of the telecom sectors licensing policy that was

pointed out was that the licensor was the incumbent operator. By contrast, when the

electricity generating business was also thrown open to the private sector, operators

were not required to pay a license fee; some received guaranteed prices and fixed

quantities which the incumbent state electricity company would have to buy.

Moreover, the state electricity boards did not license the new producers of power. In

the telecom sector, the incumbent DoT, which was deprived of its lines of business

in the value added services, was entrusted to license rivals to itself, even for basic

telephone services.


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CHAPTER-3

REGULATORY FRAMEWORK

3.1 Introduction

It becomes immensely important to understand the regulatory framework in which

the telecom sector is entitled to operate. Although the pace of reform, now, have

gained momentum, the regulatory framework to deal with the increased level of

telecommunicationization of the Indian economy should not be found wanting to

deal with any such situation. It also becomes important from the point of view of

this study that this particular aspect should be mentioned in brief, since it provides

the basis for comment on the state of the present day realities in the telecom sector.

Following are the major governing laws for the telecom sector:

(a) The Indian Telegraph Act 1885.

(b) The Indian Wireless Telegraphy Act 1933.

(c) The Telegraph Wires (Unlawful possession) Act 1950.

(d) The Telecom Regulatory Authority of India Act 1997.

(e) The Cable Television Networks (Regulation) Act 1995.

The Regulatory framework consists of two bodies viz., Telecom Regulatory

Authority of India (TRAI) and Telecom Dispute Settlement and Appellants Tribunal

(TDSAT). The role of TRAI is to make recommendations, either suo motu or on a

request from the licensor, on the following matters, namely:-

i. Need and timing for introduction of new service provider;

ii. Terms and conditions of license to a service provider;

iii. Revocation of license for non-compliance of terms and conditions of license:

iv. Measures to facilitate competition and promote efficiency in the operation of

telecommunication services so as to facilitate growth in such services.

v. Technological improvements in the services provided by the service

providers.


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vi. Type of equipment to be used by the service providers after inspection of

equipment used in the network.

vii. Measures for the development of telecommunication technology and any

other matter relatable to telecommunication industry in general;

viii. Efficient management of available spectrum;

The role of the tribunal (TDSAT) shall be as follows:

a. Adjudicate any dispute -

b. Between a licensor and a licensee;

c. Between two or more service providers;

d. Between a service provider and a group of consumers:

e. Hear and dispose of appeal against any direction, decision or order of the

f. Authority under this Act.

3.2 The Telecom Regulatory Authority of India Act, 1997 (TRAI Act)

The enactment of the TRAI Act was also a long delayed legislative process. In the

view of an independent consultant who participated in the drafting exercise, Mahesh

Uppal: to suggest, even indirectly, that the government had, at that time [of drafting

the TRAI Act], a clear idea of what it was that it wanted the TRAI to achieve, is

stretching credibility.

India's telecom regime was schizophrenic during the period of drafting and

redrafting of the TRAI Act and indeed much of the period before that. At virtually

every stage of the process, there were controversies. The creation of the new

independent regulatory agency was a significant episode, perhaps ultimately a

defining one. TRAI was not given responsibility to issue and revoke licenses, but

only to recommend them. It had responsibility to fix tariffs and resolve disputes. The

DOT surrendered its regulatory role in principle, though it still retained policy-

making, licensing, and operative powers within the same organizational boundaries


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3.3 Overhauling Legal and Regulatory Framework

3.3(a) Amendments to the TRAI Act of 1997

Soon after the GTCR was formed and the sub-groups were created, they sprang into

action to overhaul the legal and regulatory regime and to expedite the

implementation of the 1999 policy. On the recommendations of the sub-group

headed by Information and Broadcasting Minister Arun Jailey to amend the TRAI

Act of 1997, the parliament amended the Act in March 2000. TRAI's regulatory role

was split from dispute settlement.

The new TRAI, with two full time members and two part time, is responsible for

recommending the introduction of new service providers, technological

improvements, quality standards, and fixing the terms and conditions of licenses. It

is mandatory for the government to seek TRAI's recommendations, although it will

not necessarily accept them. The newly constituted Telecom Dispute Settlement and

Appellate Tribunal (TDSAT) is empowered by a chairperson to have a one or two

member bench to adjudicate disputes between a licensor and a licensee, service

providers and between a service provider and a group of consumers. Decisions ofthe Tribunal can be challenged only in the Supreme Court

3.4 Main Functions Entrusted to Telecom Regulatory Authority of India

To ensure technical compatibility and effective interconnection between

different operators and service providers

Regulate the revenue sharing arrangement between different service

providers

To lay down and ensure time frames for making available local and long

distance DoT circuits between service providers

To protect consumer interests through monitoring of service quality

standards

To ensure compliance of license conditions, universal service obligations and

the stated

Overall pricing policy by all operators and service providers


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To levy fees and other charges and to make regulations in that behalf

To settle disputes between service providers

To fix tariff for telecom service and ensure price regulation

To render advice to the government in the national context on technology

options, service, provision and other allied matters concerned with telecom

Any other matter referred to it by the government

TRAI is to exercise recommendatory functions on the need and timing for

introduction of new service provider and the terms and conditions oflicense to a service provider. In the exercise of its powers and the

performance of its functions, TRAI shall be bound by directions on

questions of policy given by the Government. TRAI is vested with

judicial authority and powers. Appeals against its decisions will lie with

the High Court.

3.5 General Principles for Regulators

According to Noll, all regulatory processes are inherently conflictual and

participants in the regulatory process will seek to influence the process to their own

advantage in any way that is available to them. Submitting information that supports

a favorable decision is one way of exercising influence. Another is to seek

intervention by political allies.

There are primarily two problems for regulators in developing countries. One is the

problem of regulatory capture where the regulator allows the regulated firms to

charge high prices, earn high profits and provide low quality service. The other is

expropriation. This can arise from two reasons: user groups may either be well

organized in the regulatory process and cause service to be provided below cost or

an election may cause political pressure to be placed on regulators to favour users

against suppliers. Noll suggest that the solution to both capture and expropriation is

the same. This is to construct a regulatory agency that it unlikely to be influenced by

any particular interests. First, the personnel of regulatory agencies should be


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heterogeneous and stable and short-term changes in the political control of

government should not cause dramatic swings in the composition of the agency.

Moreover, the careers of regulators should be secure and remunerative enough so

that regulators are not constantly seeking other employment. The British and

Japanese systems have professionals who are the regulatory authorities but policy

authority rests with cabinet of ministers, and seek to achieve independence by giving

more authority to civil servants. Second, the regulator can be given independent

authority to generate information and even resources to represent interests that

otherwise are not organized to participate in its processes. Third, the regulator

should be subject to openness requirements so that the agency conducts all business

in public, refrains from secret contacts with interested parties and not only gives

indications of decisions it is likely to make but the reasoning behind that decision.

Openness forces regulators to reveal informational basis for their decision and is

therefore useful for revealing whether the agencys decision is biased and

unsupported by facts. Fourth, the decisions of the regulator can be subject to

review by another body that is freer of representation biases, especially biases

affecting participation in the agencys processes, at the instigation of anyone who is

dissatisfied with a decision. Levy and Spiller suggested that the most common

reviewing body is a general-purpose court that itself is politically independent and

diverse in composition.

3.6 The Telecom Policy 1994

The 1994 policy totally dismissed privatization of incumbent companies and made it

clear that the much- needed private foreign investment will supplement DOT's

efforts in spreading basic telephony. The policy was unrealistic as it failed to clearly

define how universal access and service goals were to be achieved. On one hand, it

admitted that India had 0.8 per cent of teledensity; on the other, it stated that the

telephone would be provided on demand by 1997. It allowed competition in basic

services by way of duopoly in each state (called circles) and allowed foreign

companies to partner with Indian counterparts to compete with DOT in 20 circles.

However, implementation of the policy was left in the hands of the incumbent DOT.

In August 1995, the first eight cellular licensees in four metropolitan cities began


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commercial services. In late 1995, the DOT and the Ministry issued about three

dozen licenses to cellular operators in all other provinces of India.

The controversy and delay in awarding basic service licenses led only six companies

to take licenses in offering services in only few states. For the remaining states there

was no company ready to match the unrealistic reserve- price, which the ministry

and DOT had fixed. Moreover, the companies who had taken licenses later failed to

fulfill their license conditions as their business plans were flawed. They also had

serious claims against the government and its agencies, especially DOT, for not

giving timely clearances in order for them to start their commercial operations on

time. Both cellular and basic service operators had committed to unrealistic license

fees and were struggling to survive in the Indian market. They owed almost $873

million to the government towards their outstanding license fees. By 1999, only two

basic service operators were able to offer services in two provinces and they had few

subscribers; the cellular operators had signed only one million subscribers.

Therefore, to a certain extent, these companies, in going along with government's

ineptitude to some extent were responsible for delaying needed reforms.

The National Telecom Policy, which was in the works since 1990 was finally

announced in May 1994. The National Telecom Policy of 1994, only envisaged a

supplementary role for the private sector to the DoTs national efforts. However, the

NTP 1994 did take liberalization forward by introducing competition in basic

services and throwing the sector open to private sector firms. NTP 94 spelt out five

basic objectives of which two objectives of availability of telephone on demand and

universal service (connecting all villages) were targeted to be realized by 1997. Both

of these objectives have remained unrealized. In regard to quality of service,

matching "world standard" and providing "widest possible range of services" "at

reasonable prices" were stated aims. Two other objectives were to make the country

a major manufacturing base and exporter of telecom equipment and to ensure the

country's defense and security needs. (The powers of licensing and spectrum

management were retained by the Government on the ground that both need to be

strictly monitored in order to protect the strategic interests and security of the

country). There were serious gaps in the policy document as regards provision of a

suitable environment for entry of private service provider and on the issue of


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regulation. The 1994 policy was designed with the approach that services should

continue to be provided largely by a strong incumbent that faced little competition..

In addition, while major targets were specified in NTP 94, an accurate assessment of

the underlying resource requirements was not done. For example, to realize the

enunciated objectives, an estimated Rs. 230 billion of additional resources were

required. A need for private sector contribution to the effort was clearly recognized,

but various implementation problems including incomplete reforms, mitigated the

efforts to achieve the targets. Meanwhile, convergence arising due to changes in

technology and the overall market structure for service provision had changed and

there was a need to provide fresh directions through another policy.

3.7 National Telecommunication Policy 1999

Faced with a situation where investments in the sector were at a standstill and

private companies were no longer interested unless the rules of the game were

changed and the role of the referee made clearer, the government embarked on a

series of policy changes aimed at solving the problems of the sector. The

government decided to implement a new National Telecom Policy in 1999, which

apart from setting the ambitious targets for universal coverage and tele - densities,

also allowed the private sector operators in the telecommunication service providers

to shift from a license fee regime to a revenue sharing one.

3.7(a) Primary Objectives Of The NTP99:

Provision of universal service to all uncovered areas, including rural areas

Create a modern telecom infrastructure taking into account the convergence

of IT, media, telecom

Transform telecom sector to a competitive environment providing equal

opportunities and level playing field for all players In the best traditions of

Indian planning, NTP99 also set several landmarks and targets to be

achieved in the next ten years.

Telephone on demand by the year 2002

Tele-density of 7 by 2005 and 15 by 2010


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Telecom coverage of all villages by 2002 5

Increase rural tele -density from 0.5 to 4 by 20105

Internet access to all district head quarters by October 20005

Internet access to all villages by 20025

(As per the available information, all the above targets have not been fully achieved,

except telephone on demand in metros, but considerable progress has been made in

other areas)

As per the revenue sharing regime, companies would have to pay 15 per cent of their

total revenues to the government. However, this is not the long-term share, as TRAI

has recommended that the percentage of revenue share to be paid by operators

should be 17 per cent of the adjusted gross revenue. The only caveat, which

companies accepted gladly, was that in order to qualify for the new revenue sharing

arrangement, all the entrants would have to withdraw their cases against the

government in the court. All the twenty-nine firms, including 22 cellular operators

decided to move to the new arrangement. However, even in the course of the new

telecom policy, the state-owned incumbents managed to further consolidate their

position and even extend it into other sectors. The government has managed to place

two government players erstwhile DTS and now converted into a corporate entity

called Bharat Sanchar Nigam Limited (BSNL) and MTNL - as the third cellular

entrant in all the 24 markets. The decision of the incumbents to venture into a new

area may be because of the strong growth the market enjoyed during 1999, when the

cellular subscriber base grew by about 58 percent to 1.8 million subscribers.85 By

June 2000 it had crossed the two million mark.

Moreover, while DTS will have to pay the revenue share of 15 per cent like other

cellular operators, it is likely that DTS will get the money back to fund its

developmental activities of increasing rural penetration of telecom services. NTP

99 also introduced one of the most progressive and liberal Internet Service Provider

Policies, where licenses for a token fee of Rs 1 have been granted to 340 ISPs. Of

these 70 ISPs have become operational. Moreover, the government has allowed 100

ISPs to set up international gateways to the Internet, by-passing the international


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gateway of VSNL, the monopoly international long distance provider. To meet these

teledensity targets, an estimated capital expenditure of Rs. 4,000 billion for

installing about 130 million lines will be required. Recognizing the role of private

investment, NTP 99 envisages multiple operators in the market for various services.

Another major change has been a shift from the existing license fee system to one

based on one time entry fee combined with revenue share payments.

3.7(b) Notable Advances Marked By The NTP 99

1. Speeding up competition in long distance, including usage of existing

backbone network of public and private entities in Rail transport, Power and

Energy sectors for data (immediately) and for domestic long distance voice

communication.

2. The Fixed Service Providers (FSP) shall be freely permittedto establish 'last

mile' linkages to provide fixed services and carry long distance traffic within

their service area without seeking an additional licence.

3. Transforming in a time bound manner, the telecommunications sector to a

greater competitive environment in both urban and rural areas providingequal opportunities and level playing field for all players.

4. Strengthening research and development efforts in the country and provide

an impetus to build world-class manufacturing capabilities.

5. Achieving efficiency and transparency in spectrum management.

6. Interconnect between private service providers in same Circle and between

services provider and VSNL along with introduction of competition in

Domestic Long Distance.

7. Undertaking to review interconnectivity between private service providers of

different service areas, in consultation with TRAI.

8. Permission for 'resale' of domestic telephony.

9. Clarity regarding number of licenses that each operator may be granted.

10. Emphasis on certain other issues including Standardisation, Human

Resource


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NTP 99 proposes that the long-term policy will be to have uniform 20-year licenses

for both Basic and Cellular Mobile services. Extensions of license periods initially

by five years and subsequent ten-year extensions are also envisaged. These

provisions need to be used in a transparent manner, which again brings up the issue

of government divesting itself of the licensing powers in favour of the regulatory

Authority. Internet Telephony has not been permitted under NTP 99

3.8 Assessment of Regulatory Reform

Regulatory reform in Indian telecom can be seen as a two-step process. One, the

establishment of an independent regulator and, two, the regulatory Authority

implementing reform on the basis of its policy initiatives. A crucial concomitant of

this process is the separation of the incumbent service provider from the policy

maker. Since its establishment, the telecom regulator in India has taken a number of

initiatives pertaining to tariffs, interconnection charge and revenue sharing, and has

provided its recommendations on license conditions/license fee for certain service

segments. The regulator has also addressed a number of disputes under Section 14 of

the Act. An important feature of the TRAI Act 1999 is that the Authority has to

ensure transparency while exercising its powers and discharging its functions.

Hence, the TRAI has adopted a procedure of consultations, under which it prepares

consultation papers on the issues under consideration, seeks comments from the

general public and experts in the area, and provides an Explanatory Memorandum

along with its Tariff Orders, interconnection charge or revenue sharing Regulation,

and its recommendations. Such an exercise is being performed for the first time by

policy makers in India.

TRAI has also been vested with powers to frame regulations necessary for its

functioning, including for the levy of fees and charges for services. The TRAI Act

provides for a separate fund ('Telecom Regulatory Authority of India General

Fund'), which will be credited with all grants, fees and charges received by TRAI,

and funds from other approved sources. Provision has also been made for Central

Government grants towards meeting the expenses of the regulatory Authority. As

mentioned above, there is now a perception among the Government that the powers

of the regulator need to be increased. An overall perspective that would be important


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in this regard is to emphasize a system which makes it possible to quickly

implement reform. Certain other features derived from the experience of regulatory

reform across countries would be of use. Instead, they will focus more on promoting

multiple outlets for voice telephony and ensuring that a reliable and universal virtual

public network is maintained across a crazy quilt of interconnected technologies and

applications. Overall, this will likely mean decreased reliance on individual

licensing of particular services and facilities and increased reliance on general rules.

It will also involve greater coordination among authorities in different industry

sectors. Telecommunications regulation will be less concerned with licensing and

pricing and more concerned and continuous efforts to adapt standards of reliabilityand interoperability to unrelenting technology changes, as well as with frequency

allocation and assignment, dispute resolution and consumer protection. A lot more

of the telecommunication industry will probably end up being regulated by the

market.


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CHAPTER - 4

INDIAN CELLULAR MARKET4.1 Country Profile

India is the 7th largest country in the world and the second largest in Asia with a

land mass of 3.29 million square Km, and a population of over 900 million. The

second largest populous country, India is the home of 16 per cent of world's

population and accounts for 2.42 per cent of the total world area. One of the most

striking features of the Indian economy is the sheer size of the consumer market.

Private consumption expenditure grew at 13 per cent per annum (at current prices)

through the 1980s and was estimated at Rs. 3,418 billion (US $ 110 billion) in 1990-

91. The overall growth of 13 per cent is composed of widely differing growth rates

in the various sectors. Expenditure on transport and communication is increasing by

as high as 21 per cent per annum. This reflects a perceptible shift in consumer

spending from primary products to manufactured goods and services, which is also

borne out by the increasing share of manufactured goods and services in the

country's GDP. The spectacular increase in consumer spending has been

accompanied by increasing sophistication.

4.2 Some Facts About the Indian Telecom Market

India has 1000 million people & 180 million households

40 million fixed line telephones, 10 million mobile and four million Internet

connections

Target for Growth: 100 million lines by 2005 and 200 million lines by 2010

Major public confidence as ost of long distance calls in India reduces from

Rs 30 ($0.60) to Rs 9 ($0.18) per minute

International Call charges reduce by 40%

VoIP opened up for International calls


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4.3 Telecommunications Network

India operates one of the largest telecom networks in Asia comprising over 21,718

telephone exchanges, 14.62 million telephone lines, an extensive local and long

distance transmission network with 132,022 route kms of terrestrial microwave

radio relay, coaxial cables and about 36,632 Km of optical fibre systems. The voice

and non-voice telecom services include data transmission, facsimile, mobile radio,

radio paging and leased line services to cater to a variety of needs, both residential

and business. A dedicated packet switched Public Data Network with international

access for Computer Communication services is also available. Tenders have been

invited for operation of Radio Paging Services. 95 licences have been issued for

operation of services in 27 cities. Services have commenced in all the 27 cities with

over 186,000 subscribers. Rest of the country has been divided in 19 circles and

licences are to be issued. The country has been divided into 18 telecom circles and 4

metro cities for operation of Cellular Mobile Service. Despite the sustained high

growth of telecom services in the last five years, the telephone to population ratio in

India has just reached 1.3 per hundred people. India's telecoms sector is carved into

22 circles or zones, classified as "metro" and "A", "B" and "C" circles, based on

subscriber potential, market lucrativeness and the state of already present

infrastructure.

The number of cellular subscribers in India grew at a scorching pace touching 10.48

million by 2002-end with the monthly addition from November to December 2002

rising to 7, 50,000. The all-India figures were up from 9.7 million in November

2002 to 10.4 million in December, a rise of 7.7 percent. This is a 92 percent increase

over the previous year's subscriber base of 5.4 million, according to the figures

released by the Cellular Operators Association of India (COAI). Cellular subscriber

base has been growing at a massive pace for the past three years. In 1999, the

announcement of the New Telecom Policy and the migration package from fixed

license fee to annual revenue share regime gave a boost to the mobile sector. The

result was that the cell subscriber base moved up from 790,000 in 1997 to 3.1

million in 2000.


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4.4 Phenomenal Growth of the Indian Cellular Market

The four metro circles showed fewer additions to their total mobile users -registering

an increase of 4.4 percent from November to December 2002, Circles B and C saw

high growth of 11.52 percent and 11.14 per cent respectively. The less lucrative

circle C saw an increase of 8.58 for the one-month period. Metros recorded

additions of 172,000, circle A an addition of 277,000, circle B of 268,000 and circle

C an increase of 36,142. On a year on year basis, the numbers in metros topped the

list with 4.054 million representing a 38.69 percent rise; circle A-3.516 million,

registering a 33.54 percent increase; Circle B-2.550 million, a growth of 24.33

percent and circle C 360,000, witnessing a 3.44 percent rise.

The International Telecommunication Union feels India has the potential to become

No 1 in terms of the number of mobile phone users, considering the number of

people currently without mobile phones in the country. Currently, China has the

highest number of mobile phone subscribers. Michael Minges, head,

Telecommunications Data and Statistics Unit, ITU Telecommunication Bureau,

said: "India has the least mobile connectivity with only 10.1 million subscribers as

compared with China. India is the largest unserved market and therefore there is

huge potential." According to the ITU report, in the last 10 years the

telecommunication environment in the Asia-Pacific region has changed rapidly. The

rate of change has been the most dramatic in the mobile communication sector.

City Service ProviderDec'

1997

Dec'

1998

Dec'

1999

Dec'

2000

Dec'

2001Dec' 2002 Mar' 2003

Delhi

Bharti 123091 113259 153498 273262 484850 834269 902357

Sterling 96047 106201 126054 187617 343241 0 0

MTNL 0 0 0 0 45408 129809 132417

Idea 0 0 0 0 0 128306 165900

Hutchison Essar 0 0 0 0 0 580328 605485

Total 219138 219460 279552 460879 873499 1672712 1806159

Delhi Growth Rate YoY (%) 9.9 10.0 40.2 131.1 337.9 738.6 805.5

Mumbai BPL Mobile 92230 111241 155373 261654 378912 573877 621172

Hutchison Max 122772 91601 143371 218677 380835 615836 665086


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MTNL 0 0 0 0 73248 110279 159500

Bharti Cellular 0 0 0 0 0 212304 243278

Total 215002 202842 298744 480331 832995 1512296 1689036

Mumbai Growth RateYOY(%) 15.3 8.8 60.3 157.7 346.8 711.2 806.0

Chennai

RPG Cellular 25491 16244 24041 57647 107979 166305 179284

SkyCell 23044 18450 22963 38577 0 0

Bharti Mobinet 0 0 0 0 121036 200728 215109

Hutchison Essar 0 0 0 0 0 51832 55760

Total 48543 34694 47004 96224 229015 418865 450153

Chennai Growth Rate YoY(%) 5.9 -24.3 2.6 110.0 399.8 814.1 882.4

Calcutta

Modi 36664 20459 33126 90132 0 0 0

Bhari Mobitel 0 0 0 0 94077 188237 200736

Hutchison Telecom 0 0 0 0 0 247327 274281

BSNL 0 0 0 0 0 14997 19159

Usha Martin 26640 22386 34904 67426 131528

Total 63304 42845 68030 157558 225605 450561 494176

Calcutta Growth Rate YoY(%) 6.3 -28.1 14.2 164.5 278.7 656.4 729.6

All Metro Total 545987 499841 693330 1194992 2161114 4054434 4439524

Metro Growth Rate YoY (%) 11.14 1.74 41.13 143.25 339.90 725.30 803.68

All India Total 794232 1070603 1599364 3107449 5478932 10480430 12687637

All India Growth Rate YoY(%) 20.01 61.76 141.66 369.52 727.85 1483.55 1817.05

Cellular Subscriber (GSM) Growth (Dec 97 to Mar2003)

The table on the preceding page describes the phenomenal increase in the cellular

subscriber base (The data is for GSM subscribers only, authenticated data for WLL

subscribers could not be found). The varied reasons for such a stupendous growth

have placed India in the right orbit for a rightful position as a major global player in

the world, in not so distant future. An increase of 1817%, could only be described as

envious and considering that not even a sizable potential of the Indian market has

been tapped, so far, makes the whole data much more meaningful, from investors

and companies point of view. It would be prudent to add at this juncture that this


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bewildering growth rate has been achieved at the very nascent stages of Indian

telephony, and as the years progress and the base year for comparisons (Base year in

this study has been taken as 1997) shifts to some latter year, the developments

would look more sober as the market passes over from the initial stages of

introduction towards growth and maturity.

0.00

200.00

400.00

600.00

800.00

1000.00

1200.00

1400.00

1600.00

1800.00

2000.00

Dec'1997 Dec'1998 Dec'1999 Dec'2000 Dec'2001 Dec'2002 Mar'2003

Year

National Vs Metro Growth (%)

Metros National

Metr o Cities Subscriber Growth Rate

-200.0

0.0

200.0

400.0

600.0

800.0

1000.0

Year

Percentage

Delhi Mumbai Chennai Calcutta


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All India Growth Rate YoY(%)

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Dec'1997Dec'1999

Dec'2001Mar'2003

Year

Percentage

There is a need to look at the various reasons that have contributed to the growth of

cellular sector in India. If one were to look at the figures above, it becomes clear that

the growth started from the metros to begin with and then caught up with the

national fancy. It would be imprudent to say that inclination towards being more

mobile was just a fad, or a pass. Instead there are certain deep rooted and wellexplainable reasons thereto.

4.5 Reasons For Boom In Consumer Spending

The overall consumer attitude has resulted in the development of a very conducive

environment for industrial as well as economic growth. Needless to say, higher

disposable income, as a result of increased employment, better salary and wages

structure, have resulted in more spending power. Combining increased levels of

awareness and a paradigm shift towards value orientation rather than pure price

sensitivity has lead to an interesting environment for business, both services and

manufacturing activities

1. Sustained economic growth of 5.5 per cent per year through the 80s. and

more than 12% in case of Industrial growth till late 90s.

2. Increase in urban population by 75 million in the last decade to touch over

235 million in 1993 and estimated to be over 550 million by 2003 .


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3. Drastic change in lifestyles with the emergence of multiple income urban

households.

4. Increase in awareness created by the media - television (including CNN,

STAR TV), radio (with many new FM channels) and print media.

5. Increasing literacy levels The aggregate number of literates being 442

million, as per 1991 census.

Another notable development is that the perceptual shift of consumers towards the

need for better connectivity: from business and personal point of view, along with

westernization have contributed to the phenomenal increase in the demand forcellular services. One should also bear in mind that this would not have been

possible, had the affordability of telecom services would not have come to todays

level.

Telecom Affordability

0

5

10

15

20

25

30

35

97 98 99 00 01 02 03Year

Avg.Min.Call

Rates(Local/1min)

Indian customers have always been highly price sensitive and the price factor has a

great role to play in making a product/service/concept a success or a failure. Since

the initial charging for cellular services was very high, it was a niche product/service

rather than being a utility, but now with the call rate coming down to as low as 40

paise (Reliance Tariff Rates under the Dhirubhai Ambani Pioneer Offer), the cellular

sector has witnessed a revolution as the affordability increased, and at the samwe

time the utility has increased many folds, the result of which is a phenomenal

1817% growth (Dec 97 to March 2003).


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Call Usage Pattern and Contribution towards Total Call Revenue (Aggregate)

Usage Share Of Total

Subscribers

Contribution towards Call

Revenue(Calls Bi- Monthly)

>10,000 2.70% 47.10%

5001 to 10,000 2.50% 9.80%

2001 to 5000 7.90% 13.40%

1,001 to 2,000 14% 11.60%

501 to 1,000 21.30% 10%

0 to 500 51.60% 8.10%

Source: Indian Telecom Review, Business World, February, 2003

As the telecom affordability has gone up, the no. of users have experienced a

phenomenal growth, but as is evident, the maximum users are the least revenue

getters from a companys perspective and curtail their telecom spending to the bare

requirement as stipulated by the service providers. So, the companies derive their

nos. from here and their revenues from the top most category.


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The change in perception also has helped the Indian customers venture into spending

over non-conventional items which had a negligible share in the early 90s, this is a

macro effect and has its bearing on all the aspects of Consumer spending pattern and

not specifically on the spending on fulfilling telecom needs. But nevertheless

telecom sector is also one of the beneficiaries of this phenomenon.

4.6 Major Players in the Indian Cellular Sector

Besides the service providers in the metros (Please refer to Table 4a), the Indian

telecom market is divided into circles, the details of the service providers in the

various circles respectively is provided in theAnnexure-3, A Note on Major Service

Providers


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CHAPTER-5

TECHNOLOGY IN USE AND THE CONTROVERSY

BETWEEN GSM & WLL OPERATORS

The technological aspect is undertaken in this study, because it becomes important

to understand the basic concept of underlying technology, by the virtue of which,

modern telephony (especially in the Indian context) is functioning. It also provides

the means of comparison and differentiation between the service offerings, their

limitations and advantages, which reside in the very fundamentals of the technology

that is being used. It also becomes Important to mention here that the battle between

wireline and wireless was the first taste of competition that the post liberalized

telecom sector had. Now, the tussle and the market share-bone of contention remains

between the CDMA and the GSM based operators.

Broadly, for the purpose of this study, we try to understand:

1. Wireline Technology & Wireless Technology

2. Distinction between WLL & GSM Technology

India today lacks the infrastructure required for high speed communication that is

imperative for the telecom revolution. Most of the present lines are copper cables

operating at (low) while the optical networks that have been laid by the DoT,

covering a distance of 31,771 km operate with a bandwidth of 51.84 Mbps. Looking

into the future, the current capacity of our communication networks will be far

outstripped by the demand.

5.1 Wireline Technology


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The traditional wireline telephony to which India has been exposed to till recently,

had been the forte of state run MTNL & BSNL. The fundamental technology

behind this concept seems very rudimentary, if compared to the technological

options that are now available. It involves carrying of voice and data traffic

over co-axial copper wires, from the provider till the end user. For long

distance, there is the use of satellites and tie ups with other operators for which

there is a charge payable, and needless to say, this is passed on to the

customers. Besides, the underlying technology itself faces certain lacunae,

owing to the fact that the data suffers loss of transmission, leakages, stress,

and a very high Last mile linkage cost. The answer to this particular problem lies in abandoning reliance on the physical medium of carrying

traffic, to the maximum extent possible. This brings the concept of wireless

connectivity into the picture.

5.2 Wireless Technology

The first mobile wireless phones utilized analog transmission technologies, the

dominant analog standard being known as AMPS, (Advanced Mobile Phone

System). Analog standards operated on bands of spectrum with a lower frequency

and greater wavelength than subsequent standards, providing a significant signal

range per cell along with a high propensity for interference. These networks were

based on digital, rather than analog technologies, and were circuit-switched. Circuit-

switched cellular data is still the most widely used mobile wireless data service.

Digital technology offered an appealing combination of performance and spectral

efficiency (in terms of management of scarce frequency bands), as well as the

development of features like speech security and data communications over high

quality transmissions. It is also compatible with Integrated Services Digital Network

(ISDN) technology, which was being developed for land-based telecommunication

systems throughout the world.

There are a variety of wireless technologies, for telecommunication purposes.

FDMA- Frequency Division Multiple Access.

TDMA- Time division Multiple Access.


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CDMA- Code Division Multiple Access.

TDMA is a digital air interface that divides a single radio frequency channel into 6

unique time slots, allowing a number of users to access a single channel at one time

without interference. By dividing the channel into slots, three signals (two time slots

for each signal) can be transmitted over a single channel. In this way, TDMA

technology (also referred to as ANSI-136), provides a 3 to 1 gain in capacity over

analog technology. There are approximately about 120 million worldwide TDMA

subscriber for 2002.

CDMA is being used in India, which is a full-fledged cellular technology. It is in

fact being used in U.S, and Korea.

5.3 Limited Mobility for Voice

WLL means that a subscriber is linked to the nearest exchange through radio links

instead of copper wires.

Unique government initiative for rapid phone expansion

Mobile WLL CDMA phone connects to POTS system

Allows data transfer rates of 144 Kbps

20 Km radius of mobility from base station

Extends POTS but encroaches on cellular networks

Multiple conflicts: license fees, revenue fees, interconnect

agreements, urban-rural commitments

Currently about 800,000 subscribers to WLL phones

5.3(a) Wireless Local Loop (WLL)

The Wireless Local Loop technology is India's indigenous technology. It was highly

appreciated by UNDP. This technology replaces the wires and copper in local loop

with a wireless system. It requires a compact base station, mounted on a rooftop or

poles in the streets, which is used for transmission on a wireless medium to homes

and offices. The technology is claimed to bring down the cost of per line telephone

connection from Rs. 40 000 to 10 000 and facilities both voice and data. It is suited


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for both dense urban and sparse rural deployment scenarios. India and other nations

such as Fiji, Tunisia, Nigeria and Madagascar have already started to deploy.

Frost & Sullivan forecasts that WLL transmission equipment will eventually

constitute nearly 30% of all new lines. This technology will assist in more rapid

installation of the network and is ideal for both urban and rural areas. Very small

aperture terminals (VSATs) and low earth orbiting satellites (LEOs) are also being

touted as intriguing technological solutions for rural telecommunications. None of

these technologies is a panacea, but each of them will satisfy the demands of rural

telecommunications. Different technologies will be more or less appropriate based

on specific circumstances. It is most likely that a mix of these technologies will

provide the ultimate solution.

5.3(b) Advantages Of WLL Over Traditional Wireline Connectivity

WLL is cheaper and quicker than copper lines. As the cost of copper rises over time,

so does the cost of acquisition, and set up of traditional system for wireline

connectivity. In a traditional set up the most costly part is the last mile, especially

in the rural and far flung areas.

WLL is economical in this respect. Close to 90% of faults in telephonic lines occur

in this last mile. With radio links replacing copper wires, the faults become almost

negligible.

5.4 GSM Technology

The idea of cell-based mobile radio systems appeared at Bell Laboratories in the

United States in the early 1970s. However, mobile cellular systems were not

introduced for commercial use until a decade later. During the early 1980s, analog

cellular telephone systems experienced very rapid growth in Europe, particularly in

Scandinavia and the United Kingdom. The most prevalent wireless technology in the

world today, is GSM. The GSM MoU (Global System for Mobile Communications)

was instituted in 1987 to promote and expedite the adoption, development and

deployment and evolution of the GSM standard for digital wireless communications.

The GSM membership has grown exponentially since 1992. The membership now

extends to 323 members from over 125 countries. ( table given below) The GSM


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network now services over 125 million customers world-wide. The world's satellite

operators have also joined the GSM community, which further adds to its strength

and impact on world markets. GSM is today, the world's leading digital standard

accounting for 64% of the global digital wireless market.

Year Membership Networks on AirCountries /

Areas

Customers

(millions)

1992 54 31 13 0.25

1993 78 48 34 1.4

1994 102 60 65 4.5

1995 156 86 113 12.5

1996 208 105 189 30

1997 256 110 233 70.3

1998 291 120 298 108

1998 323 128 300 125

2000 400 140 380 300

Today's GSM platform is a hugely successful wireless technology and an

unprecedented story of global achievement. In less than ten years since the first

GSM network was commercially launched, it became the world's leading and fastest

growing mobile standard, spanning over 190 countries. Today, GSM technology is

in use by more than one in ten of the world's population and it is estimated that at the

end of 2002 there were 787 million GSM subscribers across the 190 countries of the

world.

The digital nature of GSM allows the transmission of data (both synchronous and

asynchronous) to or from ISDN terminals, although the most basic service support

by GSM is telephony. Speech, which is inherently analog, has to be digitized. The

method employed by ISDN, and by current telephone systems for multiplexing

voice lines over high-speed trunks and optical

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