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Twin Challenges: Supply and demand-side issues continue to hinder growth

September 01, 2015

Over the past decade, the Indian telecom industry has undergone a rapid transition due to the significant uptake of wireless voice services. The wireless subscriber base has increased at a compound annual growth rate of 8 per cent; from 400 million in March 2005 to 970 million in March 2015. However, the same is not true for the broadband segment as several impediments continue to affect services, particularly in Tier I, Tier II and rural regions. As of March 2014, only 45.61 million of the total 900 million wireless subscribers were using broadband services, according to the Telecom Regulatory Authority of India. Moreover, the inability of the government to complete the execution of its ambitious BharatNet project (earlier known as the National Optical Fibre Network programme) has further delayed the provisioning of broadband services in rural regions.

One of the main reasons for the low adoption of broadband has been the limited roll-out of requisite infrastructure. So far, telecom operators have taken a cautious approach to setting up telecom networks in rural regions. They feel that the investment and opex requirements of networks in these areas is high on account of issues like inadequate power supply, high transportation costs and pilferage of diesel. Moreover, the returns on investment come in over a long period of time and are quite low, making large investments unviable. As a result, there is a significant shortage in the number of public access points.

Inadequate optic fibre cable (OFC) network capacity, especially in rural areas, has also been restricting operators from offering high-speed broadband services. Incidentally, the majority of the backhaul network is built on copper cables, which suffer from bandwidth constraints. To address this issue, the government embarked on rolling out OFC in 250,000 gram panchayats to ensure the provisioning of high-speed broadband connectivity. However, the delays in the execution of the project have been adversely affecting broadband adoption in rural areas.

Apart from supply-side constraints, the demand for broadband in rural areas has also remained low. A primary reason for this is the lack of consumer awareness. The majority of the population in rural India lack secondary education and do not understand the benefits of these services. In these areas, digital literacy, which is a measure of the ability to use personal computers and smart devices, has also been found wanting. This can be attributed to the unavailability of affordable smart devices. Another factor is the limited availability of local content, and even though several state governments and private players are offering e-governance services in local languages, the progress in terms of availability and the number of applications has been moderate.

While the uptake of broadband services in urban regions has been significantly higher, its growth has lagged behind that of voice services. The majority of subscribers are now accessing broadband through their smart devices rather than from personal computers. However, most wireless subscribers are still not using broadband, although the uptake has been increasing steadily. This is mainly due to the cost of high-end smartphones and tablets. Most subscribers own sub-Rs 5,000 smartphones that have limited internet functionality and do not deliver an optimum broadband experience. This high cost of data plans and the patchy data network coverage and capacity has also discouraged users from shifting from 2G to 3G services.

Operators have been slow in enhancing network capacity to meet their growing bandwidth needs as they are yet to get a return on the initial investments. Low data speeds have compelled subscribers to shift back to 2G, and they are most likely waiting for the coverage to improve before switching back to 3G. Another factor is the increase in data traffic that has accompanied the rise in the number of data subscribers. It is becoming increasingly difficult to support this traffic growth on existing networks, thus making upgrades vital.

Having already paid a significant amount of capital for acquiring spectrum in the auctions, operators have been making limited investments in data networks. Highly leveraged balance sheets have reduced the flow of cash, which could have been used to expand and augment data networks. In addition, fibre connectivity has been limited in urban areas due to financial and regulatory constraints. One of the biggest challenges is the high cost of right-of-way (RoW) clearances, especially in metros and Tier I cities. Operators have to seek the approval of multiple regulatory authorities, which not only increases costs but also delays fibre network roll–outs. Meanwhile, public concerns regarding electromagnetic field radiations have been preventing them from setting up tower sites, and they are being directed to remove sites near hospitals, schools and government buildings, etc. These factors are keeping operators from expanding their data network coverage.

To address issues related to network coverage and capacity, operators have been taking several corrective measures. Many are now adopting data traffic offloading strategies like Wi-Fi hotspots, small cells and in-building solutions. Vodafone, for instance, has recently launched an application that allows its customers to shift from data networks to Wi-Fi when they enter a Wi-Fi zone. Operators are also looking at new technologies like software-defined networking and network function virtualisation to optimise data networks and improve their efficiency.

Going forward, there is expected to be a surge in broadband uptake, considering the implementation of BharatNet and the expansion of data networks. However, the government, in consultation with stakeholders, will have to address the obstacles in the way. For one, it will have to streamline the regulatory approval process for granting RoW. While the central government has directed all state governments to issue norms that are in line with its own norms to ensure uniformity, many states have not done so.

The government also needs to auction additional spectrum so that it can be used for offering data services at reasonable prices. This will allow operators to allocate higher capex towards network roll-outs rather than for spectrum acquisition. In addition, private players need to be involved in developing content for rural areas with the aim of providing not just broadband connectivity but relevant content as well. If these issues can be addressed, the government will be able to meet the objectives of the Digital India project and ensure higher GDP growth.


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