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Positive Outlook: Greater policy and regulatory clarity augurs well for industry

February 16, 2016
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There was an upswing in the Indian telecom sector in 2015 due to a policy environment conducive to change, coupled with the easing of regulatory barriers. These factors allowed service providers to expand operations and tap the growing mobile data market. Among the major policy developments were the successful spectrum auctions, which garnered the highest amount of revenue until now, through the sale of spectrum, and very little spectrum remaining unsold. Other encouraging moves were the introduction of spectrum sharing and trading norms, which allowed operators to procure a greater quantum of spectrum to improve services; higher emphasis on service quality, particularly in the voice segment; speedy implementation of the national broadband project; and the grant of payments bank licences.

In other policy moves, the government tried to establish a framework in which the role of over-the-top (OTT) players could be recognised and where their increasing competition with telecom operators in data offerings could be regulated. This led to a widespread industry debate on the broader issue of net neutrality and the question of whether free basic internet services should be provided to improve rural access. While no conclusive policy move has emerged yet, whatever decision is eventually taken on this matter will reshape the OTT landscape. Apart from this, the regulator provided its recommendations on the introduction of virtual network operators in the sector. The policy for operators who provide telecom services without owning spectrum or infrastructure is currently being formulated and will likely encourage their entry into the industry. In addition, the government continued its efforts under the Make in India and Digital India initiatives, inviting foreign participation and encouraging the setting up of domestic manufacturing facilities for handsets and other telecom equipment, and public Wi-Fi hotspots in a bid to improve broadband access.

tele.net takes a look at the major policy and regulatory moves over the past year and their impact on the industry…

Successful auction: Reforming the 3G and 4G landscape

The largest ever spectrum auction was conducted in March 2015, earning the Department of Telecommunications (DoT) a total of about Rs 1.1 trillion from spectrum sales in the 800 MHz, 900 MHz, 1800 MHz and 2100 MHz bands. The enthusiastic operator participation in the auction was on two accounts. First, the licences of several operators were due to expire in various circles in 2015-16 and they needed to be revived in order to ensure service continuity. The second key factor was that many operators were looking to increase their spectrum holdings for improving network coverage and offering high speed data services in view of the upcoming launch of 4G services.

As several operators who were buying back spectrum in circles with expiring licences contributed a sizeable share to the overall revenue, the majority of spectrum was sold at a higher price than the reserve price. For instance, spectrum in the 900 MHz band was sold at a premium of 118 per cent over the reserve price, while the final price discovered in the 800 MHz band was 65 per cent higher than the reserve price. There was minimal participation only in the 2100 MHz band due to the high reserve price and limited quantum of spectrum on offer.

The auctions were dominated by incumbent operators, who made up about 77 per cent of the total outgo of all operators put together. Almost all such operators were able to buy back spectrum in bands where licences were due for renewal. However, strategic spectrum acquisitions by operators like Idea Cellular, which emerged as the highest bidder, and Reliance Jio Infocomm Limited (RJIL), which acquired spectrum in the 1800 MHz band, are likely to set the tone for operator dynamics in the near term. While Idea Cellular, known to be a regional operator, focused on building a spectrum portfolio to launch 4G, RJIL acquired spectrum with the aim of improving its 4G experience through voice over long term evolution and other services. Meanwhile, Airtel and Vodafone focused on licence renewal and the acquisition of contiguous spectrum to compete in the growing data market.

Spectrum sharing and trading paves the way for consolidation

In a major breakthrough, the cabinet approved the Telecom Regulatory Authority of India’s (TRAI) spectrum sharing and trading guidelines during August-September 2015. Under these guidelines, the entire spectrum holding of operators has been made eligible for spectrum sharing, provided that both licensees have airwaves in the same band. The spectrum caps, however, remain unchanged and are applicable to all operators individually. An operator would be required to pay a one-time administrative fee of Rs 50,000 to the Wireless Planning Commission and an additional spectrum usage charge of 0.5 per cent of the aggregate gross revenue. Similarly, spectrum trading has been permitted in all frequency bands, including the spectrum allocated under the administrative route after a market-determined price is paid for the airwaves. The spectrum ownership right, however, will remain with the government and only the right to use it would be traded. Buyers will also have to pay a 1 per cent trading fee, which will be calculated based on the market rate or the previous auction price, whichever is higher.

The industry believes that spectrum sharing would be advantageous for capex savings as well as efficiency improvements. This mode of acquiring spectrum is likely to be used by two kinds of operators – those that are looking to offer services on a newer technology and have not yet started rolling out networks, and those that are looking to expand their footprint. In the first case, an operator can, instead of creating its own network infrastructure, choose to share spectrum with another operator offering 3G and 4G services. As sharing will lead to the better utilisation of assets, incumbent operators like Bharat Sanchar Nigam Limited (BSNL) have shown their willingness to take part in the process.

Spectrum trading is also likely to help operators offer 3G and 4G services as these require a contiguous spectrum that is not always allocated during an auction. Hence, operators can also trade as per their requirements in a particular circle on a particular band. The key spectrum sharing and trading deal that has been signed to date is between Reliance Communications (RCOM) and RJIL (in the 1800 MHz band across 22 circles). More are likely to materialise in the coming months. This will facilitate consolidation, allowing smaller operators to sell their spectrum holdings to improve their financial condition. For instance, Idea Cellular recently bought Videocon Telecom’s spectrum in the Uttar Pradesh (West) and Gujarat circles through a trading agreement for Rs 33.1 billion to provide 4G services. Other operators like Tikona Digital Networks and Aircel are also looking at this option, and more rearrangements are expected to follow in 2016.

Service quality takes centre stage

Over the past year, one of the most discussed topics in the telecom industry has been the growing concern over call drops. After receiving several complaints on the deteriorating quality of service and analysing the results of various drive tests conducted in metro circles, DoT mandated TRAI to recommend an incentive mechanism to resolve the issue. In September 2015, the regulator initiated its consultation, seeking a framework for compensating customers for call drops. Thereafter, TRAI issued the ninth amendment to the Telecom Consumer Protection Regulations, 2012, mandating operators to compensate consumers for call drops with effect from January 1, 2016.

Under this mechanism, service providers are required to credit Re 1 in the account of the calling consumer for every dropped call, with a limit of three dropped calls in a day. This move was aimed at providing some relief to consumers while inducing operators to improve their quality of service. However, it was received with widespread criticism as various industry bodies approached the Delhi High Court for overturning TRAI’s order. The industry is of the view that the increased call drop rates are on account of the lack of spectrum and the sealing of towers, and the compensation mechanism is likely to affect the net income of operators, which are already dealing with a high debt burden. While the court proceedings are still going on, TRAI has directed operators to start compensating consumers on call drops; however, no coercive action is likely to be taken against them if they do not comply. The impact of the compensation regime will be assessed by TRAI over the next six months.

Government pressure has propelled operators to take initiatives like setting up new tower sites and upgrading network infrastructure to improve the quality of service delivered to end-consumers. Meanwhile, the telecom ministry has provided support by allowing towers to be set up on government premises. TRAI, on its part, is trying to spread awareness on the electromagnetic field radiation from telecom towers as a means of reducing the sealing of towers. It is also likely to initiate a consultation process to regularly track the network quality of telecom operators. Such efforts will prove to be important in the coming months as the launch of 4G will cause more network congestion, which could hamper voice quality.

NOFN revamp

Over the past year, the government has attempted to revamp its key rural broadband project, the National Optical Fibre Network (NOFN) project, now called BharatNet. This project envisages connecting 250,000 gram panchayats with optical fibre cable to provide affordable broadband connectivity of 100 Mbps by December 2016. It is being implemented by Bharat Broadband Network Limited, while the cable is being laid by BSNL, RailTel and the Power Grid Corporation of India. The need for reviewing it came about due to significant cost revisions and delays in procuring clearances and equipment, which had caused it to fall behind targets by a substantial margin.

The government set up an NOFN review committee, which recommended revamping the project as BharatNet, giving it a broader scope and featuring more private sector involvement. Later, the committee’s inputs were assessed in TRAI’s recent consultation paper on the matter, which discusses the various implementation models that can facilitate the timely completion of the project. The regulator has plumped for the build-own-operate-transfer model with public-private partnerships, owing to its success in other infrastructure industries. A final decision on the matter is yet to be taken and experts estimate that broadband connectivity is likely to reach 50,000 gram panchayats by March 2016. Private participation is essential to speed up implementation and bring about efficiency in project development and execution.

Payments banks to tap the rural population

Another important regulatory move over the past year was the grant of licences by the Reserve Bank of India in August 2015 to a few key telecom operators in order to set up payments banks. The apex bank had granted these licences with the aim of reaching the underbanked population. The objective of these banks is to provide small savings accounts as well as payment and remittance services to migrant labourers, low-income households, small businesses and other unorganised sector entities. As operators already have a growing rural subscriber base, they are ideal candidates for driving financial inclusion.

These banks also make a good case for telecom operators as they allow them to build on their m-wallet services by providing additional facilities like deposit services and cash withdrawals without any tie-ups with banks. This will also allow them an additional channel of revenue, which would be the yield on investing the deposit money less the interest offered to end-customers. While a break-even in these services might not happen in the short term, payments banks can allow operators to have a steady flow of revenue in the long term. They will also help operators retain customers by building stronger customer relationships.

Bharti Airtel is among the operators that have been granted this licence, and it plans to set up payments banks through its m-wallet subsidiary, Airtel M Commerce Services Limited (Airtel Money) via its partnership with Kotak Mahindra Bank. Vodafone India, another key operator, will build on the success of m-Pesa and develop its mobile money and payments networks. Meanwhile, Reliance Industries has tied up with the State Bank of India to set up payments banks. This joint venture plans to use RJIL’s telecom network and the group’s online and offline retail business to offer financial services. Apart from these, Aditya Birlo Nuvo has been granted a licence; it already has a presence in financial and telecom services. It is the largest shareholder in Idea Cellular, which operates its m-wallet services through Idea Money, while its financial arm, Aditya Birla Finance Services, offers non-banking financial services. The group company will make use of its stake in both companies to extend the reach of its payments banks. The payments bank concept is largely in the planning stage as operator focus is currently on rolling out next-generation services. However, it will play an important role in light of the long-term strategy of tapping rural and semi-urban populations.

On the right path

The government’s various efforts on the policy and regulatory fronts will shape operator dynamics in the near term, particularly for the mobile data segment. Nearly all incumbent telecom operators have set up next-generation networks on the spectrum they procured in the 2015 auction. They are now in the process of launching 4G services across the country, targeting not just the metro circles but also Category A and B circles with a strong 3G uptake. The industry is anticipating the commercial launch of RJIL’s 4G services and its strong uptake owing to its aggressive pricing strategy.

The quality of service, however, will be an important aspect in encouraging 4G, and operators are likely to enter into more spectrum sharing and trading agreements to procure a  greater quantum of spectrum. The consolidation process has begun again after a lag of many years and the latest merger, between RCOM and Sistema Shyam TeleServices Limited, will allow the formation of a strong competitor, in terms of both spectrum and subscribers, against the three leading operators. Meanwhile, smaller operators are likely to be absorbed by the incumbents, allowing them to reduce debts and improve their financial condition.

The industry is now looking forward to the next spectrum auction, which is likely to take place in June 2016, with an additional 700 MHz spectrum on sale. Meanwhile, DoT is in advanced stages of procuring spectrum from the defence forces in the 2500 MHz band, adding to the portfolio of spectrum to be sold. Operators are currently banking on realising revenue from their 3G and 4G services as a means of reducing the interest burden on the expenditure undertaken for spectrum payments and setting up network infrastructure. Once the bottom lines show improvement in the fourth quarter of 2015-16, operators will be able to bid aggressively in the 2016 auction. Nonetheless, the telecom industry as a whole is expected to remain on a growth trajectory owing to the strong domestic demand for data services.

Going forward, the network security issue will take centre stage as there will be a substantial increase in the volume of data transmitted on networks. This will require a stronger incentive mechanism on the policy front to mandate network and equipment testing. Meanwhile, the quality of voice services remains an important issue that requires more attention from operators. While the feasibility of implementing the compensation mechanism remains in question, it has put pressure on operators to maintain their networks and focus on the voice segment as well.

Net, net, the industry outlook remains positive for the coming quarters, with improved policy clarity essential for sustaining growth.

 
 
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