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Exciting Times: 2015 marked by consolidation and 4G launches

February 17, 2016
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The year 2015 was a defining one for Indian telecom as the industry entered a new phase of growth led by data services. A consolidated voice market, data-driven growth, aggressive 3G-network roll-outs, the start of 4G launches, increased smart phone uptake, and more applications/content in the market were the key industry trends during the year. Meanwhile, the successful spectrum auction in early 2015 and the clearance of spectrum trading and sharing norms marked the policy and regulatory landscape. These developments, supported by a favourable merger and acquisition (M&A) policy, facilitated industry consolidation.

The key trends and developments that marked the year are as follows...

Hitting the 1 billion mobile subscriber milestone: In October 2015, India became the second country only after China to have a billion-plus mobile connections. China achieved that landmark in 2012 and is today the world leader in driving telecom trends globally. Overall too, the year 2015 has been a good one in terms of subscriber growth. A total of over 65 million mobile subscribers have been added between January 2015 and November 2015, which means that 6 million subscribers have been added on average every month. In comparison, the year 2014 witnessed an addition of just over 50 million subscribers.

Wireline telephony continues to decline while wireline broadband grows: The fall in wireline subscribers continued during the year, with a reduction of over 100,000 users. This brought the total tally in this segment to 25.72 million as of November 2015. In comparison, wired data services picked up pace, though not as significantly as in the wireless space. The number of wired broadband users increased from 15.23 million as of November 2014 to 16.38 million as of November 2015.

Successful auction of airwaves: Early in 2015, the country witnessed the biggest auction of spectrum with the government garnering Rs 1.1 trillion ($17.6 billion) to licence 380.75 MHz of airwaves in the 800 MHz, 900 MHz, 1,800 MHz, and 2100 MHz bands across 17 out of 22 telecom circles. While the outcome of the auction led to a significant outflow of funds for operators, it helped resolve the long-standing spectrum crunch issue.

Accord on spectrum trading and sharing: The government, in September 2015, approved the spectrum trading and sharing guidelines, allowing telecom operators to buy and sell unused spectrum among themselves, a move long-awaited by the industry. This allowed larger players with congested networks to buy spectrum from other players and improve their quality of service for customers, without having to wait for auctions to purchase additional spectrum. The move has spurred consolidation in the industry (which had been waiting on several deals that were either stuck or awaiting policy clarity), and cleared the gateways for sharing this scarce resource. Reliance Communications (RCOM) and Reliance Jio Infocomm Limited (RJIL) became the first set of players to strike a spectrum-sharing deal. The two firms have signed agreements for a change in spectrum allotment in the 800 MHz band across nine circles from RCOM to RJIL and for sharing of spectrum in the 800 MHz band across 17 circles. This sharing strategy will lead to the optimal use of spectrum, leading to greater network reach, lower network capital expenditure and thereby, lower operational expenditure.

Consolidation: During the past few years, most telecom operators were stretched for finances as they had committed huge capital for 2G and 3G network roll-outs and spectrum acquisition. The high cost of spectrum and aggressive tariff wars left many operators, especially the smaller ones, in a weak financial position. The new M&A norms and the spectrum trading guidelines enabled operators to rationally explore prospective buying and selling opportunities. During the year, the market witnessed several buyouts by larger players. The key among these were Bharti Airtel’s acquisition of Augere Wireless, Idea Cellular’s acquisition of Videocon’s spectrum in some circles and RCOM’s merger with Sistema Shyam TeleServices Limited’s (SSTL) Indian subsidiary.

Another key trend during the year was consolidation in the tower industry. RCOM signed a non-binding agreement with US-based Tillman Global Holdings and TPG Asia to sell its nationwide tower assets and related infrastructure for an undisclosed amount. Industry sources valued it at Rs 220 billion (nearly $3.4 billion). State-run Bharat Sanchar Nigam Limited also received cabinet approval to hive off its tower assets into a separate company.

Kick-starting the 4G era: The incumbent telecom operators upped their data play in 2015. They not only invested heavily in rolling out 3G services, but also stepped up their 4G network roll-outs. As of December 2015, Idea had completed the roll-out of its 4G service in 183 towns in seven service areas. It aims to expand its 4G footprint to the three remaining regions in which it has 4G spectrum by March 2016 and cover more than 750 towns by June 2016. Similarly, Bharti Airtel rolled out these services in over 350 towns and cities. Vodafone launched 4G services in December 2015, starting with Kochi, and intends to extend coverage in five service areas by March 2016.

Notably, for the incumbents, data growth is exploding at a rate which is expected to take the share of these services from under 20 per cent of operator revenues currently to nearly half. Already, the positive impact is visible in their financial results, wherein incremental revenues are largely being driven by growth in data uptake.

Make in India makes an impact: The government’s Make in India initiative has augured well for the telecom manufacturing segment, which witnessed a major setback in 2014 with the winding up of Nokia’s handset manufacturing operations, followed by many other players joining the league. Amongst the biggest announcements, Taiwan-based manufacturing giant Foxconn stated its plans to invest up to $2 billion to set up 10-12 units for electronic products by 2020.

In October 2015, Asus partnered with Foxconn to begin local manufacturing of smartphones in Sri City in Andhra Pradesh. Following this, handset manufacturer OnePlus has also collaborated with Foxconn to manufacture handset devices at its Rising Stars factory located in Sri City.

Call drop issue: Despite greater availability of spectrum, the problem of call drops continued during the year. In fact, the problem reached such a level that even the prime minister took note of it and voiced his concerns. The regulator intervened and, in mid-October 2015, directed mobile operators to compensate subscribers for call drops from January 1 at the rate of Re 1 for each dropped call, a decision that left the industry displeased. The issue is currently sub judice as the two industry associations have taken up the matter with the courts.

Radiation awareness: The early part of 2015 witnessed several protests against mobile towers. Many telecom towers became inoperational across the country as citizens raised health concerns regarding the radiation emanating from these towers. This took a toll on connectivity as several municipal corporations sealed these structures. New tower build-outs also became challenging. In this regard, several awareness campaigns were held across the country during the year to educate users on the issue.

A number of judgments delivered by the high courts of Gujarat, Kerala, Allahabad, Delhi and Himachal Pradesh ruled that there was no conclusive evidence to prove that the electro-magnetic fields (EMF) radiation emitted by mobile towers has adverse effects on health. After studying the issue, the Telecom Regulatory Authority of India (TRAI) also stated that EMF radiation from mobile towers does not appear to have adverse health effects either on adults or on children. It further stated that the allowed emission limit in the country is maintained at one-tenth of the global standards recommended by the International Commission on Non-Ionizing Radiation Protection and recognised by the World Health Organization.

The big debate on OTT and net neutrality: Internet regulation was in the news throughout the second half of 2015, under the semblance of over-the-top (OTT) mobile services like WhatsApp. This is an extension of the net neutrality debate, which has taken global centrestage, driven by carriers looking to squeeze more revenue from a subscriber base whose data usage pattern has evolved faster than the carriers’ business. Net neutrality is a principle that promises equality for all packets of data over the internet. In India, TRAI is actively developing a regulatory framework for OTT services. It came out with a consultation paper on the matter in March 2015 but is yet to release its recommendations.

Even though their are several outstanding areas of concern remain, such as call drops, the net neutrality debate, and infrastructure bottlenecks, particularly for setting up transmission towers, 2015 can be termed a positive year for the industry. Taking into account key decisions and the issues that still remain outstanding, it will be interesting to consider what is in store for the coming years. A few trends that are likely to emerge are as follows...

3G for the masses and 4G for urban areas: Going by the network roll-out plans of major telecom operators, 4G is not likely to emerge as a mass market product till the next two to three years. Meanwhile, the reach of 3G is likely to grow during 2016 as it will also serve as the base network for 4G services as and when they are rolled out across the country. Therefore, even though 4G will be available across the country after the launch of RJIL’s services in 2016, its uptake will largely be restricted to urban areas. In terms of affordability and handset availability, too, it will remain a niche market product for some time. By the end of 2016, it is expected that 4G uptake will surge with increased roll-outs by telecom companies and the availability of low-cost 4G-enabled handsets.

Development of broadband ecosystem: So far, 3G has failed to provide a true broadband experience, which explains its subdued uptake. However, with its high speed and high throughput capability, 4G has the capacity to give people broadband wireless on the move. China Mobile has more than 200 million subscribers on its 4G LTE network in less than two years. India can definitely achieve the same within a reasonable period if the device ecosystem is developed in a timely manner to provide access with handsets, data cards, dongles and desktop modems. The application and content ecosystems will also need to develop quickly to fill the thick pipe that 4G can provide. Both these trends can already be seen in the market as several handset-makers have announced the launch of low-cost 4G-enabled phones and a number of new applications are making an entry into the Google Play Store and Apple World on a daily basis.

Data traffic management to gain importance: Spectrum is a shared resource, and as the number of people using it increases in a particular area, the small slices available after sharing reduces the user experience. Given that Indian operators have limited spectrum holdings compared to their global counterparts, this problem gets exacerbated, resulting in higher network congestion levels, greater call drops and other quality issues. Operators have already started moving towards data offloading strategies like Wi-Fi hotspots and small cells, and the trend is only likely to accentuate as data traffic surges with the launch of 4G services. In 2016, therefore, there will be aggressive roll-outs of Wi-Fi and multi-layer networks.

RJIL’s much-awaited launch: The company is expected to launch its 4G services in mid-April 2016 after it assesses its pilot launch for employees in December 2015. It is expected to bundle data with content and lower the price points at which incumbent operators are selling internet connectivity.

Tariff wars may flatten revenues: With competition becoming stiffer, the tariffs at which 4G services are being launched could have a negative impact on operator investments in these networks. Airtel has already launched its 4G service at 3G rates so all existing 3G subscribers can automatically upgrade to 4G. Further, Goldman Sachs expects Airtel and other players to reduce prices by 25 per cent in 2016-17 in response to RJIL’s launch. Going forward, the impact of such price cuts on revenues will only be determined by the rate of service uptake. However, the volume growth will be negated if the price erosion is too high. Some analysts argue that the 4G launches by these operators before the entry of RJIL are timely and a means of guarding turf and preserving high value customers.

Consolidation will be inevitable: Given that several smaller operators are stretched for finances while larger ones are facing a spectrum crunch, consolidation, facilitated by a strong M&A policy, has become inevitable. In 2016, there is likely to be a big merger between RCOM, Aircel and SSTL. Several other M&A deals can be expected among small and big operators to achieve the appropriate scale and get access to the requisite capital for competing effectively.

In sum, the year gone by has been quite eventful in terms of the issues resolved and the opportunities that have emerged. The year ahead is expected to be an exciting one as well for the telecom sector.

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