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Mixed Performance: Analyst views on sector growth and LTE promise

February 25, 2016
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During 2015, the telecom industry delivered a mixed performance. While the government worked to ease the regulatory environment, the deteriorating quality of service came into sharp focus. Despite the significant challenges, the industry is preparing to take the next step towards growth, driven primarily by data services. Industry analysts share their views on the sector’s performance during the past year, the prevailing policy and regulatory environment, key challenges, and the future outlook…

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How would you rate the telecom sector’s performance during 2015 vis-à-vis last year?

Arpita Pal Agrawal and Ashish Sharma

During 2015, long term evolution (LTE) remained a key discussion topic, with one significant launch, multiple handset launches, year-end spectrum deals and 2016 launch announcements by major operators. Although the LTE subscriber base has not been reported, we feel that our forecast of 10 million LTE subscribers by the end of 2015 has turned out to be optimistic. There were also multiple announcements for public Wi-Fi projects, including those from the Delhi government, Pune municipality and  announcement of the Indian Railways Wi-Fi project in partnership with Google. We also saw two leading operators coming together and forming a joint venture to roll out Wi-Fi hotspots. In the data space, an unconventional monetisation option appeared in the form of major operators being given payments bank licences; this will help leverage their existing ecosystems.

Sathish Gopalaiah

For India’s telecom industry, 2015 was an eventful year, with major operators launching 4G LTE networks. Falling smartphone prices, growing data requirements, and increasing maturity of the LTE ecosystem have elicited a positive response. The continued deployment of 2G, 3G and 4G technologies has also fuelled the growth of mobile internet users, which increased by 30 per cent compared to 2014 to reach 210 million. In addition, the country’s biggest telecom spectrum auction took place in March 2015, with multiple bands being auctioned simultaneously. The smartphone market grew as well, with several new indigenous players entering the market.

Hemant Joshi

The telecom sector showed a mixed performance in 2015 in comparison with 2014. The subscriber growth rate slowed down but still managed to touch 1 billion. Data-based subscriber growth increased significantly, pointing towards a data-oriented future for telecom operators, with 300 million internet users in the country. As the 4G ecosystem is evolving, 4G services are yet to see commercial success. The telecom auction, which fetched the government Rs 1,100 billion, proved the huge potential in the country. The deteriorating quality of service and net neutrality remain key topics for discussion. While the call drop issue needs a more proactive solution, the regulator’s proposal to compensate subscribers could put a burden on operators. There were also dynamic regulatory changes during the year, like spectrum sharing and trading, which will reshape the future of the telecom industry and help loss-making operators to exit.

Inderpreet Kaur

The Indian telecom market continued performing strongly during 2014-15, recording the second highest number of subscriber net additions across the globe. In terms of 3G net additions, India was second, behind Indonesia. The uptake of 3G services, however, was slower than expected as it increased to just over 15 per cent (as of September 2015) from 10 per cent a year earlier. 4G disappointed with a slow start as Reliance Jio Infocomm Limited (RJIL) and many other operators postponed their launches to 2016. Smartphone penetration increased, with operators reporting 25-30 per cent such connections on their networks. Industry revenues, both fixed and mobile, during the first nine months of 2015 registered a slow growth as compared to the same period a year earlier. While operators continued investing in mobile networks, the increase in industry capex during 2014-15 was far lower than that in 2013-14.

Dr Mahesh Uppal

The industry has done well with respect to extending the network across the country. However, on the quality of service front, not much was done in the past year. Meanwhile, there was impressive growth in the data market. However, the choice of data services is still not attractive enough to bring lower-income people online.

What are your views on the prevailing regulatory and policy environment? What are the areas that require urgent attention?

Sathish Gopalaiah

During 2015, the regulator announced spectrum sharing and trading policies, which have given much-needed breathing space as an alternative source of acquiring spectrum. They have also provided an avenue for other spectrum holders to exit the market by selling their unused spectrum.

Issues with call quality came into sharp focus in 2015, with recurring call drops affecting the customer experience. The regulator was eventually forced to intervene and initiate corrective action. The focus on call quality is set to continue. Operators are looking at either finding innovative approaches – technology or product related – or investing more capital in their networks to address the gaps in their offerings.

The over-the-top (OTT) landscape has not been subject to regulatory scrutiny in India. A balanced regulatory framework that takes into account net neutrality ensures the quality of service provided by OTT players, and strikes a balance between operators and the OTT ecosystem is critical in coming years as the data ecosystem matures further.

Spectrum auctions and roadmaps are areas that need to be addressed and streamlined from a policy and regulatory standpoint. Further, a clearer view of the spectrum roadmap could prove beneficial for stakeholders across the telecom value chain.

Inderpreet Kaur

The regulator completed the auction of spectrum in the 800 MHz, 900 MHz, 1800 MHz and 2100 MHz bands, allowing incumbents Bharti Airtel, Idea Cellular and Vodafone India to renew their assets in the 900 MHz band and secure the contiguous spectrum required for launching data services. The government encouraged consolidation in the telecom industry with the approval of spectrum trading and sharing norms. TRAI also released its recommendations on network neutrality, strongly upholding the main objectives of net neutrality. Full mobile number portability was implemented after multiple delays and the regulator brought down mobile termination charges while completely abolishing fixed termination charges. While these measures added to industry growth in 2015, there are bigger challenges to address. The state of fixed broadband infrastructure is dismal, and it needs policy revisions before large-scale investments are made. The penetration of high speed broadband services is poor and the National Optical Fibre Network (NOFN) project is falling way behind schedule. Right-of-way conflicts have continued to deter investments in fixed broadband infrastructure, and this has affected the roll-out of NOFN as well.

Dr Mahesh Uppal

The regulatory environment has become a little ambiguous, with some of TRAI’s decisions being a cause for concern. Its approach to call drops, for one, does not reflect a sound regulatory analysis. Similarly, in the case of differential pricing and net neutrality, worryingly different approaches are being adopted in two ongoing consultations, which seem to be off the cuff and not based on a robust analysis. However, such ambiguities are not grave enough to dent the growth or uptake of services.

A positive development was the regulator allowing spectrum sharing and trading. However, there are questions over which operators benefit from this ruling.

What is the progress on the roll-out of 4G services in the country? What can be expected on this front in 2016?

Sathish Gopalaiah

The country’s major operators launched 4G services in pockets during 2015. While a large portion of the initial 4G deployments has been in the 2300 MHz band, its inherent drawbacks have forced operators to look at deploying 4G simultaneously in other bands like 1800 MHz as well. Operators have also participated in auctions to acquire further spectrum in coverage bands like 800 MHz to bolster their 4G reach. Global multi-band LTE deployments and the commercial availability of handsets supporting multiple bands are also expected to aid these complex deployment scenarios.

The anticipated auction of the 700 MHz band (digital dividend band) in 2016 will also help in extending LTE coverage in rural areas (given the penetration characteristics of the band). Deploying LTE in the 700 MHz band could ensure that Indian operators reap the benefits of its well-developed ecosystem. Meanwhile, the continued fall in the price of smartphone handsets signals a positive trend and is critical for the mass adoption and sustained deployment of 4G as a technology.

Hemant Joshi

The experience of the roll-out and uptake of 3G has made operators cautious in rolling out 4G. They are timing their roll-outs with the availability of affordable handsets, relevant applications, 4G-compatible devices, etc.

Inderpreet Kaur

Bharti Airtel is the only operator to have launched 4G on a wider scale, covering 298 cities across the country, while Vodafone introduced 4G towards the end of 2015. The penetration of 4G stood at less than 1 per cent at the end of 2015, and it will be some time before we see its strong uptake in India. While industry analysts expect a strong upside to 4G following the entry of RJIL, Ovum’s estimates suggest that 4G would gain a reportable share only after 2017. We believe it will be difficult for a 4G-only player to drive industry growth as it lacks an established subscriber base that can subsequently be migrated to superior technologies.

Dr Mahesh Uppal

There is no doubt that 4G is taking off in the country. However, given the lack of supportive devices, the absolute number of 4G users is likely to be small in the beginning. As content becomes more widely available and devices become cheaper, 4G can be an important element in the telecom industry. However, it would be of interest to those who find 3G data insufficient. As of now, there is no clear-cut evidence to suggest that a large section of subscribers is looking for faster networks. The issue with 4G is less of speed and more of cost and availability of devices. For instance, speed will pose a problem if people watch full-length movies on their phones. For watching small videos, speed is less of an issue than affordability. We expect these issues to get resolved this year. This is because 4G does not face any regulatory challenge and is predominantly a market issue. Its challenges are more commercial in nature.

What are the key challenges the sector is facing and what steps need to be taken to address the same?

Sathish Gopalaiah

The foremost challenge being faced by India’s telecom industry today is the low quantity of spectrum deployed for commercial use. This indicates a usable spectrum crunch in India. Moreover, spectrum holdings by operators in India are not on contiguous bands, which is a primary need for providing high speed data services. The recent spectrum trading and sharing guidelines should help in this regard.

While mobile internet and the broadband push have been significant in urban centres, there is a need to ensure telecom services and broadband in rural areas for inclusive and sustained economic growth. The speedy execution and implementation of the NOFN project will be key in ensuring the continued push of broadband deeper into the nation.

From an operator perspective, while revenue growth remains challenged, data consumption rates are growing exponentially due to OTT players, increasing the demand for accelerated network investments. There is a large gap between the revenue earned by telecom operators as a result of the surge in data consumption vis-à-vis the network expenditure involved. Hence, mobile operators are also looking towards government policies to help them overcome these issues.

Hemant Joshi

The increasing call drop rate is a major challenge for Indian operators. The availability of contiguous spectrum, better policies for establishing infrastructure and interoperability need urgent attention. The rise of OTT players is a concern for telcos that should be addressed by the government. Unregulated OTT players are taking away a larger pie of operator revenues. The massive debt burden of operators because of high-priced spectrum and capital spending on network infrastructure are other concerns. High-priced spectrum is likely to shift the burden from operators to subscribers in the form of increased tariffs while the debt burden limits the capability of operators to spend on innovative services.

Inderpreet Kaur

The challenges are on multiple fronts. As we see a decline in growth from voice and SMS, operators will have to rely on data-led services. Delivering value services that encourage users to consume more data and increase the overall ARPU would remain a priority. We have already seen ARPUs hitting a declining trend for leading operators during the first three quarters of 2015. Operators will be challenged by more nimble players, who would continue to leverage operator data networks and the changing regulatory regime to offer low-cost communication services. They will also be challenged with managing debt, especially in view of the proposed multi-band auction in 2016 and the investment requirements for network upgrades and roll-outs to deliver quality data/voice services.

Dr Mahesh Uppal

The challenge in India is twofold. There needs to be a strong and robust ecosystem for wireless communication because over 95 per cent of the connections are wireless. To ensure that wireless infrastructure is used in the most cost-effective manner, we have to manage spectrum better. This requires spectrum not to be treated simply as a source of revenue. We need to design auctions better and recognise the fact that the quality of spectrum continues to be poor. It is highly fragmented, particularly in the 1800 MHz band, which is important for deploying 4G. Due to this reason, 4G cannot be deployed in large parts of the country as the industry needs contiguous 5 MHz spectrum in the 1800 MHz band. A related problem is the harmonisation of spectrum. Many operators have spectrum that is not harmonised with spectrum in an adjacent circle and at times within a circle. These are issues that the government needs to address on an urgent basis.

The other challenge is capacity, as there is a pressing need for significant capacity in the backbone and fibre between telecom towers. In this regard, the progress on the BharatNet front is not very encouraging.

What is the outlook for the telecom industry? What key trends can be expected in 2016?

Arpita Pal Agrawal and Ashish Sharma

The major trends that can be anticipated in 2016 are:

  • Consolidation: Expensive spectrum and depleting voice revenue share will result in the market consolidating around five private networks and one public sector player by the end of 2016. The consolidation can be like an outright MTS-Reliance merger or via spectrum trading/sharing deals like the recent Idea-Videocon one.
  • Network experience to prevail over customer service experience: In 2016, operators will continue to focus on providing a basic high speed network experience, and customers will choose accordingly. We do not expect differentiated customer service experience to be a dominant criterion for operator selection.
  • Fulcrum of data monetisation to shift away from telcos: Operators associating with other entities to launch payments banks is the first step in the trend towards data monetisation. However, with accelerating smartphone penetration, government-mandated GPS capability in basic handsets, and application-based payment options, operators will lose their hold over customers to the larger ecosystem.
  • OEMs to go up the value chain: Original equipment manufacturers (OEMs) are expected to leverage their network proximity to go beyond plain vanilla network services to offer customer network usage-based analytics, packet probing, advertisement content-based offerings, etc. to protect their revenues.
  • Regulator focus on network quality: We expect the regulator to push for higher levels of transparency and accountability in ensuring network quality through demands for disaggregated network data reporting by licensees and related mandatory requirements.

Sathish Gopalaiah

The falling prices of smartphones, coupled with a young demography, are likely to keep data (and its growth) at the forefront of the telecom sector. The contribution of data to operator revenues could continue to increase from its current levels of 18-20 per cent. The three major trends that can be anticipated in 2016 are:

  • Continued focus on LTE deployments: LTE deployments are expected to continue gaining pace in 2016. Network quality and high speed broadband via 4G/3G could be a key factor in determining customer acquisition and retention. The entry of a deep-pocket LTE player could further stoke price-based competition and lead to the lowering of telecom tariffs and the decline in ARPUs for major telecom operators.
  • Cloud-based infrastructure enablement: Operators are likely to look at utilising cloud-based infrastructure to lower the overall cost of network deployments. Enabling technologies like network function virtualisation and software-defined networking are likely to gain ground as operators look to optimise capital investments.
  • Network analytics as a tool for targeted marketing: Declining ARPUs, coupled with the need for continued network investments, could result in operators looking at network analytics to bolster profitability. The use of analytics and deep packet inspection techniques could help with targeted marketing campaigns and strategies.

Inderpreet Kaur

Ovum expects India to be a strong base of 1.3 billion mobile subscribers by 2020, growing at a compound annual growth rate of 3.8 per cent during 2016-20. We also expect a decline in GSM subscriptions by the end of 2016 as a large number of subscribers migrate to 3G/W-CDMA networks. In term of trends, consolidation is expected, with India becoming a five- to six-player mobile market from 12 at present. Operators will focus on service quality with better and consistent network coverage. The regulator will  focus on defining minimum data download speeds over various networks in order to improve service quality and ensure value to customers. Operators will speed up the launch of content or digital services and bundle them with high speed data to drive data consumption and enhance data ARPUs.

Dr Mahesh Uppal

We expect many issues plaguing the industry to be resolved during the year. The government is aware of them and is working towards their resolution. It is essential that we allow the markets to function better so that operators offering good quality services can thrive and those who do not are penalised. This can be made possible by ensuring that consumers are provided with information to take informed and effective decisions. Since the industry has a bigger play, it has an incentive to find a resolution to these issues. Operators who have purchased spectrum have absolutely no incentive in keeping it idle. I do believe that the industry will work towards fixing the smaller problems. However, the bigger issues relating to spectrum, towers and net neutrality will need the active involvement of the government.

 
 
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