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Expert view on market scenario for 3G

May 15, 2010
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The session on "Market Outlook: Analyst Viewpoint" included a discussion among industry experts including Kunal Bajaj, partner and director, Analysys Mason; Jaideep Ghosh, executive director, KPMG Advisory Services; Shubham Majumder, regional head, telecom research, Asia Pacific, Macquarie Capital Securities; and Dr Mahesh Uppal, director, ComFirst India. The panellists shared their views on issues such as the impact of consolidation on tower valuations and the likely market scenario after the 3G auctions. The key points touched upon by them were as follows...

3G spectrum bidding and where it is headed

Kunal Bajaj
I think that the maximum price escalation has happened in the metros and a couple of Category A circles. The bid price has already crossed $1.7 billion. This has become more of a defensive strategy that the operators are being forced to adopt because they cannot afford to lose their top-end subscribers.

Shubham Majumder
It is clearly going to be upwards of $2 billion as things look today. 3G spectrum is a strategic asset and has to be viewed in conjunction with the fact that the life of the concession is 20 years. The incumbents cannot lose at any cost whatsoever, because there is no clarity on when the second round of 3G spectrum auction will take place, the cost at which it will come through and the trading rules that are in place at that time. The incumbents are looking at 3G spectrum from the mediumand longer-term data uptake potential and the really near-term imperative of decongesting their overcongested 2G voice capacity and networks. Net, net, I think 3G clearly looks like a classic winner's curse situation where operators cannot afford to lose the auction but getting the spectrum will leave a scar on their balance sheets.

Jaideep Ghosh
The 3G licence definitely means more to an incumbent or the top two or three players vis-à-vis a new player. Hence, the willingness and ability to put that kind of auction price on the table is definitely higher from the incumbent side. There are two issues: one is the price that an operator is willing to pay for getting the 3G slot in a particular circle and the other is the value ascribed to it by not getting it.

Dr Mahesh Uppal
The value of the 3G licence is certainly higher and if it goes beyond $2 billion, it is likely to become a winner's curse.

Impact of 3G on telecom infrastructure

Shubham Majumder
Companies will look at 3G as an asset for at least a fiveto 10-year time-frame and are not likely to make money out of 3G in a three-four-year time-frame. If it does get positive in terms of a net present value over a fiveto seven-year time-frame, I would be surprised.

Clearly, 3G-based station rollouts will have to be rapid for the incumbents in the top 250 to 500 cities. A capex of $300-$400 million a year in electronics for 3G per operator can be expected in the first two years.

In terms of towers, there will be a rate hike. But a massive tenancy uplift is unlikely as a lot of those 3G slots are likely to end up with the incumbents who already are large tenants on 2G for tower companies.

Jaideep Ghosh
3G rollouts will take place in the top 50 or 100 cities and may not result in a significant increase in tenancy in these cities. Even with the current master service agreements (MSAs) that are being assigned, the same operator is enhancing its presence in more than one technology. Also, in most cases, the MSAs do not factor in that tenancy even if additional technology and equipment is placed on the tower.

Kunal Bajaj
The key here is the policy that infrastructure providers adopt for charging the carriers on what that additional 3G slot is going to cost them. Will a tower company charge for the 3G equipment even if it is going into the same shed at the same price that 2G was charged or will it be charged at a premium? There is potentially an opportunity there to increase revenues. For instance, in the US, it is basically treated as two separate tenancies since space is at a premium in the US. In India, that may not be the case as the larger tower companies are operator owned and hence may have to settle for a slightly lower price.

Frost & Sullivan expects that by 2015, there will be 487,000 towers and a CAGR of about 20 per cent. Views of the panel on this...

Jaideep Ghosh
Our numbers are in the same range.

Kunal Bajaj
The number of towers is likely to be closer to 400,000. The major push in terms of coverage is going to be over the next couple of years, which is primarily going to be driven by the increasing 3G capacity.

Shubham Majumder
That question is a function of whether spectrum trading is allowed or not, when do the mergers and acquisitions (M&A) or consolidation blueprints get laid by the regulators in the operator space and the consolidation in the tower space. I would probably put a number of 375,000 to 500,000 depending on the outcomes to those three key questions. It may be less than 400,000 towers.

Competition in telecom infrastructure space

Kunal Bajaj
The process of consolidation has begun over the past year and is very healthy for the industry because this is a business of scale. As tower companies need to be able to operate and roll out efficiently, having a large presence and a large inventory is important.

Shubham Majumder
Things have happened either in the private equity space or in the M&A space. Valuations have progressively come down in the past three years. The last deal that happened in the public domain is the AircelGTL tie-up, which valued the towers at sub-$5 million per tower.

Impact of consolidation on tower valuations

Shubham Majumder
Rentals are off by 20 to 30 per cent over the past 12 to 18 months and this has impacted tower company valuations.Rentals are down because the paying ability of individual operators is significantly lower now. There are only three operators who will probably make positive operating cash flows before capex in the current financial year. So consolidation in the operator space, which will bring a semblance of order and financial viability, will help the tower space as well.

Jaideep Ghosh
I would expect valuations would remain depressed. And we may not see immediate consolidation because of the mismatch of expectations between the buyer and the seller on the valuation.

Challenges for infrastructure providers and likely avenues for cost reduction or cost management Jaideep Ghosh Cost is a key issue. Several of the business plans were made taking into account large-scale rollouts by new operators in 2008 and 2009. However, in 2010, operators are keen to cut down on their rollout costs and negotiate better deals. On the entire capex side, several cost management initiatives are possible such as reduction of material and better design.

Similarly, on the opex side, better management of power fuel and other infrastructure elements is possible.

Dr Mahesh Uppal
Besides cost, there are several regulatory issues on the horizon. One relates to safety, energy, environment, aesthetics, etc., and the other to spectrum, access, interconnection, tariff and universal service subsidy.

Kunal Bajaj
The larger operators in the passive infrastructure industry need to potentially re-engineer their entire approach of how a tower gets rolled out and the assets get utilised. This is where the potential for cost saving is really going to come in. For instance, ATC India can put up a tower in five days. If tower companies in India could reach a mid-point between 5 and 45, it would have a major impact on total cost. For instance, by adopting a centrally standardised procurement system, every tower that gets rolled out or gets upgraded or gets services is actually uniform vis-à-vis the disparity that exists in today's networks.

Impact of active infrastructure sharing on passive infrastructure

Kunal Bajaj
Active infrastructure sharing has so far been a non-starter in India. A little active and bandwidth sharing has been offered in one-off deals with some of the new entrants to help them speed up rollout.

But I think in terms of overall percentage, the amount of capacity flowing over active sharing on backhaul is very small.

Whether active sharing is going to make a big penetration into the Indian environment remains to be seen as everything is on a managed services model in India visà-vis other European markets.

Shubham Majumder
I do not expect any meaningful impact of active infrastructure sharing in the next two to three years.

Jaideep Ghosh
I think active sharing of infrastructure amongst different operators will have a negative impact on the passive infrastructure business because more operators will share the same active infrastructure and will need less of their own separate infrastructure and fewer towers. Several operators are using intra-circle roaming, which is a kind of an ice-breaker that should lead to full sharing of active infrastructure. It is also an opportunity for a passive infrastructure company to get into this space.

Dr Mahesh Uppal
Active infrastructure sharing is not really making that much of a difference.

Opportunities for infrastructure

Jaideep Ghosh
One is the core business of  rolling out towers and enhancing tenancies. Even with this kind of tariff, new rollouts are taking place by new operators. Beyond that, there are several associated businesses that include having a play on the active side, getting more into the rural space and leveraging the geographical presence, coverage, etc. of other businesses. If the associated, related and ancillary businesses are considered, these could easily add 25-35 per cent to the top line within an 18-24- month time-frame.

Dr Mahesh Uppal
Most of the opportunities are in the rural areas. Leveraging this infrastructure in rural areas in related businesses, government services, etc. is a huge opportunity.

Kunal Bajaj
One of the biggest opportunities is to reengineer operations.

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