Telecom – Comprehensive Pack

1
 KEY POINTERS TO UNDERSTAND THE TELECOM INDUSTRY

•Timeline of Key Regulatory and Competitive Factors :3

• CDMA and GSM Dispute : 12
• Operational Metrics : 17
• Tower Infrastructure : 23
• Analysis of Data Services : 30
• 3G and 4G : 38
• M-Commerce : 47
• Chances of Consolidation : 55
• Future Outlook : 60

2
Pre 1995
• Govt Monopoly
• Tele-density was less than 1%

1995 - 1998

• Sector opened up for the first time to private players

• But the tele-density did not increase (only 0.88 mn customers were added in
the 3 years, of which half were in Mumbai and Delhi.
•This is due to:
•Fixed licensing structure
• less competition (only 2 players were allowed per circle)
1998-2003
• Licensing structure was changed to revenue sharing model
• 4 competitors were allowed per circle
• Subscriber base increased to 13.3 mn
2003 - 2009

• Golden period for the industry

• Govt. implemented CPP
• With more subscribers, cost came down
• Telcos had both revenue and profit growth
2009 - 2013
• Price wars
• Negative regulatory environment (2G scams, Vodafone retrospective
taxes)
• Profitability reduced and debts increased

5
 2013 ONWARDS

•Financial performance have improved since 2013 mainly due to the

following reasons:
• Removal of inactive subscriber base in 2012-13
• Increase in tariffs by the major operators.
• Increased proportion of Data revenues
•Reduction in number of players – due to cancellation of licences ((such
as Etisalat, S-Tel and Loop Mobile [except Mumbai]) and due to wound
up of operations by certain players ((Telewings, Videocon and Sistema)

6
 India’s mobile subscribers stood at 996.5 million and grew by 10%
between 2014-15.

All India mobile subscriber base

Source: TRAI
 The proportion of active wireless subscribers has risen to 84.9 per
cent in September 2013 from 77.1 per cent in September 2012, owing
to the massive subscriber clean-up done by operators.
ACTIVE SBUSCRIBER BASE
Why high inactive subscriber base before 2012?
•Companies were trying to show higher market share
•One of the factors TRAI considered for allocating additional spectrum was based on
the number of subscribers of a telecom company. So companies padded up their
subscriber numbers.

Why companies deleted inactive subscribers in 2012?

•The additional spectrum was not allocated based on the number of subscribers, it was
based on spectrum auction
• Inactive subscribers add to the cost and not revenues
•Inactive subscribers block the spectrum and by removing them, companies could add
additional subscribers.
 The telecom industry revenues stood at about Rs. 2000 billion in
2014 and grew at 14% between 2015-16.

INDUSTRY REVENUES

Source: TRAI
 EBITDA margins and ROCE are improving due to tariff
increase and increased proportion of revenues from Data
services.
EBITDA AND ROCE
ROCE
EBITDA
•In the first six months of 2015-
16, aggregate revenues of the
major listed operators increased
year-on-year due to
improvement in data metrics.
• EBITDA margins for the six-
month period was ~34.9%.
GSM VS CDMA
GSM AND CDMA: OVERVIEW
•As GSM was the more widespread technology worldwide,
regulators decided to adopt GSM as the technology in India.
•In 2001, permissions were given to provide limited mobility
services based on code division multiple access (CDMA)
technology.
•Limited mobility is provision of mobile services within a short
distance calling area (SDCA) and has reduced features compared
to cellular services.
•Under limited mobility service, the important ‘roaming' feature is
not available.
GSM AND CDMA: DIFFERENTIAL LICENCE FEE

•CDMA players paid lesser fees as there was no roaming and

certain other services.
•Due to this their calling rates were low.
•Till 2003, separate licences were given for GSM and CDMA
(CDMA is a limited mobility service).
•The government thought that these 2 segments were distinct
and hence do not compete with each other.
GSM AND CDMA: DIRECT COMPETITION
•The limited mobility services however were more or less
competing directly with fully mobile services.
• Limited mobility services competed almost directly with
mobile services, on account of two reasons:
first, only a small proportion of the mobile
subscribers used roaming services and second, one of
the operators provided features like call forwarding,
which effectively resulted in the subscriber getting
roaming facility.
•As the licence fees paid by CDMA players was substantially
lower than that of GSM players, they could offer cheaper rates.
•GSM players were in a highly disadvantageous position.
•This led to a dispute and litigation between the erstwhile cellular
service providers and the basic service providers.
GSM AND CDMA: UASL

•The disputes resulted in operators, particularly GSM operators,

holding back their investment plans and thus hampering the growth
of the industry.
•Subsequently, to put an end to this dispute, the
Telecommunications Regulatory Authority of India (TRAI)
introduced the Unified Access Service Licence (UASL) in November
2003, wherein the licence fee are same for any type of technology.
Key Operational Metrics
KEY OPERATING METRICS

• Pre-paid vs Post paid

• GSM Vs CDMA

• ARPU

• Minutes of Usage

• Subscriber Market share

• Revenue Market Share

• Exclusive owned vs shared towers

• Share of VAS
 India n subscribers are largely pre-paid subscribers using GSM
technology .

TYPE OF SUBSCRIBERS AND TECHNOLOGY

PRE-PAID VS POST-PAID GSM VS CDMA

Source: TRAI, Industry

 ARPU has been increasing gradually after hitting the bottom in 2012

ARPU

Source: TRAI
 MOU has been increasing gradually after hitting the bottom in 2012.

MOU : MINUTES OF USAGE

Source: TRAI
 Bharti, Vodafone and Idea are the top 3 players in both subscriber
and revenue market share.

Market share
SUBSCRIBER MARKET SHARE REVENUE MARKET SHARE

Mar- Mar- Mar- Mar-

2014 2015 2014 2015

Source: Industry, TRAI

Tower Infrastructure
CHANGING TRENDS IN TOWER INFRASTRUCTURE

EARLIER MODEL CURRENT MODEL

Tower Sharing through

Consortium (Ex: Indus)
Exclusive Operator owned
Towers

Tower Sharing through

third party tower operators
(Ex: Quippo, GTL)
Why companies had exclusive tower infrastructure earlier?

• Building tower infrastructure takes time to get the required clearances, and huge

investment in land and equipments

• Once an operator developed the tower infrastructure in a circle, it created entry

barrier for the new players

Why companies are sharing the towers?

•Tower operating costs is one of the biggest operating costs of the telecom companies
• Sharing Towers reduce the costs significantly. Selling of towers to a third part could
bring in Cash as each tower can be sold at anywhere between Rs. 50 lacs to Rs. 1
crore.
• Companies want to quickly build towers to roll-out 3G and 4G services which
involves huge investment.
• 3G and 4G services require more number of towers (BTS cell sites) than the 2G
services to cover the same geographical area
•Time-bound roll-out of services after getting the licences has been made mandatory.
• Rural expansion require more towers and the ARPU is low
Consolidation in passive infrastructure segment
Cumulative increase in EBITDA margin of Telecom Service
Provider
Indicative operating and PAT margin of a tower company at
different tenancy levels
Analysis of Data Services
VALUE ADDED SERVICES (VAS) COMPONENTS

SMS
 As voice service has become highly commoditized, the telecom
operators are looking at VAS and 3G for future growth.

Why Data Services ?

•Voice services have got commoditised and is now set to enter a more moderate phase of
growth.
• Consequently, operators are now focusing on value-added services, particularly data
services, to drive future growth.
• However, the share of non-voice revenues in total wireless revenues is lower in India
(about 20 % in 2015) than in developed telecom markets (more than 50 per cent). This
indicates huge untapped potential.
•Besides offering scope for differentiation in services, data services can help operators
offer a unique value proposition to their subscribers, particularly their high-ARPU
subscribers.
 Data usage has been growing at a very high rate.

DATA USAGE TRENDS: LEADING OPERATORS

 Data as % of total revenues increased from 5% in 2011-12 to 20% in
2014-15.

DATA AS % OF TOTAL REVENUES

Source: TRAI
DATA TO GROW ON 3G AND 4G

•Data growth will be primarily on3G

and 4G.

• 3G is expected to constitute 46% of

data revenues by 2019-20, 4G 44% and

2G the remaining.

Source: TRAI
 High speed internet is the biggest segment in data services
but Video VAS and Music VAS has been growing fast.

HIGH BANDWIDTH SERVICES: MARKET POTENTIAL

Service % of Data Revenues
2011-12 2015-16
High Speed Internet 72% 60%

Video VAS (Video Calling, 4% 15%

Video Downloads)

Music VAS (Streaming, 4% 12%

Downloads)
Mobile gaming 12% 6%
Others 8% 7%
Source: Industry
Video VAS to emerge as major driver of data usage
Video-related value-added services (VAS) is expected to take off in a big way as the
bandwidth pipe widens with the advent and / or spread of 3G and 4G. Video
services can be categorised into:
Video streaming: Video-streaming services will be the major driver of video VAS,
mainly in the free content space (e.g. streaming videos from YouTube). As the
service is data-heavy, operators stand to earn substantial data revenues from
increased usage of these services. Moreover, as the penetration of 4G services
particularly rises and speeds improve, use of video streaming services will further
increase.
Video calling: Video-calling service will be another major service that will induce
greater data adoption. With the gradual improvement in technologies and
operators' service offerings, revenues from video calling will increase steadily in
the terminal years of the forecast period, as the handset ecosystem matures.
Video downloads: A few key service offerings in this segment include music
videos, mobi-sodes, short films, celebrity chats, etc
3G and 4G
 Both 3G and 4G market is expected to grow very fast over the next
few years with 4G registering higher percentage growth.

BREAK-UP OF WIRELESS SUBSCRIBER BASE

CHINA’S 4G SUBSCRIBER BASE: 76 MN IN 2014

 Per capita data usage is expected to be much is higher in 4G
compared to 3G.

DATA USAGE : 3G AND 4G

 Though 3G market has had a slow start, it has increased it’s
momentum in the last couple of years.

3G: SLOW START BUT GAINING MOMENTUM

• Late introduction (2010), lack of cheaper handsets, lower push from operators and
premium pricing amid limited spectrum availability have been some of the key
reasons for the slower 3G growth in the initial years
•. Also users were sticky to migrate from purely voice based services to voice+data
services (3G).
•Only recently has the 3G subscriber base registered a noteworthy rise to 116
million as of March 2016 (still a mere 12 per cent of the total subscriber base).
•This has been aided by a reduction in the entry-level price points of 3G handsets
and operators resorting to intermittent reduction in 3G tariffs.
Going ahead however, with the continuous fall in prices of 3G-enabled handsets,
and a greater push from service providers, there would be a sharper rise
in the subscriber base.
 4G market is expected to grow very fast over the next few years but
will still lag behind China.

4G: FASTER GROWTH

•The Indian 4G market is expected to see a significant pick-up in subscriber base,
post entry of the new operator, a wider launch of services in 2015 and a better
ecosystem.
• India's 4G subscriber base to touch about 80 million by 2018-19 from just 1 mn ,
with a better evolved ecosystem in place.
•However, despite such pick-up, the 4G subscriber base is expected to account for
only over 7 per cent of the total subscribers and 12 per cent of the data subscriber
base by 2018-19.
•India would also significantly lag China, where the 4G subscribers are expected to
over 70 million by the end of 2014 itself, driven by aggressive expansion planned,
particularly by China Mobile.
 Regulatory factors are quite conducive for 4G growth.

4G: CONDUCIVE REGULATIONS

• Spectrum Availability:
•20 MHz of spectrum was allotted to auction winners in the 4G.
• Allocation of such continuous spectrum will significantly enhance user experience
especially for data services, unlike 3G where only 5 MHz of spectrum constrained
operators' ability to provide such a spectrum at lower rates.

• Staggered auction payments:

• Operators can make staggered payments for spectrum acquired in recent auctions.
•Only 25% of the total amount is to be paid upfront, post which there is a two-year
moratorium.
•The balance is then to be paid in ten equated annual instalments.
• Such staggered payments help operators spread out cash flows.
• Spectrum Sharing Norms:
• Spectrum sharing norms have been eased out recently.
 4G growth will be enabled by combination of factors.

4G: OTHER GROWTH ENABLERS

• Availability of affordable handsets:

 Although India is currently at low penetration levels of smart phones (10-15

per cent), growth is rapid and is expected to touch close to 50 per cent levels by

2018-19

 Pricing of smart phones is expected to drop sharply .

•Adequate investments in infrastructure

•Competitive pricing of 4G services.

 Metros and Circle A would be the prime focus of 4G in the next 5
years.

4G: METROS AND CIRCLE A

• Most operators would initially focus on spread of 4G only in major cities, gauging

the user appetite.

•Such areas currently account for a large portion of the 3G subscriber base, which

could form the prime target when a a large-scale 4G offering is deployed.

•Metros and bigger cities are expected to witness the initial 4G deployment, before

such services gradually spread to other areas.

•More than 70 per cent of the 4G subscriber base likely to be concentrated in the

metros and large cities in circles A, as subscribers in these areas would be more

evolved and migrate to 4G.

 4G: SUBSCRIBER CHARACTERISTICS

• Data share in ARPUs is expected to be more than 70 per cent for a metro,

significantly higher than the current share (30%).

•High data usage customers would be relatively more sticky and may not shift

service providers just for pricing unless a significantly better user experience is too

provided. Hence, better quality of services at competitive prices would be key for a

new entrant.
M-COMMERCE
What encompasses m-commerce?

Mobile technology can be harnessed to provide a bouquet of services. The

segment broadly comprises of :

1. Mobile banking

2. Mobile payments

3. Mobile Remittances
MOBILE BANKING SERVICES
MOBILE BILL PAYMENTS
 MOBILE REMITTANCES

•Mobile remittances are a huge potential for growth on the back of strong latent
demand.
•India has a significant amount of internal migrant population, of which about 30
million migrants relocate for employment reasons.
•These migrant workers, who are largely low-income individuals (80 per cent
comprises wage labourers), need channels to send money from their work
destination back to their home towns, which opens up a potential market for
mobile remittances.
• A study conceived by NABARD estimates 50-60 per cent of the remittance
transaction needs are met by the remitter himself carrying it back or sending it
through friends and relatives visiting home.
•Other commonly used money remittance alternatives include: Post office money
order and Bank Draft.
• Mobile money deployment with cash disbursal option at the receiving end will
thus prove to be a successful business proposition.
M-COMMERCE: GROWTH DRIVERS
Increase User Base
•Mobile banking has found increased acceptance among the account holders
owing to its immense utility value, convenience and ease of operation.
•At present, about 32 banks have acquired licenses for offering mobile banking
services.
•About 130 million subscribers are registered for mobile banking services in 2015
Cost Advantage
•Banks have a significant incentive to promote mobile banking usage as the cost
of transaction incurred by the banks on the mobile channel reduces drastically to
around Rs 2 per transaction as compared to Rs 50 for the branch channel and
around Rs 15 for the ATM channel.
M-COMMERCE: GROWTH DRIVERS
Inter-bank funds transfer to gather more steam on mobile
Inter-bank transfers are presently cleared through the near-real time electronic
system of NEFT both for internet and mobile banking.
The volumes for mobile funds transfer are a miniscule proportion of annual NEFT
volume.
The proportion of mobile medium is likely to increase significantly as more banks
start offering this service on convenient channel and as a result more users come
on board.
Payment Banks and Business Correspondents
•RBI has issued many payment banking licences over the last few years. Several
Telecom companies have gotten the payment banking licence.
• The role of business correspondents are being looked at seriously by the
payment banks.
•Payment bank operations would be predominantly done through mobile.
M-COMMERCE: HIGH POTENTIAL SERVICES

• Bill Payments:

•Electricity, Cooking gas, telecom, credit card, mobile recharge

• Movie ticketing

• Mobile broking and trading

Chances of Consolidation
*Established and New operators

Established players:
Bharti Airtel,
Vodafone,
Reliance Communications,
Idea Cellular,
Mid sized-players
Tata Teleservices,
BSNL + MTNL,
Aircel
New entrants:
Uninor,
Shyam Sistema (MTS),
Videocon,
Etisalat,
STel
• Smaller and relatively new entrant’s market share is very low both in terms of revenue

market share and subscriber market share of less than 5%

• ARPU of new players is low.

• New players are making huge losses and debt.

• Post the March 2015 spectrum auctions, the top three operators - Bharti Airtel, Vodafone,

and Idea - who together account for more than 70% of industry revenues, have further

consolidated their position.

•In the last two rounds of spectrum auctions, these operators, along with Reliance Jio, have

obtained about 85% of the total spectrum sold.

•The sheer dominance of the larger players, in terms of both revenue and spectrum share,

and reduction in revenue share of smaller players will lead to constriction of capex appetite

of smaller players in the future.

•This will further make consolidation inevitable in the industry.

• Spectrum-sharing, trading and liberalisation guidelines released by the government also

facilitate consolidation as operators with unutilised/underutilised spectrum can now sell it to

operators who want to use it to plug holes in their data strategies.

•Thus, smaller operators now have a route to exit the market by trading their spectrum to

other operators.

•The impact of the guidelines was immediately visible with Reliance Communications

announcing its merger with Sistema Shyam Teleservices Ltd and Idea acquiring premium

4G spectrum in 1800MHz band in two circles from Videocon.

Future Outlook
 The subscriber base would rise steadily to touch 1213 million by
2019-20.

MOBILE SUBSCRIBER GROWTH PROJECTIONS

 Industry net ARPUs is expected to increase at a steady pace as
a result of the above reasons to reach Rs 149 by 2019-20 from
Rs 93 in 2011-12.

ARPU FORECAST
DATA REVENUES TO GROW ON 3G AND 4G
 Data as a percentage of revenue to increase from 20% in 2015 to 42%
in 2019-20

DATA AS PERCENTAGE OF REVENUES

 Industry revenues will grow at a CAGR of 11-13% between 2015 to
2020.

INDUSTRY REVENUES