KOLKATA - Given that it took five decades
for India, a country of over a billion people, to
reach 20 million landline telephone connections in
1995 - the year in which mobile telephony was
first introduced in the country - few would have
imagined that in 10 years, India would have more
mobile phones than land lines and emerge as the
fastest growing telephony market in the world. Yet
as India completed a decade of mobile telephony
last month, and still promises scorching growth
potential to emerge as the largest telecom market
in another five years, its telecom sector is
witnessing an unusual set of growth issues that
are posing as new challenges to both the industry
and its operators.
The first 10 years of
mobile telephony were relatively simple, says
Rajan Mittal, managing director of Bharti
Televentures, the largest privately owned telecom
operator in the country. "It was primarily
about
person-to-person communication. But the next 10
years of this revolution [will] be driven by a new
set of challenges."
The challenges are
many, but at the moment, two are bothering the
industry the most. The first is remaining
profitable against the rapidly sliding average
revenue per user (or ARPU in industry parlance),
and the second is to mobilize resources for
expansion in the country's vast and untapped rural
markets, as well as convincing urban and
semi-urban users to start using non-voice
applications, like the SMS, mobile gaming or GPRS
(internet over the wireless network).
The
country's telecom industry, particularly the
wireless telephony sector, now stands at the
crossroads. While subscriber numbers are galloping
- the industry is adding 2.5 million new mobile
(and about 0.36 million land line) users a month,
says Rajan Mittal - its revenue per user is
plummeting, which the industry says is severely
denting the profitability of Indian telecom
players and hampering the ability to invest for
future growth. "While gross revenues continue to
rise," says the official spokesperson of Cellular
Operators Association of India (COAI), so are
costs of the local telecom companies, and
naturally these two are impacting profits hard.
For instance, the COAI says its latest
analysis reveals the operating margin in India is
down to around 30%, compared to Asia's average of
around 50-60%. "Telecom companies today are facing
the twin challenge of having to maintain
affordability of services on the one hand and
generate enough surplus cash to fund the
requirements for network expansion and growth on
the other," says COAI.
To know why the
industry is facing this peculiar situation - of
explosive subscriber and revenue growth, yet
stalling profit margins - it is necessary to look
back. Back in 1992, while the Indian government
took what the industry called "a landmark
decision" to liberalize its telecom sector by
opening mobile telephony to private sector
operators, it also demanded its pound of flesh by
imposing a very heavy entry or license fee. To
obtain a 10-year license, for instance, a cellular
operator had to pay a license fee of over $7
billion (in the then prevailing exchange rate).
Consequently, to recover such a huge license fee,
a mobile service provider had to charge high fees.
When mobile telephony was first introduced in
Kolkata in August 1995, each outgoing call was
charged at 40 US cents per minute and incoming
calls at 20 cents.
"Naturally, with such
high call rates there were few ready to use mobile
telephones," says TV Ramachandran, COAI's
director-general Over the next four years, India
ended up with just 1.2 million mobile phone users
and a mobile phone industry "on the brink of
collapse with accumulated losses nearing $18
billion in 1998". Realizing its mistake, the
government introduced a new telecom policy called
NTP 99, with which it entered a new revenue
sharing arrangement with private telecom
operators, thus absorbing some of their losses and
bringing down license fees to about $5.5 billion.
The 1999 policy also helped in reducing call rates
by about 60% and increased the subscriber base
from 1.2 million to 1.88 million in 2000.
Over the next three years, the government
took a series of important steps that included
opening telecom to more operators and introduction
of the calling party pays (CPP) regime, which made
all incoming calls to mobile networks free. This
started the phase of an explosive growth of
subscriber base. As mobile phone prices continued
to crash to less than 2 cents per minute (for
local calls) currently, the mobile phone
subscriber base grew from 13 million in 2003 to
close to 60 million at the end of July this year.
Meanwhile, to keep up with the competition posed
by mobile phones, landline services, controlled
primarily by two state-owned telecom companies
(BSNL and MTNL), turned aggressive by slashing
call rates, helping landline subscribers to grow
as well. At the end of July therefore, the
country's landline connections, which took five
decades to reach 20 million, jumped to over 47
million.
But the price of this explosive
growth is: "India has one of the lowest ARPUs in
Asia and this is expected to slide even further
over the next five years because as telecom
operators are penetrating deeper, [they are being]
forced to aim for new subscribers from relatively
low income brackets," says Kobita Desai, principal
analyst, Telecom-Asia Pacific, Gartner. According
to NASSCOM, the IT industry lobby, the ARPU of
mobile operators has fallen from $192 per year to
about $73 per year by the end of fiscal 2005, and
could fall by another 11% by the end of fiscal
2006, "before it starts stabilizing a bit". But
Gartner is more pessimistic and projects, "The
downward trend in ARPUs is to continue for the
next five years at the very least."
Experts say that with growth in urban
centers petering out, the real potential lies in
expansion in rural areas. But according to a
recent study by the Telecom Regulatory Authority
of India, "private players are largely hesitant in
expanding in rural areas because rolling out
infrastructure with huge investments does not
appear profitable to many". According to COAI, the
reluctance to invest in rural areas is also
evident from the teledensity (telephones per 100
inhabitants) gap between urban and rural India.
While teledensity has improved from 1.5 in 1997 to
3.64 in 2001 and is currently at 9.7 in the urban
areas, rural areas continue to suffer from a low
penetration of just 1.79 connections per 100
inhabitants. According to some estimates,
expansion to connect rural areas would require
investments of over $23 billion - almost double
the amount that the telecom sector has invested in
the last decade - which the telecom sector clearly
can't afford just yet.
Perhaps this is why
telecom players are now being forced to focus on
non-voice revenues like data and content services.
But according to IDC, an international research
outfit, with non-voice revenues contributing to
just about 5% of the total revenues of the telecom
sector, there's still a long way to go before such
services can contribute toward improving the ARPUs
significantly.
Nevertheless, India's
telecom industry is optimistic. It says despite
these challenges this sector will survive and even
thrive just on the basis of its immense growth
potential in term of new users. According to
Gartner, in terms of handset sales, India could
witness enough growth in the next four years to
beat China by 2009. "Affordable services,
increased penetration, and a willing Indian
government would ensure and drive this kind of
growth," says Desai. The global research firm
predicts that India's cellular services market is
expected to grow at a compounded annual growth
rate (CAGR) of 35.6% to reach $24 billion by 2009.
The Indian cellular market recorded the highest
growth across Asia-Pacific and Japan region in
2004, with a CAGR of 67%, Gartner said in a
statement in Mumbai Thursday.
Indrajit Basu is a Kolkata-based
equity-analyst-turned-journalist with more than 12
years of experience in business/finance and
technology journalism. Besides writing for Asia
Times Online, he also writes for US-based
publications, as well as IT companies.
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