Telecom Transformation: Key themes in the sector’s evolution

Key themes in the sector’s evolution

Bharat Bhargava, Partner (TMT Advisory) and Leader, Telecom Performance Improvement, EY

The telecom revolution in India is a remarkable growth story of technology transforming lives. From contributing a mere 1 per cent share to the country’s gross domestic product (GDP) in the early 2000s to around 6.5 per cent in 2017, the Indian telecom industry is recognised worldwide for its scale. It has been instrumental in bridging the socio-economic gap, by bringing to the power of connectivity and digital services in the palms of the masses.

With the second largest telecom subscriber base worldwide and over 88 per cent mobile penetration, India has reached significant milestones in the connectivity arena. What began as a humble, mainly state-owned industry in the 1980s has grown into a mammoth ecosystem of public and private players over the years. Now, the country is moving from basic connectivity to a digital society, with both policymakers and industry players taking steps in this direction.

The industry’s growth can be attributed to several enabling factors. On the one hand, the sector was supported by progressive regulatory frameworks, funding from private as well as state-backed investors, and a growing disposable income. On the other, the sector developed alongside advancements in network technologies and the availability of affordable devices and a services ecosystem. Over the years, the Indian telecom industry has charted its distinctive journey and given many firsts to the global industry.

Rise of mobile telephony and the voice revolution: Bringing affordable connectivity to the masses

The entry of private players post the liberalisation of the market in the early 1990s resulted in enhanced network accessibility across the country. However, service affordability still remained a key issue for its mass adoption. The release of the New Telecom Policy (NTP), 1999 was a landmark regulatory initiative, which brought the focus on delivering affordable telecom services and introduced the revenue sharing regime.

Another pivotal trigger for the country’s voice revolution was the introduction of the “calling-party-pays” regime in 2003, which established a framework in which only the originating party pays for the entire call, while the receiver of the call pays nothing, except while roaming. This, along with the launch of small packet recharges, enabled prepaid users to buy airtime in affordable denominations.

These developments were instrumental in changing the market landscape and the 2000s were marked by a voice-centric market, dominated by the wireless segment and characterised by high minutes of usage and ultimately, resulted in a voice revolution across the country.

Transition from minutes to bytes, and leapfrogging technologies from 2G to 4G

In 2010, telecom operators built the foundation of high speed data networks by acquiring spectrum in the 2.1 GHz and 2.3 GHz bands. Between 2011 and 2016, the wireless market began to record a shift towards data services with the roll-out of 3G networks. The urban voice market was stagnating and the telecom industry was bombarded with new competition from over-the-top (OTT) players, which provided internet-based offerings for instant messaging, IP-based voice calling and news and entertainment services, among others.

With increasing access to high speed data networks, the availability of affordable handsets and low tariffs, this was the time when the country’s telecom subscriber base started shifting from an era of minutes to bytes. Mobile data gained popularity and OTT services began to flourish.

A more recent transition was consumers shifting directly from 2G to 4G networks, leapfrogging technologies. This was led primarily by an aggressive roll-out of 4G networks, the availability of 4G devices across price points and very low tariffs. As a result, long term evolution (LTE) accounted for around 20 per cent of the total mobile subscriptions by end-2017.

The strong growth in LTE subscriptions and low-cost data plans led to a data tsunami. The monthly mobile data traffic reached 1.9 exabytes by end 2017, and is expected to grow further, by almost five times by 2023. The transition towards advanced technologies is expected to continue, with LTE estimated to account for 78 per cent of total mobile subscriptions by 2023 and 5G services expected to be available by 2022.

Transforming market landscape: From a state-dominated model to a hypercompetitive structure and now, consolidating back to a three-four-player market

In parallel to the shift from a voice-led to a data services market, the Indian telecom industry has also evolved its market structure over the years. Following the introduction of competition, the sector witnessed significant interest from private players, from both domestic as well as international firms. With the opportunity to offer products and services to the high-volume consumer base, many players entered the market, thereby intensifying the competition.

The Indian telecom sector became one of the most hypercompetitive markets in the world, with nine to ten telecom operators competing for market share in each circle. Average revenue per user (ARPUs) continued to decline and players had no respite from their financial woes, burdened with high debt and low profitability. Even today, burgeoning debt is a key concern, with a cumulative industry debt of about Rs 4.8 trillion.

Intense competition, declining financial health, along with the cancellation of 122 telecom licences in 2012 triggered the need for a change in market dynamics, with investors looking at the exit or consolidation route. Further, the merger and acquisition (M&A) guidelines introduced in 2014, followed by the spectrum sharing and trading guidelines introduced in 2015, provided the much-needed policy push in this direction. The last two years have seen rapid consolidation in the market and in the long run the industry is expected to have only three to four key players, similar to the mature markets of the US and Europe.

Handset revolution: Development of the device ecosystem

The telecom industry has also witnessed significant development in its handset segment. The early 2000s was an era of feature phones that were fairly basic and enabled users to primarily access voice services. By the 2010s, the country saw another handset revolution, with multiple new brands mushrooming along with an innovation in devices, especially to drive value-added services. Devices with different features were made available at varying price points to cater to demand from diverse consumer segments.

Specifically, affordable handsets have been a key driver of mobile service uptake. Along with catering to the demand from price-sensitive consumers, many handsets also focused on delivering user-friendly and differentiated offerings such as longer battery life, torchlight functionalities, multilingual interaction keypads and multi-SIM capability.

The last few years have seen the rise of the smartphones, with around 380 million smartphone subscriptions as of end 2017. This is expected to grow more than 2.5 times to reach 970 million by 2023, with most of the devices based on 4G technology.

Pioneering the tower infrastructure sharing model

Another area where the country’s telecom sector witnessed exemplary innovation was the tower industry, where three of the key private telecom operators came together, establishing an innovative business model for passive infrastructure sharing.

A classic case of strategic partnership, the model not only provided significant cost efficiencies, but was also replicated in other global markets. The shared tower infrastructure company provided an integrated, neutral host platform that can be used by competing telecom operators. In the Indian telecom history, this resulted in a rapid deployment of network services, fast go-to-market time for players, and savings in capex and opex.

Progressive regulatory regime enabling development of the sector

The transformational journey of Indian telecom has been largely possible due to progressive policies and reforms. Many of these regulations helped spur innovation and development, while simultaneously protecting consumers’ rights.

Liberalisation in 1991 was a key landmark that opened up the sector to private participation, followed by the award of cellular licences. Subsequently, a series of policies, launched in 1994, 1999 and 2012, steered the sector from its infancy to a robust market.

More recently, the draft National Digital Communications Policy, 2018 has been released, which has set ambitious targets to attract investments of $100 billion in the digital communications segment by 2022, and enhance its contribution to GDP to 8 per cent by 2022, from approximately 6 per cent in 2017. This begins a new chapter in the history of the Indian telecom regulatory regime, with the policy going much beyond legacy telecom services and recognising the importance of digital services.

Over the years, many regulatory interventions have been made to shape the sector and serve the country’s unique market. The government has taken steps to promote ease of doing business by approving the unified licence regime, unveiling the M&A guidelines, permitting 100 per cent foreign direct investment (FDI) and acknowledging the issue of high taxation and levies in the sector. In the past 18 years, the telecom industry has received $30.2 billion FDI equity inflows, making it the third largest sector attracting foreign investments.

Another key policy was on spectrum assignments, which moved away from administrative allocations to an auction-based approach, embracing a more transparent and market-driven process. Moreover, over the years, the government has recognised the challenge of spectrum scarcity and made available the resource via multiband auctions. During the period 2010–16, six auctions have been held, which have cumulatively garnered revenues of Rs 3.3 trillion for the government.

The approval of spectrum trading and sharing guidelines in 2015 was another game-changing reform, which, along with the M&A guidelines, paved the way for consolidation in the market and efficient use of the scarce spectrum resource.

Looking ahead: Moving away from connectivity-only play to focusing on the creation of a digitally empowered society

In the recent past, the Indian telecom industry has evolved to focus on new revenue streams and to tap the potential of new technologies. Telecom operators have invested in synergistic market services such as mobile financial services and internet of things (IoT), and are building their content portfolios. Many players have entered into strategic partnerships with other technology, media and telecom (TMT) as well as non-TMT players, and some have used inorganic routes to enhance their capabilities in these fields.

This move is supported by multiple government-led initiatives towards creating a digitally empowered India, with the Digital India, the Smart Cities Mission and the BharatNet programme providing opportunities for sector growth. In particular, the latest draft National Digital Communications Policy, 2018 provides a promising outlook for the future, with significant milestones envisioned in the field of digital empowerment, which is expected to change the lives of people over the next five years.

Looking ahead, the country is truly at an inflection point towards a “Digital Kranti”, where a data-driven and digitally enabled society will be the norm. The telecom industry is at the centre of this revolution, providing the foundational layer of high speed data networks and catering to a generation of mobile-firsts, with mobile being the first digital screen for many consumers in the country.

Fibre-enabled fixed broadband and mobile broadband will form the backbone of the next-gen networked society, where a connected device ecosystem will drive new-age IoT services. This will open a new era of user experience as well as empower citizens with mobile-based applications across verticals such as healthcare, education, retail, governance and financial services. This is likely to change the market dynamics of the Indian telecom sector, with cross-sector collaboration and strategic partnerships to drive the digital agenda.