Sector Review

Journey towards a digital economy

The past two decades have been nothing short of revolutionary for the Indian telecom sector. There has been a perceptible growth in the number of telecom users, foreign and domestic investments, industry revenues, and service coverage to the remotest corners of the country. From being a privileged/luxury service to becoming a mass utility, telecom has positioned itself as a core infrastructure service, one that touches and transforms the maximum lives. This success can be attributed to a series of essential policy and regulatory reforms, which facilitated the entry of several new and established companies with a global vision into the sector. In fact, opening the sector to private operators was one of the watershed developments as competition resulted in wider reach and affordable services. The country reached the 1 million subscriber mark in 1998, touched 100 million in 2006 (less than 10 years), and has recently soared to over a billion.

Affordability and demand for mobile services grew particularly in 2003, when the “calling party pays” regime was introduced, which made incoming calls free and gave a big boost to mobile adoption. Over the years, voice tariffs have continued to decline and are close to zero now. They have also been amongst the lowest in the world.

India’s telecom success story is not complete without the mention of operator initiatives and the tower industry’s role in the sector growth. As per industry estimates, operators have invested over Rs 10 trillion so far in building world-class telecom infrastructure. They have also pioneered several innovative models to increase service coverage, optimise costs and enhance profitability. One such concept has been of infrastructure sharing, which has now become a norm in most of the emerging markets across the world.

The period 2000-10 saw the telecom sector take giant strides to transform from a fledgling industry into one of the world’s fastest growing markets. This was the golden period for the sunrise sector, which drove India’s socio-economic growth. Every other corporate worthy of the name wanted to reap its fortunes in mobile telephony. Essar was one of the earliest to enter the fray, so was Reliance. The Tatas, Birlas and Videocon were not far behind. A host of foreign companies made a beeline for India – Hong Kong’s Hutchison, Japan’s NTT DOCOMO, Norway’s Telenor and the UAE’s Etisalat, to name a few. Companies recorded healthy revenues and profits grew in double digits. In fact, it is during this time that Airtel, buoyed by its Indian success and a healthy balance sheet, decided to venture into Africa through the acquisition of Zain. The telecom space was becoming crowded, propelled by relaxation in foreign direct investment (FDI) norms. The presence of 10-12 players was a deviation from the global average of three to four operators, and presented a unique though unsustainable business model.

The period starting 2010 till date, however, has not been smooth sailing for the industry. One can call it complex if not extremely challenging. After much delay, 3G and broadband wireless access airwaves were finally auctioned, however, at a price that was probably the highest globally. Aggressive bidding in the auctions is a decision that operators regret till date although they had little choice back then. Operators had started facing overcrowding, increasing capex requirements and falling profitability. The industry entered an era of decelerating financial growth, which has only become worse over time.

The period is also been marked by one of the biggest scams in the country, the 2G scam, which led to the cancellation of 122 controversially allocated telecom licences in 2012. This deeply affected investor confidence as well as the fate and functioning of most of the new operators. Many big global names wrote off their investments in the Indian telecom sector, while others reduced their footprint.

The period between 2014 and 2016, however, can be seen as that of resurgence, charged with significant policy and regulatory activity. The subscriber base hit 1 billion, Bharti Airtel became the third largest telecom operator in the world (in terms of subscribers), mobile number portability (MNP) gained traction, CDMA technology was phased out, and infrastructure sharing became a norm. But all this was clearly not enough to control the industry’s growing debt pile.

The dramatic and disruptive entry of Reliance Jio Infocomm Limited (RJIL) in September 2016 has been a turning point for the sector. It fast-tracked the consolidation process and took competition to a new level. At the same time, it pushed the incumbents into a financial crisis of sorts. They are finding it extremely difficult to break the cycle of high debt and low profitability. In a major move, Vodafone India has joined hands with Idea Cellular to create a telecom giant that will be the biggest telecom company in the world in terms of subscribers. Several others, however, have succumbed to the cost pressures.

The silver lining is the unabated mobile data growth that the sector is currently witnessing. The country’s transition from 2G to 3G has been rather laggard, while that to 4G is happening at a fast pace owing to cheaper data tariffs. In fact, India is now the fastest growing data market in the world. The shift from voice to data has undoubtedly been the most vital change for the sector in recent times. Data has emerged as the new focal point of growth and competition in the industry, which traditionally derived over 75-85 per cent of its revenue from voice. A maturing data ecosystem will also give the much-needed push to government programmes such as Digital India and the Smart Cities Mission, which have high speed connectivity at their core. The government’s BharatNet programme (erstwhile National Optical Fibre Network) will also prove to be a veritable game changer in bridging the urban-rural digital divide.

Amongst other notable developments is the rise and fall of telecom PSUs. Bharat Sanchar Nigam Limited (BSNL) has long lost its position as the most formidable player in the industry, though it continues to be the vehicle for implementing the government’s connectivity programmes. Mahanagar Telephone Nigam Limited, too, has not been able to keep pace with the more nimble private players.

There are several issues, old and new, that continue to plague the sector. Local telecom equipment manufacturing has not taken off as the majority of the telecom equipment is still imported. In the handset space, Indian manufacturers are continuously losing ground to Chinese smartphone players. On the policy front, high sector levies, right-of-way (RoW) issues and depleting quality of service require immediate attention. A thriving app economy, driven by data services, has brought to the fore a new set of challenges around cybersecurity, data protection, net neutrality, etc.

A look at the key highlights of the Indian telecom sector’s journey over the past 20 years…

Mobile at the heart of the sector’s growth

Looking back, it is easy to say that it has been the uptake of mobile telephony that has driven user and revenue growth in the industry. Besides policy reforms, the availability of low-cost handsets and the rising popularity of prepaid connections (the trend of recharge coupons with denomination values as low as Rs 10 and the introduction of lifetime validity schemes on prepaid cards) have fuelled the growth. In recent times, the mobile has managed to revive India’s broadband story as well. Close to 500 million users today access data on their mobile phones. India, in fact, is amongst the highest mobile data consuming countries in the world.

Genesis and evolution of the telecom tower industry

The telecom infrastructure industry came into existence when the Department of Telecommunications (DoT) initiated IP-I registration in 2000. The number of towers has quadrupled since 2006 from 100,000 to nearly 420,000- plus at present. Tower sharing has become a norm in the industry, which has resulted in significant cost savings. In fact, the formation of Indus Towers as a three-way venture amongst Airtel, Idea and Vodafone was a notable development for the industry. Over the years, the towercos too have faced the repercussions of a shrinking operator base, and have explored new growth areas such as micro sites, in-building solutions, small cells and Wi-Fi. The Digital India and the Smart Cities Mission have opened up new opportunities for these companies. Also, significant consolidation has taken place in recent years, the most recent being the merger of Indus Towers and Bharti Infratel to form the second largest tower operator in the world.

Policy and regulatory impetus

Successive telecom policies in 1999, 2012 and now in 2018 have paved the way for structural reforms in the sector. The setting up of the Telecom Regulatory Authority of India (TRAI) and the Telecom Disputes Settlement and Appellate Tribunal in the late 1990s, and the introduction of FDI in the sector were key policy moves. The National Telecom Policy (NTP), 1999 allowed operators to move to a simpler revenue sharing regime from the previous fixed licence fee. Later, in 2003, the sector moved to the unified access service licence regime, which cleared the way for operators to offer any type of service using any technology. The increase in FDI from 49 per cent to 75 per cent in 2005, and later to 100 per cent in 2013, has allowed considerable funds to flow into this capital-intensive sector.

Over the years, the government has created a spectrum roadmap by allowing spectrum trading and sharing, and relaxing spectrum holding caps, and merger and acquisition guidelines have been some of the key moves in this regard. The introduction of MNP and virtual network operators in the sector are other policy developments. The NTP, 2012, amongst various other issues, focused on improving broadband proliferation and delinking spectrum from licences. The telecom tower industry was granted infrastructure status in 2011. Meanwhile, in 2016, the government notified the RoW rules for the speedy roll-out of telecom infrastructure.

TRAI has also released several key regulations/recommendations, which have been responsible for sector transformation over the past 20 years. These have been centred around interconnection, protection of consumer interest, quality of service, unsolicited commercial communication, infrastructure sharing, allocation and pricing of spectrum, net neutrality, data privacy, etc.

Recently, DoT released the draft National Digital Communications Policy, 2018 with the aim to provide a roadmap for digital revolution in the country. The draft policy focuses on connecting unconnected Indians and catapulting connected ones to a new phase of futuristic technologies.

Fall of wireline, rise of OFC

The wireline segment, based mainly on copper, has failed to keep up with the wireless segment. In 2004, the mobile subscriber base exceeded the fixed line base in India. The wireline user base of 40 million in 2005 has reduced to almost half at present. In the past, operators have tried bundling fixed line services with broadband but with limited success. The segment, however, has received a major facelift in the last decade with the growing adoption of fibre cables. These can carry very high bandwidth and will be the fundamental infrastructure on which India’s digital growth will rely. The fibre-to-the-home segment has also matured with big players like Airtel and RJIL looking at it as the next battleground.

Data as the new voice

The telecom sector has been witnessing a data explosion on the back of a maturing 3G/4G ecosystem. Operators are focusing on monetising their service offerings around data. Besides the expansion of networks, the rise of over-the-top platforms and social media networks like WhatsApp and Facebook, and the adoption of video services and other rich multimedia services have also given a significant push to data uptake.

The public Wi-Fi space has also evolved significantly, with data services now available on trains and other public platforms. Recently, the government has given a green signal to in-flight connectivity, which will allow users to access data during air travel.

While India took some time to graduate from 2G to 3G, the jump to 4G was more sudden. The industry is now already looking at 5G deployments. 5G will pave the way for the large-scale adoption of new-age technologies such as internet of things and artificial intelligence. The country has stepped into the age of virtualisation as operators adopt software-defined networks and cloud computing models.

Rural takes centre stage

The country’s hinterland was technologically a no man’s land and teledensity increased marginally from 0.52 per cent in 1999 to merely 1.9 per cent in 2006. A decade later, the rural penetration stands at 58 per cent. This has been made possible with the private sector’s entry into the rural space, which was earlier catered to by BSNL only.

The face of rural telephony in India is also fast changing with the implementation of the government’s BharatNet project which aims to bring broadband connectivity to 250,000 gram panchayats by March 2019. So far, 114,284 gram panchayats have been made service-ready under the project.

Blurring boundaries: Intertwining telecom with digital

From a technological point of view, the sector has changed dramatically. The industry is now witnessing an explosion of digital services like payments, e-governance and mobile entertainment. In search of alternative revenue streams, telcos have moved beyond their traditional roles to become facilitators of mobile payments. They have secured payments banks licences to enable financial inclusion. They also have their own apps for providing content such as music, entertainment and education.

Conclusion

When viewed through a 20-year lens, the sector’s journey to become the world’s fastest growing telecom market has been momentous, one of unprecedented growth and extraordinary disruptions, but most importantly, one that has connected and transformed a billion lives.

The sector, of course, has been bleeding for the past few years, but this is mostly short term and can be addressed with a relook at the existing levies and spectrum prices, among other initiatives. The prospects of long-term profitability are still very bright. Only 40 per cent of the country’s population has access to the internet, which means there is still a huge untapped demand. The government is clear on its intent of not missing the 5G bus.

The Indian telecom sector is at an inflection point on the data front, similar to the mobile phone revolution witnessed in the 2000s. Going forward, telecom will be at the forefront of turning India into a digitally charged economy.

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