In his recent presentation at the Low Cost 3G Devices Conference, Rajat Mukarji, Chief Corporate Affairs Officer for IDEA Cellular of India, argued that India is not yet ready for 3G. Basing his conclusion on the low take-up of Value-Added Services (VAS) on existing 2G networks in India and the high cost of 3G technology, Mr Mukarji believes that only a significant drop in the cost of 3G devices and infrastructure costs can bring 3G within reach of emerging markets.
India is a country covering almost 3.3 million km2 with a population of 1.098 billion at the 2001 census. There are 19 languages spoken throughout the country and 389 major cities. Economic development has been moving forward at a rapid rate in the last 20 years, particularly in the urban areas: India is without any doubt one of the big four emerging nations, China, Russia and Brazil being the other three.
In the telecoms market, India's recent growth has been impressive. There were a total of 197 million subscribers at the end of 2006, giving an tele-density of 17.9% for the country as a whole. The total number of subscribers is made up of 157 million wireless and 40 million wireline subscribers which means that 14% of India's tele-density is accounted for by wireless and only 4% by fixed wire connections. By the end of 2007 the forecast is for 250 million subscribers and 500 million by end 2010 which would take tele-density towards 50%. In addition to this, around 63 million homes currently have cable TV access and there are approximately 7.5 million internet users, 2.2 million of whom have broadband.
Big regional variations
The telecoms market is fiercely competitive with up to eight access providers competing in three circles. The calling circles were intended to ensure operators shared out the most lucrative markets and were committed to competing in all areas of the vast country. However, it has not prevented significant variations in tele-density across the nation.
In the metropolitan areas, including major cities such as Delhi, Mumbai, Chennai and Kolkotta, tele-density stands at almost 59%. However, in the A circles, mainly covering second-tier metropolitan areas, it is 17%, in less populated B circles 11% and in C circles, the most rural and deprived areas, it stands at only 7%. So, although competitive forces are driving the market, it is wrong to think of India as a high penetration market.
Low 2G ARPU
The chart shows how the increase in GSM subscribers has been matched by a fall in ARPU. As regulatory policy and competition has led operators to penetrate markets outside the major cities, the age profile of mobile ownership has become younger and the average income of owners has fallen.
2G operators have attempted to address the downward APRU trend by marketing VAS to provide new income streams. The mobile music industry now contributes 5% of total operator revenues and is expected to grow nearly 23% by 2010. There are daily downloads of around 1 million ringtones and ringback tones. The monthly growth rate of ringtones and ringback tones has averaged at between 20-25%.
In addition, the Indian mobile gaming market is expected to grow by nearly 66% in the next five years to reach US$336 million by 2009. Other VAS markets which operators are exploiting include mobile movies and advertising streaming. However, overall, compared to markets in Europe, current 2G based VAS uptake is low in India.
High cost 3G licences
The current Telecommunications Regulatory Authority of India (TRAI) recommendations are that 3G should stand alone rather than be an extension of 2G. This is starkly different from the 2005 recommendations where 3G was recommended as extension of 2G.
Reserve prices for spectrum in the prized 2.1 Ghz spectrum area, where five blocks are to be made available by the end of 2007, range from US$18.6m for the big cities, to US$3.5m to C circles. Prices in the 450Mhz area are set at half this level. To offset this high figure, there is a proposed one-year moratorium on incremental annual spectrum fees with a subsequent 1% charge of the Adjusted Gross Revenue (AGR). Spectrum bands identified for 3G in total comes to 2 x 32.5 Mhz in the next six-nine months.
Overall these figures and the restrictions placed on operators bidding for spectrum mean that 3G is currently a high cost technology. This will be nothing if 3G generates the revenues necessary to fund the investment as TRAI clearly believes it will do.
Where will the revenue come to pay for 3G?
The current roll out of 3G for India is based on two key revenue sources:
- Operators are looking for increased markets for traditional voice and data applications; and
- Operators are looking to VAS to provide new income streams.3G is seen as a way to address the regional need provide an open platform on devices, to enable local applications (languages, etc.) and to create local application entrepreneurship.
Boosting local entrepreneurship creates regional content to address the real need for communications.
High cost 3G devices
These operator requirements are, however, not directly addressed by 3G platform and device providers. The current focus of the technology is on revenue generation from areas such as MMS, gaming, mobile TV, music downloading, video conferencing, location-based services and mobile Internet.
However, in the case of MMS and gaming, markets in India are already serviced by 2G operators. The willingness of the market to take up these and other services on 3G will therefore directly relate to the cost of handsets.
In the handset area, 3G offers a huge range of perceived benefits from ever more sophisticated cameras to music and video players. But in the highly competitive retail environment in emerging and developing markets, highly price-sensitive buyers are still primarily interested in one service only - voice. So despite being feature rich, 3G devices do not offer any mass advantage over 2G devices.
Indeed, the higher costs associated with making handsets feature rich will act to price 3G out of the market and prevent the successful expansion of 3G networks until handset prices are significantly lower. In the developing world, up to 90% of subscribers are on pre-pay tariffs. Current handsets in India from Nokia, LG, SonyEricsson, Motorola and Samsung range in price from US$330 to US$1,000 before tax. Monthly service charges start from around US$45. At prices like this 3G will struggle to find takers, not withstanding the additional handset features.
The key industry drivers for 3G are generally thought to derive from the fact that 3G can be introduced as an overlay to existing infrastructure. Infrastructure sharing, both passive and active, holds costs down. In order for 3G to be successfully introduced in India the per capita Capex has to reduce in order for 3G to increase penetration to B, C circles in rural areas. Levies have to reduce in numbers and volumes, as do licence and other fees including regulatory charges.
3G offers the prospect of globally harmonised spectrum and optimal spectrum utilisation. It facilitates global roaming by offering interoperability among systems and the possibility of availing of the benefits of the economies of scale of globally available standard equipment and interference-free operations. In these ways 3G is promoted as affordable. However, without the cost of 3G networks and devices going significantly lower so as to bring the total cost of ownership within reach, India is not ready for 3G.