Last year was a tough year for the telecom industry. The new year will be challenging as well. Operators will need to run tight ships and focus on their core business to survive well.
The world was supposed to end in 2012. The Mayan calendar and theories around geometric reversal and planetary alignment, amongst others, were used to explain the end of civilization on December 21st. Well, cataclysmic and transformative events did occur, marking, perhaps, the beginning of a new era. Telecom industry got its share of transmogrification.
For years, the entire telecom industry benefitted from the rapid increase in the subscriber base.
Not so in 2012. The net addition in 2012 (until October) was 10 million compared with 141 million in 2011 and 227 million in 2010. This was partly because of clean up of inactive subscribers.
With subscriber penetration reaching 74% at the end of October 2012 (and 2G coverage expansion not at the heart of operator strategy), this lever of growth is becoming increasingly ineffective. Despite the multi-SIM phenomenon (2.2 SIMs per person, according to GSMA), subscriber net additions are on the decline, at least for now. Rural India (40% penetration vs urban penetration of 153%) provides opportunities but this is not easy picking.
The new subscriber acquisition norms, including verification formalities, add to the complexity and cost. Making number portability work and becoming a credible second SIM should be important levers of growth for some operators in 2013. Machine to machine (M2M) applications bring in a new category of subscribers and may see some traction.
2012 also saw a decline in growth of the overall industry traffic/minutes. This combined with falling revenue per minute (RPM) (read, aggressive tariffs) led to sluggish growth in the industry wireless revenue. 3G/data uptake, although increasing, was slow. Low literacy levels and 3G device penetration are amongst the reasons cited for the slow uptake.
Here, I believe operators may have missed a trick and need to do more. While there is latent demand for data and non-voice services, much of the demand still needs to be created.
Low tariffs are no more the only driver. Relevant services and applications, availability of high speed data networks and data enabled devices (smart phones and feature phones) and an intuitive and friendly user experience need to be in place for data to take off. Through multiple interventions, operators can influence almost all these enablers and we may see this happening in 2013.
There will be challenges as device subsidy has not worked in India so far and also the operator App stores have not seen much success. The recent Value Added Services (VAS) guidelines make service activation cumbersome. All this has led to uncertainty around growth, timing and volume of non-voice revenue. But this isnt the only uncertainty that crept in 2012.
In February 2012, 122 licenses issued on or after January 10th, 2008 were cancelled. Nine operators. existing and new entrants, lost licenses and associated spectrum. While the licensees were allowed to continue operations till January 2013, the competitive landscape was expected to change. Over the next few months, recommendations on auction of spectrum and guidelines for auction were released. Pan-India reserve price was set at R14,000 crore for 1800 MHz band spectrum and R7,300 crore for 800 MHz band spectrum. The prices were linked to the 3G auction price.
The auction lasted all of two days. Some of the operators that had lost their licenses did not participate, others shrunk their footprint and acquired spectrum in a handful of circles. The incumbents acquired spectrum in circles where they found it cheaper than adding capacity through network investments. There were no takers in Delhi, Mumbai, Karnataka and Rajasthan. The total payout was R9,408 crore as opposed to the expectation of around Rs 40,000 crore. The 800 MHz auction did not take place - operators chose to stay away.
Operators have been prudent. Having a pan India footprint doesnt seem vital. Now that they know their competitive environment post the auctions, focus will shift back to operations and selective investments that had stopped in 2012. Scaling back footprint does impact the vendors and others in the value chain. It seems 2013 may be a challenging year for some stakeholders in the industry.
The 2012 phenomenon does not end here. Incumbent operators will have to pay a one-time spectrum fee and the 900 MHz spectrum they hold will be re-farmed. Operators that purchased licenses/spectrum before 2008 will have to pay a one-time spectrum fee (prospective and retrospective based on the amount of spectrum they hold). The total payout by operators is expected to be R19,500 crore.
Re-farming requires operators to give up their spectrum in 900 MHz band (above 2.5MHz) which will be replaced by spectrum in 1800 MHz band. Given the propagation characteristics of the 1800 MHz band, there will be need for additional investment.
Operators will also need to write off existing investments. The impacted operators can bid and retain their 900 MHz band spectrum in the forthcoming auction but the reserve price for this band is set at two times the price of 1800 MHz. Given the current level of debt and leverageR185,000 crore and 4.9 debt/EBITDAwe do not see how these payouts can help the industry. The operators need to invest in expanding their broadband networks and improving network quality.
The much awaited National Telecom Policy was approved in 2012. Some of the key objectives include moving to unified licensing regime, de-linking spectrum from license, liberalizing M&A norms, permitting resale of services, abolishing roaming, permitting spectrum pooling and sharing. While it may take some time to operationalize all that is envisaged, these are steps in the right direction.
The world didnt end on 21 December. The doomsday scenarios perhaps misrepresented Maya history and culture. 2013 comes with new opportunities and challenges. After all, 2013 will be the year of the Snake.
We will miss Sachin Tendulkar in the one day side but we will see the launch of LTE networks. Smarter devices across form-factors will hit the markets. Operators will invest in customer life cycle management and retention and up selling will become important. Data and Value Added Services will get the much needed push and 3G network utilization should go up. Digital distribution and mobile payments will begin to see the light of day. It will be interesting to see what happens in the 900M Hz auctions. There could be a few surprises.
Some operator consolidation cannot be ruled out. Operators will run tight ships and focus on their core businesses and circles. Profitable growth will be the mantra. The other stakeholders in the industry will have to be patient. Snake is regarded as a symbol of luck and 2013 is considered by many as a year of prosperity and peace. Godspeed...
The author is Partner Telecom practice, Ernst & Young. (Views expressed are personal)