Indian telecom sector 6th globally, lags in teledensity

Updated: Mar 28 2005, 05:48am hrs
Structure

The Indian telecom services sector is one of the fastest growing in the world. The sector ranks sixth in the world, with 93.2 million telephone subscriptions by 2004-end. As a market, India presents potential with an estimated tele-density (telephones per 100 inhabitants) of 8.5 by 2004-end, compared to 51 in China and 117 in US.

The world average was 29 by 2003-end.

The structure in terms of services comprises:

Basic services

These include fixed wireline local and long distance services.

Prior to liberalisation in telecom market during the mid-1990s, the provision of these services in India was solely with the state-owned operator, the Department of Telecommunications (DoT). DoT, as an operator, has now split to Bharat Sanchar Nigam Limited, or BSNL), Mahanagar Telephone Nigam Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL). Following market liberalisation, basic services are now offered by BSNL, MTNL and private operators. At present, there are 9 operators providing basic wireline services in India.

Cellular mobile services

These comprise cellular local and long distance services offered by cellular operators through second-generation (2G) digital standards-global system for mobile communications (GSM) and code division multiple access (CDMA). Currently, there exists intense competition in wireless services, with 147 players in 22 service areas.

National long distance (NLD) services

Currently, NLD operators can provide only inter-circle long distance services, except where they enter into mutual arrangements with access providers for carriage of intra-circle traffic. Presently, four companies provide NLD services in India.

International long distance (ILD) services

About fe-ICRA Study

The fe - ICRA study gives an overview of the sector - the challenges and opportunities as well as the salient features - and then goes on to analyse four or five individual companies that together account for a major share of the sector.

In addition to the VSNL, ILD services are provided by 5 licensed operators. The Government has also allowed Internet service providers (ISPs) to provide ILD services. The Indian fixed services network had an estimated 44.76 million subscribers at end-2004. The fixed services revenues were estimated at around Rs 300 billion during FY2004. Cellular services subscribers aggregated 48.45 million by 2004-end (comprising 37.38 million on GSM and 11.08 million on CDMA). Total market size in terms of revenues was estimated at around Rs 145 billion during FY2004. While the Indian NLD market was estimated at around Rs 50 billion during FY2004, the ILD market was at around Rs 43 billion during FY2004. Features
Fast growing industry

Overall telephone connections in India have increased at a fast rate (40.5%) during FY2004 compared to 21.1% in FY2003 and 24% in FY2002. High growth has been achieved because of competition, network expansion, wider geographical coverage, declining costs and prices, lower duties on import of equipment and favourable regulatory environment. Tele-density increased from 3.6 at FY2000 to 7 at FY2004 and 8.5 at end-2004. Rural areas had a tele-density of 1.6 at FY2004 while urban areas had a teledensity of 20.7.

Shift in demand towards cellular wireless

Fixed network growth has slowed down since FY2003 primarily due to increased competition from cellular leading to surrender of fixed line connections. Surrender/disconnection of telephone connections of BSNL and MTNL increased from 2.26 million in FY2003 to 4.24 million in FY2004. Total fixed lines in India increased 3.3% during FY2004, compared to a growth of 7.6% during FY2003,

The increase in cellular connections was 159% during FY2004 and 102% during FY2003. Although fixed line tele-density increased rapidly till FY2003, the growth slowed down during FY2004. Fixed line tele-density increased from 2.7 at FY2000 to 4 at FY2004 compared to the cellular teledensity, which increased from 0.2 by FY2000 to 3.1 by FY2004. The demand for telephone connections in India has shown a rising trend in favour of cellular connections. For example, the share of cellular in total telephone connections has increased from 14.3% at end-FY2002 to 52% by end-2004. It is likely that the share of basic fixed line connections is likely to decline.

The increased preference for cellular wireless telephones is evident by the fact that cellular telephone connections accounted for 94% of new telephone connections during FY2004, compared to 33% during FY2002.

Future network evolution

In the last 129 years of telecommunications, wireless cellular has played a secondary role to wireline. This has changed during the past and the trend is likely to accelerate in this decade. Within the present decade, telephone service-namely voice telephone calls-will be increasingly carried by wireless. Fixed access could, then, evolve towards extremely low cost and high speed links for applications that need bandwidth but not mobility.

Wireless will serve the voice applications while fixed line will serve the specialised data applications. Further, new technologies, will begin to remove the present data performance barrier for wireless. This will improve the performance of wireless and reduce cost of both wireless voice and data. However, it is highly unlikely that consumers with a wireless subscription will relinquish their fixed lines connections.

Increased Competition

With the liberalisation in the Indian telecom industry, there is intense competition, especially within the cellular. Competition is likely to keep subscription growth high and pressure on prices. It could also require operators to increase capital investment to expand services. The government has also increased the limit on foreign direct investment in telecom providers from 49% to 74%. This change may also give many players access to more capital for expansion of their networks, thus increasing competition. Significant price declines

In the past, there has been a significant decline in telephone tariffs. Such price declines are expected to continue in the future. Tariff/price declines have been caused by regulatory decisions, increased competition, economies of scale, reduction in licence and regulatory costs and other costs.

With the declining services cost, subscription levels have increased, enabling operators to distribute fixed costs over larger user base. In spite, of the continuing price decline, average revenues per user (ARPUs) and minutes of use (MoUs); many operators are experiencing growth in operating profit at a higher rate than subscriber growth.

Significant consolidation

There has been a significant consolidation in the Indian telecom industry. Consolidation by major players represents their attempts to provide near-national coverage to capitalise on scale economies through a broader geographic reach and integration of products and operations. Recent regulatory initiatives and market pressures are likely to ensure that consolidation would continue.

Key success factors

Subscription base and resultant economies of scale: Operators with larger subscription base, wider footprints, and greater scope of services can achieve economies of scale and increased efficiencies.

Financial and management strength

In a growing market, operators need to incur significant capital expenditures on an ongoing basis for network expansion and introduction of new services. Control of access network

Apart from provision of telecom services, the local access is also a commodity that can be priced and rented to competitors. This is because the local subscriber link is necessary to provide new services elsewhere in the network.

In a competitive environment, local access networks and control of the local customer will be increasingly seen as a tremendous strategic asset, and a secure route towards revenue growth in the dynamic information and communication industry. New entrants will increasingly recognise the strategic importance of owning and controlling access to customers and the potential of new access technologies to reduce costs and add new revenue streams.

Increased presence in higher-speed internet (or broadband) services

Looking forward, voice revenue growth is likely to be moderated by continuing decline in prices, caused by deregulation of markets & entry of new competitors, and technological advances. One factor that could have a positive impact on telecom operators is the development of data services. Telecom revenue growth in future is likely to be driven by growth in data related services.

Outlook

The growth in fixed network subscriptions has declined in the past, due to increased competition from cellular services. Local competition is likely to be witnessed more in the cellular than in basic telephony. Cellular services are also likely to play an important role in providing universal service. The current low level of telephone penetration in the country, the large unmet demand for telephone connections, and the emerging demand for data services, is expected to result in high growth, especially wireless.

However, in a competitive environment, slower revenue growth from voice services could be offset by increased revenues from higher-speed data related services and network access services. For users, cellular services offers the obvious benefits of mobility and better service quality.

Mobile service price premium are likely to decline,thereby fuelling further market expansion and increased fixed to mobile substitution. However, falling prices and lower average revenue per user could endanger the survival of some of the weaker players. The weaker operators could then be forced to enter into strategic alliances or disinvest equity in favour of stronger players.