Ring in the rural mart

Updated: Sep 30 2006, 05:59am hrs
Just how important is it for Indian telecom companies to unlock the value at the bottom of the Indian pyramid Fundamental changes underway would give a resounding very as the answer. Established rivals like Airtel, Reliance and Hutch are seriously considering sharing passive infrastructure like cell sites and mobile towers and buildings. The future may also see sharing of active infrastructure like electronic switches and networks. Says Prakash Nanani, Spice Telecoms chief executive for Karnataka and Bangalore, With rising costs and shrinking margins, sharing of all infrastructure is a distinct possibility. More so, when one targets far-flung and low consumer density areas.

What do these changes mean for industry and the consumers Till now, telecom operators have prioritised their capital and attention to servicing more lucrative and operationally easier geographies. But, the next phase of growth lies in expanding to the Indian rural areas. Operators will need to address issues like poor backbone connectivity, remoteness, higher cost of operations to move into rural India. Market figures show that compared to 30% of their urban counterparts only 2% of rural consumers enjoy telecom services. The Indian telecom market is expected to grow to 200 million people by 2007 and 350 million by 2010 from the present 164.21 subscribers. With 70% Indian population residing in villages, the new additions will have to come from these areas.

In the near future, with increasing saturation in urban circles, Indian telecom operators will need to tap rural consumers, says Ernst &Youngs vice president transaction advisory services Nitin Gupta. The wireless subscriber base has been galloping at a CAGR of 85% with the fixed line base growing at a steady 15%. Not surprisingly, expanding reach to the rural consumer has emerged as the major focus for most operators.

The total number of cell sites in India stands at 70,000. About 50% of Indian villages have network coverage at present. The government is aiming at extending this figure to 90% by the year-end. Airtel has 20,000 cell sites in the country and is looking at doubling this by next year. Reliance has 25,000 and is looking at spending part of its planned $900 million capital expenditure next year on expanding the same. Other operators like Idea, Hutch, Spice are also in the expansion mode.

But expanding reach does not come cheap. Each cell site costs about Rs 30-35 lakh of which 60% goes into passive infrastructure with the rest being allocated to active infrastructure. Costs like power and security guards, among others, can add another Rs 50,000 per month. Maintaining uninterrupted power supply in rural areas is costly and challenging in comparison to urban areas. Remoteness of rural areas with lack of basic infrastructure also adds to operating costs, says Deepak Kapoor, executive director and leader telecom practice, PriceWaterhouse Coopers.

In addition, since there are fewer users in rural areas, a company may not be able to recover costs. Operating expenditure constitutes up to 25% of a telecom operators costs with the next 20-25% being accounted for by taxes and levies like spectrum charges, license fees, service tax among others. Manpower costs make up another 10%-15% with other costs like employee acquisition and marketing accounting for another 10%-15%. In urban areas, these expenses are spread across both high usage and higher paying customers to offset lower less paying ones, but in rural areas it may not be possible for a company to do so due to the paucity of high-use customers.

Vineet Nigam, an analyst with ICRA points out that the rural ARPU (average revenue per user) remains low. Most users still dont make calls beyond the free calls. The operator has to be content with rental revenues alone. As a result, outgoing costs can not be balanced, he adds. A major challenge for telecom operators will be to get enough subscribers at these cell sites, says E&Ys Gupta. Sharing costs is thus a necessity. Says an Idea spokesperson, Infrastructure sharing will definitely reduce costs for all operators .

So can rural consumers expect cheaper call rates as a result Industry experts say that demand exists at current tariffs levels. The problem is more of the supply than demand, says PWCs Kapoor. In the beginning, operators may enter with schemes to attract first time users, he adds. The need is for cheaper handsets. We are working with mobile companies to offer the same, says Airtels joint president Sanjay Kapoor. Other efforts to reduce costs are afoot too. Recently, Reliance Telecom decided to bid for GSM licenses in all 23 Indian circles. Industry experts pointed out that higher costs of CDMA operations and comparatively higher costs of CDMA handsets as compared to the GSM ones, were key to the companys decision. Mobile companies like Nokia and Motorola are already making sub-Rs 2,000 mobiles and are partnering telecom operators in offering cheaper handsets.

The Indian telecom market added over five million subscribers in August 2006 overtaking China in customer addition numbers. Expansion to rural areas can make this already high-growth market explode further. As for the consumers, they can expect better services, cheaper calls and a choice of handsets and technological platforms.