Enabling the next wave of telecom growth in India Industry inputs for National Telecom Policy 2011 2 Enabling the next wave of telecom growth in India Foreword The Federation of Indian Chambers of Commerce and Industry (FICCI) and Ernst & Young have collaborated on this deep review of the telecoms sector in India. The National Telecom Policy 1999 (NTP 1999) has served the sector in India for well over a decade, in which time we have witnessed significant changes in the socioeconomic environment, technological advancements and business dynamics. The telecom industry in India is ready to take the next leap forward with new developments such as launch of third generation (3G) services by private operators, 3G and broadband wireless access (BWA) auctions, launch of mobile number portability (MNP), and the emergence of mobile commerce (m-commerce). In the future, rural and semi-rural markets are expected to drive growth, especially in the wireless segment. The Ministry of Communications & Information Technology has released the 100-day agenda for the Indian telecom sector, and announced formulation of a new and comprehensive National Telecom Policy 2011 (NTP’11). Therefore, the time is ripe for a comprehensive review to build a forward looking and transparent policy that will be the backbone to achieve the ”India telecom vision 2020.” This report focuses on specific areas where the Government of India (GoI) needs to intervene and move the policy to the next generation of reforms. It aims to capture developments witnessed in the telecom sector in the last decade and analyze historical performance to estimate growth over the next ten years. It includes inputs from stakeholders in the telecom industry, encompassing operators, telecom equipment manufacturers, infrastructure providers, industry associations and industry practitioners. We would like to extend our gratitude to the industry leaders who participated in the report and helped us to present the industry’s perspective. Amit Mitra Virat Bhatia Prashant Singhal Secretary General Chairman Telecom Industry Leader FICCI, India FICCI Committee on Ernst & Young, India Communications and Digital Economy Enabling the next wave of telecom growth in India iii Executive summary The liberalization of the domestic economy and increasing new model. It aimed at making available “telephone integration with the global economy has positioned India on demand,” the provision of leading class services at as the second fastest expanding economy of the world. reasonable prices, promoting India’s emergence as a After embracing a closed, centralized economic model for major manufacturing and export base of telecom four decades, India shifted to a market-oriented model. equipment and universal availability of basic telecom Liberalization initiatives, especially in the 1990s, resulted services to all villages. In 1999, Government, recognizing in an improved business climate and in an increase in the need to overhaul its policy framework, issued the investment across the country, boosting the industrial NTP 1999, which had played a key role in shaping the growth over the past decade. Indian telecom is an sector. India has reached the goals set in NTP 1999 far economic miracle in the making. Connecting such a vibrant ahead of time, with the market evolving into the world’s economy of more than a billion people together and with second largest in terms of subscribers. Presently, there the rest of the globe is an extraordinary achievement in are more than 700 million subscribers in India, and the terms of a nation’s socioeconomic development. overall teledensity has reached more than 60%. India has faced challenges in liberalizing its telecom With plenty of strong potential value remaining, the sector industry from a monopoly to a decentralized competitive requires much attention and a robust policy framework to model. The announcement of the National Telecom address the challenges that exist in the present scenario Policy (NTP) in 1994 marked the first steps toward the as well as help to capture the opportunities that the sector holds for the country. iv Enabling the next wave of telecom growth in India The present challenges include the spectrum and licensing framework, Universal Service Obligation Fund (USOF) structure, broadband, equipment manufacturing, infrastructure segment, mergers and acquisitions scenario, taxation and aspects of foreign direct investment (FDI). The opportunities around which the policy initiatives need to be designed include financial inclusion, m-commerce and convergence. The major recommendations for the policy framework for the Indian telecom industry are as follows: Focus areas Recommendations Licensing Need to have a single universal license for all telecom services There should be a uniform fee structure across all telecom circles Pure internet service providers should continue to be allowed without payment of any license fees Provide a clear license renewal regime that includes legislation, renewal procedures, reasons for refusal to renew and appeals to regulatory decisions Enabling the next wave of telecom growth in India v Focus areas Recommendations Spectrum Need to re-farm available spectrum Spectrum up to contracted limit should be ensured as initial spectrum to the existing players Spectrum usage charge should be identified upfront at the time of spectrum allocation USOF The USOF should be utilized for the following in rural and remote areas: • Provision of public telecom and information services • Provision of household telephones • Creation of infrastructure for provision of mobile services • Provision of broadband connectivity to villages in a phased manner • Creation of general infrastructure for development of telecommunication facilities • Induction of new technological developments in the telecom sector Subsidies should be distributed through transparent market- oriented allocation strategy Broadband Backhaul connectivity and optic fiber communication (OFC) should be provided to all telecom towers, base station controllers (BSCs) and base transceiver stations (BTS) from nearest block headquarters Make available more spectrum for wireless broadband Make broadband connectivity mandatory for all buildings to get completion certificate on the lines of water and power connectivity Create content and applications in regional languages to promote rural broadband Mergers and acquisition Merger should not result in less than six operators in a circle The share of a merged entity should not be greater than 30% in terms of sub-base or adjusted gross revenue (AGR) vi Enabling the next wave of telecom growth in India Focus areas Recommendations Taxation The upcoming goods and service tax (GST) regime should aim to simplify the tax structure for the industry, with all services and goods being taxed at a standard rate Special consideration needs to be given on certain areas in the backdrop of the peculiarities of the telecom sector such as “place of supply rules” i.e., the state where GST will be paid for different kind of telecom services; ease in state-wise compliances Equipment manufacturing There is a need to set up hardware manufacturing cluster parks (HMCP) across the country and upgrade localized infrastructure to support large volume contract manufacturing R&D should be the key focus Telecom infrastructure Need to lay down a National Telecom Critical Infrastructure Policy on the lines of NTP 1999 elaborating uniform procedures for land acquisition, a uniform system of taxation and subsidies and other incentives designed to create an environment that encourages the build-out of the national telecom infrastructure and the increased participation of all stakeholders There is a need for a national right of way (ROW) policy for the rollout of backhaul network Enterprise data Upgrading encryption levels in international long distance (ILD) and national long distance (NLD) licenses to allow strong encryption of up to 256 bits to protect confidential information in accordance with international best practices Telecom Regulatory Authority of India (TRAI) and Department of Telecommunications (DOT) should eliminate the cumulative assessment of licensing fees on the purchase of inputs, which imposes double taxation on ILD and NLD license holders FDI Given the importance of foreign investment, the policy should consider raising the upper limit on foreign investment to encourage more foreign players to invest in the capex-intensive telecom sector Policies should also cover areas like financial inclusion, m-commerce, convergence, security concerns and consumer affordability. However, there is no unique, perfect model accepted globally which can be implemented in India and leading practices across the globe should be adopted for transforming the Indian telecom sector into the greatest possible success story. Enabling the next wave of telecom growth in India vii Methodology In 2010, Ernst & Young conducted a research study on the Indian telecom sector in collaboration with one of the leading business organizations in India — FICCI. The study gives a detailed perspective on the telecom sector in India, outlining the phenomenal growth witnessed by the sector and recommendations for the existing policy framework that will enable the next level of growth. It examines the NTP 1999, which is used by the Government of India (GoI) as a decision- making guide for the Indian telecom sector. This report reflects the key conclusions of that wider study. The research program studies in detail all the key segments of the telecom landscape — wireless, wireline, broadband, infrastructure, NLD, ILD, value-added services (VAS), equipment manufacturing, infrastructure and convergence. It identifies and evaluates the critical success factors that are applicable across all telecom segments such as spectrum, USOF, licensing framework, FDI, security, consumer affordability and the role of the regulator. As a part of the research program, Ernst & Young conducted comprehensive interviews with senior executives in the Indian telecom sector. These interviews provided a firsthand perspective on the opportunities and challenges faced by various stakeholders in the sector. These findings have been combined with secondary research, analysis and insights provided by Ernst & Young. viii Syed Safawi President Reliance Communications Ltd. List of Vsevolod Rozanov participants P Balaji President and Head of Communications, Chief Executive Officer Corporate Affairs & Business Sistema Shyam Development, India TeleServices Ltd. Ericsson India Virat Bhatia President, Mahendra Nahata Shamik Das External Affairs, South Asia Managing Director Chief Executive Officer AT&T Communication Himachal Futuristic S Tel Pvt. Ltd. Services India Pvt. Ltd. Communication Rajan S. Mathews Rajat Mukarji Anil Sardana TV Ramachandran Director General Chief Corporate Managing Director Resident Director Cellular Operators Affairs Officer Tata Teleservices Ltd. Vodafone Essar Association of India Idea Cellular Ltd. Sanjay Kapoor Lt. Col. HS Bedi, VSM Chief Executive Officer Mahesh Uppal B S Shantharaju Chairman and Bharti Airtel Director Chief Executive Officer Managing Director (India & South Asia) Com First (India) Pvt. Ltd. Indus Towers Ltd. Tulip Telecom Ltd. Rajiv Mehrotra Ashok Sharma Chief Executive Officer Brijendra K Syngal Parag Kar National Head — Regulatory Senior Director — Vihaan Networks Ltd. Aircel Ltd. Senior Principal Dua Consulting Pvt. Ltd. Government Affairs Qualcomm India Pvt. Ltd. SC Khanna Naresh Ajwani Secretary General Himanshu Kapania CS Rao Chief Regulatory & Association of Unified Deputy Managing Director Corporate Affairs Head of Corporate Affairs Telecom Service Providers Idea Cellular Viom Networks Ltd. and Regulatory Division of India ix Reliance Communications Industry associations Federation of Indian Chambers of Commerce and directly with ministries, policy-makers, regulators, Industry (FICCI): established in 1927, FICCI is one of financial institutions and technical bodies. It provides the largest and oldest apex business organizations a forum for discussion and exchange of the ideas in India. It plays a leading role in policy debates that between these bodies and service providers, who are at the forefront of Indian social, economic and share a common interest in the development of political change. FICCI is active in 39 sectors of the cellular mobile telephony. economy, and its stand on policy issues is sought Association of Unified Telecom Service Providers after by think tanks, governments and academia. The of India (AUSPI): constituted in 1997, AUSPI is organizations’ publications are widely read for their a registered society that works as a non-profit in-depth research and policy prescriptions. Home to organization with the aim of delivering improved 400 professionals, it has joint business councils with access, coverage and teledensity in India. AUSPI 79 countries across the world. is the representative industry body of unified Cellular Operators Association of India (COAI): access service licensees providing CDMA and GSM established in 1995, COAI is a registered, non- mobile services, fixed–line services and VAS across profit, non-governmental society dedicated to the the country. advancement of modern communication through the establishment of a world-class cellular infrastructure. Over the years, COAI has emerged as the official voice for the Indian GSM industry and interacts Association of Competitive Telecom Operators Telecom Equipment Manufacturers Association (ACTO): established in 2008, ACTO is an industry (TEMA): established in 1990, TEMA is an industry body that focuses on policies that enhance enterprise association for telecom equipment manufacturers telecommunications in India. The association as well as component and cable manufacturers. was formed by several leading non-integrated It plays an active role in the dissemination and long-distance carriers that provide service to exchange of information among the GoI, the enterprise market segment, which includes foreign agencies, embassies, trade missions, IT-enabled services, business process outsourcing Indian missions abroad and leading national and and multinational company segments. international trade associations. Internet & Mobile Association of India (IAMAI): Internet Service Providers Association of India founded in January 2004, IAMAI is an industry (ISPAI): founded in 1998, ISPAI acts as a collective body representing the interests of online and voice of the ISP community, with the mission of mobile VAS industry. The association’s activities promoting internet for the benefit of all. It has helped include promoting the digital economy, evaluating in shaping telecom policies for ISPs and internet and recommending industry standards and entrepreneurs to grow their services in a supportive practices, conducting research, creating platforms and enabling environment. for its members, communicating on behalf of the Other Service Providers Association of India industry and helping to create a favorable business (OSPAI): established in 2008, OSPAI is the environment for the industry. representative industry body, functioning as an association of companies operating in areas such as domestic and international call centers, business process outsourcing, knowledge process outsourcing, information technology (IT), medical transcription, financial services, tele-medicine, tele-education, tele-trading, billing services and network operating centers. It acts as an interface with government bodies for the growth of all services covered under the registration of other service providers. Contents 1. Indian telecom sector 3 1.1. Overview 3 1.2. Importance of telecom 5 2. Evolution of the telecom sector in India 9 2.1. History of the Indian telecom industry 10 2.2. Regulatory framework 12 2.3. Overview of the Indian telecom industry 14 2.4. Wireless 15 2.5. Wireline 16 2.6. Internet and broadband subscribers 17 2.7. National long distance and international long distance 19 2.8. Telecom equipment manufacturing in India 21 2.9. Infrastructure 22 2.10. Value-added services 27 2.11. Outlook 28 3. Achievements and setbacks of NTP 1999 31 3.1. Key achievements of NTP 1999 34 3.2. Key challenges of NTP 1999 41 4 Key enablers 45 4.1. Connected India: telecom vision 2020 46 4.2. Connected Indian: telecom mission 2020 47 4.3. Key enablers under existing scenario 48 4.3.1 Licensing 48 4.3.2 Spectrum 50 1 Enabling the next wave of telecom growth in India 4.3.3 Universal Service Obligation Fund (USOF) 53 4.3.4 Broadband 55 4.3.5 Mergers and acquisition 57 4.3.6 Taxation 58 4.3.7 Foreign direct investment (FDI) 60 4.3.8 Consumer affordability and rural penetration 61 4.3.9 Human resource 63 4.3.10 Equipment manufacturing 64 4.3.11 Telecom infrastructure 66 4.3.12 Enterprise data 69 4.3.13 Convergence 70 4.3.14 Security 71 4.4. Key enablers for potential opportunities 72 4.4.1 m-commerce 72 4.4.2 M2M communication 73 4.4.3 Mobile money 73 4.4.4 M-health 73 4.4.5 M-education 74 4.4.6 Financial inclusion 74 4.4.7 MNREGA and UID 74 5. Global practices 75 Conclusion 87 Glossary 89 Enabling the next wave of telecom growth in India 2 1 Indian telecom sector 1.1. Overview Over the past two decades, India has grown rapidly from a “command and control” economy to a market-based economy. India is now closely integrated with the global economy and is considered one of the pillars of global economic growth. The process of liberalization started in the mid-1980s and gathered momentum in the 1990s, with the further opening of the economy and the creation of regulatory institutions to march toward fully competitive markets. As a result of liberalization, India’s GDP has been rising by more than 7%1 annually in the past decade, compared with 3.5%2 annually from 1950 to 1980. The Indian economy maintained a growth rate of more than 5% even during the global recession. In FY10 (financial year ended 31 March 2010), India’s service sector was estimated to account for 56.9%3 of GDP, while the industrial sector and agriculture sector contributed 28.5% and 14.6%, respectively, to GDP. Within the services sector, the telecom sector has been the major contributor to India’s growth, accounting for nearly 3.6%4 of total GDP in FY10. In less than a decade, the mobile phone has been transformed from being a luxury that few could own into one of the essentials of an average Indian’s existence. The easy access to mobile services is the outcome of positive regulatory changes, intense competition among multiple operators, low-priced handsets, low tariffs and significant investments in telecom infrastructure and networks. 1 India: Rising growth potential, DBS Group Research, 13 October 2010. 2 “Redefining The Hindu Rate Of Growth,” The Financial Express,12 April 2004, http://www.financialexpress.com/news/redefining-the-hindu-rate-of- growth/104268/0, accessed 19 October 2010. 3 “India’s Macroeconomic Indicators,” Export-Import Bank of India website, 26 August 2010, http://www.eximbankindia.com/ind-eco.pdf, accessed 10 October 2010. 4 India 2012: telecom growth continues, Ernst & Young report, November 2008, page 8. 3 Enabling the next wave of telecom growth in India Indian telecom model Outsourcing non-core Infrastructure sharing activities like IT, network Paradigm shift from average Focus on Low cost revenue per user prepaid distribution, (ARPU) to revenue e-Charge per min Low acquisition cost Economies of scale (no handset subsidy) Source: “How can carriers make 40% EBIDTA margin at 2 cents/min tariff?,” http://www.telecomcircle.com/2009/02/carriers-ebidta/, accessed 25 October 2010. Enabling the next wave of telecom growth in India 4 1.2. Importance of telecom Telecommunication is pivotal to a country’s socioeconomic 1.2.1 Economic growth growth. It is one of the main architects of the accelerated growth and progress of different segments of the Indian telecom has emerged as one of the greatest economy. Narrowing access gaps and removing barriers economic success stories, registering a consistent to information dissemination are prerequisites for overall growth rate of more than 35% over the past decade promoting equitable and sustainable development as well in terms of subscribers. According to a World Bank study, as political and social cohesion. Increasing connectivity a 10%5 increase in teledensity is known to boost GDP is highly instrumental in improving governance, business growth by 0.6% points. In other words, a 1% increase in communication, security, response to emergencies mobile subscribers is estimated to increase per capita and in the overall strengthening of the sociocultural GDP by about US$200. According to a study by the Indian ethos of the country. The advantages of the advent of Council for Research on International Economic Relations telecommunications are manifold and explicitly verifiable (ICRIER), states with a higher teledensity have grown faster from the phenomenal success of the sector. than those with lower teledensity. States with 10%6 higher teledensity have grown 1.2% faster; for instance, Bihar could have witnessed 4% faster growth if it had enjoyed the same teledensity as Punjab. The well-distributed network of telecommunication services results in widening markets, creates efficient information flows, lowers transaction costs and is an effective substitute for infeasible physical transport. There is a substantial relationship between increase in teledensity and the economic development of a region. Mobile telephony had a profound impact on the fishing community in the southern state of Kerala. By virtue of being a carrier and disseminator of information, mobile telephony has made the rural and underdeveloped markets much more efficient. The MS Swaminathan Research Foundation (MSSRF), a government organization, has partnered with a leading telecom equipment and service provider to provide “Fisher friend,” through which fishermen are provided free mobile handsets, shared on a rotating basis, along with free access to information service. The usage of mobile phones has enabled fishermen to respond quickly to market demand and prevent wastage. Mobiles have helped to co–ordinate demand and supply, and have helped those who catch the fish communicate with merchants and transporters in an efficient and effective manner. It has helped to reduce the time spent by agents and owners waiting for boats, reduced business risk and made those involved with fishing feel much safer at sea. 5 Unfinished Business: Mobilizing new efforts to achieve the 2015 millennium development goals, World Bank, September 2010, page 17. 6 Samar Srivastava, “High-teledensity states grew faster, says study,” LiveMint, 19 January 2009,http://www.livemint.com/2009/01/19224316/ Highteledensity-states-grew-f.html, accessed 10 October 2010. 5 Enabling the next wave of telecom growth in India 1.2.2 Job creation RuralShores: bringing jobs to Besides being one of the largest revenue generators, rural India telecom is also a major creator of jobs. The telecom sector has led to the growth of a range of communication Over the years, the lack of employment technology-enabled activities and services. Operations opportunities in rural India has forced people such as data entry, revenue accounting, processing belonging to villages to move to the cities. of insurance claims, human resource services, call However, RuralShores is an initiative that aims center operations, customer support centers, software to reverse the trend. It aims to introduce rural development, systems engineering and systems design and youth to BPO and to provide employment in integration are popular examples. Further, the spread of telecom and information services to rural areas is enabling their village. the setup of rural business process outsourcing (BPO). In return, corporations benefit through cost-effectiveness due to the lower costs 1.2.3 Social development associated with a rural ecosystem, low employee attrition and the potential for Connectivity fosters social development, including scalability. Participation in the initiative is improved education, health and increased citizen an act of corporate social responsibility. participation in civil society. Telecommunication helps provide access to health care and allied services. It Moreover, it ensures complete information helps combat epidemics such as HIV/AIDS and malaria protection, guaranteed service levels, a by supplying information on treatment and control, committed workforce and business continuity. generating awareness, improving access to and connectivity with health centers, and establishing the mobile testing of diseases. The current synergy between health reform initiatives and advantages in technologies has resulted in the proliferation of e-medicine projects. • Helping to stem urban migration by generating greater This represents an innovative approach in providing quality income and employment potential in rural areas health care whenever and wherever needed. • Facilitating emergency response and access to health care and allied services 1.2.4 Rural development • Facilitating m–commerce and e-commerce through trade along the agriculture supply chain, resulting in According to FICCI and Nielsen study, Indian villages the organized aggregation of supply and demand account for 70%7 of the country’s total population, 56% of the country’s income, 64% of consumption expenditure and • Providing enhancement of microfinancing, technology 33% of national savings. The provision of telecom services transfer and entrepreneurship in rural areas and the obscure hinterland has made • Facilitating national and regional integration, previously abandoned areas highly accessible. With more creating an atmosphere of economic diversification, untapped territories being connected through telecom, the employment and a strong socio-cultural ethos hitherto dormant economic potential is being increasingly • Open rural areas to foreign investment, tapped. Communication facilities in rural areas are critical leading to the inclusion of rural India in the for the development of rural India, providing the global economic milieu and reducing the following advantages: rural-urban divide. As a result, the quality of life in rural area improves, thus reducing the pressure of urban migration 7 Challenges Before An Integrated India: Bridging The Urban - Rural Divide, Nielsen, August 2010, page 13. Enabling the next wave of telecom growth in India 6 1.2.5 E-governance • Government to government (G2G): these services take place at two levels — the local or domestic level and E-governance that helps exploit the power of the international level. G2G services are transactions information and communication technology to between the central/national and local governments, transform accessibility, quality and the cost-effectiveness and between the departments and their agencies of public services has been made possible by the telecom and bureaus. On a global footing, G2G services are revolution. Since the advent of IT and communication transactions between governments, and can be used technology, Indian ministries and government departments as an instrument of international relations are working to computerize their operations to make them and diplomacy. simpler and increasingly accessible for Indian citizens. Most relevant information about these entities is now available on their websites, making it easily accessible and 1.2.6 Strengthening investments increasing transparency. Significant progress has been Attractive trade and investment policies have transformed made in the computerization of railway bookings, allocation the Indian telecom sector into one of the most investor- of the Permanent Account Number (PAN) to income friendly markets. Between FY00 and FY10, the inflow tax payers, processing of passport application, conduct of of FDI into India’s telecom sector was approximately public examination and customs clearance, among others. INR407.1 billion (US$8.9 billion),8 accounting for more The four main types of e-governance services provided are than 8% of approved FDI. as follows: • Government to citizen (G2C): this comprises information dissemination to the public, as well 1.2.7 Gender equality as basic citizen services such as license renewals, The advent of communications technology has helped ordering of birth/death/marriage certificates and overcome institutional and social barriers of mobility, filing of income taxes, as well as citizen assistance for high illiteracy and negative social norms. It is facilitating basic services such as education, health care, hospital women’s participation in the political and economic information and libraries. processes of the country. Achieving gender equality and • Government to business (G2B): this entails empowering women is crucial because of its cross-cutting services between government and the business influence. It is an irreplaceable component for achieving community, including the dissemination of policies, most developmental goals, including the “Millennium memos, rules and regulations. Business services Development Goals.” Mobile telephones and the internet offered include obtaining current business information, can advance gender equality by: downloading application forms, renewing licenses, registering businesses, obtaining permits and the • Empowering women and surmounting gender payment of taxes. The services offered through G2B inequality: this is being achieved by promoting transactions also assist in business development, the awareness among women about their social specifically the development of small and medium and political status, and creating new economic enterprises (SMEs). Simplifying the application and opportunities for women through digital approval procedures process for SME requests would empowerment. encourage business development. • Delivering literacy and education to women wherever • Government to employee (G2E): this includes they live or work: this opens up new avenues and G2C services as well as specialized services that cover allows for flexible learning times. One prime success only government employees, such as the provision of story of communication technology promoting human resource training and development that could women’s education is India’s “Distance education for improve the day-to-day functions of the bureaucracy women’s development and empowerment” jointly run and dealings with citizens. by the Department of Women and Child Development 8 “Fact Sheet on Foreign Direct Investment (FDI) from August 1991 to March 2010,” Department of Industrial Policy & Promotion, http://dipp.nic.in/, accessed 10 October 2010. 7 Enabling the next wave of telecom growth in India and the Indira Gandhi National Open University. (R&D). In pursuance of the NTP 1999’s objective toward This program provides a multimedia training R&D, organizations such as Telecom Centers of Excellence package to make women’s self-help groups (TCOE), the Center of Excellence in Wireless Technology sustainable by developing their decision-making ability (CEWIT) and the Broadband Wireless Consortium of India and resource management skills in 150 low-literacy (BWCI) have been established. These organizations have districts. This is one of the most befitting instances of helped to create synergy among academia, the telecom the telecom and internet revolution, taking relevant industry and the Government for the creation of new education that is well aligned to the needs of the services and applications, the generation of intellectual communities to their doorstep, thus overcoming property right (IPR), the development of manufacturing cultural and language barriers. capability, focus on global telecom standardization • Helping lower child mortality and improve maternal activities and the promotion of entrepreneurship. For health: this is done by providing information on instance, the TCOEs have focused on the technological nutrition, strengthening health networks, monitoring and management challenges that Indian operators face in health trends and provisioning primary health care. reaching all sections of society while offering affordable solutions, leading class services and a global presence. 1.2.8 m–commerce 1.2.10 Provide impetus to initiatives such This is the next revolution that is expected to emerge as MNREGA and Aadhaar through the use of mobile phones, as these become a tool for commerce. Mobile phones provide consumers The GoI has undertaken programs such as the an opportunity to transact anytime and anywhere. Mahatma Gandhi National Rural Employment m-commerce finds its applications across various end Guarantee Act (MNREGA) and AadhaaR — Unique markets such as banking and financial institutions, paying Identification Authority of India (UIDAI), which aim to bills for utilities such as power and gas, booking tickets provide inclusive growth. The challenges surrounding these for transportation services such as trains and taxis and programs include job cards for those demanding work, the online shopping. Mobile banking enables customers of elimination of ghost workers, the introduction of electronic banks and other financial institutions to access their muster rolls, wage payments and the authorization of account information, transfer funds, trade stocks and wages electronically. Furthermore, the introduction of purchase financial products such as insurance. According GPS-enabled biometric systems at the grass-roots level to Cybermedia India Online Limited, the value of mobile continues to remain a challenge. The integration of such payment transactions in India is expected to reach programs with mobile telephony is expected to benefit approximately US$1.3 billion by 2013.9 such programs of national importance. For instance, an integrated system for taking biometric attendance through handheld devices and transmitting it through 1.2.9 Facilitating research and mobile phones for authentication is expected to solve the development challenge of attendance. Once a worker has logged in, this data could be transmitted to MNREGA, making sure the The growth in high-speed communication and advances worker is paid for the day. in internet technology are making India a major R&D hub. Efforts are constantly being made to devise more affordable technology for the masses. In India, there is a significant focus on technology with the potential to improve rural connectivity. NTP 1999, formulated by the GoI, places great emphasis on research and development 9 “Nokia to rollout mobile banking in India,” CyberMedia India Online Ltd., 14 April 2010, http://www.ciol.com/News/News/News-Reports/Nokia-to-roll- out-mobile-banking-in-India/134910/0/, accessed 12 October 2010. Enabling the next wave of telecom growth in India 8 Evolution of the 2 9 telecom sector in India Enabling the next wave of telecom growth in India 2.1. History of the Indian telecom industry The Indian telecom sector has evolved from the bygone days of “telephone on demand” to the advent of 3G telephony. Its history begins with the laying down of the first experimental electric telegraph line in Kolkata. In 1881, telephone services were introduced, with exchanges being opened in Kolkata, Mumbai, Chennai, Karachi and Ahmedabad. Following independence, all foreign telecommunication companies in India were nationalized to constitute the Posts, Telephone and Telegraph (PTT), and were under government control. In the early 1980s, the sector underwent its first wave of change. DoT was established in 1985 to provide domestic and long-distance services in India. Further, in 1986, two wholly government-owned companies — Videsh Sanchar Nigam Limited (VSNL), which is now known as Tata Communications, and Mahanagar Telephone Nigam Limited (MTNL) were formed. VSNL and MTNL aimed at providing services to international and metropolitan areas, respectively. The introduction of the New Industrial Policy 1991 initiated the liberalization process in India. Telecom equipment manufacturing was also de–licensed in 1991, and the NTP was announced in 1994. The formulation of NTP 1994 was followed by the launch of mobile telephony in India in 1995. However, growth in the initial years was very slow due to high mobile handset prices as well as the high tariff structure of service providers. The introduction of NTP 1999 heralded pro-consumer policies. NTP 1999 enabled the telecom sector to reach an average subscriber growth rate of more than 35%, primarily due to initiatives taken by the regulator and service providers. The liberalization of the sector resulted in the need for a regulator, and the TRAI was established in 1997. In January 2000, the Telecommunications Dispute Settlement and Appellate Tribunal (TDSAT) was established to take over the adjudicatory and disputes functions from TRAI. Brief history of the Indian telecom sector • 2006: DoT announces criteria for additional spectrum • 2007: Cap on number • 1991: Telecom • 2003: Uniﬁed Access of players in a circle equipment manufac- Service License removed turing completely (UASL); Interconnect • 2008: New licenses deregulated Usage Charges (IUC); granted by DoT • 1992: VAS opened to and calling party pays • 2010: 3G and BWA private sector (CPP) spectrum auction participation • 2004: Broadband • 2011: MNP launched • 1981: Contracts with a • 1994: NTP 1994 policy; universal Pan-India French company to • 1997: Establishment licensing regime; and merge with the of TRAI guidelines for • 1947: Nationalization state-owned ITI, to set • 1999: NTP 1999 intra-circle M&A of all foreign up 5 million lines per • 2000: Establishment 2005–11 telecommunication year of TDSAT companies to • 1985: Establishment constitute the posts of DoT 2000–05 and telegraph • 1986: Establishment • 1950: Telephone of VSNL and MTNL exchanges taken over 1990–2000 from the princely states 1980–90 1947–80 Enabling the next wave of telecom growth in India 10 In 2002, the Universal Service Support Policy came into the sharing of infrastructure among mobile operators. effect, providing statutory status to the USOF in December Operators were allowed to share infrastructure in their 2003. The fund was introduced to provide access to tower installations. In March 2008, the TRAI abolished the telegraph services to people in rural and remote areas access deficit charge (ADC), which covered the levy paid by at affordable prices. In May 2003, the calling party pays mobile operators to the state–run operator, BSNL. ADC was (CPP) regime was introduced, through which all local the fee paid by private mobile operators to the state-owned incoming calls were made free. During the same year, the BSNL, which mainly used the proceeds of ADC to develop GoI introduced the Unified Access Service (UAS) licensing rural telephony services. In July 2010, telecom towers regime, which permitted an access service provider to offer were accorded “Infrastructure Status” by the Reserve Bank both fixed and/or mobile services under the same license, of India (RBI), as these constitute an essential and possibly using any technology. The GoI subsequently issued licenses the most expensive component in the entire telecom in November 2003, January 2004, December 2006, service delivery infrastructure. March 2007 and January 2008. The GoI commenced the auction for 2x5MHz in the The GoI also introduced the Broadband Policy 2004, 2100MHz band for 3G services in April 2010, which which recognized the ubiquitous potential of broadband witnessed fierce bidding for spectrum. The reserve price services and their contribution toward the GDP growth for 3G services was categorized on the basis of circles — and improved quality of life through e–governance, INR3.2 billion for the more populated A and Metro circles; e–commerce, entertainment, education and medicine, INR1.2 billion for the B circles; and INR300 million for the among others. The Broadband Policy 2004 specified rural C circles. The auction aimed at allotting three targets in terms of subscribers. In 2004, mobile services to four 3G licenses for each of the 22 regional circles. had outpaced fixed-line services with nearly 45 million The bidding process continued for 34 days, reaching mobile subscribers. Further, in February 2004, the DoT the final stage in May 2010. The seven winners were issued guidelines for the intra-circle merger of cellular required to pay INR509.7 billion to the GoI. Additionally, mobile telephone service (CMTS)/UAS licenses. the amount payable by BSNL and MTNL for 3G services pushed the total auction revenue to INR677.2 billion In November 2005, new UASL guidelines were issued. The (US$14.6 billion). Following the auction of 3G mobile licenses were to be issued on continuous basis without services, the Government concluded the auction of BWA any restriction on the number of entrants in a circle and services across India. The GoI offered two 20MHz blocks in applications were to be processed within 30 days of the 2.3GHz range in each of the country’s 22 circles. The submission. Allocation of spectrum and grant of wireless bidding process continued for a period of 16 days, raising license was subject to availability and, in case UASL was INR385.4 billion (US$8.2 billion) in auction revenues. Thus, not allocated spectrum due to non-availability, the licensee the GoI raised in excess of INR1 trillion from the auction of was required to endeavor to rollout services using wireline 3G and BWA services. technology. FDI limit in the telecom sector was increased from 49% to 74%. In February 2008, the DoT approved 11 Enabling the next wave of telecom growth in India 2.2. Regulatory framework A number of positive regulatory changes have driven growth in the sector. The key feature of India’s regulatory regime is transparency in industry information, an open approach and encouragement of consultation with stakeholders. The key stakeholders as a part of the regulatory environment in the telecom ecosystem include the Ministry of Communications & Information Technology (MICT), Department of Telecommunications (DoT), the Telecom Commission, the Telecom Regulatory Authority of India (TRAI) and the Telecom Dispute Settlement & Appellate Tribunal (TDSAT). MICT • The MICT is part of the Indian Government. The key departments of the ministry include the Department of Telecommunications, the Department of Information Technology, and the Department of Posts • The MICT formulates policies with respect to telecom, post, telegraph and other means of communication • The laws governing the telecom sector include the Indian Telegraph Act, 1885; the Indian Wireless Telegraphy Act, 1933; and the Telecom Regulatory Authority of India Act, 1997 DoT • The DoT is a part of the MICT. Its key responsibilities include: • Policy, licensing and coordination matters relating to telegraphs, telephones, wireless, data, facsimile and telematic services and other like forms of communications • International cooperation • Promotion of standardization and R&D • Promotion of private investment Telecom Commission • The Telecom Commission was set up in 1989 by the GoI to deal with various aspects of telecommunications • The commission consist of four full-time members that are ex-officio Secretary to the GoI in the DoT, and four part-time members that are secretaries to the GoI of the concerned departments • The Telecom Commission is responsible for policy formulation, licensing, wireless spectrum management, administrative monitoring of public sector undertakings (PSUs), R&D and standardization and validation of equipment, among other matters Enabling the next wave of telecom growth in India 12 TRAI • TRAI was established as an independent statutory regulatory authority under the TRAI Act in 1997. The key powers and functions of the authority include: • Recommending the need for a new service provider, and the terms and conditions of license to a service provider • Ensuring technical compatibility and effective inter-connection between different service providers • Regulating revenue-sharing arrangements among service providers • Ensuring compliance with the terms and conditions of license • Setting and enforcing the time frames for providing local and long-distance telecommunication circuits • Recommending revocation of licenses for non-compliance of their terms and conditions • Facilitating competition and promoting efficiency in the operation of telecommunication services • Protecting the interests of the consumers • Monitoring the quality of service and conducting periodical surveys • Inspecting the equipment used in the network and recommending the type of equipment to be used by service providers • Settling disputes between service providers • Advising the central government in matters related to the development of telecommunication technology and the telecom industry • Levying fees and other charges • Ensuring compliance with universal service obligations • Performing other functions, such as administrative and financial functions, that may be entrusted to TRAI by the central government, or as may be necessary to carry out the provisions of the TRAI act TDSAT • In April 2000, the GoI established the Telecom Dispute Settlement & Appellate Tribunal (TDSAT), as an authority separate from the TRAI to handle disputes in the telecom sector • The functions of TDSAT are to adjudicate any dispute between a licensor and licensee, between two or more service providers, and between a service provider and a group of consumers; and to hear and dispose of appeals against any decision or order of TRAI • The appellate tribunal consists of a chairperson and two other members 13 Enabling the next wave of telecom growth in India 2.3. Overview of the Indian telecom industry India is the world’s second-largest telecom market. The total subscriber base (including wireline and wireless) reached 723.3 million10 in September 2010. The wireless segment has been registering monthly mobile additions of about 15 to 2011 million subscribers. Subscriber base and teledensity (wireless and wireline) 800 61.0% 70% 700 52.7% 60% Total subscribers (million) 600 50% Teledensity (%) 500 37.0% 723.3 40% 400 26.2% 30% 300 621.3 18.2% 12.9% 429.7 20% 200 7.0% 9.0% 300.5 100 2.9% 3.6% 4.3% 5.1% 205.9 10% 28.5 45.0 98.4 140.3 0 36.3% 54.6 76.5 0% FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Sep-10 Total subscribers Teledensity Source: TRAI According to TRAI, the total subscriber base grew from with US$200–US$350 per subscriber for wireline. FY00 through FY10 at a compound annual growth rate Lower costs and the additional benefit of mobility that (CAGR) of 36.1% to reach 621.3 million subscribers. In is associated with wireless subscribers have led to the the past decade, the total teledensity has risen above stagnation of the wireline subscriber base. 50%, with the mobile segment leading this growth. Such phenomenal growth can be attributed primarily to the Urban and rural subscriber base, September 2010 country’s large population, high economic growth, hyper- 100%= 723.3 million competition in the sector, affordable handsets, reduced tariffs, infrastructure sharing and the introduction of positive and enabling regulatory reforms. The telecom Rural revolution in the country has impacted both the urban Urban 32.3% and rural population. However, urban subscribers account for more than 65% of the overall subscriber base, leading toward a huge urban–rural digital divide. As of September 2010, wireless subscribers constitute 67.7% the majority of the total subscriber base, accounting for 95.1%,12 whereas wireline subscribers account for 4.9%. The capital cost to provide mobile service varies in the range of US$50–US$90 per subscriber,13 in comparison Source: TRAI 10 “TRAI Press Release No. 63 /2010,”TRAI website, http://www.trai.gov.in/Default.asp, accessed 10 December 2010. 11 Shauvik Ghosh, “Telcos to recoup 3G bid money in 5-6 years: Analysys Mason,” LiveMint, 30 May 2010, http://www.livemint. com/2010/05/30230743/Telcos-to-recoup-3G-bid-money.html, accessed 12 October 2010. 12 Ernst & Young analysis. 13 “Position paper on the Telecom sector in India,” Department of Economic Affairs – Ministry of Finance, December 2009, page 4, http://pppinindia.com/ pdf/ppp_position_paper_telecom_122k9.pdf, accessed 10 October 2010. Enabling the next wave of telecom growth in India 14 2.4. Wireless India has emerged as one of the world’s fastest-growing FY10. Mobile services were commercially launched in telecom markets, and this growth is primarily attributed to India in 1995. In the initial years of mobile telephony, the growth in wireless services. India’s mobile market is the the growth in the number of subscribers was very low, second largest in terms of subscribers in the world after with average monthly subscriber additions in the range China. The wireless subscriber base in India grew from of 0.05–0.1 million16 subscribers. The advent of NTP FY00 through FY10 at a compound annual growth rate 1999 paved the way for aggressive growth in the wireless (CAGR) of 77.5%14 to reach 584.3 million15 subscribers in subscriber base. Wireless subscribers in India 800 70% 700 58.0% 60% 49.6% 600 50% Wireless subscribers (millions) 500 33.7% 40% Teledensity (%) 400 687.7 30% 300 22.8% 584.3 14.6% 20% 200 391.8 9.0% 4.8% 261.1 10% 100 0.4% 0.6% 1.2% 3.2% 165.1 1.9 3.6 6.5 13.0 33.7 52.2 98.8 0 0% FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Sep-10 Source: TRAI Wireless subscribers Teledensity Wireless subscribers: GSM vs. CDMA, September 2010 GSM subscribers constitute about 84.1% of the total 100% = 687.7 million wireless subscriber base. Over an extended period, the gap between GSM and CDMA has widened as the GSM subscriber base has grown more rapidly. The road ahead CDMA for the Indian telecom sector is expected to be more 15.9% GSM eventful, primarily due to the advent of new services such as 3G, VAS, mobile number portability (MNP) and the growth of manufacturing. 84.1% Source: TRAI 14 Ernst & Young analysis. 15 “TRAI: The Indian Telecom Services Performance Indicators (January - March 2010),” TRAI website, July 2010, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. 16 “Penetration of Mobile Telephony in India & Value added services in Indian Mobile Telephony market,” Zinnov Research and Consulting, October 2006, http://www.zinnov.com/presentation/Mobile_VAS.pdf, page 2, accessed 15 October 2010. 15 Enabling the next wave of telecom growth in India 2.5. Wireline The Indian wireline market grew at a CAGR of 3.3%17 during wireless infrastructure, there is a significant opportunity the period between FY00 and FY10. In the recent past, the for future growth, driven by the immense potential for wireline subscriber base has declined due to lower mobile data growth. tariffs, cheaper handsets, improved mobile coverage, In FY10, the wireline subscriber base was 37 million,18 the advantage of mobility among wireless networks with a teledensity of 3.1%. Over the years, the urban and inadequate infrastructure of the wireline network. market has dominated the wireline subscriber base, Furthermore, the major wireline operators in India also accounting for 73.1% of the subscribers in FY10. As of operate mobile networks, where they see higher revenue September 2010, there were 3.5 million19 public call growth and continue to invest extensively. Although offices (PCOs) and 0.6 million village public telephones wireline infrastructure in India is not as extensive as (VPTs) in India. Wireline subscribers 50 22.7% 25% 45 18.9% 41.3 41.4 41.5 40.8 38.3% 40.1 39.4 20% 38.0 Wire line subscribers (million) 40 37.0 35.6 35 32.7 15% 7.9% Growth rate (%) 30 26.7 17.1% 10% 25 3.3% 20 5% -3.0% 0.3% 15 -1.9% -2.6% 0% -3.3% -3.7% 10 -5% 5 0 -10% FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Sep-10 Wire line subscribers Growth rate Source: TRAI Change in the composition of subscribers In FY00, the wireline market accounted for 93.4% of the subscribers; in FY10, it accounted for 5.9%. The 100% 5.9% wireline market is dominated by the government- 80% controlled incumbent players. Apart from these two players, additional private players have also ventured into 60% the fixed-line market. Although fixed-line operators are 93.4% 94.1% trying to offer VAS such as high-speed internet access, 40% video on demand and videoconferencing, besides other 20% new technologies, wireline service continues to face stiff 0% 6.6% competition from wireless services. In the future, the FY00 FY10 emergence of new technologies such as fiber to the home Wireless Wireline is expected to drive the growth of the wireline market Source: TRAI; DoT in India. 17 Ernst & Young analysis. 18 “TRAI: The Indian Telecom Services Performance Indicators (January - March 2010),” TRAI website, July 2010, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. 19 “TRAI: The Indian Telecom Services Performance Indicators (July - September 2010),” TRAI website, January 2010, http://www.trai.gov.in/Default.asp, accessed 15 January 2011. Enabling the next wave of telecom growth in India 16 2.6. Internet and broadband The internet has revolutionized the lifestyle of many broadband subscribers has increased at a CAGR of Indians by creating a new means of communication, 23.9%20 and 117.5% to reach 16.2 million and 8.8 million, knowledge sharing, governance, employment and the respectively in FY10. This falls short of a Broadband delivery of services. Although the internet is a function Policy’s goals of 40 million internet subscribers and of various factors such as literacy, access to personal 20 million broadband subscribers by the end of 2010. computers and electricity, it has made significant Broadband infrastructure plays a vital role in a country’s inroads in the urban market. Further, the evolution of achievement across domains such as social progress and technology and increase in bandwidth has given rise to economic development. According to Booz & Company, it is internet connections at speeds faster than traditional estimated that a 10%21 increase in broadband penetration dial–up connections. The minimum threshold speed for a translates to a 1.5% increase in labor productivity in a broadband connection is 256 kilobits per second (kbps) country. Also, a 10%22 increase in broadband penetration or more, whereas traditional internet connections have a leads to a 1.3% increase in GDP. Broadband brings a speed of less than 256 kbps. number of benefits, such as opportunities for education, The DoT formulated the Broadband Policy 2004, which governance, entrepreneurship and services. The envisions the creation of a framework through various opportunities hold a much larger promise for India’s large access technologies such as optical fiber, digital subscriber low-income population and a growing economy. lines (DSL) on copper loop, cable television networks, satellite media, terrestrial wireless and future technologies. From FY05 through FY10, the number of internet and Internet and broadband subscribers (million) 20 17.9 16.2 15 13.5 11.1 10.3 9.3 8.8 10 6.9 6.3 5.6 5 3.9 2.3 1.4 0.2 0 FY05 FY06 FY07 FY08 FY09 FY10 Sep 10 Internet subscribers Broadband subscribers Source: TRAI 20 Ernst &Young analysis. 21 Bringing Mass Broadband to India: Roles for Government and Industry, Booz & Company, June 2010. 22 “Broadband Commission Presents Report to United Nations,” International Telecommunications Users Group website, September 2010, http://intug. org/2010/10/09/international-insights-%E2%80%93-september/, accessed 25 October 2010. 17 Enabling the next wave of telecom growth in India Market share by subscribers of technologies in internet Market share by subscribers of technologies in access, September 2010 broadband, September 2010 0.5% 1.6% 0.8% 3.6% DSL 4.5% DSL 4.0% Dial-up Cable modem Wireless 6.5% 10.3% Ethernet Cable modem Wireless Ethernet Others Others 50.5% 31.0% 86.6% Source: TRAI Source: TRAI Digital subscriber line (DSL) is the preferred technology among service providers for both internet access and broadband services. As of September 2010, DSL constituted 50.5% of the market share in internet access, and 86.9% of the market share in broadband access. The share of wireless technology continues to be negligible and remains to be fully exploited, especially in the case of broadband services. Broadband penetration continues to be very low in India, despite a structured framework that included ambitious goals to be met in 2010. Currently, broadband users are concentrated in urban areas, primarily in business districts or high–end residential areas of the larger cities. The key factors responsible for the widespread adoption of broadband include affordability and availability. 2.7. National long distance and international long distance The Indian enterprise data connectivity market is growing Voice over Internet Protocol (VoIP) is considered a key at 10% annually and annual revenue is expected to near enterprise application for lowering operating costs. It has the US$10 billion mark in the next five years. The growing spurred the demand for IP-based virtual private network demand for connectivity is coming primarily from the (IP-VPN) services in India. The other services relevant IT and IT-enabled services sectors (ITeS), the financial to this segment are international private leased circuits, services sector and the government. Most large global internet connectivity, multiprotocol label switching (MPLS) players have set up operations in India to cater to the based IP-VPN services, and national and international data connectivity needs of their customers. With telecom and connectivity. A majority of global operators in this space IT converging, managed services and network security are also offering VAS such as network security, network services are provided by global operators in partnership integration, network management, network storage and with Indian IT companies. enterprise voice solutions. Enterprise segment revenues23 Activity FY08 FY09 FY10 FY11E Private line 829 930 1,064 1,200 VPN 423 480 495 510 Ethernet 40 70 92 130 Managed business VoIP 92 110 125 150 Managed IP telephony 51 65 75 80 Hosting services 161 210 260 350 Application services 170 250 370 600 Security 110 130 150 180 Continuity and recovery 20 30 45 52 Managed storage 40 56 61 72 Outsource task 1,600 1,900 2,251 2,800 Contact center 20 31 39 45 Total (US$ million) 3,556 4,262 5,027 6,169 23 Industry estimates. 19 Enabling the next wave of telecom growth in India NTP 1999 opened up the NLD service for private operators, without any restriction on the number of operators. As of December 2009, the GoI had issued 29 NLD24 service licenses. In FY10, the Indian market for NLD grew by 13.7% to reach total revenues of INR164 billion.25 However, the market slowed in FY10, primarily due to a decline in ARPU across all operators. Market size of NLD 180 60% 160 48.3% Market size (INR billion) 50% 140 120 35.3% 40% Growth (%) 164.0 100 25.0% 30% 80 144.3 60 20% 97.3 40 71.9 13.7% 10% 20 0 0% FY07 FY08 FY09 FY10 Market size (INR billion) Growth (%) Source: Voice and Data In 2002, India’s ILD services were opened up for private players, with the sale of the strategic stake in VSNL to the Tata Group. ILD has witnessed steady growth, with its revenues reaching INR176 billion26 in FY10. As of December 2009, the GoI had issued 24 ILD27 service licenses, with the annual license fee being reduced to 6% of the AGR. Market size of ILD 200 30.0% 35% 30% Market size (INR billion) 150 25% 17.3% Growth (%) 20% 100 15% 115.1 115.3 150.0 176.0 50 10% 0.2% 1.0% 10% 0 0% FY07 FY08 FY09 FY10 Market size (INR billion) Growth (%) Source: Voice and Data 24 DoT Annual Report 2009–10,Department of Telecommunications, FY10. 25 “India’s NLD market has grown by 13.6% in FY 2009-10,” Voice & Data, http://voicendata.ciol.com/content/vnd100_2010vol-II/110070520.asp, accessed 18 October 2010. 26 “India among the Top Few Fastest Growing Telecom Markets,” Voice & Data, http://voicendata.ciol.com/content/vnd100_2010vol-II/110070519.asp, accessed 18 October 2010. 27 DoT Annual Report 2009–10,Department of Telecommunications, FY10. Enabling the next wave of telecom growth in India 20 2.8. Telecom equipment manufacturing The telecom equipment industry comprises products Value of telecom equipment imports to India such as cell phones, chipsets, wireless and landline infrastructure equipment, DSL and cable modems and 10 8.9 networking devices, including routers and switches. India is Imports (US$ billion) 8 a strong market for global telecom equipment vendors. 6 3.7 Telecom equipment manufacturing and exports 4 2 1.3 1.7 600 1.2 518.0 140 Production (INR billion) 0 500 Exports (INR billion) 110.0 120 2005 2006 2007 2008 2009 412.7 400 100 Source: International Trade Centre 81.3 300 80 236.6 178.3 60 200 140.0 160.9 40 Share of imports by country of origin, 2009 15.0 19.0 100 4.0 20 2.5 100%=US$8.9 billion 0 0 FY04 FY05 FY06 FY07 FY08 FY09 Production Exports Note: Includes both indigenous and offshore production Source: DoT; “Indian telecom ﬁrms may get DoT boost,” LiveMint, 19.4% China http://www.livemint.com/2010/04/01215017/Indian-telecom- ﬁrms-may-get-D.html, accessed 02 August 2010; “Policy recommenda- South Korea tions to increase domestic telecom growth and exports of telecom 3.3% Sweden equipment and service,” “Telecom Equipment & Services Export Promotion 3.4% 59.1% Council (TEPC), Ministry of Communications and IT, GOI.” US 3.9% According to industry estimates, the demand for 4.5% Singapore telecom equipment is expected to be worth US$70–100 6.4% Hong Kong billion28 in 2015. From 2005-09, the manufacturing and Others exports of telecom equipment grew at a CAGR of 33.9% and 112.1%,29 respectively. Furthermore, according to a leading telecom equipment manufacturer, the market Source: International Trade Centre for wireless infrastructure equipment is estimated to be US$8–10 billion,30 and equipment worth INR190 billion Although a few Indian mobile operators have a significant was imported in 2009. Despite the growth of a localized presence globally, companies in the manufacturing manufacturing environment in India, only 40% of the segment are yet to feature in the global telecom requirement for equipment is met through local sourcing, landscape. Manufacturers in India face challenges such with the remainder coming from global companies as high logistics costs, an unreliable power supply, manufacturing in India. The majority of telecom segments inadequate tax benefits and competition from low-cost are highly dependent on imports, with the exception of Chinese equipment. telecom towers and cables. 28 “Telecom equipment manufacturing in India needs help urgently,” India Climate Portal, 21 July 2010, http://www.climatechallengeindia.org/telecom- equipment-manufacturing-in-india-needs-help-urgently-21-july-2010-t, accessed 12 October 2010. 29 Ernst & Young analysis. 30 “Time to go local in telecom equipment purchase,” CyberMedia India Online, 02 September 2010, http://www.ciol.com/News/News/News-Reports/ Time-to-go-local-in-telecom-equipment-purchase/140758/0/, accessed 10 October 2020. 21 Enabling the next wave of telecom growth in India 2.9. Infrastructure The Indian telecom success story is built around the availability. The components of mobile networks include wireless segment. The wireless sector has charted an the electronic infrastructure, the civil infrastructure impressive growth trajectory, growing at a CAGR of and backhaul. Typically, civil infrastructure forms about more than 75%31 in the past decade in terms of the number 60% of the cost of setting up a network, while electronic of subscribers. Infrastructure development plays a crucial infrastructure forms the remaining 40%.34 role in the development of the wireless sector. The high Electronic infrastructure consists of the electronics level of growth in the Indian wireless telecommunications needed to run a wireless network such as a BTS or cell site, market will continue to drive huge investment in radio antennas, feeders, radio access network, cables, infrastructure as well as a speedy rollout of networks node B, core network and other transmission equipment. into new areas. As of March 2010, there were 425,45532 Civil infrastructure includes the complementary elements telecom towers in the country. of a cellular network that ensure that the electronic The development of the telecom infrastructure depends components are operational. However, it does not play on four key factors: rollout, competition, price, and any role in carrying wireless signals. Civil infrastructure safety and aesthetic concerns. The rollout of services by includes components such as tower site, steel tower, operators takes place only on the back of robust telecom shelter room, power regulation equipment, battery backup, infrastructure. Competition will give further impetus air conditioner, fire extinguisher, diesel generator set to the development of infrastructure. Falling prices of and security cabin. It is not influenced by the type of the telecom services will help to increase their affordability, communication technology being used, whether it is GSM, and the demand for more services will translate into the CDMA, 3G or BWA. However, the number of operators development of more telecom infrastructure. Finally, as the providing their services from a particular site influences the safety and aesthetic issues related to the setup of towers extent of civil infrastructure installed at the site. Backhaul are addressed, the rollout of infrastructure will become consists of the intermediate links between the core of the easier. The National Telecom Critical Infrastructure Policy network and the various sub-networks. It connects the is expected to address these concerns as well as the issues electronic infrastructure at the tower site with the BSC affecting telecom providers on the state level, including and MSC. ROW related issues, hurdles to the erection of cellular Infrastructure Provider-I (IP-I) can provide assets towers and value added tax (VAT) levies on broadband such as dark fiber, ROW, duct space and tower through services delivered through fiber media. The policy should simple registration without paying any license clearly define the role of the Central Government and the fee. It can also create active infrastructure, on behalf states to help catalyze telecom sector growth. of the licensee. 2.9.1 Mobile network 2.9.2 Towers and in-building solutions Typically, a mobile network in a circle consists of mobile Telecom towers are broadly classified as ground-based switching centers (MSCs), each of which is connected and rooftop towers. Ground-based towers (GBT) are to base station controllers (BSCs), with each BSC being 200 to 40035 feet high and are mostly used in rural and connected to a base transceiver station (BTS). The BTSs semi-urban areas because of the easy availability of real are installed in a contiguous manner, so as to facilitate the estate. GBTs involve a capital expenditure in the range of handing over of signals from one BTS to another like a INR2.4 to 2.8 million, depending on the height of the chain. The radius of each BTS varies from 500 meters to tower. GBTs can accommodate up to six tenants. Rooftop as much as 8-10 km,33 depending upon subscriber usage, towers (RTTs) are placed on the roofs of high-rise buildings, topography, frequency band of operation and spectrum 31 Ernst & Young analysis. 32 “Growth of Telecom Sector,” Lok Sabha, http://loksabha.nic.in/, accessed 28 October 2010. 33 Telecom towers and allied infrastructure, Crisil Research, December 2008, page 9. 34 Telecom infrastructure industry in India, ICRA Rating Feature, March 2009, page 5. 35 Telecom infrastructure industry in India, ICRA Rating Feature, March 2009, page 6. Enabling the next wave of telecom growth in India 22 are shorter than GBTs and are common in urban and highly 2.9.3 Telecom infrastructure in India populated areas, where there is paucity of real-estate space. Typically, these involve a capital expenditure of Initially, operators used their tower infrastructure for INR1.5-2 million. RTTs can accommodate two to three competitive advantage. However, over the past few tenants. Over the past couple of years, telecom operators years, the leading operators have opted to share their have hived off their telecom towers into separate entities. infrastructure. Today, there are an estimated 425,455 As a result, there are three types of tower companies — telecom towers in India, implying a subscriber-per-tower pure-play tower companies, operators with towers and ratio of 1,460. Currently, tenancy level for the industry operator-owned tower companies. stands at 1.55.36 In recent years, the growth of mobile communications In July 2010, telecom towers were accorded Infrastructure has made the provision of radio coverage within airports, Status37 by the RBI. This constitutes an essential and mass transit systems, shopping malls, stadiums and office possibly the most expensive component in the entire buildings an essential requirement. Coverage is required to telecom service delivery infrastructure. The GoI provides meet the needs of both the general public, which expects certain benefits specifically to infrastructure companies. its mobile phones to work at all times, and emergency The tax benefit encourages the participation of private services, which need reliable communications for efficient sector through investment. Extending Infrastructure incident management and personal safety. In-building Status to telecom towers and the resultant income tax solutions are designed to improve the reception of radio benefits should certainly encourage tower companies to frequency signals indoors to meet the increasing demand expeditiously set up more towers in underserved areas. for high-quality mobile services. State-wise number of towers States Public sector Private sector Towers Rajasthan 2,028 23,322 25,350 Gujarat, Daman and Diu 2,271 26,121 28,392 Maharashtra and Goa 3,608 41,494 45,102 Karnataka 2,154 24,766 26,920 Madhya Pradesh and Chhattisgarh 1,854 21,323 23,177 West Bengal, Orissa, Sikkim, Andaman and Nicobar 3,337 38,371 41,708 Assam and Arunachal Pradesh 720 8,275 8,995 Delhi, Haryana and Chandigarh 2,008 23,090 25,098 Uttar Pradesh and Uttarakhand 4,577 52,630 57,207 Andhra Pradesh 2,752 31,644 34,396 Punjab and Himachal Pradesh 1,512 17,387 18,899 Jammu and Kashmir 488 5,614 6,102 Tamil Nadu and Pondicherry 3,071 35,321 38,392 Bihar and Jharkhand 1,794 20,634 22,428 Nagaland, Meghalaya, Manipur, Mizoram and Tripura 369 4,242 4,611 Kerala and Lakshadweep 1,494 17,184 18,678 Total 34,037 391,418 425,455 Source: “Growth of Telecom Sector,” Lok Sabha, http://loksabha.nic.in/, accessed 28 October 2010. 36 “TRAI: Consultaion paper on issues related to telecommunication infrastructure policy,” TRAI website January 2011, http://www.trai.gov.in/Default. asp, accessed 01 February 2011. 37 “Master Circular - Exposure norms,” Reserve Bank of India, http://www.rbi.org.in/scripts/BS_ViewMasterCirculardetails.aspx, accessed 20 September 2010. 23 Enabling the next wave of telecom growth in India 2.9.4 Energy requirements Spectrum constraints and network quality: for operators in urban areas, superior network quality is a sustainable Currently, telecom towers consume an average of about differentiating factor that helps to reduce customer churn 5-6 kilo watt of energy coupled with an average of 8 hours and command premium prices. Tower sharing could help of diesel generator running time due to power outages. operators maintain quality network coverage throughout On average, 27 million units of electricity are consumed the city. per day. Average diesel consumption per site per hour is about 2.5 liters, translating to 6 million liters of diesel per Capital expenditure (capex) and operating expenditure day. This translates to consumption of more than 2 billion (opex) savings: the setting up of a countrywide cellular liters of diesel per year for cell sites, which is subsidized network requires substantial capex. A significant part of by GoI. The dependence on diesel could be reduced if the the network rollout is likely to come in the untapped rural Government utilized that subsidy to support a move toward areas, where mobile teledensity is barely in the double renewable energy options such as solar, fuel cells or wind digits. Since many rural areas are far-flung, more ground- power by treating these toward renewal effort as a part based towers will be needed, further increasing capex of the overall effort to reduce greenhouse gases and the requirements. With sharing, massive amounts of funds country’s carbon footprint. can be saved, and newer operators can build an asset- light model. It is estimated that infrastructure sharing in its current form has helped achieve savings of INR557.6 2.9.5 Future growth potential, billion resulting from savings in infrastructure provisioning fee (IPF), energy, capital and interest costs. investments required and emerging trends The industry faces low profitability, and has a pre-tax margin of 7%–8%. Overall, the industry has pumped in Estimated cost savings resulting from INR1 trillion and another INR400–500 billion is expected infrastructure sharing39 to be invested in the next two years. It is estimated that Component Savings tenancy levels will rise to between 2–2.5x in the course of (INR billion) this decade.38 Capex (including interest) 476.0 Opex saving as a result of infrastructure 71.4 provisioning fee savings 2.9.6 Goals of infrastructure sharing Opex saving as a result of shared energy 10.2 The key beneficiary of infrastructure sharing is costs the subscriber. Infrastructure sharing serves the Total opex savings 81.6 following goals: Total savings (capex and opex) 557.6 Optimal use of scarce resources: infrastructure sharing in its simpler forms will lead to better use of scarce national Reduction in execution risks: erecting towers carries resources, such as land and energy. In its more complex with it significant execution risks and requires as many forms, it will allow a better use of spectrum. as 40 clearances from separate authorities such as Rollouts in rural and semi-urban areas: as wireless service the Standing Advisory Committee on Radio Frequency providers penetrate rural and semi-urban areas, significant Allocation (SACFA), state electricity boards, land owners investments will be required, and infrastructure sharing and so on before the tower and electronic infrastructure will act as an important tool to achieve faster rollouts and can be completed. Against this background, the concept of save operating and capital expenditure in these areas. infrastructure sharing assumes special importance. Such Due to higher costs of land development, additional an arrangement works well for both partners, as the tenant security, insurance costs, power shortages, a higher paying a higher rent to the tower company accelerates proportion of ground-based towers, unclear land ownership the time-to-market process, while the tower company and expensive backhaul connectivity costs in the rural earns revenues. areas, service providers have strong incentives to share infrastructure. 38 Industry estimates. 39 Industry estimates. Enabling the next wave of telecom growth in India 24 Revenue stream for incumbents: sharing enables 2.9.7 Models of infrastructure sharing incumbents to earn revenues from a new source, apart from improving capex and opex efficiencies, As India’s mobile networks have expanded over the past freeing up significant resources and management time few years, coverage is no longer a source of competitive to focus on their core business. The tower business can advantage. Operators have realized that the industry needs become a profit center by itself, rather than just leading to significant capital expenditure, which can be reduced by cost savings. sharing their networks. What started off as arrangements between two telecom operators has evolved into the Expeditious time-to-market for new players: sharing creation of tower companies. Commercial considerations significantly speeds up the time-to-market, as operators appear to be driving the increasing trend to adopt a can dramatically reduce site acquisition times and load variety of infrastructure models. The level of sharing their electronics and electronic network elements onto among wireless service providers varies depending on the the civil infrastructure of incumbent operators in a civil complexity of the arrangements and the interdependence sharing model. of the wireless service providers. Infrastructure sharing can Government initiatives on infrastructure sharing: take the following forms40: regulators favor faster deployment and investment Civil infrastructure sharing: this refers to the sharing of optimization in the telecom sector. Infrastructure physical sites, buildings, shelters, towers, masts, power sharing limits duplication and gears investment toward supply and battery backup. This is by far the most common underserved areas, product innovation and improved form of infrastructure sharing in India now. customer service. There are many government initiatives that support infrastructure sharing. These provide Electronic infrastructure sharing: this refers to the sharing incentives for companies to participate in infrastructure of electronic elements such as antennas, feeders, radio sharing, thus contributing to the growth of the industry access network (RAN), cables, node B and transmission as a whole. equipment. Local restrictions and environmental benefits: as RAN sharing: this is the simplest type of electronic local authorities become more concerned about the infrastructure sharing. It involves all the access environmental and aesthetic effects of the number and network elements to the point of connection with the location of antennas in an area, zoning regulations may core network, including radio equipment, mast and site. start to play an important role in driving service providers An extended version of RAN can be in the form of to share civil infrastructure. intra-circle roaming. Service providers can agree to provide mobile services to each other’s subscribers to Less negative environmental impact: although ensure converage wherever their own network signal is environmentalists show limited support for telecom not available or weak. This can increase the coverage area network deployment, infrastructure sharing typically and improve the quality of service. Usually, operators receives the backing of many conservation groups either establish a joint venture company to operate the because less network buildup means fewer negative shared network or establish an agreement on the use of environmental impacts. each other’s networks. Thus, infrastructure sharing reduces operating costs and Node B sharing: in the Node B sharing model, one physical provides additional capacity in congested areas where unit is shared by two distinct nodes B. The radio network space for sites and towers is limited. It also provides an controller (RNC) and core network are not shared in this additional source of revenue but may be limited by differing model, so that each service provider can maintain control strategic objectives. It helps to expand coverage into of its equipment and spectrum use. The separation of the previously unserved geographic areas. For operators who core network also allows each service provider to offer have been awarded 3G licenses and will be launching 3G differentiated services to its subscribers. operations, it provides an opportunity to reduce capital and operational expenditure by sharing infrastructure from the start of the build-out. 40 “Mobile infrastructure sharing,” GSMA, page 12. 25 Enabling the next wave of telecom growth in India Core network: the most complex form of network sharing National roaming: mandatory national roaming is a form involves both radio and core network elements, permitting of infrastructure sharing that allows new operators, who one or more partner service providers to access some or have yet to complete their network deployment to provide all of the mobile network, including electronic components national service coverage through sharing incumbents’ such as optic and feeder fiber cables, radio links, network networks in specific areas. National roaming accelerates elements, backhaul, antenna and transmission equipment. competition by allowing new players to launch their This can be implemented to various levels depending on services within a shorter time frame. which platforms operators wish to share. Distributed antennae sharing (DAS): over the past few Radio and core sharing: all electronic components in the years, DAS has emerged as a powerful tool for wireless access and core network as well as civil infrastructure are carriers to bolster their coverage and boost their capacity, shared. In Sweden, there are five operators, four of whom especially with the advent of smartphones and 3G. have formed two consortiums of two operators each. Each Essentially, DAS is a collection of small antennas spread consortium has built out a joint network. The regulator over a specific geographic area and connected by fiber to permitted this level of sharing, but required each operator a central location or power source, usually a base station, to maintain 30% of its network separately. to provide wireless service within a geographic area or structure. DAS technology can be used to boost signal Backhaul sharing: common backhaul sharing will be very coverage in large buildings, stadiums and shopping malls useful in rural environments where traffic from BTS to as well as for outdoor purposes. The benefits of DAS are BSC is very low. A common RF or optical fiber medium can twofold — the technology allows carriers to fill in coverage be utilized, reducing cost and maintenance efforts. Exits gaps and dead spots in their macro network and, by from such sharing arrangements can easily be provided if breaking down the macro cell site into smaller pieces, it warranted due to an increase of traffic or other reasons. helps add much-needed capacity to operators’ networks. Mobile virtual network operators (MVNOs): these typically do not have their own network and have no rights to spectrum. They typically rely on operator network sharing to get access to subscribers and offer services. Enabling the next wave of telecom growth in India 26 2.10. Value-added services (VAS) According to the Internet and Mobile Association of India (10%–20%) and content aggregators (10%–15%). Content (IAMAI), the mobile VAS in India was estimated to be owners end up getting approximately 5%–10% of the worth INR145.0 billion41 in 2010, growing at a CAGR overall revenues. of more than 50% during 2006–10. The rollout of 3G The demand for mobile VAS is driven by the increase in the services is expected to drive the mobile VAS market in the mobile subscriber base, which has exceeded the future, creating opportunities for both telecom operators 700 million44 mark, as well as aggressive marketing efforts and companies engaged in VAS. Entertainment mobile by telecom operators to spread awareness about their VAS constitutes 57% of the overall revenues followed by services such as updates and alerts. Moreover, the decline information mobile VAS (39%) and m-commerce (4%).42 in ARPU has compelled mobile operators to focus on The key mobile VAS include person-to-person (P2P) SMS, mobile VAS to generate additional revenues. The rollout monotones, polytones and truetones as well as caller of 3G services in the near future is expected to provide ring-back tones (CRBT), person-to-application (P2A) SMS, consumers with new and improved services such as high- application-to-person (A2P) SMS, games and services speed data transfer. such as m–commerce and m–radio. The key participants in The demand for mobile VAS is mostly driven by the youth, the mobile VAS market include content owners, content with India being one of the leading mobile markets for the aggregators or developers, media companies, technology young. The mobile VAS revenues in the country are driven enablers, short-code providers, handset manufacturers and by the P2P SMS service, followed by music. The growth content converters. of m–commerce, which provides services such as mobile In terms of revenue distribution among various market banking, mobile payments and money transfer, is also participants, out of the total amount paid by end users expected to drive the market for mobile VAS. (excluding P2P SMS), approximately 60%–80%43 is captured by mobile operators, followed by technology enablers Market size of VAS Revenue distribution of VAS services (%) 160 100 145.0 140 10 15 Market size (INR billion) 120 15 100 93.0 Growth (%) 60 80 75.1 60 45.6 40 28.5 20 Operator Technology Content Content Total 0 revenue enabler aggregator owner 2006 2007 2008 2009 2010F Source: Mobile VAS in India: 2010, IAMAI, July 2010 Source: Mobile VAS in India: 2010, IAMAI, July 2010 41 Mobile VAS in India: 2010, IAMAI, July 2010. 42 Mobile VAS in India: 2010, IAMAI, July 2010. 43 Mobile VAS in India: 2010, IAMAI, July 2010. 44 “TRAI Press Release No. 63 /2010,” TRAI website, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. 27 Enabling the next wave of telecom growth in India 2.11. Outlook 2.11.1 Wireless At the end of December 2010, there were 752.2 million45 mobile subscribers, with a significant number of multiple and inactive Subscriber Identity Module (SIM) owners. According to Ovum, during the period 2010–15, the number of wireless subscribers in India is expected to increase at a CAGR of 10.1%,46 to reach 1,217.1 million47 subscribers in 2015. Further, the country’s wireless teledensity is expected reach 97.2% and 110% in 2015 and 2020, respectively. Future subscriber growth is likely to hinge upon rural and low-income users. Although the telecom sector is witnessing strong customer additions every month, the ARPU continues to shrink, leading to falling profit margins of mobile operators. The presence of as many as 14 mobile operators in certain parts of the country and rising financial pressures are expected to drive consolidation in the sector. Wireless subscribers in India 1,600 109.9% 120% Wireless subscribers (million) 92.9% 95.9% 97.2% 1,400 87.1% 100% Teledensity (%) 1,200 77.7% 1,000 63.2% 80% 800 44.7% 60% 1,516.8 600 1,134.5 1,185.3 1,217.1 40% 923.8 1,049.1 400 752.2 200 525.1 20% 0 0% 2009 2010 2011F 2012F 2013F 2014F 2015F 2020F Wireless subscribers Teledensity Source: TRAI; DoT; Ovum; Ernst & Young analysis 2.11.2 3G subscribers 3G subscribers forecast 3G is the next generation mobile technology which is capable of delivering broadband content, including a host 350 25% 3G subscribers as a percentage of of rich multimedia services such as video calling, video 20.0% on demand, location based services and remote access/ 300 wirless subscribers (%) 20% 3G subscribers (million) VPN applications. 3G services will drive the expansion of 250 wireless services in future. 3G subscribers are expected 15% 200 11.7% to reach 142 million by 2015, accounting for 12% of the 10.0% total wireless subscriber base. Further, 3G subscribers are 150 8.9% 303.4 10% 6.9% expected to be more than 300 million by 2020, accounting 100 3.8% 142.0 5% for 20% of the total wireless subscriber base. 118.0 50 101.0 72.0 35.0 0 0% 2011F 2012F 2013F 2014F 2015F 2020F 3G subscribers 3G subscribers as a % of wireless subscribers Source: Ovum; Ernst & Young analysis 45 “TRAI: The Indian Telecom Services Performance Indicators (January - March 2010),” TRAI website, July 2010, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. 46 Ernst & Young analysis. 47 Ovum: Mobile regional and country forecast pack: 2010–15, Ovum website, http://www.ovumkc.com/, accessed 16 October 2010. Enabling the next wave of telecom growth in India 28 2.11.3 Wireline There were 35.1 million48 wireline subscribers at the end of December 2010. The wireline market is in decline, a trend that is expected to continue. According to Ovum, during the period 2010–15, the number of wireline subscribers in India is expected to decrease at a CAGR of nearly 4%,49 to reach 29.1 million50 by 2015. Further, the wireline subscribers are forecasted to reach 26.3 million in 2020. The growth in the mobile market is seen as the cause of the decline. Wireline subscribers in India 40 Wire line subscribers (million) 35 30 25 37.1 35.1 34.9 33.5 20 32.1 30.5 29.1 26.3 15 10 5 0 2009 2010 2011F 2012F 2013F 2014F 2015F 2020F Source: TRAI; DoT; Ovum; Ernst & Young analysis 2.11.4 Broadband As of September 2010, there were 10.3 million broadband subscribers in India. The growth of broadband is expected to increase with uptake of 3G and BWA services. Considering increasing broadband demand, the broadband connections are estimated to reach 150 million by 2020. Broadband subscribers forecastc Year Number of % of households to be Number of broadband households covered for broadband connections (million) 2010 236 5% 11.5 2012 241 20% 48 2014 250 40% 100 2020 275 55% 150 Source: “TRAI: Consultation Paper on National Broadband Plan,” TRAI website, June 2010, http://www.trai.gov.in/Default.asp, page 16, accessed 10 October 2010; Ernst & Young analysis 48 “TRAI: The Indian Telecom Services Performance Indicators (January - March 2010),” TRAI website, July 2010, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. 49 Ernst & Young analysis. 50 Ovum: Fixed voice connections forecast pack: 2008–15, Ovum website, http://www.ovumkc.com/, accessed 16 October 2010. 29 Enabling the next wave of telecom growth in India 2.11.5 Revenue and capex Over the years, the Indian telecom sector has witnessed an increase in revenues and contribution toward GDP. The growth in revenues is driven by cheaper mobile handsets, lower tariffs, the increase in mobile penetration in both urban and rural areas, and the adoption of VAS. According to Ovum, during the period 2009–15, industry revenues and capital expenditure are expected to increase at CAGR of 8.1%51and 7.0%, respectively, to reach US$51.0452 billion and US$14.97 billion by 2015. Further, industry revenues and capex are expected to increase to US$57.2 billion and US$ 13.9 billion, respectively by 2020. The future revenue growth and increase in capex is expected to be driven by the rollout of 3G services and the increase in broadband penetration across the country, including BWA penetration. Other services such as ILD, NLD and VAS are also expected to drive revenue growth. Revenue and capex forecast 70 Revenue and capex (US$ billion) 60 50 40 30 57.2 45.9 15.1 48.4 51.0 20 38.7 11.8 43.1 13.8 14.8 15.0 32.0 10.0 34.5 13.9 7.3 10 0 2009 2010F 2011F 2012F 2013F 2014F 2015F 2020F Revenues Capex Source: Ovum; Ernst & Young analysis Over the years, with the introduction of 3G and BWA services, the contribution of non-voice services towards the industry revenues is expected to reach 38% by 2020. Revenue break-up: voice and non-voice 10% 17% 22% 27% 32% 38% 90% 83% 78% 73% 68% 62% 2011F 2012F 2013F 2014F 2015F 2020F Voice Non-voice Source: Pyramid Research; Ernst & Young analysis 51 Ernst & Young analysis. 52 Ovum: Forecast of service provider revenue and capex, 2009-2014, Ovum website, http://www.ovumkc.com/, accessed 16 October 2010. Enabling the next wave of telecom growth in India 30 Achievements 3 and setbacks of NTP 1999 31 Enabling the next wave of telecom growth in India The NTP 1999 aims at making India competitive in the global telecom market through growth in exports, FDI and domestic investment. The key objectives of the policy include telecommunication for all and within the reach of all, achieving universal service across all villages, global standards in the quality of service, the emergence of India as a major manufacturing base and a major exporter of telecom equipment, and protection of the country’s security interests. The policy includes specific targets: • Make available telephone on demand by 2002 and sustain it thereafter so as to achieve a teledensity of 7% by 2005 and 15% by 2010 • Encourage the development of telecom in rural areas, making it more affordable by fixing a suitable tariff structure and making rural communication mandatory for all fixed service providers • Increase rural teledensity from 0.4% to 4% by 2010, and provide reliable transmission media in all rural areas • Achieve telecom coverage of all villages in the country and provide reliable media to all exchanges by 2002 • Provide internet access to all district headquarters by 2000 • Provide high-speed data and multimedia capability, using technologies including international services digital network (ISDN), for all cities with a population greater than 200,000 by 2002 Enabling the next wave of telecom growth in India 32 NTP 1999 has been a catalyst for the telecom sector: • Growth in the subscriber base (723.3 million) and in teledensity (61.0%) • Contribution of telecom to overall GDP of almost 3%, up from 1.5% in 2000 • Creation of jobs across sales and marketing, technology, R&D and customer care, among others • Among the lowest tariffs in the world, and the adoption of per-second billing by various operators • Robust growth in revenues — industry revenues recorded at US$35 billion • Increased FDI in the telecom sector — accounts for more than 8% of cumulative FDI inﬂows in the past decade • The promotion of manufacturing of telecom equipment in India and the growth of telecom exports • Growth of the telecom industry has led to the development of new business ecosystems, e.g., mobile value-added services (MVAS) encompass mobile operators, content creators, providers, aggregators and technology enablers Sector still faces challenges for growth: • Spectrum re-farming and effective management of spectrum in a transparent manner • Creation of an effective licensing framework where amendments are carried out in consultation with service providers • “Critical” Infrastructure Status along with uniform policy and single window clearance • Energy requirements, especially reliability, resulting in huge operating expenditure • Effective utilization of USOF to increase rural penetration • Increasing broadband penetration and rural connectivity • Overcoming security concerns over the use of mobile handsets and telecom equipment • Limited availability of talent, especially telecom specialists • Fixed mobile convergence (FMC) 33 Enabling the next wave of telecom growth in India 3.1. Key achievements of NTP 1999 3.1.1 Teledensity poses a critical challenge due to low population density, geographical spread, low per capita income and the cost Reforms in the telecom sector have been encouraged by of maintaining phones in rural areas. As a result, there is the active participation of the public and private sector. an uneven distribution of teledensity among Indian states Following independence, the teledensity level in the resulting in slow economic development of the states and country was 0.02%53; by 1998, the level had increased their surrounding regions. to only 1.9%. NTP 1999 has been instrumental in the growth of telecom in both urban and rural areas, and its Currently, about 70% of the population in India lives in targets have been achieved well in advance. The overall rural areas, and mobile penetration stands at a meager teledensity target of 15% by 2010 was achieved in FY07. 28.4% in rural India. There is a significant opportunity for Furthermore, the overall teledensity as of September 2010 service providers to increase penetration in rural areas stood at 61.0%.54 Urban teledensity and rural teledensity and generate revenues. The impact of mobile telephony at the end of September 2010 were 137.3%55 and 28.4%, on rural areas has been profound. It has helped reduce the respectively, with rural teledensity being far ahead of the cost and time of transactions and has visibly compensated NTP 1999 target, which was set at 4% by 2010. for the poor infrastructure. According to a study by Robert Jensen, a Harvard University economist, the introduction Although India has witnessed a steep rise in teledensity of mobile telephony in Kerala increased the fishing over the past few years, the disparity between urban and community’s profits by 8%,56 decreased fish prices by 4% rural areas in terms of mobile penetration has increased and consumption of fish increased by 6%. significantly. The improvement in rural teledensity Urban and rural teledensity 140% 137.3% 119.7% 120% 100% 89.4% 80% Teledensity (%) 65.9% 61.0% 60% 52.7% 47.3% 38.0% 37.0% 40% 28.4% 26.2% 26.2% 24.3% 20.8% 18.2% 20% 10.4% 14.3% 12.9% 14.9% 12.2% 9.2% 8.2% 2.9% 9.1% 5.8% 4.3% 5.1% 4.0% 2.3% 0.7% 0.9% 3.6% 1.2% 1.5% 1.6% 1.8% 0% FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Sept 10 Urban teledensity Rural teledensity Total teledensity Source: TRAI 53 “Rural Telecom and IT,” Indian Institute of Kanpur website, http://www.iitk.ac.in/3inetwork/html/reports/IIR2007/04-Rural Telecom.pdf, page 76. 54 “TRAI Press Release No. 63 /2010,” TRAI website, http://www.trai.gov.in/Default.asp, accessed 10 December 2010. 55 “TRAI: The Indian Telecom Services Performance Indicators (July – September 2010),” TRAI website, January 2010, http://www.trai.gov.in/Default.asp, accessed 15 January 2011. 56 Jensen, R., “The Digital Provide: Information (Technology), Market Performance and Welfare in the South Indian Fisheries Sector,” The Quarterly Journal of Economics, 2007. Enabling the next wave of telecom growth in India 34 Total teledensity by state in India, FY10 The Indian telecom industry employs more than 430,00057 direct employees, with the majority of these employees being a part of the public sector undertakings (PSU). The ratio of the number of subscribers per employee is very high in the case of private operators in India. Mix of private and PSU operators, by subscriber base 100%= 98.4 140.3 205.9 300.5 429.7 million 26.5% 20.8% 34.7% 43.5% 52.9% 73.5% 79.2% 65.3% 56.5% 47.1% FY05 FY06 FY07 FY08 FY09 Low teledensity: 0%–50% Medium teledensity: 50%–100% Private operators PSU operators High teledensity: 100% and above Source: TRAI; Dun & Bradstreet Source: TRAI 3.1.2 Teledensity and employment Employees of private and PSU operators Over the past decade, private telecom players have 100%= 436,891 429,400 432,771 considerably expanded their operations, which has resulted in an increase in employment opportunities 9.7% 11.0% 14.7% in the telecom sector. The sector has created direct employment across various business areas such as sales 90.3% 89.0% 85.3% and marketing, technology, R&D and customer care, as well as indirect employment. The expansion of the Indian BPO FY05 FY06 FY07 industry is a classic example of indirect employment. Private operators PSU operators Subscribers per employee ratio in India FY05 FY06 FY07 PSU operators 132 158 193 Private operators 1,089 1,678 2,110 The development of telephony in India has played an important role in altering the structure of the economy. It has paved the way for a knowledge- and information-based economy, which augurs well for sectors such as IT/ITES, media, technology, education, R&D and financial services. 57 Overview of Telecom Industry, Dun & Bradstreet website, December 2009. 35 Enabling the next wave of telecom growth in India 3.1.3 Size of the telecom sector and contribution to GDP The revenues of the Indian telecom sector have The contribution of the telecom sector to India’s GDP increased by almost fivefold from US$7 billion in FY00 is estimated to increase from 1.5% in 2006 to 2.8%59 in to US$35 billion58 in FY09. The growth in revenues has 2010. The Indian economy is expected to sustain an 8% been driven by favorable factors such as the availability or a higher growth rate in the future. As the country aims of cheaper mobile handsets, lower tariffs, the increase in to achieve higher teledensity, the contribution of the mobile penetration in both urban and rural areas and the telecom sector in GDP is expected to increase. According adoption of VAS. In addition, infrastructure sharing has to an ICRIER study, a 10%60 increase in mobile penetration enabled operators to improve margins by bringing down results in a 1.2% increase in GDP. costs significantly. Contribution of telecom to GDP India’s telecom sector is a voice-centric market characterized by high MoU and ARPU. A sharp decline in 3.0% 2.6% 2.8% 2.4% call charges and the cost of services has enabled the rise of 2.5% 2.2% 2.2% 2.3% 2.3% mobile subscribers and revenues. 2.0% 1.7% 1.6% 1.6% 1.5% 1.5% Indian telecom sector gross revenues 1.0% 0.5% 40 35 0.0% 35 33 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 31 30 Revenue (US$ billion) 25 Source: TRAI; Ernst & Young estimates 25 20 20 The contribution of the telecom sector also has a 17 15 multiplier effect on growth, due to associated individuals 15 and businesses. Further, the GoI’s aim to reach rural 8 8 9 10 7 teledensity of 40%61 by 2014 from the current levels 5 and achieve broadband coverage of all 250,000 village panchayats under the Bharat Nirman Program is 0 expected to enhance the contribution of the telecom FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 sector to India’s GDP. Source: TRAI; Ernst & Young analysis 58 Transfer Pricing Report — Telecom (general), Ernst & Young, 2010. 59 Ernst & Young analysis. 60 “High-teledensity states grew faster, says study,” LiveMint, http://www.livemint.com/2009/01/19224316/Highteledensity-states-grew-f.html, accessed 10 October 2010. 61 “Bharat Nirman: A business plan for rural infrastructure,” Bharat Nirman website, http://www.bharatnirman.gov.in/page2.html, accessed 20 October 2010. Enabling the next wave of telecom growth in India 36 3.1.4 FDI in the Indian telecom sector From FY08 through FY10, FDI equity inflows in the telecom sector increased at a CAGR of 42.3%65 to reach In the past decade, India has witnessed a considerable rise US$2.6 billion. Higher levels of FDI in the telecom sector in FDI. During the last decade, FDI in India increased at a have intensified competition and strengthened market CAGR of 28.0%62 to reach US$37.2 billion63 in FY10. The penetration. They have also opened up opportunities for telecom sector is among the leading sectors attracting FDI, telecom manufacturing and related business areas in accounting for 8.1% of the cumulative FDI equity inflows the sector. from FY00 to FY10. Over the past few years, a number of foreign ownership and equity regulation reforms have been introduced in the telecom sector. These reforms have led to 3.1.5 Restructuring mobile tariffs an increase in FDI inflow in the sector. The decline in tariffs has enabled the industry to reach a FDI limits in telecom64 phenomenal size in terms of subscribers, while at the same time diluting the ARPU. In the early days, mobile tariffs • 100% FDI is permissible in the case of infrastructure providers that offer dark fiber, ROW, duct space, tower, email, were targeted toward both the calling and receiving party, and voice mail: with the regime popularly known as “receiving party pays.” • FDI of up to 49% can be done on the Automatic Route In January 2003, TRAI announced the implementation of (without prior government approval); beyond that, prior the “calling party pays” regime, with incoming calls being approval is required free of charge for the receiving party. • 74% FDI is permissible in the case of basic, cellular, unified access services, NLD/ILD, V-Sat, public mobile radio trunked services (PMRTS), global mobile personal communications services (GMPCS) and other VAS • FDI of up to 49% can be done on the Automatic Route (without prior government approval); beyond that, prior approval is required • 74% FDI is permissible in the case of ISPs with gateways, ISPs not providing gateways, radio paging and end-to-end bandwidth • FDI of up to 49% can be done on the Automatic Route (without prior government approval); beyond that, prior approval is required Cumulative FDI equity inﬂow in India, FY00-10 Services sector 21.4% Computer hardware and software FDI equity inﬂow in the telecom sector Telecommunications (US$ billion) 9.0% Housing and real estate 38.3% Construction activities 8.1% Power 2.6 2.6 Automobile 1.3 7.6% Others 4.1% 7.3% 4.2% FY08 FY09 FY10 Source: Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce and Industry 62 Ernst & Young analysis. 63 “Fact Sheet on Foreign Direct Investment from August 1999 to July 2010,” Department of Industrial Policy & Promotion, http://dipp.nic.in/, accessed 10 October 2010. 64 Department of Industrial Policy & Promotion: Consolidated FDI policy effective from April 2010, Department of Industrial Policy & Promotion, April 2010, page 58. 65 Ernst & Young analysis. 37 Enabling the next wave of telecom growth in India The effective price per minute for an outgoing mobile GSM operators: ARPU and MoU call has declined from approximately INR16.4066 in 1995 600 600 to almost INR0.30 today. Since the formulation of NTP 493 484 1999, the industry has experienced a decline of about 471 500 500 410 423 95% in mobile tariffs. The entry of new service providers MoU (minutes) 395 400 400 ARPU (INR) has resulted in a tariff war, as the market entrants have used pricing to grab market share. Per-second billing has 366 300 300 emerged as an industry norm, thereby creating a win-win 298 situation for subscribers. 200 264 200 205 The intense competition in the telecom sector 100 164 100 has led to declining ARPU among mobile operators. 131 From FY06 through FY10, the ARPU of GSM and 0 0 CDMA operators decreased by 64.2% and 70.3%, FY06 FY07 FY08 FY09 FY10 Sep10 respectively. The average annual decrease for GSM and ARPU MOU CDMA operators was 22.1% and 25.8%, respectively. ARPU levels are estimated to continue declining over Source: TRAI the next few years, though the rate of decline is expected CDMA operators: ARPU and MoU to be slow. Following the introduction of the NTP 1999, 600 600 the MoU among telecom service providers have also witnessed an increase. Although India has recorded one of 500 550 500 MoU (minutes) the highest MoU globally in the past few years, the sector 471 ARPU (INR) has also experienced a decline in MoU, especially in the 400 400 case of CDMA operators. In addition, the rate per minute 364 300 256 352 300 (RPM) has declined due to the increase in competition in 308 202 307 the sector. 200 159 200 99 3.1.6 Handset prices 100 76 78 100 The Indian mobile handset market is estimated to be 0 0 worth INR500 billion.68 The market has witnessed the FY06 FY07 FY08 FY09 FY10 Sep10 entry of a number of mobile manufacturers, raising ARPU MOU the total number of manufacturers to about 30 from approximately 5 in 2008. Source: TRAI GSM and CDMA operators: RPM The Indian mobile handset market is dominated by established global brands. The market is characterized 1.0 0.9 by the presence of both high–end and low–end mobile 0.9 phones, with a wide gap between handset prices. The 0.8 market is also inundated with unbranded and cheap 0.7 0.6 imported mobile phones, which are primarily Chinese in 0.6 0.5 INR origin. The growing mobile subscriber base in India has led 0.5 0.4 0.5 0.4 to the entry into the market of a number of “homegrown” 0.4 0.3 0.4 0.4 mobile handset manufacturers. 0.3 0.2 0.3 0.3 0.1 0.2 0.0 FY06 FY07 FY08 FY09 FY10 Sep10 GSM CDMA Source: TRAI 66 “One Minute at a Time,” Outlook India, http://business.outlookindia.com/printarticle.aspx?266748, accessed 21 October 2010. 67 Ernst & Young analysis. 68 “Small handset makers making big strides,” Business Standard, 15 April 2010, http://www.business-standard.com/india/news/small-handset-makers- making-big-strides/391912/, accessed 5 October 2010. Enabling the next wave of telecom growth in India 38 Average selling price (ASP) of mobile handsets 200 180 Average selling price (US$) 160 140 120 100 80 60 40 20 0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 2Q09E 4Q09E 1Q10E 2Q10E Nokia Motorola Samsung Sony Ericsson Others Source: Company data; Macquarie Capital In the past decade, mobile handsets have evolved 3.1.7 Global outreach of Indian telecom rapidly, adding numerous features ranging from companies monochrome screens to touch screens, monotone ringtones to MP3 ringtones, Video Graphics Array In the early 1990s, greenfield investments were a (VGA) to 8-to-12-megapixel cameras, enhanced memory, popular mode of overseas investment among Indian Global Positioning System (GPS), email, 3G and an firms, and foreign affiliations were formed through joint improved user interface. Globally, the average selling price ventures, usually with a minority ownership. Over the (ASP) of both feature phones and smartphones has been period, India has witnessed prominent diversification in on the decline. However, the price of feature phones is the industry composition of overseas activities of Indian declining at a faster rate than smartphones. Over the next firms. Over the past decade, FDI by firms belonging to few years, the ASP of feature phones is expected to be developing countries has gained momentum and has US$50, and the ASP of smartphones is expected to drop become an integral part of globalization. Indian companies below US$200. have reached overseas destinations to tap new markets and have acquired technologies. The market has witnessed Indian mobile handset market investment in the form of greenfield projects, and the 120 7 majority of this capital value has been used to acquire 6.0 companies. M&A provide benefits such as expansion of 5.4 5.6 6 global footprint, access to niche technologies, new product 100 4.7 mix, a wider customer base and growth momentum. In 5 line with the change in the pattern of investments, the Volume (million units) 80 Value (US$ billion) 4 structure of ownership has also shifted toward majority and 3.2 full ownership. 60 101.5 108 3 95.6 According to the National Council of Applied 40 71.8 2 Economic Research (NCAER), India’s FDI outflows (debit) 20 have grown at a CAGR of 47.5% to reach a projected 33.4 1 US$18.6 billion69 in FY09, from US$0.8 billion in FY01. 0 0 The share of manufacturing in the investment activity has FY06 FY07 FY08 FY09 FY10 Source: Voice & Data 69 “NCAER: FDI in India and its growth linkages,” Department of Industrial Policy & Promotion, August 2009, http://dipp.nic.in/, page 13, accessed 10 October 2010. 39 Enabling the next wave of telecom growth in India declined considerably, whereas the share of services has increased. The Indian telecom sector has actively been a part of the global M&A activity, leading to the emergence of telecom giants from India. Key overseas M&A by Indian firms Year Target company Acquirer company Deal value (US$ million) 2010 Zain Africa BV Bharti Airtel Ltd 10,700.0 2010 Warid Telecom, Bangladesh Bharti Airtel Ltd 300.0 2003 FLAG Telecom Group Ltd Reliance Gateway Net Pvt Ltd 194.8 2005 Teleglobe International Holdings Ltd. TCL 177.0 2010 Telecom Seychelles Bharti Airtel Ltd 62.0 2000 Astratel Nusantara PT CDC Capital Partners 30.0 Source: Thomson ONE Banker Enabling the next wave of telecom growth in India 40 3.2. Key challenges of NTP 1999 NTP 1999 envisaged the affordability and availability of Globally, broadband penetration is accepted as a measure telecommunication services for the common populace, of a country’s ability to compete as an economic power. along with the benefit of VAS such as internet for the Despite India’s status as an IT superpower, broadband urban and rural population and the abolition of the digital penetration levels in India are far below other emerging divide. However, the telecom sector continues to face countries such as Brazil, Russia and China. According to various issues that act as impediments to its growth. Boston Consulting Group, India has an internet penetration of 7%,72 in comparison with 33% in Brazil, 31% in Russia and 28% in China. The Broadband Policy 2004 has failed to 3.2.1 Growth of wireline keep pace with advances in technology and failed to boost the telecom sector. The wireline segment has added just 10 million users since the introduction of the NTP 1999, and the number of wireline subscribers has fallen from 41.5 million in FY06 3.2.3 Spectrum challenges to 37 million in FY10. Although wireline infrastructure in India has been in place for an extended period, the The Indian telecom industry has witnessed phenomenal growth of wireline phones is not in sync with the rise in growth in the number of subscribers, with a CAGR of 77.5% the number of wireless subscribers. The decline has been during the period FY00–10. Furthermore, according to due to lower mobile tariffs, cheaper handsets, improved TRAI, the Indian telecom industry is expected to reach mobile coverage, the advantage of mobility among wireless 1 billion73 wireless subscribers by March 2014. In line networks and the inadequate infrastructure of the wireline with the growth of subscribers, the need for spectrum to network. However, wireline and wireless complement service these subscribers has also increased. According to each other. The stagnancy in the growth of wireline TRAI, the bandwidth required by 2014 may be as high as networks has an impact on the overall growth of the 800MHz.74 Spectrum bands such as the 900MHz band are telecom sector and other services such as internet and of great value to mobile operators due to the longer ranges broadband services. these can support, therefore requiring lesser BTSs density and lower capital and operating expenditure. 3.2.2 Growth of broadband Currently, in the absence of a long-term plan to meet future requirements, the advent of new technologies is As of September 2010, there were 17.9 million70 expected to create conflicts for spectrum. The availability internet subscribers and 10.3 million broadband of spectrum for commercial services in India is below the subscribers in India; the Broadband Policy 2004 had required levels. Despite being the second-largest market in anticipated 40 million71 internet subscribers and terms of the subscriber base, India lags behind in terms of 20 million broadband subscribers by 2010. The sluggish availability of spectrum for commercial use. growth in broadband services is attributable to the absence of low-cost devices, inadequate content and applications in regional languages, the affordability and availability of broadband services and inadequate infrastructure. 70 “TRAI: The Indian Telecom Services Performance Indicators (July - September 2010),” TRAI website, January 2010, http://www.trai.gov.in/Default.asp, accessed 15 January 2011. 71 “Broadband Policy 2004,” DoT website, http://www.dot.gov.in/ntp/broadbandpolicy2004.htm, accessed 10 October 2010. 72 The Internet’s New Billion, Boston Consulting Group, September 2010, page 7. 73 “TRAI: Spectrum Management and Licensing Framework,” TRAI website, page 339, May 2010, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. 74 “TRAI: Spectrum Management and Licensing Framework,” TRAI website, May 2010, page 18, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. 41 Enabling the next wave of telecom growth in India Spectrum and license allocation timeline in India • In 1995, the GoI auctioned 2x4.4MHz of start–up spectrum for GSM-based services First stage: 1995–2003 • Two operators were selected for each License Service Area (LSA). Subsequently, in 2001, the third operator license was awarded, along with 2x4.4MHz of start-up Auctioning scarce spectrum spectrum in the 900MHz band, to the government operator on a pro bono basis • In 2001, the fourth operator license was issued using a three-stage auction procedure. Start-up spectrum of 2x4.4MHz in 1,800MHz was given to the winning bidder: • In addition to the entry fees, licensees were required to pay a percentage of annual revenue as spectrum charges • In 2002, subscriber based norms (SBN) was introduced. It laid down a roadmap for the allotment of 2x12.5MHz of spectrum per operator in each LSA • In November 2003, GoI announced UASL that allowed basic service license holders Second stage: 2003–06 to provide full mobility-based services with a stipulated entry fee based on the bid price paid by the fourth operator in 2001 Unified Access Service (UAS) • The fixed fee-based license allowed any number of mobile licenses to be provided and licenses implicitly de-linked spectrum allocation from licensing. Although firms were awarded licenses after paying the required entry fee, they were given start-up spectrum only as and when available • Following the entry of two or three CDMA-based mobile operators in each LSA, one or two new firms also paid the stipulated entry fee and obtained a license to operate GSM services in certain LSAs • 3G services were treated as a separate service from 2G, and TRAI continued to Third stage: 2006–08 maintain that there was a shortage of 2G spectrum • A new SBN policy was defined, and incumbents were kept out of fresh allocations. Criterion for allocation of The GoI allocated spectrum to new telecom players in service areas across India spectrum • The defense services agreed to vacate 2x20MHz in the 1,800MHz band, in addition to 25MHz in the 2.1GHz UMTS band • The DoT proposed new 2G spectrum usage charges for all operators. All operators were expected to pay higher spectrum usage charges, irrespective of the quantity they held. This differed from the earlier strategy of increasing spectrum charges only for those operators who held more than 6.2MHz per circle in case of GSM players and above 5MHz for CDMA • In August 2008, the GoI announced the policy for 3G mobile services, in line with Fourth stage: 2008–10 TRAI’s recommendations, and opted for the auction of a start–up spectrum of 2x5MHz in the 2.1GHz band with reserve prices for different categories of LSAs Policy on 3G and 3G auctions • In May 2010, the e–auction of 3G mobile services was concluded after 183 rounds of bidding across all service areas. All of the 71 blocks up for auction across the 22 service areas were sold: • All the winners of the auction were required to pay INR509.7 billion to the GoI within 10 days of the closing of the auction. Including the amount paid by state-owned BSNL and MTNL, it totalled to INR677.2 billion • Following the completion of the 3G auctions, the bandwidth for broadband services (WiMAX) was auctioned by the GoI. It auctioned two 20MHz blocks in the 2.3GHz range in each of the country’s 22 service areas. The GoI raised INR385.4 billion from the broadband wireless auction Source: “A peep into RF spectrum allocation process in India,” Integrated Defense Staff http://ids.nic.in/tnl_jces_Sep_2009/Spectrum%20allocation%20 procedure.pdf accessed 02 August 2010 Enabling the next wave of telecom growth in India 42 3.2.4 Licensing challenges 3.2.6 Infrastructure NTP 1999 permitted Cellular Mobile Service Providers Telecommunications infrastructure, despite being a (CMSPs) to provide all types of mobile services, including “key infrastructure,” is far from ubiquitous. There are voice and non-voice messages, data services and PCOs, in huge gaps in low-income or sparsely populated areas, their service area of operations, using any type of network especially away from cities and towns, where telecom equipment that met the International Telecommunication companies see poor returns on the expensive investment Union (ITU) or Telecommunication Engineering Center required in setting up the infrastructure. Completing the (TEC) standards. Prior to this, licensees were required important task of connecting the remaining areas therefore to use GSM technology. The policy made the cellular requires an all-round effort by improving the economics license technology neutral, and also allowed licensees to of rolling out networks and addressing any other migrate from a fixed license regime to a revenue-sharing stakeholders’ concerns that act as a barrier. arrangement starting in August 1999. In November 2003, Telecom infrastructure service providers face several the GoI introduced the UAS licensing regime, permitting challenges, which are highlighted below: an access service provider to offer either fixed or mobile services or both. Since the introduction of the UAS Role played by multiple state agencies: there is no licensing regime, the total number of licenses in a circle uniform approval process across the states, and the ranges from 12 to 14.75 biggest barrier to setting up telecom towers and other infrastructure is the wide variation in the approval Globally, the allocation of spectrum is separate from the process adopted by local bodies. Several demand grant of license to provide service. However, in India, prohibitive fees; others require dealing with multiple licenses are bundled with the allotment of a certain amount agencies; some treat infrastructure business in the same of spectrum. way they treat petty commercial undertakings; and some look at infrastructure companies as a means to finance 3.2.5 Equipment manufacturing deficits. Tower companies, therefore, incur huge costs and delays because several state agencies are involved in The Indian telecom sector has witnessed rapid growth. granting approval for setting up towers. However, telecom manufacturing in India has not been Inadequate utilization of towers: towers are not fully able to keep pace. Currently, there is a limited number utilized as no law ensures that no new tower is built in an of telecom equipment manufacturers and providers tend area where an existing tower is under utilized. to be highly dependent on imported equipment during the setup of mobile networks. Moreover, the country lags Civic issues: there is a need to address civic issues behind in terms of telecom R&D and continues to be reliant such as zoning regulation, single window clearance, on imports. preferential treatment for sharing and incentives in a timely manner. 75 “TRAI: Spectrum Management and Licensing Framework,” TRAI website, May 2010, page 59, http://www.trai.gov.in/Default.asp, page 59, accessed 10 October 2010. 43 Enabling the next wave of telecom growth in India Taxation on towers: multiple levies and high taxes are Power consumption: one of the major problems faced is imposed for setting up mobile towers. For instance, the the lack of reliable grid power. Without it, service providers Municipal Corporation of Delhi (MCD) charges INR100,000 are forced to use diesel generator sets at tower sites most per tower and the New Delhi Municipal Council (NDMC) of the time. Secondly, the power connection to telecom charges INR200,000 per tower as a one-off registration towers is treated as one to a “commercial establishment,” fee in Delhi. and thus, the highest tariff is applied to the telecom site. In large parts of India, the power is either unavailable or Delays and cumbersome processes for the SACFA erratic. This increases the dependence on diesel, which clearances: the SACFA gives siting clearance of all wireless is not only more expensive but also polluting. Further, installations in the country. The site clearance basically there is no clarity on the rates to be paid by infrastructure requires examination from the point of safety for flight companies. Some agencies charge them “industry” rates, navigation and interference with existing wireless systems. while others charge “commercial” rates, and there are Utilization of USOF and incentives: since the next level other options as well. This adds avoidable uncertainity in of growth is expected to come from rural areas, there an already tough business. is a need to accelerate the pace of setting up the tower Energy consumption: cell sites account for most of the infrastructure in these areas. Although the USOF was energy consumed by mobile networks, as these are created with the sole aim of promoting rural telephony, dependent on diesel generators to keep running. Diesel the fund rules are too cumbersome and lack focus. They fuel is subsidized, and it is estimated that India as a country do not reflect the fact that USOF subsidies are perhaps consumes more than 2 billion liters of diesel per year for most urgently required to defray the cost of infrastructure cell sites. creation in rural areas. Environmental issues: diesel consumed by towers results Grievance redressal: there is no clear grievance escalation/ in about 17,000 tonnes of CO2 and 24,000 tonnes of redressal mechanism that infrastructure companies can carbon equivalent. The cumulative carbon footprint of seek when a conflict arises. telecom towers due to diesel consumption in a year is more Safety: the construction of telecom towers is still a than 5.5 million tonnes.76 The thrust in increasing rural self-regulated activity throughout India. Currently all the telephony will further aggravate the diesel dependence by telecom operators are following IS codes, namely IS:800, telecom towers. IS:802 and IS:875, for the design of towers. The above IS Misplaced apprehensions on health hazards of codes are primarily meant for electric/power transmission electromagnetic radiation from mobile antennas: line tower design, and the load criteria for telecom towers many state governments and municipalities have barred and transmission line towers are different. towers in residential areas, citing concerns over alleged health hazards relating to BTS. 76 Industry estimates. Enabling the next wave of telecom growth in India 44 4Key enablers As we enter the second decade of the 21st century, India’s telecom industry is at a crossroad. This is the appropriate time to look again at the NTP 1999 and customize it to meet current and future needs. The NTP 1999 has served the sector well for more than a decade, which witnessed significant changes in the socioeconomic environment, technological advancements and business dynamics of telecommunications. Therefore, the time is ripe for a comprehensive review to build a forward-looking, strong and transparent policy framework that will be the backbone to achieving the India Telecom Vision 2020. India needs a principle and objective-based, transparent, efficient, independent and competitively neutral policy that will accelerate the pace of growth in telecom services and manufacturing. • A principle- and objective-based policy that provides a clear roadmap of the telecom sector and is reviewed regularly to keep abreast with rapid technological developments in the sector • A transparent approach to policy formulation, providing interested parties with concrete opportunities to navigate the growth of the telecom sector • The creation of an efficient mechanism to implement regulatory decisions. It needs to identify and address barriers to growth • The functioning of the regulator in an unbiased manner, and the formulation of a competitively neutral policy that is not discriminatory toward any of the stakeholders 45 Enabling the next wave of telecom growth in India 4.1. Connected India: telecom vision 2020 The policy initiatives should focus on achieving the vision for connected Indian Telecom 2020: India should have a convergence services enabled network with voice, data, video, media, broadband and internet services delivery to subscribers with high quality of experience. It should be supported by different metrics of quality of services at affordable tariffs meeting the needs of different segments of society, with inclusive participation from rural India to ensure telecom coverage for all. Enabling the next wave of telecom growth in India 46 4.2. Connected India: telecom mission 2020 Connected India: telecom mission 2020 should aim to achieve the following objectives: • To recognize and treat telecom infrastructure as critical infrastructure to accelerate the pace of growth of the sector and increase its contribution to the Indian economy • To connect the unconnected at affordable prices to ensure 100% telecom coverage of the country; achieve rural penetration of 100% and reach overall wireless penetration of 110% • To strengthen broadband penetration to reduce the digital divide; achieve total broadband connections of 150 million • To earn revenues of around US$60 billion A two-pronged strategy is needed to achieve connected India Telecom Mission 2020. First, the existing challenges faced by various stakeholders need to be addressed. This involves key enablers such as licensing framework, spectrum, USOF, broadband penetration, M&As, equipment manufacturing and infrastructure development. Second, the policy should be able to meet future opportunities. This will, among other things, include the unique identification number (UID) scheme, financial inclusion and m-commerce. 47 Enabling the next wave of telecom growth in India 4.3. Key enablers under existing scenario 4.3.1 Licensing77 The telecom sector has evolved from a monopolistic regime in the early 1990s to 12–14 licensees in a circle now. In November 2003, the GoI introduced the UAS licensing regime, which let the provider offer fixed, mobile or both services under the same license, using any technology. The GoI has issued many new UAS licenses since the introduction of the UAS regime. Globally, the number of incumbent telecom service providers varies from four to six, with the allocation of spectrum separate from the allocation of a license. However, in India, under the UAS regime, a licensee is entitled to obtain a certain amount of spectrum, subject to its availability and efficient usage. Parameters Recommendations Spectrum and license Need to have a single universal license for all telecom services. The policy must preserve competition and ensure that no service is given a price arbitrage over others. Fee There should be a uniform license fee across all telecom circles. Multiple levies, including service tax and license fees (such as universal service obligation fees and spectrum charges), are currently imposed on the industry. Moreover, states levy additional taxes such as octroi, VAT, stamp duty, entry tax and levies on towers, which aggregate to 30% of the revenues earned by telecom companies. A uniform revenue share license fee of 1%, excluding the USOF, should be fixed. Since there is a significant cash reserve lying unutilized in the USOF, DoT should consider lowering the contribution from 5% of AGR to 1% of AGR. Pure internet service providers should continue to be free of any license fees. 77 See 5.1. for global practices. Enabling the next wave of telecom growth in India 48 License renewal Ensure regulatory certainty and ease investor concerns: • Provide a clear license renewal regime that includes legislation, renewal procedures, reasons for refusal to renew and appeals to regulatory decisions • Provide details along with the license, if the legislative framework is not comprehensive • Create a balance between certainties in the renewal process • Regulatory discretion to clear parameters of license renewal with appropriate checks and balances Procedures for license renewal: • Initiate renewal process well in advance of expiry • Perform periodic forward review of market and needs • Disclose and publish reasons for non-renewal of licenses • Adopt a public consultation process • Guarantee a right to appeal In the event of non-renewal: • Provide minimum notice period • Delay vacancy of spectrum to give enough time for operators to adapt strategies • Ensure exit strategies for operators and continuity of service to consumers Change in license conditions and obligations: • Renewal process is a good occasion to review license conditions • Ineffective mandatory service obligations create an anti-competitive impact, if the burden is not kept at a manageable level Amendments Currently, amendments to license agreements are carried out unilaterally. Service providers should be consulted before provisions in license agreements are amended. 49 Enabling the next wave of telecom growth in India 4.3.2 Spectrum78 Spectrum, being a scarce natural resource, plays a critical role in the provision of mobile telecom services. In India, the National Frequency Allocation Plan (NFAP) is the basis for spectrum utilization and development and the manufacturing of wireless equipment. The next five years are going to see the spread of telecom services enabling subscribers to benefit from voice, data and other application services. An increasing availability of smart-phones with significant processing capacity and a wide array of applications are resulting in higher requirements of spectrum. It is estimated that the total requirement of spectrum in the next five years would be of the order of 500-800MHz including 275MHz for voice services alone. In line with estimated demand of approximately 500-800MHz spectrum across various bands out of a total 1,161MHz79 of identified spectrum by TRAI, a minimum of 287MHz and a maximum of 454MHz is currently available. A mechanism to ensure transparent and non-discriminatory spectrum management is needed. Spectrum available for telecom operators in different frequency bands80 Frequency band Spectrum available in the Spectrum available (in MHz) band (in MHz) for telecom sector 450-470 20 - 698-806 108 - 806-824 18 - 824-844 20 20 869-889 20 20 890-915 25 18.6-21.8 935-960 25 18.6-21.8 1,710-1,785 75 35-75 1,785-1,805 20 - 1,805-1,880 75 35-75 1,880-1,900 20 0-20 (after coordination) 1,900-1,910 10 - 1,920-1,980 60 0-60 2,010-2,025 15 - 2,110-2,170 60 60 2,300-2,400 100 40 2,500-2,690 190 40 3,300-3,400 100 100 (ISPs) 3,400-3,600 200 - Total 1,161 287.2-453.6 78 See 5.2. for global practices. 79 “TRAI: Spectrum Management and Licensing Framework,” TRAI website, May 2010, page 22, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. 80 “TRAI: Spectrum Management and Licensing Framework,” TRAI website, May 2010, page 22, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. Enabling the next wave of telecom growth in India 50 Country-wise spectrum availability Country Total licensed Wireless subscribers, Subscriber/MHz spectrum for mobile 2008 (million) (million/MHz) services, MHz (2008) Argentina 170 46.5 0.27 Brazil 200 150.6 0.75 Canada 265 150.6 0.57 Chile 140 14.8 0.11 Colombia 120 41.4 0.35 Mexico 120 75.3 0.63 Spain 358 49.6 0.14 UK 353 77.4 0.22 US 294 270.3 0.92 Source: “Digital Dividend Pavilion - Latin America Wireless Roadmap,” 3g Americas website, February 2009, http://www.3gamericas.org/documents/MWC%202009%20Digital%20Dividend%20Pavilion-3G%20Americas%20 Erasmo%20Rojas.pdf, accessed 14 January 2011; ITU - ICT Statistics 2008; Ernst & Young analysis. Circle-wise spectrum allocated in India81 Circle Allocated spectrum (MHz) No. of operators Subscriber Subscriber/MHz (million) (million) GSM CDMA Total GSM CDMA Total Delhi 53.6 15 68.6 12 4 16 33.5 0.49 Mumbai 72.4 15 87.4 11 4 15 31.3 0.36 Kolkata 60.4 13.75 74.15 10 4 14 19.2 0.26 Maharashtra 69.4 15 84.4 12 4 16 50.7 0.6 Gujarat 60.4 12.5 72.9 11 4 15 38.9 0.53 Andhra Pradesh 69.4 13.75 83.15 12 4 16 52.7 0.63 Karnataka 69.4 13.75 83.15 12 4 16 43.1 0.52 Tamil Nadu 67 12.5 79.5 11 4 15 62.2 0.78 Kerala 61.2 15 76.2 11 4 15 28.1 0.37 Punjab 63.2 15 78.2 12 5 17 24 0.31 Haryana 63.8 12.5 76.3 12 4 16 17.2 0.22 Uttar Pradesh — West 61.2 13.75 74.95 11 4 15 37.2 0.5 Uttar Pradesh — East 62.4 13.75 76.15 11 4 15 53.3 0.7 Rajasthan 63.8 15 78.8 12 4 16 37.6 0.48 Madhya Pradesh 63 12.5 75.5 11 4 15 37.3 0.49 West Bengal 53 11.25 64.25 10 4 14 31 0.48 Himachal Pradesh 57.6 10 67.6 11 4 15 6.1 0.09 Bihar 66.8 13.75 80.55 12 4 16 44.7 0.55 Orissa 59.4 11.25 70.65 11 4 15 18.6 0.26 Assam 55 10 65 10 4 14 10.2 0.16 North East 53.2 10 63.2 10 4 14 6.2 0.1 Jammu & Kashmir 49.4 10 59.4 10 4 14 4.7 0.08 81 “TRAI: Spectrum Management and Licensing Framework,” TRAI website, May 2010, page 22, http://www.trai.gov.in/Default.asp,accessed 10 October 2010; “TRAI: The Indian Telecom Services Performance Indicators (July-September 2010),” TRAI website, January 2010, http://www.trai. gov.in/Default.asp, accessed 15 January 2011; Ernst & Young analysis. 51 Enabling the next wave of telecom growth in India Operator spectrum holdings Country/Region/Operator Spectrum holding per operator, MHz India 28-37 Denmark 118.4 EU average 92.6 France 138.5 Germany 65 Italy 72.7 Spain 100.6 Sweden 92 UK 82.2 US 75-96 Source: “Digital Dividend Pavilion - Latin America Wireless Roadmap,” 3g Americas website, February 2009, http://www.3gamericas.org/documents/MWC%202009%20Digital%20Dividend%20Pavilion-3G%20Americas%20 Erasmo%20Rojas.pdf, accessed 14 January 2011; “Presentation to the DoT committee on spectrum allocation criteria,” Communications Today, http://www.communicationstoday.co.in/images/1-pdotfinal.pdf, accessed 14 January 2011. Parameters Recommendations Availability Align spectrum bands with globally harmonized bands to achieve interference-free coexistence and economies of scale. Identify and vacate new spectrum bands for future use. Re-farming Need to bring in additional spectrum for commercial telecom services. Need to review the present usage of spectrum available with government agencies so as to identify the possible areas where spectrum can be re-farmed, and to draw up a suitable schedule. Regular spectrum audits should be carried to oversee the efficient utilization of spectrum. Spectrum allocation Spectrum allocation should be based on technology neutrality, service flexibility, timely allocation, timely spectrum reconciliation and enhanced transparency. Need to lay down a clear roadmap for spectrum management which should state the requirement and availability of spectrum for each circle as well as for the whole country. This roadmap should be made available publicly to ensure transparency. National frequency allocation plan should be reviewed every two years. Spectrum allocation to 2G spectrum up to the contracted limit should be ensured as initial spectrum. existing players Allocation of spectrum beyond the contacted limit should be based on market mechanisms. The contacted limit of spectrum will be 6.2MHz for GSM operators and 5MHz for CDMA operators. Spectrum allocation to new Allocation of spectrum should be based on auctions. Spectrum should be provided to the highest players bidder, based on a transparent auction mechanism to determine the price. Spectrum usage charges The criteria for levying spectrum usage charges should be identified upfront at the time of allocation of spectrum. Spectrum sharing and Service providers should be allowed to enter into arrangements for transfer/sharing of spectrum trading among themselves so as to effectively utilize it and attain maximum spectral efficiency in the sector. It should be based on market price and not administered pricing. Enabling the next wave of telecom growth in India 52 4.3.3 Universal Service Obligation Fund (USOF)82 NTP 1999 envisaged access to basic telecom services for VPT and RCP: around 570,000 VPTs are currently eligible all, especially those in rural and remote areas, at affordable for financial support for operation and maintenance. As of prices. In 2002, the Universal Service Support Policy came 31 December 2009, BSNL has provided VPTs to 61,186 into effect, with a universal service levy of 5% being levied out of 62,302 uncovered villages. Out of the target of on the adjusted gross revenue (AGR) earned by all telecom 40,705 rural community phones (RCPs), 40,694 have operators except on VAS such as internet service, voice been provided as of December 2009. mail and email. The USOF is estimated to hold around INR180 billion,83 at the end of FY10. However, rural Tower infrastructure: provide infrastructure support to teledensity is at 28.4%, whereas urban teledensity is about set up and manage 7,436 infrastructure sites spread over 137.3%, resulting in a huge digital divide. The USOF has a 500 districts in 27 states. As of 31 December 2009, about long way to go to provide impetus to rural telephony and 6,950 towers have been set up under this scheme. bridge the gap between the funds collected and disbursed Rural broadband: 95,011 broadband connections out of in an effective manner. the proposed 888,832 wireline broadband connections The USOF covers rural and remote areas with public access have been provided as of 31 December 2009. telephones and individual rural household telephones in net Multi access radio relay (MARR)-based VPT: out high cost rural and remote areas. The USOF has enabled of 185,121 MARR-based VPTs installed before telecom development in rural areas through the following April 2002, about 184,500 have been replaced as of key developments: 31 December 2009. Disbursement of the USO levy to the operators 60 54.1 55.2 50 39.4 40 34.6 (INR billion) 32.2 30 17.7 18.5 20 15.0 16.0 13.1 12.9 10 N/A 0 FY05 FY06 FY07 FY08 FY09 Dec-09 Funds collected Funds disbursed Source: DoT 82 See 5.3. for global practices. 83 “Minister Sachin wants to ‘Pilot’ IT revolution in northeast,” Indo-Asian News Service, 7 March 2010, via Dow Jones Factive, © 2010 HT Media Limited. 53 Enabling the next wave of telecom growth in India Parameters Recommendations Objectives The USOF framework needs to be reviewed regularly to effectively utilize the funds to achieve universal service. The USOF should aim to achieve the following: • 100% rural teledensity by 2015 • 25-30 million broadband subscribers in rural areas over the next five years • Data coverage to all villages through cable modem termination system (CMTS) data technology by 2015 • Broadband connectivity for 250,000 gram panchayats by 2012 • At least 20 active public information kiosks with at least 256 kbps speed in every district headquarters by 2015 Potential usages The USOF should be utilized for the following: • Provision of public telecom and information services • Provision of household telephones in rural and remote areas as may be determined by GoI from time to time • Creation of infrastructure for provision of mobile services in rural and remote areas • Provision of broadband connectivity to villages in a phased manner • Creation of general infrastructure in rural and remote areas for development of telecommunication facilities • Induction of new technological developments in the telecom sector in rural and remote areas Method of allocation Subsidies should be distributed through transparent market-oriented allocation methodology. Fund collection There is a significant cash reserve lying unutilized in the USOF, so DoT should lower the contribution from 5% to 1% of AGR. Enabling the next wave of telecom growth in India 54 4.3.4 Broadband84 India trails all developing Asian countries, as well as Broadband services should be encouraged using wireless its BRIC counterparts, with a broadband penetration media because the laying of fibers block by block at district of just 0.74%.85 There were just 8.8 million broadband headquarters would be costly and time-consuming. To connections at the end of FY10, against the target of 20 kick-start the broadband penetration in rural and far-flung million by 2010 set in the Broadband Policy of 2004. The areas, deployment of wireless access should be given net broadband addition per month is just 0.1 to 0.2 million. preference and fiber media should be utilized from the The growth of broadband is restricted by several factors already available fiber capacity across nation. The last mile such as its perceived utility, application, connectivity, lack access issue can be addressed through the deployment of of vernacular content, cost of device and affordability. wireless technology. Today, socioeconomic growth is dependent on the spread Broadband should be redefined and clauses such of broadband services across the country. India has set as ‘’always on’’ and minimum speed should be removed a target of 100 million broadband connections by 2014, from National Broadband Policy, 2004, in order to connecting 40% of the households in the country. The encourage broadband. drivers for broadband services are broadly classified as technological, economic, social, behavioral and The 3C’s — customer, cost and competition — are government initiatives. India lags behind in terms of ITU’s essential for improving broadband penetration. The ICT Development Index (IDI),86 with a ranking of 129, 106, need to provide broadband services in rural areas should and 118 out of 154 countries in terms of ICT access, use, be met with the help of easy financing and the means and skills, respectively. This calls for a critical review of the to share capital expenditures. Further, there should Broadband Policy 2004 and the creation of appropriate be balanced competition to ensure the quality and infrastructure to support broadband growth. affordability of services. 84 See 5.4. for global practices. 85 “TRAI: Consultation Paper on National Broadband Plan,” TRAI website, June 2010, page 3, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. 86 “TRAI: Consultation Paper on National Broadband Plan,” TRAI website, June 2010, page 28, http://www.trai.gov.in/Default.asp, accessed 10 October 2010. 55 Enabling the next wave of telecom growth in India Parameters Recommendations Infrastructure Optic fiber communication (OFC), high-capacity microwave and satellite connectivity should be extended to rural, remote and inaccessible areas. Backhaul connectivity and OFC should be provided to all telecom towers, BSCs and BTS from the nearest block headquarters. The development of the customer premises equipment (CPE) model should be supported for the interoperability of broadband. There is a case for private-public partnership (PPP) in broadband along the lines of highway construction in India through the build, operate and transfer route. The Government should foster competition to improve the pace of penetration. More than two service providers with a rollout obligation should be funded. Wireless broadband More spectrum should be made available. Since growth will be through wireless broadband, the government and private sector should collectively work toward developing low-cost mobile applications. Regional content Content and applications in regional languages should be created to promote rural broadband. Investments should be made in key content development and services such as e-health and e-education. The support for local access and content delivery to towns should extend beyond the 150 commercially viable towns. PC penetration Workshops by local entrepreneurs should be promoted under the common services centers (CSC) scheme, which is a part of the National e-Governance Plan (NeGP). Computer usage by government employees should be encouraged. Online fee payments should be encouraged for land records, vehicle registration, driving licenses, payment of electric and water bills. Discounts should be provided for online payments. Fiscal incentives Tariffs need to come down. This can happen only if there are incentives to build infrastructure and provide broadband services. The GoI should consider a differential tax to encourage the private sector to set up common access points. The tax status for expenditure on connectivity/usage should be similar to policies on other public welfare services such as education and medical allowance. Right of way (ROW) ROW procedures should be uniform, and charges for broadband services should be rationalized across all states. Broadband connectivity should be made mandatory for all buildings requiring a completion certificate, on the lines of water and power connectivity. In addition, building and cooperative society bylaws can be effectively modified to make it mandatory for such entities to invite broadband service providers to broadband-enable buildings by at least 10 Mbps per household. Similarly, all national and state highway projects should include the laying of an optic fiber backbone. Enabling the next wave of telecom growth in India 56 4.3.5 Mergers and acquisitions87 At present, intra-circle M&A is allowed subject to the following conditions: • The total number of operators in a circle should not fall below four • Market share and revenues of the merged entity should be less than 40% in each circle • A three-year lock-in for owner’s equity in the new operators that have been given licenses recently (no lock-in if fresh equity) • Maximum spectrum of the merged entity will be capped at 15MHz for Metros and A circle and 12.4MHz for B circle and C circle • No one entity can hold equity stake of 10% or more in more than one licensee company in the same circle The Government should continue to follow the policy to permit mergers but at the same time retain enough competition in the market so as to protect the consumer interest. The TRAI recommendations dated 11 May 2010 should be followed to maintain the balance between the interests of consumers and service providers. Parameters Recommendations Number of operators Mergers should not result in less than six operators in the circle. Service area and license Merger of licenses shall be restricted to the same circle. stipulations Merger of license(s) shall be permitted in the following category of licenses: cellular mobile telephone service (CMTS) license with CMTS license, unified access services license (UASL) with UASL, CMTS license with UASL, and UASL with UASL. Merged licenses in all the categories above shall be in UASL category only. Market share of merged entity The share of a merged entity should not be greater than 30% in terms of sub-base or AGR. Lock-in period The stipulation regarding the minimum period of three years from the effective date of license for merger or acquisition should be done away with. 87 See 5.5. for global practices. 57 Enabling the next wave of telecom growth in India 4.3.6 Taxation Over the years, the significance of the telecom sector • Recharge coupon vouchers (RCVs): the Indian to the Indian economy has grown immensely. Currently, telecom sector is also characterized by a large prepaid the sector contributes significantly to GDP, as well as tax. subscriber base. As of September 2010,89 96.4% According to TRAI, the operators pay up to 30%88 of their of the GSM subscribers and 94.1% of the CDMA total revenues toward different levies, which is 23%–25% subscribers were prepaid subscribers. RCV is one of higher than their counterparts in other Asian countries. the most popular ways to pay for telecommunication The Indian telecom sector is subject to numerous taxes services, which account for 80%–85% of the operator and levies. This includes the uniform license fee, 5% levy revenues. Over the years, the bouquet of services has for USOF, VAT, custom duty and other taxes. Currently, changed, as the RCVs are witnessing liberalization the revenue share license fee (including the USOF) is in the flexibility of their usage, such as to procure prescribed as follows: merchandise, or other services. The issue whether the sale of RCVs should attract service tax or VAT has • 6% to 10% of AGR for access services, depending on been a subject of constant debate and discussion. It the category of circle is important to note that currently industry players • 6% of AGR for NLD/ILD services are paying service tax on RCVs, while the dominant purpose for selling these RCVs is provision of telecom • 6% of AGR for internet service providers for revenues services to subscribers. The levy of VAT on the sale of accruing from internet telephony service RCVs to subscribers would result in double taxation, Despite the significant contribution of the Indian telecom thereby leading to greater financial burden on the sector to the growth of the GDP and the tax revenue of the telecom sector. Indian economy, there are certain key challenges faced by • Central value-added tax (CENVAT) position on tower the sector which are outlined below: materials and shelters: telecom operators are availing • Sale of light energy: broadband services also continue CENVAT credit on goods such as angles, channels to face taxation-related concerns. Various states across and beams, which are used for building transmission India have issued show cause notices, or passed orders towers. Towers and shelters fall under Chapter 73 and demanding VAT/sales tax on the activity of providing 94 respectively of the Central Excise Tariff Act 1985. broadband connectivity by use of optical fiber cables The classification of tower, tower material and shelters treating it to be sale of “artificially created light has been an industry issue on which even the service energy” under the respective state VAT legislation. The tax authorities in different jurisdictions have taken issue was first taken up in the case of a leading telecom a different stand and have sought to deny credit on player by the state of Karnataka, with the matter these goods treating such goods as not qualifying as going up to the Supreme Court. The Supreme Court “capital goods” under the CENVAT Credit Rules 2004. without going into the merits of the case has ordered However, these goods could be treated as “component/ a relook at the matter by the state VAT authorities. It spare/accessories” of “capital goods” (i.e., BTS etc.) is important to note that currently the industry players and accordingly they can be treated as capital goods are paying service tax on such broadband services. in the hands of an operating company given that The levy of VAT on the activity of providing broadband towers and shelters are essential for the provision of connectivity services would lead to double taxation telecommunication services. This position has been of such services, thereby leading to greater financial adopted by industry players. Denial of credit on such burden on the telecom sector. goods would lead to an increase in the financial burden on telecom operators. 88 “Telecom firms want lower tax burden,” The Economic Times, http://economictimes.indiatimes.com/news/news-by-industry/telecom/telecom-firms-want- lower-tax-burden/articleshow/2753840.cms, accessed 10 January 2011. 89 “TRAI: The Indian Telecom Services Performance Indicators (July – September 2010),” TRAI website, January 2010, http://www.trai.gov.in/Default.asp, accessed 15 January 2011. Enabling the next wave of telecom growth in India 58 • Levy of entertainment tax on VAS products: there is a proposal in certain states to levy entertainment tax on VAS products as such products to entertain the caller. It is important to note that as per the current proposal, entertainment tax is not proposed to be subsumed in goods and services tax (GST). In case entertainment tax is levied on VAS products, the non-subsumation of entertainment tax in GST could impose a significant financial impact on the telecom industry. • Upcoming GST regime: according to industry experts, in view of the exponential growth witnessed by the telecom sector, GST should not translate into an ambitious target to generate higher service tax revenues from the telecom sector. The upcoming GST regime should aim to simplify the tax structure for the industry, with all services and goods being taxed at a standard rate. Further, special consideration has to be given on certain areas in the backdrop of the peculiarities of the telecom sector such as “place of supply rules90” i.e., the state where GST will be paid for different kind of telecom services; ease in state- wise compliances. The upcoming GST regime should, thus, aim to rationalize the tax structure in the Indian telecom industry, along with the creation of a roadmap for a single unified levy. The sector should be provided tax benefits and incentives in recognition of being a key contributor to the socioeconomic development and GDP of the country. 90 Place of supply rules define the place (state) which has the right to tax a service transaction. 59 Enabling the next wave of telecom growth in India 4.3.7 Foreign direct investment (FDI) In the past decade, globalization has led to a rapid increase among countries for the benefit of trade liberalization in FDI, thereby enhancing economic growth in developing and to prevent discrimination between domestic and countries. The telecom sector has been among the sectors foreign suppliers. Together, the WTO and the ITU that have witnessed substantial growth in FDI. The telecom encourage the development of a global telecommunication sector has a substantial impact on a nation’s economic infrastructure and the formation of an integrated global development, social stability and national security. telecommunication market. Hence, the balance between economic gains from foreign In the Asia–Pacific region, the telecommunications investment and national telecommunications sovereignty market reform has continued, with countries such as the presents a challenging task. Philippines, Taiwan and Thailand opening their markets FDI in telecom brings advanced technological skills and to foreign investment. In Latin America, several countries large amounts of funds, and enhances market competition. that first privatized their domestic operators in the early However, many countries control FDI in telecom 2000s are now preparing for a second round of market according to their economic and developmental needs, openings. Foreign private investment has entered the and due to its influence on national security. As a result, developing markets through joint ventures with local telecommunication industries are often state-operated and telecommunication operators or the sale of equity stakes monopolized in many countries. in state-owned telecommunication entities to private foreign investors. The Indian telecom sector needs to foster a suitable environment where investment and entrepreneurship, FDI in developing countries enables the development of including the development of new forms of electronic a local telecommunication infrastructure and universal commerce, prosper together. Globally, major FDI in access. It results in substantial progress in meeting such the telecom sector is facilitated by two international countries’ basic telecommunication requirements. Given organizations — the World Trade Organization (WTO) and the importance of foreign investment, the policy should the International Telecommunication Union (ITU). The consider raising the upper limit on foreign investment to WTO aims to promote foreign and domestic investment, encourage more foreign players to invest in the capex- and the ITU allocates global spectrum to particular intensive telecom sector. services and manages scarce communications resources Enabling the next wave of telecom growth in India 60 4.3.8 Consumer affordability and rural penetration The Indian telecom market has some of the lowest tariffs in the world, with a large majority of people using low-cost mobile handsets. The DoT has been successful in providing world-class telecom infrastructure at globally competitive tariffs and has reduced the digital divide by extending connectivity to unconnected areas. Mobile tariffs per minute in US$ 0.3 0.2 0.2 0.23 0.1 0.19 0.17 0.16 0.1 0.11 0.09 0.05 0.04 0.03 0.01 0.0 Belgium UK France Brazil Phillipines Malaysia Thailand Pakistan China India Source: DoT; India Telecom 2010 brochure In February 2006, a leading operator launched the followed up by incumbent operators introducing cheaper “One India Plan.” It was considered affordable, tariffs, giving India some of the lowest tariffs in the customer friendly and innovative for both local and long world. Furthermore, the increase in subscriber base and distance calls. It also removed the distinction between teledensity has enabled telecom companies to achieve fixed-line and cellular tariffs. The plan enabled customers economies of scale and, at the same time, provide to make calls to any phone from one end of the country leading class services. to the other for INR1 any time during the day. This was 61 Enabling the next wave of telecom growth in India Drivers of affordable mobile communication • Transparent regulation • Easy market entry Policy and regulatory approach • Lower tax burden • Low risk • License reforms to permit Affordable mobile mobile resale communications • Innovative business model • Reduction in capex and opex Operator strategies • Increased usage • Highly utilized networks Affordable mobile communication is driven by policy and There is a need to create a regulatory framework that a regulatory approach and operator strategies. Factors enables greater sharing. In order to drive penetration in such as transparent regulation, easy market entry, lower rural and remote areas, it is important that alternative tax burden, and low risk enable the creation of policy and models such as mobile resale be introduced. Resale of a regulatory approach that helps to drive down tariffs. On mobile services will allow an entity to resell mobile services the other hand, operator strategies such as innovative after buying connections in wholesale from the underlying business models, reduction in capital expenditure and service provider. The entity will sell the connections to operational expenditure, increased usage and highly their end customer and contract and bill them in their utilized networks also help lower tariffs. Pakistan has taken own capacity for the services provided. The entity will not initiatives on the policy and regulatory front by removing replicate the efforts of service provider. The services will be import duties on mobile handsets and reducing SIM provided only by the underlying access provider who will card activation charges to make mobile communication continue to address the related compliance requirements. more affordable. Similarly, operators in Bangladesh have For the service provider, the entity buying connections in designed products and services such as micro prepaid top- wholesale will be the customer. This arrangement will allow ups, which are available in very small increments, and also SMEs, small office, home offices and other organized/ allow consumers to transfer airtime between each other unorganized groups in rural and remote areas to serve the and use it as currency. needs of the population in a holistic way. Enabling the next wave of telecom growth in India 62 4.3.9 Human resource Number of students by ﬁeld of study in India India has the benefit of a huge population, which is 1% 2% characterized by a dynamic young population base– more Arts 3% than half of which is under 25 years old. However, only 3% Science 17%91 of those in their mid–20s or older have completed Commerce/ their secondary education. India possesses a developed 7% Management higher education system that offers training in many fields. Engineering/ 45% Technology In terms of size and diversity, India has the largest 18% Medicine number of higher education institutions, followed by the US and China. As of December 2009,92 there were 504 Law universities and university-level institutions, including 243 Agriculture state universities, 53 state private universities, 40 central Others universities, 130 deemed universities and 33 institutions of 21% national importance. However, India lags behind China and the US in terms of student enrollment. Source: Making the Indian higher education system future ready, Ernst & Young, 2010 Number of higher education institutions and student enrollment In keeping with the NTP 1999’s R&D objective, organizations such as the Telecom Centers of Excellence 30,000 30 (TCOE), the Center of Excellence in Wireless Technology 25.4 25 (CEWIT) and the Broadband Wireless Consortium of Number of higher education Student enrollment in higher 21,213 India (BWCI) have been established. Such organizations 20,000 17.8 20 promote R&D and help in creating a talented workforce. education (million) institutions 12.9 For instance, in May 2007, a committee comprised of the 15 DoT, COAI, and AUSPI submitted a report that suggested 10,000 10 ways to form seven TCOEs across India in a PPP mode. 6,706 21,213 Each TCOE is sponsored by a telecom operating company 5 and is hosted by a premier technical or management 0 0 institute. The main funding for a TCOE comes from India US China the sponsoring telecom operators, while the GoI provides Source: Making the Indian higher education system future ready, basic and research infrastructure. Ernst & Young, 2010 91 Unleashing India’s Innovation, World Bank website, October 2007, page xv. 92 Ministry of Human Resource Development, Government of India — Annual Report 2009–10, Ministry of Human Resource Development, FY10. 63 Enabling the next wave of telecom growth in India 4.3.10 Equipment manufacturing93 The production of telecom equipment in India has • Significant export potential: according to the Telecom increased at a CAGR of 29% from FY04 to FY09, reaching Equipment and Services Export Promotion Council a value of INR518 billion94 in FY09 during the last five (TEPC), the segment holds an export potential of years. The value of telecom equipment exports was INR450-500 billion96 by FY14, further strengthening INR81 billion in FY09 during the last five years. According the case for a robust telecom manufacturing industry. to DoT estimates, the requirement for telecom equipment • Increased competitiveness in the global market: a in India is expected to be about INR5 trillion95 by 2015. technologically advanced manufacturing ecosystem However, the share of locally manufactured equipment in India prospectively offers an international platform has declined to 30% in FY09 from 74% in FY04. India to telecom manufacturers. Thus, localized players needs to position itself as a telecom manufacturing hub in can expect to compete globally with established the long term, and policy initiatives should be focused on manufacturers and make their own mark in foreign encouraging localized manufacturing. markets in the long run. The case for a growing telecom electronics and equipment manufacturing industry is as follows: • Employment generation: given the right impetus, growth in the segment holds the potential to triple the country’s current employment base by FY14. Parameters Recommendations Manufacturing hub There is a need to set up hardware manufacturing cluster parks (HMCP) across the country and to upgrade localized infrastructure to support large volume contract manufacturing. The policy should provide encouragement to localized manufacturers for products designed and manufactured in India as well as products that are manufactured but not designed in the country. Fiscal incentives Domestic telecom equipment manufacturers may be allowed to have access to external commercial borrowing for capital expenditure and working capital requirements. In addition, financial institutions should lend money for the capital expenditure and working capital requirements of the telecom equipment manufacturers at the rates they use when lending to telecom service providers or infrastructure providers. It is necessary to ensure the free movement of the equipment/raw materials. In addition, the provision of a single window clearance for all state-level approvals would be a vital fiscal measure. Other significant incentives would encompass the removal of withheld tax on the fee for transfer of technology and software import. The tax on the payment of royalty should be as low as possible. In order to encourage technology transfer, royalty payments of up to 5% on domestic sales and 8% on exports should be exempted from income tax. In order to reduce transaction costs, customs clearance for imports and exports should be done on a self-declaration basis. There should be provision for round-the-clock customs clearance, supported by the banking system. Export promotion The Government could create a sizable export promotion fund for the Telecom Equipment and Services Export Promotion Council (TESEPC), resulting in the significant growth of exports to developing nations. There is a need to align product certification with international standards and to facilitate global accreditation for the testing facility. 93 See 5.6. for global practices. 94 “Indian Telecom: A Tale of Stupendous Growth,” The Viewspaper, 28 February 2010, http://theviewspaper.net/indian-telecom-a-tale-of-stupendous- growth/, accessed 20 October 2010. 95 “Indian telecom firms may get DoT boost,” LiveMint, 01 April 2010, http://www.livemint.com/2010/04/01215017/Indian-telecom-firms-may-get-D. html, accessed 02 August 2010. 96 Policy Recommendations to Increase Domestic Telecom Growth and Exports of Telecom Equipment & Services - Telecom Equipment and Services Export Promotion Council (TEPC), page 4. Enabling the next wave of telecom growth in India 64 Bilateral trade programs Telecom exports from India may be included in bilateral trade agreements with emerging markets in regions such as South Asia, Africa, Latin America, Russia and Eastern Europe. Indian trade missions in these regions should proactively seek opportunities in the telecom electronics and equipment domain and facilitate business interactions. Taxation The current taxation structure for mobile handsets must be maintained for long-term growth. Financial support Set up an autonomous body, similar to the Telecom Finance Corporation, to assist and provide guidance to those who want to set up a manufacturing facility. Investments for accessories A detailed program should be created to attract investment in the manufacturing of accessories such as batteries and chargers for mobile handsets. R&D R&D should be the key focus. The active participation of the private sector in multiple projects is expected to lead to R&D benefits that will flow to both the public and the private sector. A fund for R&D and product development for the segment should be created. Leading class R&D centers in the PPP mode should be promoted. Service hubs Telecom equipment manufacturers should be encouraged to create service hubs to develop a global network and strengthen their presence across India. 65 Enabling the next wave of telecom growth in India 4.3.11 Telecom infrastructure97 Infrastructure growth is critical to the rollout of services. scale and spread of the tower portfolio and the ability to For India to achieve 85% teledensity, it needs 95% raise capital. The biggest barrier to setting up telecom coverage. At present, there is no uniform approval process towers and other infrastructure is the wide variation in the across states for setting up telecom infrastructure. The approval process adopted by local bodies. telecom infrastructure service provider needs to apply to Given the challenges that the industry faces, there is a the local municipality or panchayats for permission to build need to lay down a National Telecom Critical Infrastructure a tower. But the lack of guidelines or standard procedures Policy on the lines of NTP 1999 elaborating uniform results in enormous delays and huge cost implications. procedures for land acquisition, creating a uniform taxation Moreover, the tower business is characterized by high regime, and extending subsidies and other packages to initial capital investments, stable and predictable cash flow, create a conducive environment to boost national telecom low working capital requirements and high incremental infrastructure building and thereby ensure the increased profitability. The profitability is dependent on the ability participation of all the stakeholders. to increase tenancy on the tower, the rents charged, the Parameters Recommendations State subject There is an urgent need for simplification and harmonization of complex rules and processes so that unreasonable barriers do not impede the rollout of infrastructure. GoI should announce a National Telecom Critical Infrastructure Policy (NTCIP). If legislative amendments are needed, they should be adopted in a timely manner. There is a need for national ROW policy for rollout of backhaul network. Tower infrastructure needs to come under the Indian Telegraph Act, and GoI should declare mobile and tower infrastructure as “Critical Infrastructure Services.” Tower infrastructure should be erected in accordance with the NTP and licenses granted by the GoI under the Indian Telegraph Act. These are not matters of local self-government or municipal departments, but are matters liable to be governed by the GoI or regulatory authority constituted by it in accordance with the NTP. Telecom/broadband connectivity should be considered a necessity such as water and power in every housing facility. This mandate should be included in bylaws of the local and state governments. There is also a need for an empowered committee or similar structure to engage with roads and power ministries, which are directly connected with the growth of tower infrastructure. Full utilization of towers— There should be laws governing the rollout of towers. A 70-meter tower could service an area of 2-3 optimum sharing square kilometers, and there could be distance guidelines for the same. The rollout subsidy could be fixed at a flat amount based on the approved tower design for a period of five years. Every tower should be fully utilized. If an existing tower is not operating at 100% capacity, then no new tower should be allowed in that zone, which avoids duplication of capex. Once the existing tower is at capacity, a new tower could be awarded through a bidding process. Such practice is being followed in developed countries such as the US. Technological approaches that can potentially reduce the direct and indirect costs of creating telecom infrastructure should be encouraged. The march of technology-IP/converged platforms is leading to integrated technology-neutral host platforms. Also, in-building solutions and DAS make it possible to conserve spectrum and reduce the visual impact of towers. Civic issues Civic issues such as zoning regulation, single window clearance and preferential treatment for sharing and incentives need to be addressed in a timely manner. 97 See 5.7. for global practices. Enabling the next wave of telecom growth in India 66 Taxation on towers Rationalize the tax structure across states in the form of tax cuts, fiscal incentives and subsidies. The fee levied on tower companies should not be viewed as a source of income to fund the development of a municipality. The Central Government should not impose a cess on tower operators. Since tower operators do not directly serve the end consumer, a cess should not be levied on them. Currently, there is no cess on handset manufacturers, call centers (with about 40,000 employees) and BTS manufacturers. The immediate cost of infrastructure creation can be brought down significantly by reducing government duties and taxes, which account for 60% of infrastructure companies’ outgo. Infrastructure companies are akin to players such as equipment vendors and network management companies. There is little justification for imposing costs such as lincense fees on these players, because they do not interface directly with end users. SACFA clearances Telecom service providers coordinate with a variety of departments for site clearances which is a time-consuming process. The SACFA Committee should be revamped as part of a faster and simpler site clearance process. Utilization of USOF and USOF subsidies are required to defray the cost of infrastructure creation in rural areas. incentives The USOF contribution toward the setup of telecom infrastructure and its role for rural rollouts should be specified. Time-related incentives ought to be provided to tower infrastructure providers to speed up deployment. Grievance redressal A broader framework should be created to handle and settle grievances involving infrastructure companies in the event of a conflict. Safety concerns Each tower should have a structural certificate, which should be approved by a competent authority. Tower specification and standardization requirements should be clearly spelled out. There could be 6-10 standard designs for a tower, which would be approved by a “design approving authority.” The development of specific IS code of telecom towers will help the industry to follow optimized design parameters, which will make towers safer. Standardized design across operators and geography would further help optimize sharing and potentially reduce cost. Power tariffs and Telecom services should be treated as a public utility service, and the industrial rate structure should consumption be made applicable to towers across all states. The state electricity boards should be advised to place a priority on applications for utility connections from telecom infrastructure service providers. Grid power supply should be made available. Energy consumption Indian mobile operators and equipment vendors need to develop energy-efficient networks by designing and deploying low-energy BTSs that are powered by renewable energy. Operators should reduce their existing diesel generator run times by deploying the latest fast- charging batteries and improving their partial-state-of-charge capabilities. The energy used by tower companies should fall under a uniform classification in all states. The dependence on diesel could be reduced if the Government utilizes the current diesel subsidy to support a move toward renewable energy options such as solar, fuel cells or wind power, and treating these efforts as part of the overall effort to reduce greenhouse gases and the country’s carbon footprint. There should be a method to cash in carbon credits. 67 Enabling the next wave of telecom growth in India Aesthetic concerns There could also be special consideration made for camouflaging towers in and around certain specific urban areas having heritage or other architectural significance; and not for all generic urban areas. Even for limited camouflaging, there should be a joint endeavor between civic agencies and other related departments. Environmental issues If these BTSs can be run on renewable energy resources, annual carbon emissions could be reduced. 118,000 renewable energy base stations could reduce annual carbon emissions by up to 6.3 million tonnes. Alternative sources of energy need to be developed and deployed wherever found feasible. Service providers are using green shelters or deploying outdoor BTS wherever found feasible to reduce power consumption. Operators are also experimenting with the use of non-conventional sources of energy wherever feasible for meeting energy requirements. The feasibility of using biofuels is also being studied. These measures have the potential to reduce the carbon footprint significantly, increase the energy efficiency of new network equipment and optimize network technology to increase energy efficiency. There should be incentives for tower companies to optimize fuel and power costs. Operators should be encouraged to use green technologies. Misplaced apprehensions International institutions like the World Health Organization, the British Medical Association, the on health hazards of International Commission on Non Ionizing Radiation Protection (ICNIRP) and the GSM Association electromagnetic radiation have opined that there is no conclusive evidence of any health hazards due to radiation from mobile from mobile antennae-BTS towers. Local authorities and consumer groups should be made more aware of this. While the operators are making their best efforts to educate the general public, a positive public stand by the regulator would be extremely helpful. Furthermore, there is a need to fix the feed strength to control radiation emissions. Recent surveys have shown that the radio frequency exposure from base stations ranges from 0.002% to 2% of the levels of international exposure guidelines, depending on a variety of factors such as the proximity to the antenna and the surrounding environment. In fact, due to their lower frequency, at similar radio frequency exposure levels, the body absorbs up to five times more of the signal from FM radio and television than from base stations. This is because the frequencies used in FM radio (around 100MHz) and in TV broadcasting (around 300 to 400MHz) are lower than those employed in mobile telephony (900MHz and 1,800MHz) and because a person’s height makes the body an efficient receiving antenna. Further, radio and television broadcast stations have been in operation for the past 50 or more years without any adverse health consequence being established. Enabling the next wave of telecom growth in India 68 4.3.12 Enterprise data The share of data service in India’s total telecom revenue is The Indian enterprise sector requires the ability to provide about 11% as compared with many other countries where sophisticated IP-based and other data communications it ranges from 20% to 40%. India does not rank in the top services to meet needs of enterprise and multinational 10 data revenue earning countries. customers. However, current ILD and NLD licenses were drafted before the development of current GTS Ranking of subscribers, data revenue, and services and technologies, and are largely premised on service revenue98 by country the provision of mass market consumer voice services. Rank By By data By service Therefore, these licenses do not allow the use of adequate subscribers revenue revenue encryption in accordance with current commercial 1 China US US standards to protect confidential information. They also do not address the contracting and billing arrangements 2 India Japan China required by enterprise and multinational customers and 3 US China Japan do not clearly set forth licensee obligations regarding data 4 Russia UK France services required by customers. Despite the large number 5 Brazil Italy Italy of players entering the enterprise data segment, telecom licenses are voice-centric. Therefore, most regulations 6 Indonesia Germany UK are voice-centric and do not cover issues related to 7 Japan France Germany enterprise service providers. Regulatory restrictions 8 Germany Korea India related to interconnection of data and public switched voice 9 Pakistan Spain Spain networks interfere with the realization of these services’ 10 Italy Australia Brazil full potential. Focus area Recommendations Encryption Encryption levels in ILD and NLD licenses should be upgraded to allow strong encryption of up to 256 bits to protect confidential information in accordance with international best practices. In the interest of national security, the customer should undertake to make its encryption key available to the licensed entity on demand. Lawful interception The proper treatment of data services under the ILD and NLD licenses, including lawful interception and monitoring conditions, should be clarified. The security/lawful monitoring and interception requirements applicable to enterprise data services should be specified, with attention given to MPLS and IP-VPN services, which do not connect to a public network. International private leased Indian BPOs are addressing contact center requirements globally to collect voice calls outside of India circuit (IPLC) regime and transporting them over an IPLC or MPLS link provided by the authorized service providers. In line with international practice, BPO customers need variable per minute usage-based pricing model both for inbound and outbound calls. To promote competition in the IPLC segment, a wholesale pricing regime should be introduced. It should be retail minus and avoid vertical price squeeze by the incumbent. Interconnection regime and Access charges under existing Reference Interconnect Offers (RIOs) should be fair, non-discriminatory cable landing station (CLS) and cost-based. access Access charges under new RIOs for accessing new cables should represent only the actual incremental network costs of providing the access services. Costing should be in place for RIO charges to ensure proper cost-oriented charges, specifically LIRC. Taxation Need to eliminate the cumulative assessment of licensing fees on the purchase of inputs, which imposes double taxation on ILD and NLD license holders. 98 Enterprise Sector, Association of Competitive Telecom Operators, November 2010. 69 Enabling the next wave of telecom growth in India 4.3.13 Convergence99 Market-related convergence arises due to consumer The ITU defines convergence as the integration of expectations of one-stop service availability and customer end terminal equipment, or access devices such bundling of services. Today, most of the telecom as the telephone, television and personal computer. Triple operators provide broadband services in addition to voice play is also used to define the end result of convergence, communication services. As a result, the convergence of which refers to the combination of three services — voice and data has created a trend for tariff plans based internet, telecom and telephone. Convergence has evolved on the volume of data transferred with common billing due to the processes of digitalization and computerization. for interchangeable use of voice calls and data services. Technological convergence has made way for business Convergence has led to increased competition in the convergence, with a service provider offering a bundle of marketplace, impacting both the telecommunications services. Hence, a telco provides video, data and telephone and broadcasting sector as a whole. through separate channels, whereas another telco provides triple play through a single channel. In the US and Hong Kong, commercial power lines have been used to provide telecommunication and internet services. In the near future, it is expected that these lines will become an alternate medium for providing information services, taking convergence to a new level. Convergence creates opportunities such as the combination of either equipment or businesses to provide multiple telecommunications, broadcasting and internet-based services by a single operator. At the same time, it poses challenges that need to be addressed from a regulatory perspective. It is essential to create a regulatory framework that addresses the issues arising from both technological and business convergence. 99 See 5.8. for global practices. Enabling the next wave of telecom growth in India 70 4.3.14 Security In the recent past, India has witnessed a series of terrorist manufacturers, as the requested information is considered attacks, with terrorism being primarily attributable to sensitive and proprietary. religious communities and radical movements. The In 2009, the DoT blocked calls to mobile devices without key stakeholders associated with security concerns a 15-digit International Mobile Equipment Identity (IMEI) surrounding telecom equipment include the DoT, the number, which is a unique number allotted to every mobile Ministry of Home Affairs, Indian intelligence agencies, phone for the identification purposes. The IMIE number telecom equipment manufacturers and telecom operators. helps intelligence agencies track mobile phone users and As a result, the GoI has taken steps regarding telecom curb anti–national activities. This move is expected to have infrastructure equipment, issuing guidelines related impacted approximately 25 million users, with Chinese to the import of network equipment from foreign mobile phones being the major category. telecommunications vendors. The key players that have been impacted by the security concerns include one of Although the GoI has initiated these steps to enhance the world’s leading mobile handset manufacturers, virtual security and curb terrorism with the help of mobile private networks (VPNs), internet service providers and telephony, other issues remain that continue to raise one of the world’s leading internet search engines. concerns over security. Firstly, Know Your Customer (KYC) verification process for a mobile connection faces issues The guidelines mandate the sharing and monitoring of such as forged documents, leaving the telecom system source code and design along with Indian security agencies. highly vulnerable. Secondly, with the rapid growth in Further, the guidelines put the onus for compliance on the voice and data traffic, modern data mining and network mobile operator, with penalties for non-compliance. The management infrastructure that is able to monitor DoT has also mandated thorough inspection of hardware, terabytes and exabytes of data need to be set up, along software and facilities at the time of procurement and with a trained workforce. Thirdly, any suspicious equipment periodic review thereafter. The guidelines outlined by the that is active in a network should be liable to being disabled GoI impact the commercial viability of telecom equipment via government-approved encryption. 71 Enabling the next wave of telecom growth in India 4.4. Key enablers for potential opportunities Telecom will find its immense use in schemes and in India is expected to boost market growth, driven by the initiatives aimed at socioeconomic development in the uptake of services such as mobile web browsing, mobile years to come such as m-commerce, the UID scheme and banking and multimedia messaging service (MMS). financial inclusion. The m-commerce service umbrella in India has been limited primarily to payment and transfer systems, with each 4.4.1 m-commerce100 broad category providing an array of services. Going forward, the rollout of 3G services and The next revolution that is expected through the use of increasing usage of WAP, web-enabled phones mobile phones is the emergence of m-commerce. Mobile and smartphones by mobile subscribers is expected to phones provide the consumer an opportunity to transact play an important role in the growth of m-commerce. anytime and anywhere. m–commerce finds its applications It is forecasted to overtake e-commerce in terms of the across various end markets such as banking and financial number of transactions, with synergy existing between institutions, paying bills for utilities such as power and gas, e–commerce and m–commerce, especially in the case of booking tickets for transportation services such as trains banking and internet-based purchases. and taxis and online shopping. The rollout of 3G services m-commerce Mobile banking Mobile payments Mobile transfer • Inter–account fund transfer • Information services, including • Prepaid card top-up • Account inquiry current affairs, tourism and • Person-to-person transfers search engines • Stock trading • International remittances • Ticketing (e.g., train, cinema) • Bill payment • Shopping (i.e., purchase of goods and services) 100 See 5.9. for global practices. Enabling the next wave of telecom growth in India 72 4.4.2 M2M communication monetary settlements. Mobile payment technology will transform the nature of physical interaction between According to Ericsson, the world is expected to witness consumers, merchants and banks. The initial application 50 billion101 connected devices in 2020, with machine– will focus on mobile banking, to look at account information to–machine (M2M) communication being the key driver and transfer small amounts of money between various behind this exponential increase in connected devices. accounts; over a period of time, bill payment related Utilities, government, health care, education, finance, to utility and others will become a major application; transportation and other emerging industries are expected thereafter, adoption of other services such as ticketing, to be at the forefront in adopting M2M communication. coupons and advertising would pick up, with mobile M2M is characterized by small amounts of data between money becoming a truly rich and integrated application for the device and network, and will enable networks to consumer convenience. This will cause a reduction in the support automated machine communications. The key cost of transactions, owing to increased volume, disruptive advantages provided by M2M include cost and spectrum business models and reduced legal and professional fees. efficiency, service quality and security, redundancy and coverage. 4.4.4 M-health 4.4.3 Mobile money M-health applications include the use of mobile devices in collecting community and clinical health data, delivery of Mobile communication and secure mobile transaction health care information to practitioners, researchers and opportunities will bring a transformation in the manner patients, real-time monitoring of patient vital signs and in which money is managed, mobilized and generated in direct provision of care via mobile tele-medicine. It offers a future. It will significantly impact the banking industry, huge potential for health care delivery in India. There are a where the ability to conduct transactions from anywhere number of government schemes and other initiatives from and at any time inherently lends itself to real-time medical service providers offering tele-medicine services, to extend affordable health care to all in the country. 101 The World of 50 billion connections, Ericsson, December 2010, page 2. 73 Enabling the next wave of telecom growth in India 4.4.5 M-education 4.4.7 MNREGA and UID M-education offers innovative use of mobile and wireless MNREGA and UID strive for providing inclusive growth. technologies for education. It aims to bridge the supply- MNREGA aims at enhancing the livelihood security of demand gap of high-quality teachers in the country. It people in rural areas by guaranteeing 100 days of wage- enables a virtual community to facilitate the learning employment in a financial year to a rural household whose activities of teachers, students and peers through adult members volunteer to do unskilled manual work. collaboration in a distributed environment. MNREGA achieves twin objectives of rural development and employment. The UID program is critical to improving the delivery of social services, subsidies and other government 4.4.6 Financial inclusion programs while also strengthening national security. Financial inclusion is central to the overall task of The integration of such programs with mobile inclusive growth. Financial inclusion aims to bring telephony will benefit the nation. For instance, an the unbanked and under-banked population into the integrated system for taking biometric attendance through organized financial services framework and assist in growth hand-held devices and transmitting it through mobile of the electronic payments market in India. In India, about phones for authentication is expected to solve the 80% of households do not have bank accounts. The ability challenge of attendance. Once workers have logged in, this of the Indian telecom sector to reach the masses owing data could be transmitted to MNREGA, and help them earn to its scale and built-in affordability will help to achieve their daily wages. financial inclusion. Enabling the next wave of telecom growth in India 74 5. Global practices 75 Enabling the next wave of telecom growth in India 5.1. Licensing In February 2001, the Hong Kong Government released its 3G licensing framework. Following the Hong Kong pre–qualification exercise, the Government decided to issue four licenses through auctions. The pre–qualification criteria included investment, network rollout, quality of service and financial capability. The Government selected a royalty-based proposal that required the bidder to pay a certain percentage of its annual 3G revenue turnover determined by the auction, with a guaranteed minimum payment. The royalty auction included the following: • Bidders were asked to bid for a level of annual royalty of the percentage of turnover from their 3G services network operations. • Successful bidders were expected to pay a minimum royalty fixed by the Government for the first five years of the license. From the sixth year on, the successful bidders were required to pay royalties according to the royalty percentage determined at the time of auction, with the same royalty percentage applying to all licensees. • Successful bidders were required to provide a five-year rolling guarantee of the minimum royalty payment for the entire license period. • In May 2000, Sweden issued an invitation to provide network capacity for UMTS mobile Sweden telecommunications services. The Government decided to issue four licenses for up to 31 December 2015. • The selection of applicants was based on the “beauty contest” criteria (i.e., allotting licenses to operators who best meet stated pre-set criteria). • The Government focused on rapid rollout and nationwide coverage. Further, the Swedish law states that licenses are allocated based on specific criteria, which is to the advantage of operators and consumers, as operators do not pay expensive fees to the state for the issue of licenses. • In 1998, the Japanese Ministry of Posts and Telecommunications (MPT) published the draft for Japan the introduction of 3G services and solicited public comment. In March 2000, the MPT established the technical regulations and publicized the licensing policies. • The number of 3G operators was fixed at three per region, with new as well as incumbent opeartors — but not fixed regional operators — being eligible. • Since the 3G license allocation in Japan was straightforward, with the number of applicants matching the number of licenses, the policy for comparative selection was not invoked. • The three-license limit was driven by a shortage of spectrum, with the regulator having a total of 60MHz of spectrum for 3G services. Enabling the next wave of telecom growth in India 76 Allocation of 3G mobile licenses102 Country Number of Mobile Method Date Sum paid licenses incumbents (US$ million) Austria 6 4 Auction November 2000 610.0 Australia 6 4 Auction March 2001 351.7 Canada 5 4 Auction January 2001 1,482.0 Finland 4 3 Beauty contest + nominal fee March 1999 Nominal France 4 3 Beauty contest + nominal fee July 2001 4,520.0 Germany 6 4 Auction July 2000 45,870.0 Italy 5 4 Auction October 2000 10,070.0 South Korea 3 2 Beauty contest + fee End 2000 3,080.0 Netherlands 5 5 Auction July 2000 2,508.0 New Zealand 4 2 Auction January 2001 51.4 Norway 4 2 Beauty contest + fee November 2000 44.8 Portugal 4 3 Beauty contest + fee December 2000 360.0 Spain 4 3 Beauty contest + fee March 2000 120.0 each Sweden 4 3 Beauty contest December 2000 44.08 Switzerland 4 2 Auction December 2000 116.0 UK 5 4 Auction April 2000 35,390.0 Note: The “beauty contest” approach purports to allocate licenses to operators who best meet stated pre-set criteria. Policy-makers and regulators should focus on creating interest among providers and providing incentives for 5.2. Spectrum long-term investment. This is done through the principle of renewal expectancy, and through promoting regulatory Re-farming of spectrum certainty through a fair, transparent and participatory renewal process. It is essential to provide details about • The US Government created the Spectrum Relocation license renewal or reissue, and ensure sufficient lead times Fund (SRF) in December 2004, which provides a and transitional arrangements in the event of non-renewal funding mechanism through which federal agencies or changes in licensing conditions. Public consultation can recover the costs associated with relocating their procedures and the right to appeal also increase the radio communications systems from certain spectrum prospects for a successful renewal process. bands, which were authorized to be auctioned for commercial purposes. In September 2006,103 the Federal Communications Commission (FCC) concluded the auction of Advanced Wireless Services (AWS) in the 1,710–1,755MHz band paired with the 2,110– 2,155MHz band. The 1,710–1,755MHz band used by federal agencies was reallocated to AWS under the provisions of Commercial Spectrum Enhancement Act (CSEA), including the use of the SRF to facilitate relocation of federal communications systems. The 102 “3G Mobile Licensing Policy,” ITU website, page 50, http://www.itu.int/osg/spu/ni/3G/casestudies/GSM-FINAL.pdf, accessed 22 October 2010. 103 “1710–1755MHz spectrum band relocation,” National Telecommunications and Information Administration website, page 1, http://www.ntia.doc. gov/reports/2008/SpectrumRelocation2008.pdf, accessed 12 October 2010. 77 Enabling the next wave of telecom growth in India AWS auction raised US$13.7 billion in net winning is guaranteed the moment it is needed, the possibility bids, and facilitates the provision of innovative new exists to use the spectrum for other applications wireless services in the commercial market. the primary user does not need. Spectrum could be • In March 2007, the UK Department of Trade shared on a short-term or long-term basis under the and Industry’s spectrum strategy committee, in condition that the use is vacated immediately when consultation with the Office of Communications the need arises. (Ofcom), formulated policies and a strategic plan • Geographical sharing: in certain situations, spectrum for the future allocation of spectrum to meet the is needed only in certain geographical areas. Spectrum needs of users in both the public and the private assigned to the maritime sector may need to be used sector. The committee formulated the strategic plan for maritime radio services only near the coastline, for the Ministry of Defense (MoD), civil aeronautical, inland waterways and rivers. Such spectrum could be civil maritime, emergency and public safety made available for other applications inland. services (E&PSS) and science services. The MoD has management rights to 35%104 of the spectrum Spectrum trading bands listed in the UK Frequency Allocation Table (UKFAT), and it has begun a program to identify • Spectrum trading gives public and private sector entities which spectrum can be released and time frame for the opportunity to decide which spectrum to release releasing it. or share. It also provides the terms and flexibility to • In 2006, the Australian Communications and Media enter into leasing arrangements for a limited time if Authority (ACMA) reviewed government spectrum the bodies do not wish to dispose of the spectrum holdings, sharing or reallocation opportunities for permanently. The critical success factors for spectrum spectrum, and spectrum regulation. One of the key trading include a large number of buyers and sellers; an recommendations of the Independent Review of inefficient primary mechanism of spectrum allocation Government Spectrum Holdings (IRGSH) was a regular that makes it necessary to move to a market-based review of all defense band allocations. method of secondary allocation; and innovation in the • In 2010, the Brazilian telecommunications regulator, supply and demand for radio-based technologies. ANATEL, agreed to re-allocate spectrum in the 2.6GHz • In 1989, New Zealand was the first country to introduce band to support the nationwide deployment of next- open market trading of spectrum. The secondary generation mobile broadband services. The 2.6GHz trading of spectrum provided benefits such as economic band had previously been allocated to multichannel efficiency, promotion of innovation and flexibility. multipoint distribution service (MMDS) operators to • In 2003, the FCC formulated rules for spectrum trading, support pay-per-view TV services. The re–allocation simplifying them in mid-2004. The FCC distinguished benefits the country’s mobile operators, giving them between de jure rights, i.e., assignment of the license the option to deploy LTE immediately. to another party, and de facto control, i.e., transferee • In Italy, as a part of spectrum re–farming, the Ministry retains the license and legal responsibilities, but of Communications and the Ministry of Defense have transfers management control of the spectrum. Further, agreed to make 2x75MHz spectrum available for in 2004, the FCC proposed the concept of developing WiMAX in the 3.4–3.6GHz band. smart devices that adjust to the spectrum they use and take advantage of underused spectrum. Sharing of spectrum • Time sharing: defense needs to use part of the spectrum only in crisis situations during exercises. While it is important to ensure that access to spectrum 104 “A Strategy for Management of major Public Sector Public Holdings,” UK Department for Business, Innovation and Skills website, page 28, http://www. bis.gov. uk/files/file38572.pdf, accessed 12 October 2010. Enabling the next wave of telecom growth in India 78 5.3. Universal Service Obligation Fund In many countries, a separate universal service fund has In Greece, USO services were provided by incumbent been set up, with the aim of increasing overall teledensity. operators. However, after liberalization of the telecom sector, a competitive tender mechanism was used. In the Most European countries, with a relatively small UK, BT is the designated USO provider. In Mexico, the geographical area and high population density, have incumbent operator was required as part of its privatization not considered the creation of a universal fund. On the to install payphones in 20,000 rural areas over a five-year other hand, countries with large geographic areas and period to meet the policy goal of ensuring some telephone consequently much higher costs to serve rural areas have access in all villages with at least 500 residents. funds that aim to cater for the rural population. Universal service levies by country105 Communication service providers are obliged to contribute to this fund in many countries. The contribution rate Country Contribution by operators ranges from 0.1% in France to 6% in Malaysia. In most Malaysia 6% countries, subsidies are granted according to formulas for India 5% of license fee compensating operators already serving high-cost rural Colombia 5% areas within their operating territory, or proposing to expand into high-costs areas. US Less than 4% (plus state levies) Russia 2% Brazil has developed a mechanism that achieves universal objectives through obligations imposed on its licensees. Canada 1.5% (plus federal contributions) The Brazilian legal framework uses a variety of tools Peru 1% to achieve universal service. As a result, the telecom Uganda 1% regulator, ANATEL has imposed a coverage obligation Nigeria 1% rather than a funding mechanism. Considering USOF for rural wireless broadband services With the rising importance of broadband, governments should consider whether they should create a USOF for broadband services. The key reasons include: • Considering whether broadband is an essential service of significant “social importance” • Estimating the degree of expected market penetration of broadband service • Assessing the nature and extent to which broadband will not be made available by the market and the associated reasons • Identifying and specifying the objectives and desired outcomes • Assessing the extent to which market demand and delivery will meet the specified objectives • Considering the social and economic disadvantages incurred by those without access to broadband if there is no government intervention • Estimating the costs of intervention to widen broadband deployment through the use of the USO mechanism • Estimating the costs of intervention through the use of the USO mechanism compared with the use of other approaches 105 Organization for Economic Co-operation and Development: Working Party on Telecommunication and Information Services Policies, page 19, http:// www.oecd.org/dataoecd/59/48/36503873.pdf, accessed 20 October 2010. 79 Enabling the next wave of telecom growth in India Methods of utilizing USOF across various countries106 Developed countries Country Source of revenue Method of allocating funds Australia Levy on licensed operators depending on The Government determines the level of subsidy market share of eligible revenue. paid to the USO provider. Canada Both fixed and mobile operators pay a fixed Universal service fund compensates costs percentage of eligible telecom revenue. estimated on the basis of long run marginal costs, and additionally 15% for joint and common costs. France Operators contribute a percentage of Compensation for costs incurred by USO revenue i.e., 0.1%. provider. Italy Major operators contribute 1% of revenue. The USO provider makes an offer to provide services at specified cost, and the regulator decides what part to accept. Japan Telecommunications carriers contribute to The telecommunication carriers are eligible to the USOF. receive universal service funds. Developing countries Country Source of revenue Method of allocating funds Argentina 1% of all operators’ gross revenues. Government to determine based on its goal to increase wireless and wireline teledensity. Brazil 1% of service providers’ gross operational Universal service fund supports ICT projects revenues earned from telecom services. consistent with the Government’s development objectives. Chile Government budget. Subsidies distributed through competitive bidding, with the lowest bidder being the winner. Colombia 5% of national and long distance operators’ Subsidies distributed through competitive revenues, plus funds from license fees. bidding, with the lowest bidder being the winner. Malaysia Fixed and mobile network operators Starting in 2002, operators invited to submit contribute 6% of their weighted revenue proposals for universal service provider and from designated services to the fund. to be compensated from the fund through a competitive process. Nepal 2% levy on the revenues of the incumbent Subsidies distributed through competitive operators, ISPs and mobile operators. bidding, with the lowest bidder being the winner. India 5% levy on the revenue of Subsidies distributed through competitive telecommunication operators. bidding, with the lowest bidder being the winner. Peru 1% of all operators’ gross revenues. Subsidies distributed through competitive bidding, with the lowest bidder being the winner. South Africa 0.16% of all operators’ revenues. Subsidies mainly awarded to tele–center projects and areas of greatest need. Uganda 1% levy on all sector participants, including Subsidies distributed through competitive telecom operators, the postal service, bidding, with the lowest bidder being the winner. couriers and ISPs. 106 Organization for Economic Co-operation and Development: Working Party on Telecommunication and Information Services Policies, April 2006, page 19. Enabling the next wave of telecom growth in India 80 5.4. Broadband Broadband networks are an essential infrastructure for the 23%,108 in comparison with 4% in developing economies. global economy, as they provide businesses and consumers Furthermore, it declined to just 2%, if China is excluded with fast and continuous access to internet–based from the developing world. Although the world is services, content and applications. Broadband services witnessing a rise in broadband penetration, the growth have economic benefits both in developed and developing rate is much higher in the developed world. For instance, nations. However, infrastructure, regulatory environment, during 2005–08, Eastern Europe added 19.5 million fixed urban–rural divide and other factors that impact broadband broadband subscribers, whereas African countries were penetration are very different in developing nations. able to add 2.4 million fixed broadband subscribers. Emerging markets such as India need to adopt leading practices that facilitate rapid and cost-effective deployment Broadband penetration by country 2009 of broadband technologies. The essential leading practices that enable countries Netherlands 37.1% to increase broadband penetration include: adoption of Korea 33.5% regulations that embraces innovation and competition; UK 29.5% form PPPs, invest in infrastructure and latest technology; Finland 26.7% encourage competitive ecosystems; and release spectrum for the sustainable deployment of broadband services. US 26.4% The firm combination of national objectives toward Australia 23.3% broadband services with leading practices is expected to China 7.7% enable developing nations to achieve benefits of India 0.7% broadband growth. 0% 10% 20% 30% 40% Source: OECD; TRAI; Intel Monthly broadband charges on a purchasing power parity basis (US$) 60 50 40 30 56 20 35 34 32 29 10 23 22 20 18 16 7 0 UAE Germany Saudi China Japan UK Canada US Hong India Israel Arabia Kong Source: “Measuring the Information Society,” ITU, 2010; Booz & Company analysis There are more than 497.8 million107 broadband subscriptions across the world. However, a large digital divide exists between the developed and the developing 1. Investment in information 2. Increased security aware- 3. The number of organiza- world in terms of broadband penetration. The broadband security has increased: ness controls will be imple- tions currently evaluating the The survey revealed developed penetration rate ingrowth in theeconomies is nearly to mitigate new or mented use of virtualization organization’s annual investment in increased risks: techniques is growing: information security. Of all The survey revealed that more A total of 34 % of respondents participants, 61% (46% globally) than 60% of the respondents are revealed that they are either agreed that their organization will implementing security awareness evaluating or planning to evaluate spend more this year in information controls to mitigate new or virtualization techniques in the security than it did last year. increased risks. Other top trends next 12 months. However, 23% of 107 World Broadband Statistics: Short report, Point Topic Ltd., page 4. that emerged were increases in the global respondents stated that 108 “Intel: Realizing the benefits of broadband,” Intel website, page 2, http://www.intel.com/Assets/PDF/Article/WA-323857001.pdf, accessed 12 October 2010. auditing capability and stronger they have embraced cloud identity and access management computing, as against only 8% by systems. Indian organizations. 81 Enabling the next wave of telecom growth in India 4. The trend of actions that 5. The Information Security organizations have taken to Management System (ISMS), control the leakage of which covers the overall South Korea Policy element Action Objectives • The South Korean Government created an action plan for the emergence of a knowledge-based society, with each citizen having access to a personal computer. The Korean Digital Divide Act created the five–year master plan to close the digital divide, formulated the action plans, and launched the Korean Agency for Digital Opportunity and Promotion (KADO) Priorities • Encourage infrastructure investment by incumbents and market entrants • Support construction of new high-capacity digital broadband backbone, through funding • Financial support for R&D, technology demonstration projects, subsidies for purchase of personal computers by low-income citizens • Promote digital literacy • Support e–governance, e–commerce, education and other information and communications technology (ICT) services Incentives and initiatives • Offer a 30%-50% discount on telecom service charges to low-income and disabled users • Provide low-interest loans for communications infrastructure development in less-advantaged regions, as well as funding for information society–related R&D • Plan to implement number portability for both wireline and wireless services • Create fund for promotion of digital literacy • Develop content for disabled people and elderly people • Create and support ICT United Kingdom Policy element Action Objectives • Create a “digitally rich” UK, where all have the confidence to access the new and innovative services delivered by computer, mobile phone, digital television or any other device • Bridge the digital divide arising due to access cost related to internet services • Establish the UK as a world leader in digital excellence with public services that are responsive, personalized and efficient • Use ICT to reduce social exclusion Priorities • Transform learning with ICT • Set up a digital challenge for local authorities to achieve both excellence and equity in ICT • Make the UK a safe place to use the internet • Promote the creation of innovative broadband content • Create a strategy for the transformation of delivery of key public services • Have Ofcom (the independent regulator and competition authority for the UK telecom industry) set out regulatory strategy • Improve access to technology for the digitally excluded and ease technology use for the disabled Incentives and initiatives • Ensure that ICT is embedded in education to improve the quality of the learning experience for all, re-engage those who have been disaffected and equip children with skills increasingly essential in the workplace • Have Ofcom research the prospects for home broadband adoption, focusing on adoption among the more disadvantaged • Provide support to BBC and commercial market for experimentation in broadband content using commissions and partnerships Enabling the next wave of telecom growth in India 82 5.5. Mergers and acquisitions The telecom sector has evolved at different rates In the UK, the telecom regulator, Ofcom, has proposed a around the world, with different views on each cap on the award of spectrum to a mobile operator. The regulatory issue. The emergence of new technologies spectrum under 1GHz is the obvious choice for mobile and applications worldwide has forced mobile operators broadband as the airwaves have higher propensity which is to expand their global footprint through mergers and needed for high data rate services. Ofcom has proposed a acquisitions, especially in emerging markets. However, cap on the amount of spectrum held by any operator in the there is a lack of regulatory consistency at the spectrum range under 1GHz. In March 2010, the merger international level, which would help overcome the of the UK operations of two mobile operators was cleared challenges posed by globalization. by the European Commission. The combined amount of spectrum held by the two parties — at 1,800MHz — was In any country, the key to the telecom sector is radio larger than that of their competitors. As a result, the spectrum management. A spectrum cap refers to the parties offered to surrender 15MHz of spectrum, allowing amount of spectrum any operator or group of operators other competitors to rollout services. can hold in a geographic area. The US and the UK have gradually eased their respective spectrum caps. Similarly, a spectrum cap has been implemented in Canada, Mexico and Guatemala. However, other countries, In the US, a spectrum cap was in place from 1994 to 2003. such as Australia, have abstained from the implementation It placed a limit of 45MHz on the commercial mobile radio of a spectrum cap. spectrum (CMRS) that a single entity could acquire in any geographical area across the US. In 2001, the cap was raised to 55MHz, and it was abolished in 2003. After the elimination of the spectrum cap, the FCC used a cap of 70MHz in deciding mergers. After the auction in 700MHz band, the spectrum cap in the US stands at 95MHz. 83 Enabling the next wave of telecom growth in India 5.6. Equipment manufacturing Finland: Market openness, liberalization and innovation drive the telecom equipment industry109 Background • Prior to the 1990s, the Finnish economy was dominated by forest-related industries. However, in the late 1990s, the economy shifted to ICT and consumer electronics, with electronics and electrotechnics accounting for about 25% of the country’s exports. These changes were primarily driven by higher education and the emergence of knowledge-based industries. Further, the country’s ICT sector has benefitted from investment in R&D, which more than doubled between 1985 and 2005. Strategic initiatives • First-mover advantage: in the 1970s, Finland’s state-owned post, telegraph and telephone (PTT) operator developed the Nordic mobile telephony standard in collaboration with Sweden-, Norway-, and Denmark based PTTs. In 1991, the first GSM network was launched in Finland, with Nordic countries benefitting from the first-mover advantage in the mobile telecom industry worldwide. • Deregulation and increased competition: in the late 1980s and early 1990s, Finland lowered the entry barriers through the introduction of reforms. After the collapse of the Soviet Union in 1991, the country redirected its trade to the West, and joined the European Union in 1993. From 1987 to 1997, Finland deregulated the telecom sector by the adoption of the Telecommunications Act and a new Radio Act, and in 1991, networks were opened to free competition. • Foreign direct investment: in 1993, Finland removed the restriction on foreign ownership in Finnish firms and restrictions on capital inflows. The country witnessed more than fivefold growth in FDI from 1990 to 2000, particularly in the ICT sector. An increase in FDI has resulted in technology transfer and cooperation that has helped to fuel the telecom sector. • Specialization in telecom: Finland’s ICT sector has developed specialization in the manufacturing and export of telecom equipment, with telecom equipment manufacturing accounting for 90% of the ICT manufacturing in 2003. It employed more than 80,000 people in over 4,000 firms in 2000. • Development of clusters: the development of the Finnish telecom industry is also attributed to the emergence of an ICT cluster, which encourages cooperation among a wide range of manufacturers and suppliers. The mobile telecom cluster, which is also known as Finland’s Wireless Valley, includes a wide range of stakeholders, including mobile application developers, equipment manufacturers, component manufacturers and electronics contract manufacturers, content owners and content providers for mobile applications, mobile network operators, academic and research institutions, consulting firms, public certification and standardization authorities and financial service providers. • Skilled workforce: Finland has a strong skilled workforce, primarily driven by a robust educational system in which basic, secondary and tertiary education is free of charge. The country has invested in a number of technical universities, which has facilitated the emergence of Finland in the telecom sector by providing a large pool of engineers. 109 Caroline Lesser, “Market Openness, Trade Liberalisation and Innovation Capacity in the Finnish Telecom Equipment Industry,” OECD Publishing, 29 July 2008. Enabling the next wave of telecom growth in India 84 China: Emergence of a global manufacturer and innovator110 Background • China’s telecom sector has witnessed rapid growth in the last two decades, with the emergence of Chinese firms that have successfully competed in the global marketplace, despite the presence of multinationals. • Over the years, Chinese manufacturers have evolved from producing cheap and low-quality imitations to products that use high-end advanced technology. • The emergence of a strong telecom sector in China has also been driven by a burgeoning domestic market with the highest number of mobile subscribers in the world, government support to domestic telecom enterprises and the presence of a well–qualified technical workforce. Strategic initiatives Since 1978, China has implemented numerous reforms that have boosted the country’s manufacturing and trade. The key reforms undertaken by the country include development of a trade policy, reduction in tariff barriers and development of an enabling environment to attract FDI. • Export processing: in the late 1970s and 1980s, China established an export processing policy. Under the policy, raw materials such as parts and components and other intermediate imported goods do not have any duty imposed, as long as they are used to produce export goods. This enabled the country’s domestic and foreign-owned firms to compete, worldwide. • Tariff barriers: during the 1980s and early 1990s, the country reduced its tariff barriers drastically. In the 1980s, some of its tariff rates were above 50%. The implementation of the export processing regime facilitated the reduction of tariff rates. In 2001, the tariffs reached less than 15%. Additionally, the US granted China the most favored nation status in 1980, and the country joined the WTO in 2001. • Foreign direct investment: in 1979, China implemented policies that favored the inflow of FDI, along with technological expertise. This helped the country to produce products rapidly. • Research and development: during the late 1990s, leading global telecom manufacturers launched their R&D centers in China. These centers have helped global players to understand the local market and helped in the overall development of the telecom sector. Furthermore, R&D led to the emergence of Chinese manufacturers that spend a significant portion of their revenues on R&D. time limited. National roaming was permitted in rural 5.7. Telecom infrastructure areas for a longer period than for urban areas. • Other European NRAs followed the Commission’s • Brazil is split into 11 licensing areas with 4 operators in approach and as such active infrastructure sharing was each licensing area. These operators are encouraged limited. The operators challenged the Commission’s to share both civil and electronic infrastructure, decision. The European Court of First Instance ruled particularly in rural areas that may be costly to in favor of the operators and stated that the EU had serve otherwise. overplayed the competition concerns. This has led to greater opportunities for operators to engage in • Infrastructure sharing has been well accepted globally. infrastructure sharing. In the EU, individual national regulatory authorities are required to notify the EU Commission of decisions • In Australia, operators have commercially regarding infrastructure sharing. The awarding of 3G negotiated for 3G site and RAN sharing. An licenses led to an increase in applications to share administrative group has been established to own infrastructure and in particular for new 3G operators and operate existing RAN and fund future network to be permitted to use national roaming to provide full rollout plans as agreed with operators. geographic coverage. Initially, the EU took a negative • In Sweden, there are five operators, four of whom view of the benefits versus costs of infrastructure have formed two separate consortiums of two sharing and saw it as having a potential negative operators each. Each consortium has built a joint impact on competition. As a result, although national network. The regulator permitted this level of sharing, roaming was permitted for new entrants, it was often 110 Behzad Kianian and Kei-Mu Yi, “China’s Emergence as a Manufacturing Juggernaut: Is It Overstated?” Federal Reserve Bank of Philadelphia, 2009. 85 Enabling the next wave of telecom growth in India but required each operator to maintain 30% of its • In Canada, the Canadian Radio-television and network separately. Telecommunications Commission (CRTC) is an independent • In Norway, a number of commercially negotiated and public authority to regulate and supervise all aspects of regulated agreements exist between the two main the Canadian broadcasting system, as well as to regulate operators and the MVNOs. There are commercial telecom common carriers and service providers. agreements between the main operators. The main • In Canada in 2002, the regulatory functions of the operator is obliged to provide national roaming Broadcasting Standards Commission, Independent and MVNO access, publish tariffs and reference Television Commission, Office of Telecommunications, offers, implement accounting separation and is Radio Authority and Radio Communications Authority subject to price and accounting controls for national were combined to form Ofcom. It is also the regulator of roaming. All operators may share sites and masts. the UK communications industries, with responsibilities Radio network controllers (RNC) may be shared across television, radio, telecommunications and wireless physically, but operators must retain logical control communications services. over their networks and spectrum. All transmission • In July 2005, the Australian Broadcasting Authority and routes (i.e., optic fiber, cables, P-P radio lines) may the Australian Communications Authority merged to form be shared. For core networks, the mobile switching the Australian Communications and Media Authority. center (MSC) may not be shared. The Ministry of Transport and Communications may, subject to an • In July 2000, the Independent Communications Authority of South Africa was established. It is the regulator of the individual consideration, allow fulfillment of the telecommunications and the broadcasting sectors, and coverage requirements through roaming in networks took over the functions of two previous regulators – the based on other technologies than Universal Mobile South African Telecommunications Regulatory Authority Telecommunications System (UMTS), provided such and the Independent Broadcasting Authority. networks can offer sufficient capacity and that the arrangement is without substantial disadvantage to subscribers. 5.9. m-commerce 5.8. Convergence Globally, the rollout of 3G has provided the required impetus to drive widespread adoption of m-commerce services. Mobile networks in North America witnessed growth in data services • In the US, the Federal Communications Commission that were also driven by the introduction of smartphones. (FCC) is an independent agency that regulates After smartphones were released, networks’ packet data grew interstate and international communications by nine times larger than voice services. In India, voice revenues radio, television, wire, satellite and cable and content. are expected to decline at a CAGR (2008–15) of 1.1% to reach However, cable TV services require approvals at the US$19.5 billion111 in 2015, but data revenues are expected municipal level. Telecom operators that provide IPTV to increase at a CAGR of 16.7% during the same period. services on their broadband networks have demanded m-commerce is very popular in countries where most of the amendments to the regulations to allow them to population is unbanked. Countries such as Sudan, Ghana, the provide national franchise and rollout of services. The Philippines and South Africa have been the largest adopters cable industry has opposed this demand, as the cable of this service. Latin American countries such as Uruguay, industry underwent the time-consuming and expensive Paraguay, Argentina, Brazil, Venezuela, and Mexico have also process to secure city-by-city franchises over the last implemented m-commerce successfully. three decades. Recently, the state of Texas passed a bill deregulating the telecom markets. This has made it possible for telephone companies to receive a statewide franchise to provide video services that compete with cable. 111 Ovum: Mobile regional and country forecast pack: 2010–15, Ovum website, http://www.ovumkc.com/, accessed 16 October 2010. Enabling the next wave of telecom growth in India 86 Multiple reforms in the Indian telecom sector have coalesced to produce a remarkable decade of continued success. Looking ahead, progressive policies will become increasingly important to guide unparalleled growth and transformation in the sector. 87 Enabling the next wave of telecom growth in India Conclusion The telecom sector in India has witnessed a series of • The USOF should be utilized for the provision of public fundamental structural and institutional reforms over the telecom, information services, household telephones past decade. The best feature of India’s regulatory regime and broadband connectivity in rural and remote has been its open and transparent approach, with which areas. It should be used for creating infrastructure the regulatory authorities make industry information for the provision of mobile services and development public and accessible, and encourage a healthy level of of telecommunication facilities, and inducting new consultation with stakeholders. This approach has helped technological developments in rural and remote the sector grow by leaps and bounds. The report is an areas. The distribution of funds should be through attempt to help understand the viewpoints of various transparent market-oriented allocation methodology. stakeholders and to arrive at reasonable and practical DoT should also consider lowering the contribution to recommendations to help overcome the challenges that 1% of AGR toward the fund. the sector faces and harness its opportunities. • Operators must be allowed to merge intra-circle while being allowed to combine spectrum. The share of a The key recommendations for improving the existing merged entity should not be greater than 30% in terms scenario focus on licensing framework, spectrum, of subscriber base or AGR. USOF, broadband, M&A, equipment manufacturing and infrastructure sharing. • HMCP should be set up across the country, and fiscal incentives should be provided to promote local • A single license should cover all telecom services. manufacturing. R&D initiatives should be encouraged. There should be uniform fee structure across all telecom circles. • A National Telecom Critical Infrastructure Policy on the lines of NTP 1999 should establish uniform • Future policy should encourage identifying and procedures for land acquisition, a uniform taxation vacating spectrum bands for future use. Spectrum regime, and subsidies and other packages for creating allocation should be based on technology neutrality, an environment conducive to boosting the construction service flexibility, timely allotment, timely spectrum of national telecom infrastructure and ensuring the reconciliation and enhanced transparency. Spectrum increased participation of all the stakeholders. sharing and trading should be allowed. The key recommendations for advancing the sector to • Broadband infrastructure — OFC, high-capacity the next level of growth focus on financial inclusion, microwave and satellite connectivity — must be m-commerce, convergence, security concerns and extended to rural, remote and inaccessible areas. consumer affordability. Content and applications in regional languages should be created to promote rural broadband. Enabling the next wave of telecom growth in India 88 Glossary AWS Advanced Wireless Services A2P Application-to-person ACMA Australian Communications and Media Authority ACTO Association of Competitive Telecom Operators ADC Access deficit charge AGR Adjusted Gross Revenue ARPU Average Revenue Per User AUSPI Association of Unified Telecom Service Providers of India BSCs Base Station Controllers BTS Base Transceiver Stations BWA Broadband Wireless Access BWCI Broadband Wireless Consortium of India CAGR Compound annual growth rate CDB Cut-out Distance Band CEWIT Center of Excellence in Wireless Technology CLS Cable Landing Station CMRS Commercial Mobile Radio Spectrum CMSPs Cellular Mobile Service Providers CMTS Cellular Mobile Telephone Service CMTS Cable Modem Termination System COAI Cellular Operators Association of India CPE Customer Premises Equipment CPP Calling party pays CRBT Caller Ring Back Tones CRTC Canadian Radio-television and Telecommunications Commission CSC Common Services Centers CSEA Commercial Spectrum Enhancement Act CVD Countervailing Duty DAS Distributed Antennae Sharing DoT Department of Telecommunications DSL Digital Subscriber Lines 89 Enabling the next wave of telecom growth in India E&PSS Emergency & Public Safety Services FCC Federal Communications Commission FDI Foreign direct investment FICCI Federation of Indian Chambers of Commerce and Industry FY Financial Year G2B Government-to-business G2C Government-to-citizen G2E Government-to-employee G2G Government-to-government GBT Ground-Based Towers GMPCS Global Mobile Personal Communications Services GoI Government of India GST Goods and Services Tax HMCP Hardware Manufacturing Cluster Parks IAMAI Internet & Mobile Association of India IBA Independent Broadcasting Authority IBA ICASA Independent Communications Authority of South Africa ICNIRP International Commission on Non Ionizing Radiation Protection ICRIER Indian Council for Research on International Economic Relations ICT Information and Communications Technology IDI ICT Development Index ILD International long distance IMEI International Mobile Equipment Identity IPF Infrastructure Provisioning Fee IP-I Infrastructure Provider-I IPLC International Private Leased Circuit IP-VPN IP-based Virtual Private Network ISPAI Internet Service Providers Association of India IT Information Technology ITeS IT-enabled Services Sectors ITU International Telecommunication Union 90 KADO Korean Agency for Digital Opportunity and Promotion kbps kilobit per second KYC Know Your Customer MARR Multi Access Radio Relay MCD Municipal Corporation of Delhi MMDS Multichannel Multipoint Distribution Service MMS Multimedia Messaging Service MNP Mobile number portability MNREGA Mahatama Gandhi National Rural Employment Guarantee Act MoD Ministry of Defense MoU Minutes of usage MPLS Multiprotocol Label Switching MSCs Mobile Switching Centers MTNL Mahanagar Telephone Nigam Limited NCAER National Council of Applied Economic Research NDMC New Delhi Municipal Council NeGP National e-Governance Plan NFAP National Frequency Allocation Plan NLD National long distance NRAs National Regulatory Authorities NTCIP National Telecom Critical Infrastructure Policy NTP National Telecom Policy OFC Optic fiber communication P2A Person-to-application P2P Person-to-person PAN Permanent Account Number PCOs Public Call Offices PMRTS Public Mobile Radio Trunked Services POPs Point of Presence PPP Private-public Partnership PSU Public Sector Undertakings PTT Posts, Telephone and Telegraph RCP Rural Community Phones RCV Recharge Coupon Voucher RIOs Reference Interconnect Offer 91 Enabling the next wave of telecom growth in India RKM Route Kilometer RNC Radio Network Controllers ROW Right of way RPM Rate per minute RTT Roof-top tower SACFA Standing Advisory Committee on Radio Frequency Allocation SATRA South African Telecommunications Regulatory Authority SIM Subscriber Identity Module SRF Spectrum Relocation Fund TCOE Telecom Centers of Excellence TDSAT Telecommunications Dispute Settlement and Appellate Tribunal TEC Telecommunication Engineering Center TEMA Telecom Equipment Manufacturers Association TESEPC Telecom Equipment and Services Export Promotion Council TRAI Telecom Regulatory Authority of India UAS Unified Access Service UID Unique identification number UIDAI Unique Identification Authority of India UKFAT UK Frequency Allocation Table UMTS Universal Mobile Telecommunications System USOF Universal Service Obligation Fund VAS Value-added services VoIP Voice over Internet Protocol VPNs Virtual Private Network VPTs Village Public Telephones VSNL Videsh Sanchar Nigam Limited WMO Wireless Monitoring Organization WPC Wireless Planning & Coordination Wing WTO World Trade Organization 92 Notes 93 Enabling the next wave of telecom growth in India Enabling the next wave of telecom growth in India 94 Notes 95 Enabling the next wave of telecom growth in India Enabling the next wave of telecom growth in India 96 About Federation of Indian Chambers of Commerce and Industry (FICCI) FICCI, set up in 1927, is the largest and oldest apex organization of Indian business. With a nationwide membership of over 1,500 corporates and over 500 chambers of commerce, FICCI espouses Indian businesses and speaks directly and indirectly for over 250,000 business units. FICCI maintains the lead as the proactive business solutions provider through research, interactions at the highest political level and global networking. FICCI organizes a large number of exhibitions, conferences, seminars and meets for promoting business. 97 Enabling the next wave of telecom growth in India Ernst & Young’s Global Telecommunications Center Telecommunications operators are facing the challenges of growth, convergence, business transformation, technological change and regulatory pressures in increasingly difficult economic conditions. Operators choose Ernst & Young because they value our industry-based approach to addressing their assurance, tax, transaction and advisory needs. 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