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									Building on the Initial Success of Cellular

TV Ramachandran, Director General, COAI
       March 27, 2006 @ Dubai

 Cellular opened up in 1992
   – Duopoly regime
   – GSM standard only
   – Receiving Party Pays (RPP) system
   – 10 year license

 Metro Licenses awarded in 1994 through a beauty parade
   – 8 licensees (2 in each Metro) committed to pay license fee of USD 32
      million for first 3 years & USD 192 per subscriber per annum thereafter

 Circle Licenses awarded in 1995 through single stage bidding process
   – 34 licensees committed to pay USD 6.16 Billion

 License fee paid by 1995 licensees 45 times higher than that paid by 1994

Challenges of Phase I

 High cost of licenses translated into high tariffs, low growth of the market,
  limited rollout of networks, etc.

 Policy maker & licensor - Department of Telecommunications (DoT) – also an
  operator – conflict of interest

 Regulatory Authority (TRAI) set up in 1997, but ambiguity in its powers &
  jurisdiction led to several orders of TRAI being challenged

 Widespread litigation
   – Entry of MTNL (incumbent PTT in Delhi & Mumbai) into cellular
     challenged on the grounds that policy was for duopoly
   – Operators challenged imposition of penalties for delayed network rollout
     claiming that delays were on account of Government not giving timely

By end of 1998, cellular (& fixed) operators had defaulted on rollout obligations,
were unable to meet huge fixed license fee obligations & were on the verge of
bankruptcy and were engaged in several litigations against the Government

Course Correction - I

 In October 1998 Prime Minister constituted a high powered Inter Ministerial
  Group on Telecommunications (GoT) to look into :

    –   Proposed New Telecom Policy;

    –   Issues Relating to existing licensees & appropriate remedial
        measures within the framework of the New Telecom Policy

    –   Issues relating to TRAI.

 The result of the above initiative was

    1. Announcement of NTP 99 in March 1999 (effective April 1, 1999),

    2. Migration of existing operators to the new regime in August 1999 &

    3. Amendment of the TRAI Act in January 2000.

National Telecom Policy 1999

 NTP 99 formulated in an open, transparent & consultative manner.
     – Draft discussion paper on Policy placed on the Internet & received >17,000
       responses from a cross-section of stakeholders.

 Preamble to NTP-99 recorded the importance of telecommunications
   – “The Government of India (Government) recognises that provision of world
      class telecommunications infrastructure and information is the key to rapid
      economic and social development of the country. It is critical not only for the
      development of the Information Technology industry, but also has widespread
      ramifications on the entire economy of the country. …. Accordingly, it is of
      vital importance to the country that there be a comprehensive and forward
      looking telecommunications policy which creates an enabling framework for
      development of this industry.”

 Key objectives enunciated in the Policy included
   – provision of access, availability of affordable services, creation of a modern
      and efficient telecommunications; increased competition, level playing
      field, etc.

National Telecom Policy 1999 - Highlights

 High cost fixed license fee regime replaced with lower cost licensing structure
  viz. a fixed entry fee + revenue share mechanism
 Greater degree of competition
     – Incumbent PTTs deemed to be 3rd cellular operator
     – Introduction of further competition based on need & timing and the
       recommendations of TRAI.
 Flexibility in choice of technologies in access
     – Service providers could use utilize “any type of network equipment, …circuit
       and/or packet switches, that meet the relevant …ITU../ TEC standards.
 Separation of policy making, licensing & service provision functions of
  DoT – corporatization of DoT by 2001

 Para 3.11 of NTP 99 stated Government‟s intention to satisfactorily resolve
  problems of existing operators.

 Union Cabinet approved NTP-99, opined that it would be in public interest for
  NTP-99 to be uniformly applicable all over the country
Opinion of the Attorney General on Migration

 Pursuant to NTP-99, Government sought Attorney General’s opinion whether
  it was legally possible to bring existing licensees under NTP-99

 Attorney General in his opinion noted that

    – The 1994 Policy had failed to achieve its objectives

    – the expected network expansion had not materialized.

    – large capital resources had been invested by private licensees & that
      their unviability was affecting both the financial institutions who were
      funding these projects, but also the viability of the telecom service
      industry itself.

    – in light of the objectives of NTP-99 & having regard to the ground realities
      and the prevailing situation engulfing the telecom industry, migration of
      licensees from the 1994 Telecom Policy to NTP-99 was warranted.

    – However, the transition to the new policy should be from a prospective
      date while fully realizing past dues and arrears.
The Rationale / Considerations behind Migration

Government realized that without Migration:

 Likely that bulk of exposure by Financial Institutions (~ 2.3 Billion USD) would
  become non-performing assets.
 Several companies would be unable to secure financial closure           abortion of
  projects  large-scale bankruptcy & failures
 Efforts to mechanically enforce contracts, terminate licenses, encash bank
  guarantees, take over assets, etc  multiple & prolonged litigation.
 Bound to be dislocation of services & serious inconvenience to consumers.
Government thus felt that
 Shift to revenue share would promote interest of telecom sector, improve tele-
  density, lower tariffs & improve both reliability & quality of services
 Since migration would be from a prospective date & there would be no write-
  off of past dues or liabilities, solution would be legally tenable.
 Since NTP-99 envisaged open competition, existing licensees would be giving
  up their duopoly rights in exchange for migration to the new regime.

Migration Package offered to Existing Operators

 Existing cellular (& fixed) operators offered migration package in July 1999
     – license fees dues upto July 31,1999 were to be paid & deemed as entry
       fee under new regime
     – annual license fee to be collected on a revenue share basis thereafter.
     – licensees given a six-month extension of Effective Date on their
       respective licenses.
 In return it was demanded that :
     – Existing operators give up rights of operating in a regime with limited
       operators i.e. forego duopoly & accept a multipoly regime
     – operators would give up all their existing claims and withdraw all
       litigations against the Government.

 All existing cellular (and fixed) operators accepted the migration package and
  migrated to the new regime with effect from August 1, 1999.

           Migration was thus a Settlement between Private Operators
                               & the Government
Amendment of the TRAI Act

TRAI Act amended in January 2000. The amendment saw :
 A bifurcation of the recommendatory and functional role of TRAI
    – Mandatory for Government to seek TRAI recommendations for introduction
      of new service provider. However Government decision to be final
    – TRAI given absolute powers on tariffs & interconnection
 Institution of separate dispute settlement mechanism (Telecom Dispute
  Settlement and Appellate Tribunal -TDSAT)
 TDSAT empowered to adjudicate any dispute
    – between a licensor and licensee
    – between service providers,
    – between service providers and a group of consumers
    – appeal against directions, decisions & orders of TRAI
 Institution of TDSAT is another uniquely Indian initiative, and a successful
  one at that, which has not been attempted by any other telecom regime.

    Having an independent body to adjudicate over telecom disputes gave a
            tremendous boost to investor confidence in the sector
Lessons from Phase - I

 Migration was one of the most groundbreaking and landmark decisions of the
  Government with no parallel either in India or rest of the world.

 In comparable situations in other telecom regimes, where licensees have bid
  exorbitantly and have been unable to meet their contractual obligations, the
  unwillingness of Governments to renegotiate contracts has lead to the
  collapse of the sector.

 But the timely and responsive intervention of the Indian Government
  showed tremendous vision and foresight and clearly demonstrated the
  commitment of the Government to the reforms process.

 Migration was not an easy decision, but the Government did not hesitate to take
  this bold step. In fact, it can safely be stated that migration was one of the key
  factors that was responsible for the complete transformation of the Indian
  telecom, especially the cellular mobile sector, which is now widely looked up to
  as the flag bearer of the Indian liberalization process.


 By 2000 all existing operators had migrated & were offering services under

 Cellular licenses had been made technology neutral – licensees could use any
  technology, as long as it was digital

 Incumbent PTT was in the process of entering the market as the third cellular &
  also corporatizing into a separate entity
    – Accomplished in October 2002 with the birth of BSNL

 TRAI had made recommendations for
   – introducing 4th operator into cellular through a multi-stage bidding process
     (4th operator entered in 2001 @ entry fee of USD 345 Million)
   – Unlimited competition in fixed services at nominal entry fee of USD 105

Challenges of Phase - II

 Fixed Operators allowed to offer ‘limited’ mobility under their fixed service

 Limited Mobility morphed into full blown cellular mobility

 Introduction of WLL(M) created severe disturbances in the playing field

    – Cell operators paid a huge entry fee for their licenses, fixed operators
      got right to mobility at nil entry fee

    – Cell Operators were on a RPP Regime while the fixed + mobile
      operators gave free incoming calls

    – Fixed/Mobile operators enjoyed cross subsidy from long distance
      revenues – no such benefit available to the cell operators

Government permits Fixed Operators to offer ‘Limited’ Mobility

 In 2000/2001 in a turnaround from existing policy & licensing regime,
  Government allowed Fixed operators offer mobile services (through WLL) under
  the fixed service license.

 Cellular operators challenged the Government decision in TDSAT as :
   – Licenses were service specific both under NTP-94 & NTP-99
   – FSPs permitted use of WLL for last mile access, but only for fixed services
   – FSP licenses prohibited them from offering any type of mobile services.
   – In response to an earlier query by TRAI, Government clarified that FSPs
      could not offer mobile services either under license or under policy.

 Government decision created non level playing field for cell operators as
   – Fixed operators paid no additional fee for mobility
   – The fixed license had more advantageous terms & conditions as it allowed
       • Cross subsidy between local and long distance calls
       • Operated on a free incoming calls regime.

 Taking advantage of the situation, two large business houses took the
  opportunity to acquire pan India Fixed + WLL(M) licenses

The WLL(M) Dispute

 WLL(M) litigations were protracted and bitter & lasted almost three years.
 Dispute goes from the TDSAT to Supreme Court & back to TDSAT & back to
  Supreme Court

   January 2001 – Cell Operators challenge WLL(M) in TDSAT

      March 2002 - TDSAT Dismisses Petition of Cell operators

          December 2002 - Supreme Court Upholds Appeal of Cell Operators,
          remands matter back to TDSAT for full de novo review
             August 2003 - TDSAT delivers a split verdict, Chairman upholds
             Petition, Member (in 2:1 majority) dismiss Petition
                October 2003 - Cellular Operators again file appeal in Supreme
                Court seeking to uphold Chairman‟s judgment
                    October 2003 - TRAI recommends unified access licensing,
                    gives fixed operators option to migrate to full mobility
                       November 2003 - Government accepts recommendations
                       of TRAI, amends policy to allow unified access licensing
                          December 2003 – Cell operators reach out of court
                          settlement with Govt., withdraw from Supreme Court
Course Correction -II

 Over the period 2001 to 2003, a number of measures were introduced to
  redress the differential rules that were applied to cellular & limited mobility
  operators :

     – April 2001 - high powered Group on Telecommunications recommends
       that WLL(M) no longer be entitled to cross subsidy from long distance

     – May 2003 - CPP regime introduced for cell operators.

     – November 2003 - Telecom Policy was amended to allow fixed operator to
       offer mobile services by migrating to a Unified Access Service License after
       payment of an additional entry fee

Removal of Cross Subsidy from Long Distance

 “To ensure fairer competition and at the same time to ensure services at
  affordable rates, the Group is of the view that the present revenue sharing
  arrangement between FSPs & long distance carriers on the one hand and
  CMSPs & long distance carriers on the other hand, should not be continued
  with those aspects of FSP services which have the advantage of limited mobility.
  Since WLL limited mobile subscriber can be said to have the benefit for some (but
  not all) of the benefits that accrue to regular cellular subscribers, the sharing ratio
  for these two should be equalised. This means that the present ratio of 60:40
  for WLL subscribers should be reduced to 5:95 in respect of, but only in respect
  of, those subscribers who use the facility of WLL with limited mobility through
  hand-held sets…..
                                Report of The Group On Telecom & IT, April 27, 2001

 Actioned by Regulator through it Interconnection (Charges and Revenue
  Sharing) Regulation in December 2001, effective February 2002.

 Anomaly on local calls continued to persist – WLL(M) operators were on CPP
  while cell operators were on an RPP regime.

Introduction of CPP Regime for Cellular

 In 2003, Regulator introduced the Interconnection Usage Charge Regulations
  under which it specified origination, carriage and termination charges applicable
  to different services

 A corollary of the introduction of the IUC regime was the introduction of a
  Calling Party Pays regime for cellular services.

 The new regime was finally made applicable from May 1, 2003

Introduction of Unified Access Service Licenses

 October 2003 - Regulator recommends Unified Access Licensing. Under
  UAS licenses
   – Operator to be permitted to offer both fixed & mobile services
   – Fixed/WLL(M) operators allowed to migrate to UAS upon payment of
      additional fees
   – Cellular operators allowed to migrate at no extra cost
 Recommendations note that largest WLL(M) operator flouting conditions, acting
  as cell operator from Day 1, recommends levy of penalty (delayed interest) of ~
  107 million USD

 November 2003 - Government actions above recommendation, amends
  telecom policy and introducing a Unified Access Licensing regime

 December 2003 - In an offline discussions with cell operators Government
  hammers out settlement package , offers
   – A further reduction in annual license fee by 2% (to 6-8-10%)
   – Additional waiver of 2% (for 4 years) to 1st & 2nd Cell operators who had
     paid high license fees under 1994 regime
   – Permission for intra circle mergers & acquisitions
   – Increase in FDI limit, assistance in debt restructuring, etc                   19
Lessons from Phase - II

 UAS Licenses addressed subsisting anomalies between WLL(M) & cell
  operators - with regard to cross subsidy from long distance revenues, anomaly
  of RPP versus CPP and then finally the issue of legality of WLL(M) through
  amendment of policy

 Progressively WLL(M) was equated with cellular till finally in 2003, it was
  legalized to be offered as a fully cellular mobile service

 Thus while cell operators could argue ad infinitum about the delays in
  judicial proceedings, the subsistence of non-level playing field conditions for
  almost three years, the retrospective legitimization of an illegal service,
  backdoor entry into mobile services, etc. – the reality was that the steps
  taken by the Government reflected a recognition of the practical realities of
  the situation


 All fixed operators expeditiously migrated to UAS licenses after paying the
  necessary fees;

 Cell operators too accepted the settlement package offered by the
  Government and withdrew their appeal from Supreme Court

 UAS licensing resulted in intense competition in the cellular mobile sector as
  there were as many as 6-8 operators in every service area

 Intense competition resulted in both affordability & choice for Indian consumers
  as cell tariffs in India dropped to being amongst the lowest in the world

Challenges of Phase - III

 Delay in Introduction of Unified Licensing Regime
   – UAS Licenses introduced as Step 1, Step 2 was to be a complete unified
      license (including long distance)
   – Full unification was supposed to be completed in 6 months i.e. by April 2004
   – Consultation process drags on over 2 years
   – Final recommendations in January 2005 maintain (in fact increase) the high
      entry barrier for acquiring long distance rights

 Use of Fixed Wireless Terminals to offer Mobility
   – In November 2004, erstwhile Fixed Operators start using the Fixed wireless
      Terminals to offer mobile service
   – Mobile services priced anti-competitively at fixed line rates as operators
      classified these services as „fixed‟ in order to evade payment of access deficit

 Spectrum issues of GSM & CDMA Operators
   – From early 2003, CDMA operators start demanding introduction of US PCS
     Band into India.
   – Move strongly opposed by GSM as introduction of disruptive US PCS Band
       • Would block the evolution of GSM to 3G
       • Result in severe interference in existing & future mobile services              22
Course Correction – III

 November 2005, Government announces
   – Simplification of long distance licenses
   – Additionally also permits access provider to offer internet telephony, internet
     services & broadband

 August 2005 - Fixed Wireless Terminals classified as limited mobile phones in,
  no longer able to evade ADC

 February 2006 - Access deficit charges to be recovered as a revenue share
  from all operators – removes arbitrage opportunity for „fixed‟ wireless services

 April 2006 ??? - Announcement of 3G guidelines
   – All indications that India will adhere to international consensus and offer 3G
      in ITU identified 2.1 GHz band
   – Spectrum policy, both existing as well as draft revision earmark 2.1GHz
   – Regulator too, has ruled out US PCS band, recommends 3G only in 2.1GHz
   – Pilot projects being initiated in 2.1GHz
   – Government committed to technology neutrality
Introduction of Unified Licensing

 November 2005, Government announces

    – Simplification of long distance licenses
        • Entry fee for national long distance rights cut by 97.5% - from USD 22
          MLN to 0.55 MLN USD
        • Entry fee for international long distance rights slashed by 90% from 5.5
          MLN USD to 0.55 MLN USD

    – Government additionally permits access provider to offer internet telephony,
      internet services & broadband

 Above initiatives usher in a virtually unified licensing regime

Resolving ADC Anomalies

 January 2005 – Government operator BSNL raises ADC claim on the CDMA
  operators on the grounds that they were “providing limited mobile services in the
  disguise of fixed services.” this move is challenged in Courts
 March 2005 – TRAI issues notification that “as the issue of mobility has
  implication with respect to applicability of ADC, the Authority direct you to strictly
  ensure that the terminal used for fixed wireless services should be strictly
  confined to the premises of the subscriber…”
 Almost simultaneously Government issues license clarification also stating that
  the terminal used for fixed wireless services should be strictly confined to the
  premises of the subscriber and also further goes on to state that “wherever
  such restriction cannot be imposed it shall be treated as WLL(M) ...
 August 2005 - Government classifies all Fixed Wireless services as limited
 September 2005 – TDSAT pronounces judgment, holds that the service is
 February 2006 – Government modifies ADC regime, Access deficit charges to
  be recovered as a revenue share from all operators (instead of an a call-by-call

          Actions of Government & Court remove arbitrage opportunity
              for ‘fixed’ wireless services, restore level playing field                   25
      International Spectrum Arrangements

               800     850       900       950 1000         1700 1750 1800 1850 1900 1950 2000 2050 2100 2150 2200 2250                    2500 2550 2600 2650 2700 MHz



                      Cellular                                 AWS                                                    AWS
                                                                                       AD B EF C    AD B EF C

                                                                                                                      IMT                            IMT2000

                         IMT2000                                     IMT2000                IMT2000
ITU                    (future refarming)                         (future refarming)                                  2000                         Extension Band

                                  GSM                                                          IMT                    IMT


                                                                  GSM 1800                                                                           IMT2000
Europe                            900                                                          2000                   2000                     (deployment in discussion)

                                  GSM                                    GSM                   IMT                    IMT

China                Cellular
                                  900                                    1800                  2000                   2000

                                                                                                   IMT                IMT

                             PDC                                      Korea
                                                                                                   2000               2000

Brazil                                                                    GSM                  IMT                    IMT


                                                                          1800                 2000                   2000

                                                                                               IMT2000 Core Band

        Strong submissions by GSM industry that USPCS Band was out of line with
      international spectrum arrangements & that 2.1GHz band adopted for 3G by all
                             countries & regions except USA
 Concerns with Mixed Band Plan being advocated by CDMA

       800 MHz         1800 MHz        CorDECT                                Uplink    Downlink
       900 MHz         US PCS          2GHz

                                                                      1920-1980           2110-2170

                   890-915   935-960       1710-1785   1805-1880

   824-844   869-889                                          1850-1910     1930-1990

GSM industry also pointed out its concerns regarding the adoption of Mixed Band Plan –
(US PCS 1900 MHz & 2.1GHz) being advocated by the CDMA operators viz.
  – Severe harmful interference in base station & handsets (due to duplex reversal at
    1980 MHz) impairing globally harmonized 2.1GHz band
  – Mixed Band Plan not implemented anywhere in the world
  – B5 Arrangement (Mixed US PCS & 1800 MHz band) dropped by ITU on account of
    interference issues                                                                27
Recommendations by the Regulator on Spectrum

 Submissions of GSM industry were noted & accepted by the Regulator.

 TRAI, in its recommendations on spectrum related issues noted that Mixed
  Band Plan of US PCS 1900 MHz and 2GHz will cause interference & has
  recommended that 3G be offered only in 2.1GHz

 Further, Report of International Expert Agency Aegis commissioned by TRAI
  stated :

    – The proposal     of giving 2X10 MHz (1910-1910MHz paired with 1980-
      1990MHz) “has a high probability of being unworkable” … “TRAI must
      decide whether to permit this operation on the balance of risk. For an
      operator the proposal may appear technically manageable and therefore
      workable provided all the spectrum was under its control. But, for a Regulator,
      other broader factors must also be considered in addition and the
      consequences if interference does occur may warrant a more conservative

    – With regard to the Mixed IMT-2000 2GHz and PCS 1900 bands, the Report
      states “Because of the nature of interference, TRAI would not be able to
      guarantee interference free operation and would therefore need to
      consider if it would be held liable in any way for the impact of
      interference. TRAI would need to consider who pays for the modification of
      existing systems to mitigate the effects of interference.”
 The Lessons from India

                                                  Effective charge (in Rs. Per min)             Subscriber Base (in mn)

                                             16                                                                                            Lo wer ing o f A D C f r o m         60
                                                                                                                                            3 0 % t o 10 % o f sect o r
                                                       14         14                                                                                 r evenue
                                                                          N T P' 9 9
                                                                                                                                        C PP                          51.53

                                                                                                                                                                                     Mobile subscriber base (in Million)
         Effective charge (in Rs. per min)

                                             12                                                                                    Int r o d uced

                                             10                                                                                                         33.31
                                                                                              3 r d & 4 t h C ellular
                                                                                                    Op er at o r

                                             8                                                                                                                                  30

                                                                                                                          of CDMA
                                             6                                          6

                                             4                                                        3.58
                                                                                                                    2                                                           10
                                             2                                         1.88
                                                                    1.2                                                                                0.44
                                                        0.88                                                            6.5          1.6
                                             0                                                                                                                                  0
Source: TRAI                                        1998        1999             2000         2001             2002              2003               2004           2005

Course Corrections at every stage have yielded positive benefits for both
 consumers & industry - Lower Tariffs & increased subscriber growth                                                                                                                                                        29
Other Measures taken by Government

 Increase of FDI limit in telecom to 74% (from 49%)

 Announcement of Guidelines for mergers & acquisitions

 Incentivising entry of global players into the country

    – in the last 12 months several major international players, Alcatel,
      Ericsson, Motorola, Nokia, Samsung, LG, etc. have set up manufacturing
      / research facilities in the country.

    – Over the last 18 months, more than 10 MNCs have committed nearly $5
      billion to telecom manufacturing in India. Another $2 billion is
      expected to be committed soon.

On the Anvil – Initiatives in Infrastructure Sharing

 Subsidy support for Shared Infrastructure in Rural Areas
    – Subsidy support from the Universal Service Fund for creation of
      shared wireless infrastructure in rural & remote areas
    – Brilliant masterstroke by Government. Scheme expected to
          • Attract all operators
          • Lead to expeditious & economical rollout of networks
          • Offer competition & choice to rural consumers
    – Proposal being finalized by the Government

 Infrastructure sharing amongst cell operators in Urban & Semi-
  Urban Areas
    –    For both existing as well as new sites
    –    Multiple operator sharing technically feasible
    –    Pilot projects in Delhi & Mumbai, soon to spread to other cities & towns
    –    Camouflaging sites to reduce visual pollution

        Above initiatives will play a leading /crucial role in facilitating
         achievement of target of 250 million subscribers by 2007
Snapshot of Indian Cellular Industry

 5th largest network in the world

 2nd largest among emerging economies

 133 state-of-the art Networks on Air: 83 GSM

 Services in about 4000 cities & towns and nearly I00,000 villages

 Over 85 million mobile subscribers (GSM + CDMA) – end March
  2006 – GSM running at nearly 80% of total market share

 Nearly 5 million mobile subscribers being added every month,
  subscriber growth in India has reached China levels

 Cellular Tariffs amongst the lowest in the world

        Key Industry Indicators

         Minutes of Use (MoU) :              331

         EBITDA Margin:                      ~ 40%

         Operating Cost/Subscriber/month :   USD 3.6

         ARPU/month:                         USD 8.4

         Monthly Churn:                      6%

         Bad Debts:                          ~ 2.5%

USD 1 = Rs. 45


           100       76
                   2005        2006    2007


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