Unlocking the Indian Telecom

Industry’s Potential
– The Shape of Things to Come

Alok Shende
Director, ICT Practice

19 April 2006

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Agenda

1 Making the Case

2 Challenges in Indian Telecom Service Providers Space

3 Challenges in Indian Telecom Equipment Manufacturers Space

4 Challenges in Indian Telecom Handset Manufacturers Space

5 Recommendations

2
1 Making the Case

2 Challenges in Indian Telecom Service Providers Space

3 Challenges in Indian Telecom Equipment Manufacturers Space

4 Challenges in Indian Telecom Handset Manufacturers Space

5 Recommendations

3
 The Indian Telecommunications Industry at a Glance
ü~ 125 million subscribers as of Dec 2005

üMore than 4 million subscribers added per month

üThe sector has grown at ~ 35% p.a. in 2005

üTotal current investments of the telecom industry are over INR 90,000 crores

ØTotal FDI till September 2005 was INR 41,800 crores

üNetwork connecting close to 4500 towns & cities and more than 65,000 villages

üA sector, which in less than 10 years, has increased Indian tele-density to 12

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While the tariffs have decreased, the subscriber base has exploded

E ffe ctive ch a rg e (in Rs. P e r min ) S u b scrib e r B a se (in mn )

16 Low ering of A D C from 30% 60

to 10% of sector revenue
14 14
NTP '99
14
C PP Introduced
51.53 50
12
40
10 33.31
3rd & 4th C ellular
Operator
8 30

6 6
20
4 3.58
13
3.58 2 10
m R
s.p
(n
arg E
fectivh

1.88
)

M
0.44

cra(n
ilesu
b
o
1.2

)
0.88 6.5 1.6
0 0.4 0

1998 1999 2000 2001 2002 2003 2004 2005

Source: TRAI Study paper No 2/2005

•The per subscriber mE usage has increased from 12-15 mE per subscriber in 1999 to ~30 mE per subscriber in 2005

•The minutes of usage per month per subscriber has also increased from 114 minutes in 1999 to 367 minutes in 2005

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 But the biggest challenge is decreasing ARPU …

1400
1299
ARPU in INR per Subscriber per Month

1200 1160

1000

821
800 740

600 512
399 374
400

? –> What Next

200

0
1999 2000 2001 2002 2003 2004 2005 2006

Source: TRAI Performance Indicators

•Global average ARPU – USD 21

•Indian Average ARPU – USD 8

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The New Business Strategy: From Services to Business Ecosystem

Historic
Ra
dio Transition
Pa
Legac Fix
gin
ed
g y E/
Mobile Wallets and
Lin Payment
Wi Telec e M
rel om Pa
es y Early Vertical
Third-party Specific
s Sol
consumer and m programs
early enterprise en utio
t ns Future
Telecom Service Applic Diversi
Focused Business ations fied
Teleco
m Fix
ed
Access and early Wir Lin
applications ele
e
ss New
Telecom
Telecom Service Blended Business
with Emerging Areas like Ecosystem
VAS & Mobile Applications

Transform to be Telecom Ecosystem Enabler

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 The New Telecom Ecosystem – Feeder Model
Drive Indian Economy
Active &
Passive Towards the 10%
Wireless
Infrastructur Economy Growth Service
e Target Provider
Providers

Application New
Fixed Line
& Telecom Service
Content
Providers
Business Provider
Ecosystem

Telecom
Transmission Telecom
Equipment Handset
Manufacturer Manufactu
s rers
Telecom
Network
Equipment
Manufactur
ers

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 What the New Ecosystem Will do ?
If the new ecosystem is established to meet the target of 250 million subscribers, then the

•Increase in tele-density will increase the rate of growth of GDP

–A 1% increase in tele-density results in 3% increase in rate of GDP growth rate

•Current 5 million jobs generated by this sector can increase to 12 million

•Proper facilitation to various sub-sectors in the ecosystem can increase revenues generated by

the telecom industry for the government

–Mobile services industry’s annual contribution of INR 32,000 crores can increase beyond

INR 50,000 crores

–The annual revenues for the government by mobile industry can increase from INR 15,000

crores to INR 65,000 crores

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1 Making the Case

2 Challenges in Indian Telecom Service Providers Space

3 Challenges in Indian Telecom Equipment Manufacturers Space

4 Challenges in Indian Telecom Handset Manufacturers Space

5 Recommendations

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 Levies & Duties
•The Indian Telecom sector has one the highest levies and duties imposed on it
–The total regulatory charges are between 17 ~ 26% exclusive of goods and service tax

•This high incidence of levies and duties means a low return on capital , thus adversely impacting
availability of funds for network expansion
–The return on capital expenditure for mobile services is very low in India at 7.8%

•Clubbing low tariffs, falling ARPU’s and high levies and duties means lower funds with players to
reinvest in a constantly funds demanding nature of business

Regulatory charges % age of revenue

Service tax, GST 10% + GST

License Fee 5 – 10%
Spectrum Charge 2 ~ 6%*

USO Included in license fees

Total Regulatory charges 17%~26% + GST

* Backbone spectrum charges extra GST – Goods & Service Tax Source: TRAI

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 Spectrum

•To enable a faster expansion of wireless telephony, adequate spectrum is a pre-requisite

•The growing telecom industry has witnessed a surge in spectrum usage from 12-15 mE per user

in early 2000 to close to 30 mE per user in 2005. The net result is the congestion in networks.

Since spectrum is not available, operators tend to reuse the same spectrum across multiple sites

thereby causing interference and call drops.

•The increase in FDI limit will see the true benefits once the spectrum issues is resolved. The

international Telco provider community is keenly watching the developments towards spectrum

resolution and wants it to be sorted out before it can invest in this growing market.

–An increased FDI activity can help Indian Telecom industry to meet the 250 million target

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 Connecting Rural India

•More than 70% of Indian population lives in the rural India but contribution from rural India to

Indian Telecom industry stands at a mere 20%.

•Rural tele-density stands at a mere 1.5%

•Mobile and wireless services have not penetrated rural areas the way they should.

•USO concept is a good way to achieve faster growth and penetration in really remote areas. It is

an effective way to meet government’s obligation to provide service in rural areas.

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 Infrastructure Sharing & Clearing Issues

•Being a developing country, duplication of infrastructure is a colossal waste. Infrastructure

sharing, as an option, should be considered more seriously

•The players face enormous delays in obtaining Right of Way from different agencies like NHAI,

pollution board, municipal corporations etc thus hampering faster network roll outs

–Changing local rules and regulations across different states handicaps roll outs instead of expediting

at this time

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1 Making the Case

2 Challenges in Indian Telecom Service Providers Space

3 Challenges in Indian Telecom Equipment Manufacturers Space

4 Challenges in Indian Telecom Handset Manufacturers Space

5 Recommendations

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Challenges Faced by Indian Equipment Manufacturers Industry
•The current demand – supply mismatch
–The industry needs to add capacity in tunes of 150 million lines to achieve the target of 250 million
subscribers by 2007
•major portion of these requirements would be catered to by importing the required telecom equipment

•Inverted duty structure currently hampering the industry

–The customs duty on the finished product is lower than the inputs used to manufacture it

–The telecom infrastructure equipment, majority of which is imported annually into the country at 5
percent customs duty. Whereas, duties are levied (10 - 30 percent) on inputs that go into the
manufacturing of this equipment, except ICs at zero percent, making domestic production costlier
than the imported equipment

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1 Making the Case

2 Challenges in Indian Telecom Service Providers Space

3 Challenges in Indian Telecom Equipment Manufacturers Space

4 Challenges in Indian Telecom Handset Manufacturers Space

5 Recommendations

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 Challenges Faced by Indian Handset Industry
•The mobile handset manufacturers have till recently bypassed India completely despite the pace
at which the handset sales have been growing for the past two - three years
–The handset market in 2005 was over 30 million units, till recently all handsets were imported into
India

–No base of suppliers to source components

•Huge Gray Market – Almost 60 percent

–The hike in VAT on cell phones from 4 to 12.5 percent in the current budget will promote the gray
market for handsets

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1 Making the Case

2 Challenges in Indian Telecom Service Providers Space

3 Challenges in Indian Telecom Equipment Manufacturers Space

4 Challenges in Indian Telecom Handset Manufacturers Space

5 Recommendations

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 Recommendations
•For infrastructure sectors, (e.g. power, roads etc.) 100% exemption is available for the full term of

10 years in succession and these 10 years can be opted from the block of 20 years. A similar

100% exemption for successive 10 years out of the 20 years should be allowed for Telecom

sector, which is currently at 5 years. This will result in higher disposable capital to reinvest in

business

•There should be no service tax on the IUC amount receivable from other operators. IUC is levied

for allowing the call from the cellular service provider to be carried over to the other service

provider.

•The cellular industry is presently paying a service tax of 10.2% on its gross revenues in addition

to state governments demanding sales tax on elements like airtime, rentals etc. The industry

thus faces double taxation with both sales tax as well as service tax being levied on it

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 Recommendations
•The government should seriously identify all the unused spectrums and allocate them to the

cellular industry. Also steps should be taken to enforce a more constructive and disciplined role

of spectrum utilization among service providers and other wireless users in the spirit of mutual

understanding and co-operation.

•The USO fund has yet to be utilized for practical implementation and state success stories. The

fund needs to be utilized by players more effectively and government should ensure that the

operators use this fund to enter into the rural India

•Infrastructure sharing should be mandated by the government, both for private operators as well

as incumbent

•A single window clearance system should be put in place to expedite all clearance related issues

and thus endure faster network roll-outs across India

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 Recommendations
•The government should encourage the vendors to manufacture handsets in the country rather
than just reducing the import duty
–This would enhance the telecom ecosystem further as related ancillary units would flourish

–Government should work on policies to make India regional manufacturing hub for mobile handsets

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Thank You
www.frost.com

ashende@frost.com

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