New Delhi: Bharti Airtel Ltd, India’s largest phone company, made the highest bid of Rs12,300 crore for high-speed, third-generation (3G) spectrum recently. Chief executive officer Sanjay Kapoor said in an interview that the returns will come when an ecosystem is built. Edited excerpts:
Do you believe 3G spectrum deserved such a high price? What’s your horizon for breaking even?
We have presented that it is expensive. I cannot say much on the strategy going ahead. We will come out with how we plan to leverage what we have soon. With any new service, the first emphasis is creating the ecosystem of content providers, device suppliers, application providers and the customer experience—that is what we will be concentrating on to begin with. The moment you build traction, the returns follow. To create an ecosystem for something as big as 3G requires a critical mass of operators—one player cannot create an ecosystem. Once the other operators come, they create an ecosystem. A bulk of the 2G capacities will get replaced with 3G capacities, so therefore, the expenses, opex and capex (operating and capital expenditure), will be incremental.
Will apps be the real differentiators?
The biggest money spinners for 3G, even in the developed world, are a combination of voice and Internet access. In India, it will begin from there as well. Applications will follow. The number of Indians with access to the Internet is dismal, where 60-70% of the so-called broadband users have speeds of less than 256 kbps. The first empowerment will be Internet access and then applications will follow. Things like video have not been money spinners in most parts of the world. It is always a bouquet or a mix of applications that renders the critical revenues that you are looking for.
It is a natural tendency to surf, which will come alive. The number of people that access Internet will go up and the usage of existing users will also go up due to accessibility of the Internet at a higher speed. Proliferation will accelerate.
The long run: Sanjay Kapoor says 3G will be a catalyst and will expedite the process of consolidation in the telecom sector. Priyanka Parashar/Mint
When we launched our app store, we saw that customers from smaller locations consuming and downloading more applications, which tells us that there are opportunities in every nook and corner of the country. Around 17-18% of the applications that have been downloaded are paid applications, which is high by any standards.
Are you happy with the result of the 3G auction? Weren’t circles such as Punjab, Maharashtra and Gujarat lucrative enough to go after?
The belief is that we are essentially covering the critical mass that we wanted to cover. We would have loved to have a pan-India footprint but given the expense involved, we ended up making choices. Going ahead, there will be opportunities to share networks with other operators, so customers will get our 3G services in areas where we are not present. Sharing will be the order of the day—it’s a matter of time. There is revenue to be made from sharing.
Will you launch in December, assuming you get spectrum in September?
We have said in the past that the network is by-and-large 3G-ready. The core network, content and application platforms, passive infrastructure, among other things, are 3G-ready. It’s the radio side that needs some enhancement for 3G.
Do you see the operators who have won 3G spectrum going sick due to the large debt they have taken on? Will it bring tariff stability?
Some of the equations that are coming out in terms of pricing that some operators have paid for these licences seem fairly aggressive. In the process of consolidation, 3G will be a catalyst; it will expedite the process of consolidation. We have said that the market’s propensity to drop prices does not exist today. The 3G exercise has put a further lid on that.
With the coming of 3G, will Indian customers also get plans such as those in the US that subsidize handsets?
Given the prepaid nature of the market in India and the lack of a system where you can control the credit, there is no possibility of device bundling and discounting. Also, prices prevailing in the market do not leave any room for subsidizing gadgetry. There will be devices and gadgets made available by the operators.
The device manufacturers look at India and China closely because the volume story is hidden here. As soon as there is an increase in consumption of broadband, the availability of these devices will increase while their prices will come down. The volumes of these two countries impacts worldwide trends for many devices.
What is the bigger challenge—2G competition or 3G rollout?
Customers are agnostic to technologies. They are looking at services. The way we sharply segment our customer base, I think we will begin to sharpen our competition base as well. In India, in the 2G segment there are 14 operators, on the wireless broadband side, there are three-four. So, for at least the short term, you will have to segment your competition as well. In the long run, the differences between 2G and 3G will wipe away and by the time consolidation happens, these difference will go away. The long-term survivors will have all types of technology and services. We are agnostic to technologies. The 2G-3G divide is shrinking in our minds. We develop our strategies based on customer behaviour and needs.
The fortunate part about India is that the bulk of new customers are coming from rural India, which is still very dismally penetrated compared to other parts of the world. There is a huge amount of unserved markets. Soon after providing voice connectivity, we will be embarking on a journey to provide Internet connectivity.
The whole phenomenon of this industry is going to move from persons to the SIM (subscriber identification module) completely. It is believed that by 2020, there will be 50 billion SIMs across the world as the world will move towards machine-to-machine applications—a SIM for your surveillance, car, GPS (Global Positioning System), return path for DTH—any number of applications, including one in your microwave and one in your refrigerator, this is going to be a reality. Time-frames are to be defined. If this is true, then India should be prepared for six-seven billion SIMs in the country. Each person will carry multiple SIMs for multiple applications and it will no more be about the number of SIMs but the number of applications. Most of these businesses will actually move from being a telecom business to a more lifestyle business. If this is true, then we have just touched the tip of the iceberg.
We will move to a very different dimension in the future. Verticalization of the businesses, where we started with music, will proliferate into commerce, entertainment, health, advertising, among many other things.
There are very few businesses across the globe that can participate in verticals that are out of their traditional domain. This business has the potential of moving from a share of telecom wallet to a share of customer wallet, and the dependency of pure voice among other applications will change. Nobody can tell you what will be the main revenue stream in the year 2020.
Do you have to separate 2G and 3G customers?
No, we don’t have to, but any company that believes in mining data and understanding customers would always want to know it for their purposes. I would want to know how my returns on 3G are after making the significant investments.
From a customer view point, it will mesh up but any organization will mine its data. But the difference in the cost to serve a 2G customer and the cost to serve a 3G customer should be incremental as voice is the stickiest application across the globe. A customer with a 3G device will automatically move to 3G—it will happen by default.
What is the shape of the consolidations that we will see?
In the long run, only 2G players or only 3G players have not survived. Generally, what we have seen is that operators with combinations of both 2G and 3G have survived in most parts of the world. So clearly, consolidation in India will be led by a bit of technology, but will be largely led by the economics.
The economics will make sense for even a large economy like India for no more than five-six operators. When the world has seen survival of three-four operators, India being slightly larger, I would say five-six. But I won’t anticipate more than three of them making money. The balance will always be on the border or on the other side of the border.
Eventually, it will be only economics that will decide what sort of consolidations happens—there can be no other way.