Year 2012 was an exceptionally tough year for the Indian telecom industry. Yet, it was a year that marked an inflection point from where we should see a sustained period of revival. As I look back, there were three key events that defined the activity of the Indian telecom industry in the year gone by:
The year saw continued hyper-competition, which was a result of several players entering the Indian telecom market in 2008 due to a low entry barrier and reckless government policies. New entrants lured customers with lower prices and free minutes, resulting in the phenomena of rotational churn that reached astronomical level of 15%. Retailers were the only winners who made money at the expense of operators without offering any real customer benefit.
This unhealthy competition also led to a 40% drop in pricing over the last 12 quarters.
We have always maintained that like any global market, the telecom market in India will eventually comprise five-six players and therefore consolidation is inevitable. However, the only question has been—when? Consolidation always happens first in the minds of the customer and that began when despite the presence of 13-14 players, the top three-four players continued to command 68-70% of the market share. This further gained traction when at the beginning of this year market leaders stepped up aggression and saw a steady increase in their share.
Second, some operators made an outright exit due to cancelled licences—while others opted to walk away from certain circles due to increased pressure from investors to show line of sight to financial viability.
Finally, the new First Time Acquisition (FTA) rules further reduced the customers’ willingness to opt for new SIMs and this reduced the number of gross additions per month from close to 19 million in July 2012 down to 8 million in November 2012.
We fully expect this consolidation to continue until we get to a scenario of healthy competition with a handful of strong players providing relevant services for customers and earn a fair return.
Price discovery of spectrum
Telecom is a spectrum-hungry industry and we need this quintessential raw material in abundance to prepare a business case which truly lends India Inc. to be competitive. The world has realized that future competitiveness of economies will come from a mix of physical and virtual infrastructure. While India was behind in developing physical infrastructure, we have the opportunity to keep pace in the development of virtual infrastructure. Just consider this—in the US, telecom operators are allocated over three times the spectrum (nearly 550 MHz) for offering various telecom voice and data services.
In comparison to this, operators in India are handling over 2.5 times the customers in the US with a total of 160 MHz of allocated spectrum.
This is despite the fact that countries like US are very wired and India’s data experience will primarily be driven by access on wireless devices. If spectrum cost remains at current quoted prices, it is going to be impossible to prepare a business case that will enable a digital life in India.
It is important to realize that spectrum should not be used to bridge the short-term fiscal deficit but as a resource for long-term progress.
This became evident in November 2012, when the government’s spectrum auction had no takers and only realized about 30% of its revenue target of Rs.40,000 crore. Although the regulator has already announced a 30% drop in price for unsold spectrum, there will be a few more iterations before the final price is discovered.
There’s no doubt that India is amongst the toughest telecom markets in the world. However, its data potential makes it one of those with the greatest opportunity.
Data today stands where voice telephony stood in 1994-95, and with only 1% penetrated on broadband—growth on the data side can only go northwards. In other parts of the world, it took four-five years to fully develop, engage customers in 3G technology, while in India, 3G has seen very promising uptake within 18-20 months of launch. Additionally, from being a follower on 2G and 3G, we are now matching the world in access to new age technology with the launch of 4G LTE in India.
As the industry was grappling with hyper competition, only two-three companies were investing in developing capabilities to deliver the data experience.
Companies like Airtel are already seeing more than 20% of their customers use one form or another of data (2G, 3G, 4G and other wired services such as DSL, MPLS, etc.). Leading service operators are now more equipped to address the data needs of diverse customer types—be it today’s Internet generation that comprises the always-online data natives, or the tech-savvy data migrants who learn and pick up the relevance of data in their lifestyles. Airtel led the market by demystifying data for customers with initiatives such as Smartbytes, Bill Shock alerts, My First Internet packs, etc.
As I look ahead, what do these events mean for the future of Indian telecom?
With consolidation, 2013 should mark the beginning of the comeback of the Indian telecom sector.
With an emphasis on bringing back the strength of the poster boy that Indian telecom had once been, only the tough will survive the significant financial commitments that the sector demands.
The data story is just beginning, and we see this demand continuing to grow due to the following factors:
Youth: India has the largest population of youth in the world —people below the age of 26 account for 50% of the population and this group are the biggest consumers of data.
This is a very powerful segment, which has the potential of bridging the digital divide between the developed world and the developing world.
Device penetration: Smartphone usage in India is low with even the most optimistic reports putting the numbers at 25 million amongst the 900 million plus overall mobile users. Smartphone users consume over 3X more data than feature phone users.
Underserved segments: According to the National Sample Survey, only about 0.4% of rural households have access to Internet at home compared with about 6% of urban households. As more of these households get access, data demand will increase manifold.
Data will also help enable certain essential services like health, education, finance, etc.
In 2012, customers in India started to show early yet extremely positive signs of accepting the advent of telecom-enabled services. Airtel Money, which was rolled out across India this year, saw tremendous market adoption and took banking capabilities to the masses. Ancillary services such as these can be expected to contribute billions of dollars of new business for Indian telecos in years to come.
On the voice front, there is a large population yet to have access to basic telecommunication services. While the overall teledensity is at 77%, when you consider that the VLR to HLR (visitor location register and home location register) ratio for the industry is at 78%, there are only about 700 million active users of the 900 million SIMs in the market. To add to this, there are several multiple SIM users which further reduce the number of unique customers. This situation will be even more acute when you look at a 40% tele-density for rural India.
Finally, as we start the new year, we expect regulators to strike a fine balance between protecting the consumer interest and the profitability of service providers. We are optimistic about the role to be played by the licensors to reduce uncertainty and bringing back sustainability. Airtel is excited about the year ahead and continues its march towards fulfilling its vision of becoming “the most- loved brand enriching the lives of millions”.
Sanjay Kapoor is CEO (India and South Asia) at Bharti Airtel.