The much-anticipated auction for third-generation, or 3G, telecom ended on 19 May after 183 rounds of bidding, earning $14.6 billion for the Indian government. Yes, 3G is expected to transform the Indian mobile landscape. But before India starts thinking of 3G as some magic bullet for its communication needs, it should realize that—as the experience of other countries demonstrates—rolling out these services isn’t all that easy.
An analysis of the year of 3G launch and the penetration levels of 10 countries across Asia, Europe and the US (see chart) indicates that it has taken Japan nearly a decade to reach the highest level of market penetration (at 87%). It appears to have taken an average of 6.5 years to achieve an average penetration of 37% among these countries, resulting in an average penetration at around 5% per year after launch. Based on the international experience, there are several challenges that India could foresee during the 3G deployment.
The availability and affordability of handsets, first, is a critical factor in mobile adoption rates. Taiwan issued 3G licences in 2005, but was able to capture only 10% of the market primarily due to limited availability of mobile handsets. Japan, currently the global leader in 3G penetration, faced a “handset recession” for several years.
India is expected to have 500 million mobile subscribers by 2010, a number that is expected to increase to 730 million subscribers by 2012. With this huge expected subscription, India has to be watchful of the handset market. The present phones—from mobile giants such as Nokia, Samsung and Sony Ericsson—are relatively expensive. The problem is that if cheaper versions aren’t available, India’s rural population will be shut out. Consider also that Chinese-made handsets are now under severe government scrutiny, apparently for security purposes.
Pdf: Ahmed Raza Khan/Mint
Second, poor infrastructure has been a stumbling block in some countries such as Indonesia and Malaysia. Infrastructure in both semi-urban and rural India could raise similar concerns. A 2009 report from London-based consultancy Ovum states that the addressable market for 3G would be less than 200 million—out of a potential 800 million customer base—due to poor road connectivity and electrification.
Third, a quick glance at the chart shows that pricing and low average revenue prove a big challenge for many countries. If companies aren’t assured good profit margins, they won’t have the appetite to make inroads.
And Indian companies need to really possess the risk appetite to make inroads into regions suffering from poor infrastructure. But, as the price war that Tata DoCoMo started last year with its one paisa per second billing shows, competition in this sector has become so fierce that average revenue per user (Arpu) are threatened. Will this invite the sector to consolidate? It appears so. The last decade has seen a slew of telecom mergers and acquisitions throughout the world. SBC acquired Ameritech in 1999; GTE merged with Bell Atlantic in 2000 to become Verizon; Qwest Communications acquired US West in 2000; WorldCom acquired MCI Communications in 1998. In India, the Vodafone group took over Hutchison’s stake in 2007.
Fourth, government intervention also influences the cost to the customer and to the operators. Germany, the biggest of the European markets, had a poor start with heavy licensing fees ($46 billion) and other strict requirements leading to enormous capital costs. Indonesia progressed slowly; this slow growth attributed to the relatively expensive price (566 billion rupiah, or $62.26 million) the government levied. Swedish regulators imposed mandatory coverage to almost 100% of the population.
Even if Indian regulators don’t go that far, the regulatory climate—as companies such as Vodafone have been pointing out—prompts questions. The telecom regulator has recently demanded a retrospective fee for use of a certain section of the 2G spectrum, that too at 3G rates. Besides making the climate unpredictable, such interventions leave companies with less cash.
That is a big question after Indian companies doled out $14.6 billion for 3G. While it’s still unclear how much of this high cost would affect the consumer, the companies, having taken on serious debt, may be left with fewer resources to devote to the roll-out.
Capturing the Indian market is not going to be easy. The 3G market penetration barriers are not limited to the aforementioned. India may have its own unique challenges, which other countries haven’t seen, and which would be hard to predict.
That’s not to suggest Indian 3G is doomed: There is scope for unique solutions here, too. Given that the Indian market comprises a larger section of the semi-urban and rural population, operators should concentrate on increasing their total revenue instead of focusing on Arpu and penetration factors. The Ovum report suggests that partnerships with government, NGOs and non-telecom players for product and service innovation would help. Additionally, India should encourage sharing infrastructural costs. Here, the Indus Tower initiative, started in 2007 among Airtel, Vodafone and Idea to build cell towers, could set an example for managing capital expenses.
If such efforts succeed, the Indian public could expect a combination of advanced technology, multiple services and excellent communication—provided they are willing to wait.
Madhukar Angur is the chairman of Alliance Business School, Bangalore. The author thanks Srividhya Sathyanath for her research assistance.
Comments are welcome at firstname.lastname@example.org