Rethinking expectations on 3G

Rethinking expectations on 3G
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First Published: Thu, Feb 22 2007. 01 08 AM IST
Updated: Thu, Feb 22 2007. 01 09 AM IST
By now, the industry probably has you thinking about 3G cellular technologies as the next big revolutionizing force for Indian telecom. While that is the hype, let us now discuss the reality.
Current second-generation (2G) subscriptions are growing at almost seven million a month. Based on this, analysts and service providers expect 3G to make a grand entry into the Indian market. 3G supports higher data speeds that makes Internet browsing faster for subscribers and expands voice capacity, allowing telcos to reduce network congestion.
Telcos also believe that applications such as video conferencing and mobile TV will stabilize their revenues and allow broadband Internet access on the move, improving subscriber experience for the masses. Thus the expectation is that 3G will replicate 2G’s mass-market success.
However, 3G does not replicate the factors that made 2G mass-market. Instead, service providers will likely use 3G to serve high end subscribers who are network capacity hungry, supplementing, and not replacing their 2G network offerings.
Voice-centric 2G GSM and CDMA technologies have grown at a compounded rate of 87% over the past eight years. We attribute this phenomenal growth to specific factors. Supply factors include falling tariffs and low perceived entry costs for subscribers. Intense competition focused on capturing market-share has led service providers to reduce tariffs. India now has some of the cheapest service plans in the world. Entry costs for subscribers fell with the drop in handset costs due to technical improvements, increased volumes and subsidization by service providers.
There has also been significant latent demand for telephone services, and cell phones offered subscribers the possibility of better service quality and improved business prospects through ubiquitous accessibility. Fed by growing disposable incomes, middle and upper-class Indians began to adopt cellular phones as essential. Improved socio-economic opportunities led to the cellular phone’s transition from a luxury into a necessity across classes.
Unlike 2G, these factors do not exist for 3G. On the supply side of the 3G equation, higher tariffs and larger entry costs make it unlikely that the bulk of subscribers will choose 3G in the near future. Service providers will need to have higher tariffs because the spectrum and hardware that carries 3G signals have a much higher up-front price. If the government follows the telecom regulator’s recommendations from September last year, a spectrum auction would have a combined reserve price of Rs5,250 crore, leading to collections that cross Rs7,500 crore. Add to this network deployment and hardware upgrades, and 3G rollout in India will cost at least a few billion dollars. Handsets for 3G also cost four to five times more than 2G handsets. This is partly because their capabilities are significantly greater, but also because volumes are 16 times less.
Demand is unlikely to extend beyond subscribers who find high-speed data a useful value addition to 2G’s capacities. At this time, SMS is the most prevalent data application on current networks, and the growing market for ringtones and similar value-added services (VAS) does not require high-speed data connections. The minutes subscribers spend talking are increasing over time, and most Indian subscribers are happy with voice-centric service plans. 2G will also be more than sufficient to address the needs of the more than 50% of India that’s left to be covered.
So, what role could 3G play in the Indian market? It is most likely that 3G will attract the 15-20% of subscribers who use 75% of the network capacity in the largest cities. These customers are high-end and high-revenue, and are typically concentrated in specific pockets in these cities. 3G networks will offer service providers the chance to add a higher capacity layer to existing 2G networks, a process often referred to as overlay. Given that operators can get additional spectrum for 3G services, it will be possible to move top-end subscribers to 3G networks and free up space for their fast growing 2G subscriber base. Not only will this address those subscribers that have actual wireless data needs, and the money to pay for that, but will also allow better quality of service to all subscribers due to the distribution of traffic over two sets of networks. Network deployment costs also fall because operators do not need 3G everywhere. Beyond high-traffic areas, they can upgrade existing 2G infrastructure at significantly lower costs.
There is a risk that Indian service providers will rush headlong into 3G just to keep pace with their competition, ignoring the potentially expensive auctions and network deployment. Even as 3G investments serve a small and exclusive subscriber group, it is essential that investment in the fast growing 2G networks should not suffer.
As operators make decisions about investment and deployment of 3G networks in the Indian market, they should consider overlay strategies to balance serving the niche high-end 3G subscribers and the larger 2G base. Subscribers should hope for better quality of service, but not expect 3G to have the same impact around them as 2G did.
Kunal Bajaj is director-India of BDA Consulting. Siddhartha Raja is currently a consultant for Trai. Your comments are welcome at theirview@livemint.com
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First Published: Thu, Feb 22 2007. 01 08 AM IST
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