Telecom Circle

In one of my previous post on 3G license fair price, I had written that I expect the Pan India 3G license to cost around $2 billion. However, now that 3G auctions are over the final price of a Pan India license is $3.6 billion ($1 = Rs 47), which is much higher than the my expectations and the expectations of all the analysts. The Government managed to garner $14.4 billion which is expected to bring the budget fiscal deficit down to below 5%. With the final price of $3.6 billion for a pan India license, it is now time to look at the options in front of the winners.

The results and winners of 3G auction can be downloaded here (3G_Auction_Final_Results).

The interesting thing about the auctions is that no single operator has bid for the Pan India license. Due to the high auction price, they have bid for the circles where they have strong 2G positions. Below is the interesting 3G network map of winners.

From the 3G winner map, it is clear that most of the operators have tried to bid for their stronghold circles except for Reliance and Tata. Airtel’s largest circles are Delhi, Karnataka, Andhra Pradesh, Bihar and Rajasthan where it has won the 3G licenses as well. Similarly, Idea has got 3G licenses for its strong circles like Maharashtra, Kerala, Haryana and Andhra Pradesh. Airtel and Vodafone have tried to ensure that their bid amounts for their key circles remain below the annual revenues, e.g. in Karnataka, Airtel has to pay $351 million which is just 49 per cent of the income generated there. On the other hand, Bharti dropped out of the race in Maharashtra and Gujarat where the bid amount had crossed the company’s annual revenue numbers. Clearly, the aim of the operators was to protect their current strongholds and current revenues. The figure below clearly shows the operator strategy was to defend their 2G revenues even if they fail to cover the large parts of the market.

The article from Economic Times on the relative competitive scenario post 3G auctions can be downloaded here (3G Economic Times)

What is the break-even user base for operators?

I have done a detailed analysis on the number of 3G subscribers required by operators in next 5 years to break-even in 5 years. The result of the analysis shows that the break-even subscriber base is highly sensitive to the ARPU that the operators can get from 3G subscribers.

The key assumptions in the above analysis is that the number of cell sites required across India would be around 75,000 resulting in a network CAPEX of $1,700 million and additional OPEX of $ 112 million per year. With the current ARPU levels of around Rs 150 ($3.2), I would not expect the 3G ARPU levels to be above Rs 350 ($7.5) which means that the industry would need to add over 52 million 3G subscribers in the next 5 years. If the 3G ARPU is lower than Rs 350, then the required user base for break-even goes up significantly. Given the current 2G congestion for large incumbents , the operators would endeavor to shift as many users to 3G as possible. Operators cannot price the 3G services high otherwise not many users would shift to 3G leaving the 2G networks no less congested from the levels that they are today.

What can be operators strategy to break-even on 3G?

Operators need to be very careful in the selection of their strategy options as the stakes are very high now. They need to work with the other ecosystem players to ensure that the total cost of ownership is as low as possible and that the relevant content is available to attract users to 3G. Here are some of the actions that can be taken by Indian operators to break-even faster than what most of the analysts think:

1. Replicate Minute Factory Model: The Indian operators have been innovative in bringing the costs down in 2G by changing the measurement metrics from ARPU to margins per minute. They have considered their business as a “Minute Factory” where minutes are sold at a certain price and there is a cost to the minutes. As long as the the realized rate per minute is higher than cost per minute by 30-35%, they are okay. Their entire effort has been to bring down the cost of minutes and have looked at network outsourcing, lower tariffs among host of other things. One of my previous posts on the case study on Indian operators has looked into the various actions taken by operators to keep the tariffs low. Even in 3G, Indian operators would need to follow the same “Minute Factory Model” in their efforts to attract higher number of 3G users. However, this action is likely to result in lower ARPU which would in turn mean higher 3G users required to break-even.

2. Refarm 900 MHz Spectrum: Unsuccessful bidders in any circle have an option of refarming their 900 MHz spectrum for 3G usage. This is an attractive option as most of the unsuccessful bidders have excess 2G 900 MHz capacity in the circles where they could not win. Refarming is a highly cost effective way of launching 3G services.  Refarming was explained in one of the previous posts on Spectrum Refarming – Rollout 3G services on 2G spectrum

3. Indirect bundling of handsets/ Upgrade schemes with handset vendors: Handset bundling in India is not prevalant as the ARPU levels are low which means that the handsets costs cannot be recovered even in two years time. Also, the operators have focused on keeping the costs low and hence have not indulged in any kind of handset subsidy. However, this should not prevent them from looking at innovative ways of indirect handset bundling. They should be willing to offer network minutes for free in return for tie-ups with handsets companies. The operators should tie up with handset vendors to upgrade the handsets of its subscribers who are on the verge of replacing their handsets by proactively targeting subscribers with over 18 months old handsets. Studies have shown that after upgrading their handsets, the users tend to experiment more with mobile services resulting in higher ARPU.

Handset vendors should also work with the operators to keep the aspiration levels high as well as keep the 3G handset prices low. There is a need to develop handsets that are “Made for India” keeping in mind the operator objectives. If the operators want to focus on voice, then there is a need for a cheap handset which may not have a big screen size or multimedia capabilities. On the other hand, if the operators decide to focus on music and videos, then the handset capability needs to be changed accordingly. Similarly, if the operators refarm the 2G spectrum then the handset vendors should have the handsets ready to support it. MediaTek’s plan of bringing cheap 3G smartphones based on Android might just be the impetus that this market requires. However, the other handset players need to better the MediaTek offering as the MediaTek based handsets may not be good for the ecosystem players and consumers in the long term.

4. Focus on Non Voice Devices: Operators should aggressively focus on non voice devices like the data cards, net books and other devices needing connectivity. This would ensure higher revenues and faster break-even. In the coming years, the popularity of net-books, eBook readers and handheld tablets is bound to increase and hence the need for connectivity.

5. Ensure fair Revenue share: For the success of 3G, it is important to have the right content and applications for the users. The ecosystem would be more vibrant if all the players get a fair revenue share. Fair revenue share would ensure higher developer interest in developing new applications. Unlike the other markets, the revenue share in India is heavily skewed in favor of operators which needs to change for quality content to be develop and mobilized.

6. Aggressively focus on GPRS: Once the users begin to shift to 3G, the 2G network would get decongested and the operators would be able to offer GPRS/EDGE plans to their subscribers. Subscribers should first experience internet and then would demand better speeds. Hence, GPRS can be a good stepping stone to complete 3G transition. It is therefore important for the operators to continue to focus on increasing GPRS penetration.

7. Roll-out HSPA+: India is already one of the last countries to roll-out 3G and therefore, it would be good for the operators to provide superior consumer experience in terms of internet speeds by rolling out HSPA+ rather than just WCDMA.

I am very sure that the operators would be able to break-even on 3G networks within 5 years if they follow the same that they did for 2G. India has always been different from other parts of the world in telecom and there is no reason why it cannot give positive surprises even on 3G.

Please leave your comments on the other possible strategies that the operators could adopt for faster break-even in 3G
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