There is a strong rumor of Qualcomm partnering with Airtel to roll-out TD-LTE network in India. Qualcomm has bid for the ongoing BWA spectrum and would need to find an Indian partner if it were to win the bid as Indian laws prohibit any foreign company to hold more than 74% share in any telecom company.

Qualcomm has a good chance of winning the bid as it would do anything to get the spectrum and showcase the TD-LTE technology. Airtel has not been able to get 3G spectrum in almost half the circles and would be keen to leapfrog technology by launching 4G across the country. 3G spectrum can then be used for freeing up the 2G network. Qualcomm on the other hand has no interest in launching the network by itself and is only interested in blocking WiMax from getting further foothold in India. Thus there is a perfect match between Airtel and Qualcomm.

I had mentioned in my earlier post that in a statement, Qualcomm made it clear that it intended to act only as a facilitator: If it wins the spectrum auction, Qualcomm plans to partner with an India-based operator to build a TD-LTE network and then exit the business. Surely, Qualcomm would like to partner with a pan India player and with significant subscriber base. Qualcomm has good relationships with Tata and Reliance but does not view them as potential partners which leaves is it with Airtel as the only choice. Vodafone is a global company and would not like to have a tie-up with Qualcomm.

Please note that this rumor has not been confirmed by either Airtel or Qualcomm.

Recently read about the dynamic pricing plan from Uninor offering up to 60% discounts to its customers on the call costs based on the location and the time when the call is made and and the discount increases in areas with lower network traffic and during off-peak hours . Visit the link to get more info on the plan from Uninor.

Obviously Uninor is not the first company in the world which offered this kind of plan. Many emerging market operators have introduced this plan in various countries and many more are considering to do so. It is believed that this will result in the increase in the MOU and also bring down the burden on the networks where they are really clogged. MTN Group was the first operator to introduce dynamic pricing with its MTN Zone tariff in Swaziland and South Africa in February 2008, and has since rolled it out to 11 of its 21 operations. Vodacom South Africa quickly followed suit and introduced its own dynamic tariff, Yeboforless, in May 2008. More recently, Orange Botswana launched its new prepaid dynamic tariff (Sesolo Zone) in July 2009 and Safaricom Kenya announced the launch of its new prepaid dynamic tariff (Supa Onega) in September 2009. Orange Group has indicated that it is looking to trial a dynamic tariff offering in most of its African subsidiaries.

There are lots of analyst views (including Mohit’s) which say that it has the potential to increase ARPUs, MOU and hence the profitability for operators. They have always taken these plans as positive for the company. There are real examples which show that for a brief period of time, these plans do increase ARPU. One of them is Vodacom – ARPUs increased two consecutive quarters after the launch of dynamic pricing plans. I personally don’t believe that ARPUs increased because of this plan and there was something else which led to increase in ARPUs. The reason is ARPUs declined for the next 2 quarters after the first 2 quarters of increase and then increased once again after the decline. So ARPUs dont really follow a pattern apart from suggesting that ARPUs in Quarter 3 and Quarter 4 are normally higher than other quarters. Some of the other reasons why I believe this kind of plan is rather negative for the company are stated below. I know I am going against the collective intelligence of various operators but I have my reasons for the same.

• These discounts are based on the premise that these discounts would lead to uniform level of usage through out the day well distributed between high and low loads. However, in emerging economies where price elasticity seemingly is high, the introduction of dynamic pricing will lead to considerable change in the user behaviour leading to non uniform usage behaviour through out the day eroding price per minute. This risk could be minimized by having a real variable pricing plan where there are no preconfigured prices for any time and location. In fact pricing would really change based on the network load and not on time and location (I know network load is directly proportional to time and location of the user but still it matters when the prices are configured in the system)

• These discounts are aimed at cannibalizing operators own existing customer base by offering a blanket plan to the whole customer base. I think if operators need to offer this plan, then this should be offered to properly segmented customers based on their usage behaviour. Blanket plan would lead to lesser revenues from even that customer segment which is willing to pay full rates for the call during that time at that location. But by offering this plan to everybody operators can loose out on massive revenues. So plans should be launched after carefully studying the customer usage behaviour

• If operators want to uniformly distribute the network through out the day, then instead of cannibalizing their existing revenues, they should focus on other mechanisms/business models by which they can sweat their infrastructure by other means instead of loosing out on revenue from their customers who would change their behaviour. One of the most common businesses which comes into mind is M2M where ARPUs are really low and operators can charge least possible rates for these transactions promoting M2M transactions and usage. M2M can be automated in such a way that they take place only those times during the day when network usage is least. This would help operators not only capture very low ARPU business but also refrain from making less from those call where they could have made more. Dynamic pricing can seriously cannibalize operators own market.

• Could this lead to bad customer experience – With ever changing prices, customers could get really get confused about the cost of the making a call. If they made the call in one area and then moved to another, what price would they be charged. How many times in a day this pricing is changed. What are the T&Cs in these. These are the valid questions which operators will have to address otherwise customers could have a real bad experience dealing with this complex plan.

Finally, not to say that these plans invariably loose money but they have the potential to backfire and can lead to even lower ARPUs for the operators. What operators need is development of new business models to make effective use of their networks rather than dynamic pricing to cannibalize their own market

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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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Uninor, which is a joint venture between Norway’s Telenor and India’s Unitech, came out with an innovative tariff plan to attract subscribers in a highly competitive Indian market.  In this market, competition intensity has meant lower tariffs but Uninor has introduced the dynamic pricing where customers would be offered 5-60% discount based on traffic on the network. The traffic would be function of location and time at which they call. The discount would change on an hourly basis and the discount available at any moment will be visible at all times on the screens of handsets that display cell broadcast. When the call ends, a flash will appear on the phone screen indicating the actual discounted cost of the call. Discounts are calculated by a sophisticated ‘Discount Engine’ that relies on state-of-the-art IT systems to continuously monitor traffic at every tower in the network. This plan is called ’24X7 Badalta Plan’ which in English means ’24X7 Changing Plan’.

Many analysts have dubbed this plan as a revenue depleater. They suspect that the effective call rates would fall and this is another way of triggering tariff war. However, I differ in the assessment and feel that this plan has a potential to increase usage. Anybody who needs to call would call irrespective of the time and place but if the user sees 50% discount flashing on the screen, he would be tempted to call-out to his friends or family. I would not be surprised if this plan leads to overall increase in ARPU due to higher minutes of usage.

Uninor has already outsourced its network and in case of managed services, the payment is made on peak capacity. This means that the increased utilization in off peak hours is at no extra cost till the time it does not cross the peak capacity. This effectively means that any increase in usage would go straight to the bottom line and hence the EBIDTA of this plan would be very high. If Uninor customers do not make call in the peak hours and wait for the discounts then Uninor pay outs would come down on account of lower peak capacity in future. This way it is a win-win situation. Operators have tried to give incentives for usage in non peak hours like night usage at half price but the pricing has never been this dynamic.

Another benefit of this plan would be ability of the operator to offer differential pricing in rural and urban areas. The capacity utilization is low in rural areas. The dynamic pricing of Uninor would offer higher discount in rural areas and lower discount in urban areas. This would not only help fill up the rural network but also help Uninor differentiate itself from other operators in the lucrative rural market.

The location based pricing is a radically new concept and it would be wrong to dismiss it as yet another means of lowering tariff. Having acquired the ability of monitoring the network utilization by tower on a real time basis, Uninor would be in a position to collect consumer data on the price elasticity which would help it in designing better plans. Most of the operators struggle with questions around price elasticity when it comes to plans aimed at increasing usage. I for one would be interested in tracking the success of this plan.

3G auctions finally took-off on 9th April after many delays and postponements. Government expects $7-8 billion from the 3G and BWA auctions and if the last 15 days are any indications, then the collections from the auctions are going to exceed the expectations. As on 27th April, the pan India license if for a premium of 147% at $1.92 billion (base price was $782 million). The auctions in all the circles would remain open till there is excess demand in any of the circles to maximize Government’s revenues. The question to be asked is where would the carriers stop bidding and what is the fair value for a pan India license?

Background:

There are around 14 operators in each of the service area in the country. The high competitive intensity has led to a tariff war with the realized rate dropping below 1 cent/min making India the cheapest country in the world when it comes to mobile telephony. Out of 14 operators, almost 50% are new operators which are still in the process of launching 2G networks and have a combined market share of less than 10%. The presentation below provides a good overview of the Indian Telecom Market.

The Government of India started the process of auction of 3G and BWA airways on 9th April with an objective of garnering $7-8 billion and has set the base price of a pan India 3G license at $780 million. There are 4 slots available in all the circles except for Punjab, Bihar, Himachal, J&K and West Bengal where there are 5 slots available. One of the slots in each circle has already been awarded to the state owned company, BSNL (MTNL in Delhi and Mumbai) so effectively there are 3 slots for auction in most of the circles.

What are the analysts estimates?

Many of the top equity analysts and investment bankers have estimated that the operators are going to bid around $2 billion for a pan India license. The table alongside shows that analyst views on the 3G auction price for pan India license. The analysts have based their claims on high data revenues from 3G.  Motilal Oswal has assumed non voice revenues of 20% of total revenues by 2015 and 12% annual growth in wireless revenues for next five years. In the last few quarters, due to competitive tariffs, the operators have seen negative revenue growth and I do not see the wireless revenues to grow at 12% CAGR for five years. Similarly, BNP Paribas has assumed the data ARPU to be Rs 100 which is very high considering it is close to Rs 18 currently. Is there any killer 3G application that would increase the data ARPU? I do not think there is any application that cannot run on 2G networks. No doubt the experience would be much better but the country is yet to adopt the mobile internet. So expecting the data usage to shoot up significantly with 3G would not be right.

The latest 3G auction bid value can be accessed from the DOT Website.

Will the operators buy the analyst argument?

They have no choice but the get the spectrum. There are four serious bidders for the pan India license and there are only 3 slots available. The cost of not getting the 3G spectrum is high due to the following reason:

1. High congestion: In most of the metro and A circles, the networks of the leading operators are choked due to spectrum constraints. The operators are likely to use the 3G spectrum for voice thereby reducing congestion on 2G airways. The availability of higher amount of spectrum would also help the operators reduce their capital expenditure (CAPEX). In my opinion, the operators are not bidding to launch high speed networks but are bidding to get as much spectrum as possible.
2. Service Differentiation: Currently, there is very little differentiation amongst the operators and with the mobile number portability (MNP) round the corner, no operator can miss the opportunity of becoming a differentiated player using 3G.
3. Higher Data Usage: Operators are hoping that better experience on mobile internet is likely to drive the data revenues. With the 2G network becoming less congested, even the GPRS experience is likely to be much better. I believe that there is a potential to increase the data revenues to 15% of total revenues in the near term but not to the levels that some of the analysts are projecting.

What would be final auction price for pan India license? It is clear that no big incumbent operator can afford to be bow out of the 3G and they will try to get the spectrum at any cost till the time their balance sheets are able to support the license fee. The operators would need to fund the 3G license fee as well as fund the rollout of 3G networks. This would result in higher debt on their balance sheets leading to higher debt to equity ratio (leverage). This means that the ability to fund the 3G license and the networks would vary from operator to operator depending on the current levels of debt. As per the analysis of BNP Paribas, the debt to equity and debt to EBIDTA levels pre and post 3G license acquisition would be as follows (assuming $2 billion as the cost of 3G license):

Bharti has negligible debt but after the acquisition of Zain, its balance sheet would soon get $10.7 billion as debt but still it would be in a better situation than Reliance and Idea to be able to fund the $2 billion 3G license cost. In case of Reliance and Idea, the net debt to EBIDTA becomes abnormally high which makes me believe that at some stage they would walk out of the bidding for pan India license and would concentrate on getting the licenses in circles where they are strong. Vodafone and Tata Docomo would be able to fund their 3G aspirations due to availability of funds from Global organization for Vodafone and from Docomo for Tata. This means that the fight would be amongst Airtel, Vodafone and Tata to get the pan India license but the other players especially Reliance and Tata are going to drive the price in a few circles to an unsustainable levels. This means that the pan India license would finally cost around 2 billion to the operators.

Is $2 billion fair price for 3G license?

It is difficult to say if $ 2 billion is the fair price or is the 3G license overpriced in India. It would all depend on the data take up by consumers and the operators ability to price the service in a way that they are able to maximize the 3G subscribers on a base station. This means it would be in the interest of operators to keep the tariff low to gain consumer traction and limit the geographic expansion till there is a strong business case to do so. This would help bring down the CAPEX. The analysts have been talking to the operators on the possible license cost and have been spinning the business case around the $ 2 billion mark by playing with assumptions around data uptake and ARPU/wireless revenues. I am sure the Indian operator would not be looking at data as the only driver but would apply the “Minute Factory” model to 3G as well. This would ensure mass adoption of 3G in the country as it happened in case of 2G.

An interesting and probably first of its kind case study challenge was conducted India Social, where in any organization that had taken travelled the social media route and attained success could participate and exhibit their tactics. The winners of this case study challenge were Pratham Books (1^st prize), Fastrack (2^nd prize) and Cleartrip.com (3^rd prize). Let us, introduce these organizations in brief in the benefit of the audience – Pratham Books was established in 2004, as a non-profit Public Charitable Trust with an objective to enable the democratization of children education, Fastrack which was initially launched (in 1998) as a sub-brand of Titan (an arm of Tata group) became later on an independent brand in 2005, with focus on watches for urban youth and Cleartrip established in 2006 is one of the top online travel companies in India.

In this article we have made an attempt to analyze and understand the similarities and dissimilarities in the social media strategy adopted by these winners. The interesting aspect to notice was that the context of these companies varied to a great extent – Pratham (NGO, products & services), Fastrack (high involvement product category), Cleartrip.com (high involvement services category). This insight essentially signifies that any company (irrespective of its business focus & domain) that realizes the true potential of social media and dedicatedly implements it in the right manner, has an opportunity to reap satisfactory results. We have analyzed their social media strategy based on criteria – platform selection, stakeholders targeted, activities undergone and the impact measurement.

As indicated in table1 Pratham used six social media platforms, the highest of the three competing firms, followed by Fastrack which used four, and Cleartrip which used three platforms. However, the common platforms amongst all three were Facebook and Twitter. An interesting point to be noted is that Orkut, which was the first social networking website to gain prominence in the country, was not preferred by any of the companies. Also, the match between the product category in which  a particular company was involved and the platform it chose was incredible, for instance in order to familiarize users with the books it prepared Pratham ensured it had presence on Scribd and YouTube, where its users could read the free books that were uploaded. Similarly, Fastrack, which is the country’s famous brand known for its luxurious products, ensured its presence on YouTube and Flickr to demonstrate its product varieties and new arrivals. Lastly, as Cleartrip doesn’t have any product to demonstrate, it probably didn’t needed to be present on YouTube, Flickr or Scribd, and hence was just present on Facebook, Twitter and Blog. This strengthens the argument that the key question to be asked is not on how many platforms should the company be present? but on which platforms should  the company be present to justify the objective and the product/service the company is offering?

We, further analyzed the usage of most common platforms – Twitter and Facebook. As shown in table 1.1 it could be noted that the number of people whom Fastrack and Pratham books followed, was nearly matching the number of people who followed them on Twitter. This strategy is highly debated in the industry where many experts feel that it is not necessary for a company to follow every customer who follows the company on Twitter. However, it makes sense and the empirical proof here strengthens the argument that it is indeed necessary to follow those customers who follow the company. The only exception was Cleartrip, where it seems follows the tide of industry experts.

The table1.2 indicates the number of fans on the fanpages of these companies on Facebook. Though, the numbers could not be compared with each other due to the high variance in the business context of these firms, in general one could realize that product with fun, luxury, style (hedonic) attract more response which was very clearly evident in case of Fastrack. Also, the connect, with right target audience of Fastrack which is primarily youth, is easily possible on these social networking websites, which makes it inevitable to avoid them.

The most important criteria to compare these companies, was the kind of stakeholder involvement that they considered. As Pratham’s stakeholder involved a wide variety of member organizations, the focus on the entire community was very important for them, to ensure the co-ordination between community members. However, the focus for Fastrack and Cleartrip was clearly on existing and potential customers. Also, Pratham had to concentrate not only on the external stakeholder members, but also the internal staff to ensure they were in sync with the overall business and social media strategy.

So far, we have discussed regarding the presence of companies on various social media platforms, however the crucial element is not the presence, but the kind of activities that are undergone on these platforms. Hence, we analyzed the range of activities that were conducted and the impact measurement tactics employed by these firms. We are sure that it would be an eye-opener for the readers of this article that none of the impact measurement tactics are traditional internet performance measurement ones (like CPC, CPM, hit ratios, pages visited). The impact measurement tactics have been very well framed and they match the activities that were conducted, which essentially indicates that there could be no standardized evaluation tactics, but they need to be tailored according to one’s requirements.

This case studies exhibited in this article may not be the industry’s best practices, but we felt that sharing these case studies on which data was publicly available and confirmed (by India Social) provides authenticated learning.  We are sure there might be such innumerable case studies, which are yet to be identified and understood. To sum up, the key learnings from these three interesting case studies would be:

• Depth and not the breadth of social media platform that matters.
• Firms should be prepared to face the negative discussions on social media
• Synchronization between the product category and social media platform is very essential
• Identifying the presence of right target audience on right social media platform is the key.
• Conducting appropriate activities and measuring their impact in the most suitable manner is what matters at the end of the day.

The start provided by India Social in organizing such events, and an attempt to publicize the social media strategy that firms follow is a welcome move and we are sure the criteria of evaluating entries would become stringent in future. Some of the criteria that could be seriously considered are:

1. Whether firms outsourced the social media campaigns or developed in-house
2. What were the cultural challenges that these firms faced while adopting social media?
3. How could they measure the financial impact of these activities? (Note: We understand that many a times social media campaign are not supposed to be revenue generating activities, but still it needs to be accountable in some manner to justify the manpower resources that needs to be committed for these activities, if done in-house)
4. Are there any mechanisms to measure the input (primarily manpower) costs and compare their output?

Leaving aside all these analyzes the reader has read so far, we would like to share our personal experience with these winners when we posted the “congratulations” message on their respective fanpage on Facebook, guess what? we received a prompt acknowledgement from Pratham, which probably justifies its brand name (Pratham in Hindi language means, “first”)!!!!

Our attention focuses on recent and upcoming announcements that peg events for rapidly evolving next generation wireless competition.  From the view of the author, among the many events, the top two events that stand out most are:

• Sprint-Clearwire’s announcement of the HTC EVO Android 2.1, 4G WebPhone
• Qualcomm’s intent to bid on the India auction following April 9^th for BWA with TD-LTE

Sprint’s CEO, Dan Hesse, is expected to unveil the HTC Supersonic, officially announced as under the EVO 4G brand name, a leading-edge SmartPhone that will be the first market-leading phone to work on both 3G and Clearwire’s WiMAX network during his keynote address and in press briefings at CTIA.

The EVO 4G is a successor of the well reviewed HTC HD2 model. Specifications include:

• 4.3″ TFT, (~ 1/3 larger than the iPhone)
• 3G/4G WiFi hotspot extension capability
• 8 MP Primary Camera with Dual LED; Auto focus, Digital zoom
• 1.3 MP front-facing camera targeted at BB hogging social networking, web-casting of pictures and streaming video
• Kickstand for stationary use incl. HDTV viewing
• 3.5mm Head Jack
• Clearwire WiMAX, Sprint 3G data network coverage
• Stereo Bluetooth
• GPS, proximity and motion sensors
• Digital compass
• 1 GB ROM
• 512 RAM
• 1,500 mAh battery
• 1GHZ Snapdragon
• MicroUSB and MicroSD card clot
• Micro HDMI
• Qualcomm 1 GHz Snapdragon processor with EVDO
• Sequans WiMAX chip
• Social networking with most popular sites
• Android market access to over 30,000 applications

The EVO 4G represents that the WiMAX ecosystem and deployments have crossed a long anticipated threshold as a competitive full featured converged network.  Clearwire and Sprint will look for entry of this and other subscriber-growth driving Android and Microsoft Mobile 7 devices that will be introduced over the next year to ramp sales sharply.

While it can be argued that Clearwire’s primary strengths lie in wireless broadband, more as an adjunct to other networks rather than as a mobile hand-held device juggernaut, the onus on 4G providers will be to fulfill a pallet of market needs.  The device category that has become the most subscriber grabbing and, therefore, greatest threshold for capturing mind and market share is the leading edge of the SmartPhone and larger form-factor MID devices.  Sprint-Clearwire takes the BB strengths of the NG network to deliver more fully on the promise of 4G: full-tilt-boogey broadband anywhere.

Of necessity, Clearwire’s first priority has been to build out a substantial network footprint.  Regardless of the value proposition of the WiMAX/3G combination, leading edge devices require  large markets to sell into. As Clearwire has reached around 50 million POPs currently and expects to cover over 110 by early 2011, the draw for handset providers has crossed a threshold.

The remaining details of the EVO 4G  are almost unimportant: it follows previous HTC units which have improved over time to become challengers to the iPhone, Motorola DROID, which is similarly based on Android OS. Price and availability of the device and service plans are keys to success.  If married to similar Sprint’s aggressive always connected package strategy, the EVO 4G may carve out a revival for Sprint and a surge in subscriber growth for Clearwire.

No ‘Lines in the Sky’

On the other side of the world, Qualcomm entered the fray for the week of April 9th BWA auction in India. This throws a new wrinkle into the development of 4G and causes reflection on the ‘Clash of the Titans’ between mobile wireless and ITC worlds:

• One of WiMAX’ primary tenets has been that standards should develop based on the merits of underlying technology
• Furthermore, spectrum should be regulated and used as technology agnostic
• IEEE 802.16, 3GPP, and related standards groups have evolved efforts towards use of IP for multiple services from embedded machine to machine, MtM, to high-end mobile devices
• As Qualcomm lost their gambit to promote UMB as a worldwide standard for 4G, they became a strong advocate for LTE with their IPR licensing position ostensibly in long term jeopardy.

The Qualcomm bid could have a number of possible repercussions:

1. Delay of use of a portion of the spectrum.  However, the auctions are arranged so that no bidder can block development in a specific geography.
2. Prying away of some WiMAX deployments to LTE, particularly the TD-LTE version spearheaded by the Chinese.
3. An increased market potential for WiMAX/LTE multiple mode chipsets.

Each of these events portrays how much the industry has converged: WiMAX is crossing the threshold to become more mainstream, even while limited by spectrum access. LTE a close cousin in terms of technology is being positioned as both a BWA as well as next generation mobile network.

Sprint and Clearwire’s recent interviews further clarify that the company is, after all, a network operator rather than a religious technology advocate.   Sprint’s choice of the name “EVO 4G” is particularly well suited and telling: one flavor of technology or the other does not shackle The ‘nature’ of devices on IP networks.  In fact, the major reason for the disruptive shift to open applications development environments and open ‘all-IP’ WRAN, wireless radio access,  has been to allow greater degree of freedom from specific hardware network and device environments.  The introduction of the EVO 4G marks a capstone event for the coming together of broadband and wireless.

On 15th Feb, 2010 Bharti announced the acceptance of its bid for Zain’s Africa business by Zain’s board. The deal value is $ 10.7 billion which Bharti plans to fund by loans arranged by Standard Chartered Bank and a couple of other Banks. This is the third attempt by Bharti to enter Africa after two failed attempts with MTN of South Africa. The share price of Bharti took a serious beating after this announcement as most of the analyst felt that Bharti is overpaying for Zain’s assets by around $ 2 billion. My analysis shows that it is a good deal for Bharti and its stock price would rise in the long run. In fact, just after the announcement of the deal, I brought Bharti shares and my optimism is based on the following facts:

1. Low Financial Leverage

Bharti has a very low “Net Debt to Equity Ratio” of 0.05 at the end of Dec., 2009 which means that it is virtually a debt free company. It is good to have low debt but zero debt is not a desirable situation as debt can increase the shareholders’ return on their investment due to tax advantages associated with borrowing. The figure along side illustrates how financial leverage can help companies optimize their cost of capital. As it can be seen from the figure, the total cost of capital is high if there is no or low debt and there is a level of financial leverage where the total cost of capital is the lowest. Most of the companies try to maintain leverage at the level where the total cost of capital is lowest.

Bharti is a profitable company with over 40% EBIDTA margins which is higher than the cost of debt. This means that it is better for the company to pay interest than paying dividends to a large number of shareholders and hence it should either reduce the shareholding (through share buyback) or increase debt and deploy debt in a profitable way. Bharti has selected the second option and is taking debt to buy Zain that would return higher profits in the long term. It is like investing for the future. Even if Bharti were to pickup $ 7 billion for the Zain acquisition as debt, then also the leverage is unlikely to exceed 1 which would still be lower than many listed companies. To put the case in perspective, Verizon has a debt to equity ratio of 1:45 while the similar ratio for Sprint Nextel is at 1.19 and for Telefonica, it is as high as 2.78 (source: Forbes financial application).

2. Free Cash

Bharti is one of the few carriers across the world that has free cash flow and it does not make sense for the company to keep sitting on the pile of cash when it can deploy it in productive assets. The capex in the Indian operations have started to decline and hence the free cash flow is likely to increase even further in future. If Bharti decides to fund the Zain acquisition through debt, it would not find much problem in servicing this debt due to generation of free cash flow in the years to come.

3. Attractiveness of African Market

Africa is the next frontier as far as mobility is concerned. As markets saturate, the carriers start to look at opportunities outside of their domestic markets. Vodafone invested in India around three years back to increase the growth potential of its revenues. Now that the tariffs have declined significantly in India and that the penetration levels have crossed 45% in India, there is little opportunity left in the domestic market for Bharti. The penetration levels in Africa are around 33% and the ARPU levels are high varying from $8 – 12 (apart from Kenya and Ghana where it is closer to India ARPU levels of $4). Bharti can replicate its low cost model in the African market which would not only bring the cost down but would also result in significantly higher subscriber addition. The level of competition in Africa is not as intense as India as most of the countries have no more than 4-5 operators. The countries where Zain has operations in Africa have a population of close to 500 million which is an indicator of the opportunity that lies in Africa.

Summary

I believe that with this deal, Bharti would be able to increase the valuation of the company in the longer term. The Zain deal would turn out to be better than MTN as it would be an outright purchase rather than co-ownership as in case of MTN deal. Most of the joint ventures or mergers fail due to cultural issues and ego issues between partners and the ego issues are more likely in co-ownership model. Moreover, in case of Zain, the regulators are unlikely to hold the deal on account of nation pride as Zain does not belong to any of African country and hence there would not be any insistence on dual listing or any similar binding as it was in the case of MTN.

Indian telecom market is currently the most attractive telecom market with a lot of interest being shown by foreign players. Since in India, the fixed line subscribers are not even 10% of the mobile subscriber base, in this article, I am going to talk about mobile subscribers and its market only.

The country was divided into 23 circles when the mobile phones were introduced in the country. Separate licenses were given out for each of the circles in 1994. The circles were classified as Metros, A, B or C depending upon the revenue potential for the circle with Metros & A circles expected to have the highest potential. The following table lists the current telecom circles and the mobile subscriber base in each of them:

The figures below are a snapshot of key operator indicators by for GSM (Click on the image to view it clearly)

The figures below are a snapshot of key operator indicators by for CDMA (Click on the image to view it clearly)

There are many innovations that have helped reduced the cost of ownership of mobile phones. The figure alongside (source: TRAI) is a snapshot of how the subscriber base increased as the tariffs reduced due to innovations and government interventions. India is the now the second largest market in terms of mobile subscriber base after China but still it is at 48% teledensity and adding 15-17 million new subscribers every month.

Indian market is not only the most attractive but also the most competitive with over seven operators in each circle and another five new operators likely to start operations in the near future. Nowhere in the world does any country have so many carriers. The dominant players are Airtel, Reliance, Vodafone, BSNL (state owned), Idea and Tata. Reliance and Tata offer CDMA technology while all the other players are in the GSM space. GSM has a 75% share of sbscribers and now even Reliance and Tata have either launched or in the process of launching nation-wide GSM services. Apart from the current players, there are several new players like Aircel, Unitech-Telenor, Shyam-Siestema, Etisalat that have got the license and spectrum to launch mobile services in several telecom circles. Shyam-Siestema is the only player to launch CDMA services while all the new operators are in the lucrative GSM space. The adjoining figure gives the market shares of the operators in India. It is a fragmented market with the biggest operator (Airtel) garnering only 23% share.

ARPU (Average Revenue per User)

India is a predominantly prepaid market (93% of all subscribers are on prepaid) with low ARPU and high minutes of usage(MoU).The GSM ARPU is Rs 144 (~ USD 3.2) per month with a usage of 411 minutes per month in the quarter ending Dec, 2009. Similarly, CDMA ARPU stood at Rs 82 (~USD 1.8) with a usage of 318 minutes per month. There is a wide disparity in the rural and urban teledensity with rural teledensity at 20% vs. urban teledensity of around 103%. The chart below gives the progressive wireless penetration in rural and urban areas.



Regulatory has played a big role in development of Indian telecom market by brining in the competition at the right time and by removing bottlenecks. However, there are a few pending issues that still need to be resolved like the 3G spectrum auction and allocation, Mobile Number Portability and 2G spectrum allocation policy.

Given the low tele density in the country, the subscriber base is expected to grow at a brisk pace. Government expects the mobile base to cross 600 million by 2010 and most of the new additions are expected to come from rural areas where the mobile penetration is still low.

(All the data is sourced from COAI, AUSPI and TRAI which are the leading industry associations and regulatory bodies)

Resources on India Telecom Industry

1. India Subscriber Database – Circle-wise, operator-wise from year 2000 onwards (updated till Apr’10)

2. Presentation on India Telecom Market

2. Download the latest TRAI report (Released Jul’10) to access key telecom indicators

3. ARPU Revenue Analysis – Oct-Dec 09-FINAL- Circle-wise ARPU data for GSM networks

4. Case study on How Indian Carriers make 40% EBIDTA margins at 2 cents a minute

5. Report (based on actual numbers) on Internet Usage in India – Comviva India Mobile Internet Study

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