Greenfield Telcos: Innovation Holds the Key

Its a win-win situation for all. Indias buzzing telecom market welcomes new

entrants as they make a beeline unveiling billion dollar investment plans to tap

this growing market. The reasons are not difficult to guess. As a result of

Indias liberalization policy since 1991, coupled with the structural and

institutional reforms, India has the distinction of being the worlds fastest

growing telecom market with a CAGR of 34% over the last decade.

With nearly 490 mn subscribers and with an annual addition of more than 125

mn over the last couple of years, India will reach the 500 mn subscriber base in

2010. As per the latest figures released by Telecom Regulatory Authority of

India (Trai) the number of telephone subscribers in India increased to 600.69 mn

for the month of February from 581.97 mn in the previous month, registering a

growth rate of 3.22%. The number of wireless subscriber base increased from

544.98 mn in January to 563.73 mn in February registering a growth of 3.44%.

To put it simply, wireless subscription currently stands at 563.73 mn with

18.76 mn new subscribers added (in the month of February) while the wireline

subscription declined to 36.96 mn.

Too Many Cooks



FY 08 saw the arrival of a plethora of operators in the Indian telecom

market. Some of the significant deals include Japanese player DOCOMO buying 26%

stake in Tata Teleservices for $2.70 bn; Telenor bought a 60% stake in Unitech

Wireless for $1.23 bn; UAEs Etisalat was one of the first to enter the market

by buying 45% stake in Swan Telecom for $900 mn; while Bahrains telecom company

Batelco bought 49% stake in S Tel for $225 mn.

While subscribers may be glad to change operators based on tariff charges

with some even going to the extent of using two to three SIM cards per user, the

harsh truth is that the Indian telecom market is at the point of inflexion and

has transitioned into the second stage of evolution. However, the interesting

aspect is the speculation around the expected lifespan of this growth.

While the recent entry by players like Aircel, Uninor and MTS has surely

managed to cause a furore in the Indian telecom industry; it still remains to be

seen whether the market will be able to sustain the roaring market growth even

resulting in a dent in the market share of brawny players like Airtel.

"As most foreign markets reached the saturation point, foreign operators like

Vodafone, France Telecom, Orange started looking elsewhere for growth and the

Indian telecom market presented an unprecedented growth opportunity.

Interestingly most Indian operators have realized that even though it is a high

growth potential market yet one cannot have a 70% market share," says Vsevolod

Rozanov, president and CEO, MTS India (Sistema Shyam TeleServices). MTS India

which is a JV between Russia based Sistema and Shyam Group of India only has a

miniscule 1% market share, but Rozanov is confident and says, "In the next two

to three years, with a mix business model of voice and data we will have a

market share of 4-5%."

Sanchit Vir Gogia, assistant research manager, Springboard Research says,

"The situation today in the Indian telecom industry is vastly different from a

decade ago when the competition was scanty and private players could afford to

charge a premium (an astronomical rate of Rs 32 per minute) and hoped to recover

their cpaex in a surprisingly short time span. Today, the penetration in metros

is already near saturation and call rates and average revenue per user (ARPU)

are a rock bottom; hence, not many can expect to achieve the break-even point

anytime in the near future."

Opportunities Galore



IT today is regarded as the differentiating element between a successful and

a failed business and for a new entrant in any market, technology is a

prerequisite to ensure a successful launch and increase productivity in an

organization.

Apart from acquiring the staff to enable faster IT rollouts even as it

addresses the time-to-market and demand to be ahead of competitors; a new

operator has to also meet the customer demands for real-time responses and

on-demand services and launch new services continuously for maintaining the

competitive advantage. In addition, the new player has to design, build and

deploy operations all within a short time-span requiring IT systems equipping

them with the competitive edge.

However, in economic crisis, technology is one of the first areas to feel the

heat of budget cuts. And for any non-IT enterprise, focusing on keeping the

technology updated is time consuming, something which can be avoided, and

perhaps this is why most greenfield telecom operators realized the need to go

for strategic outsourcing and engage a suitable strategic IT partner who can

take ownership for the IT systems and operations, and deliver the best solutions

and services, and assist to develop a significant competitive advantage.

Most greenfield operators in India, both incumbent and greenfield, for

instance Datacom, Uninor, Etisalat DB, Loop telecom, S Tel have opted for long

term strategic outsourcing and in particular deals based on the build operate

transfer (BOT) model of strategic outsourcing.

In FY 09 Wipro Infotech, the India and Middle East business arm of Wipro was

awarded a nine-year IT outsourcing contract by Unitech Wireless. Wipro Infotech

would provide a range of IT services to Unitech Wireless which has outsourced

its IT management to focus better on its core telecom business. Wipro will

deploy component based service delivery platform (SDP) for Unitech Wireless to

deliver a wide range of services. Meanwhile, Wipro Infotech will be working with

the operator right from the launch and will take responsibility for key aspects

of the service infrastructure.

With the number of greenfield telecom operators on the rise, telecom

equipment maker Nokia Siemens Networks (NSN) shifted its global services

business unit headquarters from Munich to India for greater proximity to

customers in one of the fastest growing telecom markets in the world. In 2007,

NSN won a Rs 300 crore contract from Aircel to build and operate a greenfield

GSM network in Kolkata, including supply of GSM/EDGE equipment, implementation,

project management and managed services, such as operating and maintaining the

network infrastructure.

Unitech Wireless also handed out deals worth $400 mn for the design,

deployment and management of the operators new GSM mobile network in India,

with Alcatel-Lucent and Huawei Technologies sharing the spoils with Huawei

getting around $225 mn.

Not Alls Well



A continuous spend on capital (capex) since most of these new players are

rightly targeting new circles (mostly rural and tier-2/3 towns), its a catch-22

situation since most of these areas do not already have the requisite telecom

infrastructure in place requiring most of these players to dig into their deep

pockets and invest in towers and base stations.

Infrastructure sharing is a good bet but it is bound to face challenges. With

more operators on the same network (resulting in higher users), challenges like

call dropping and network congestion will prevail. Therefore, providing good

network coverage across the country including rural areas and thus, gaining

substantial customer base continues to be a major challenge. With ARPUs going

south as metros hit a saturation point, operators will have to look towards

rural areas for propelling growth; however lack of network infrastructure will

be a major impediment in rural areas.

The lack of regulation and policy on new technologies is another major area

of concern for the new entrants. For instance, the government has withheld the

decision on 3G for a long time and as a result India is already behind the curve

and most people are now talking about 4G. Uninor for instance has decided to

stay away from the 3G auction (which will begin soon) as its still to get the

spectrum that it deserves for 2G services. However, for the new entrants who are

participating in the 3G spectrum allocation, the moot question will be to

acquire a substantial base of users which is directly related to the penetration

of high end mobile handsets which again are concentrated in big metros of the

country. Says Gogia, "Such technologies require high capex with no clearly

defined timeframe for effective returns. This ambiguity of deferring

investments, perhaps is the reason why players like Uninor have moved away from

the bid for 3G."

On the consumer front, new entrants have to address several key issues like

absence of brand loyalty from consumers and often changing SIM cards based on

the latest promotion reflecting in growing user base by most operators.

Operators will have to keep this in mind while quoting inflated user base; the

differentiating factor here is the revenue gain from regular users.

While number portability certainly is a welcome service, operators will find

it hard to keep customers who are volatile and make network decision based

solely on offers and call prices. However, the business user is not likely to

switch and will need to be excited enough before changing operators. Operators

will have to provide uninterrupted network connectivity to corporate users as

they tend to be wary of their network choice and will not switch to any other

network for cheap frills.

Though a growing but small market currently, the value added services market

will see growing adoption with the coming of 3G; but the sad part of the story

is that the core market is still demanding basic telephony and this is

particularly true for rural areas. This also connects to the point of low

penetration of high end handsets which are currently concentrated in metros.

Another challenge here is the willingness to pay for content. People will search

for it, but not pay for it.

"The lack of skilled human resource is another major challenge and with

attrition levels as high as 25%, the telecom sector is seeing wide scale

poaching," says Rozanov.

The Road Ahead



The need of the hour clearly is innovation and this is particularly true

for these new operators if they wish to quickly gather the customer base. While

some like Virgin are clearly using the VAS route and looking at targeting

specific customer segments, the issue here is of long term business viability of

this model. And with tariff rates being almost same for most operators now, the

competition will be on VAS.

Operators on their part will need to step up the branding efforts in order to

reconnect with customers. The key to acquiring and retaining customers for new

operators will be providing improved network coverage in rural areas and remote

locations.

Most importantly large scale consolidation is inevitable within the next two

to three years. As Gogia rightly points out, "Once consolidation happens, around

four to five operators at the most will survive, since most foreign players as

we have seen in the past do not intend to stay put and are here to make a quick

buck by increasing the user base, thereby increasing valuation, sell and exit."

Stuti Das



stutid@cybermedia.co.in