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