Telecom: Holding Huge Potential

The telecommunications services industry, in the last 18 months or so, has hit the headlines for all the wrong reasons: A big scam that saw the minister-in-charge being sent to the jail; some explosive tapes associated with it that questioned the credibility of some of the big businessmen and media persons in the country; and a few business partnerships falling apart, along with other controversies such as operators reporting higher than actual mobile subscribers base and the like.

Yet, despite all the bad news surrounding it, the telecom services industry in India managed to grow 7% in FY12, to reach `182,459 crore, according to estimates by VOICE&DATA, sister publication of Dataquest. This was driven entirely by mobile services segment that accounts for close to two-thirds of the overall industry. Mobile services grew 17% in revenue terms, adding more than 107 mn new connections.

However the scam and the cancellation of licenses–with foreign investors not too sure about in which direction things will move–the prevalent mood in the industry is that of confusion, if not hopelessness. That has taken its toll on the business too–including in the star performer, mobile.

Last year was the first full year that even after number portability was too slow to take off, though it accelerated later. 3G, launched with much fanfare, accompanied by some high-pitch marketing campaigns, was another non-starter, with the active user base by the end of the year not even touching 5% of the total mobile subscribers’ base. While high prices get the blame, it is too simplistic to assume the main reasons for that.

Lack of speed, lack of applications, and the operators’ own indecisiveness in the wake of introducing the so-called 4G services are bigger reasons for the lack of success. The wait for 4G just continues. With decisions for license cancellations as well as no clarity about policies, companies are holding investments back, sometimes even in critical areas such as network expansion. Last year saw QoS dropping significantly.

With more competition, it seems, finally, the industry is seeing the ‘Rule of Three’ unfolding for itself, what with both Vodafone and Idea growing much faster than the leader, airtel, and grabbing market share. For the uninitiated, the ‘Rule of Three’, is a market phenomenon, suggested by marketing guru, Jagdish Sheth and Rajendra Sisodia, which states that in a mature market, there will normally be 3 major competitors and several others, which will only succeed if they are able to create some niche for themselves. That means Indian telecom market is now close to a very mature market. The success of companies like MTS in a segment shows that with a niche positioning, even a new provider can succeed.

The story of fixedline business is worrying. With plain vanilla voice telephony almost entirely switching to mobile, the segment should have found newer avenues such as consumer broadband with content and applications, small business solutions, providing pipes for cloud, data centers, and so on.

However almost all fixedline service providers have found their sweet spot in plucking the low-hanging fruits–providing fatter and fatter pipes to large enterprises, sometimes with a little value addition. While all that is being experimented with, the segment is yet to find its killer app and continues to shrink.

The good thing is whether it is fixedline or mobile, all the solutions that the industry is experimenting with, to get out of the sticky situation, is IT and at the core of it there are two things. One, despite the prevalent slowdown in the industry, IT can still grow in telecom, as it penetrates more and more into core of telecom technology. Two, as we realized while doing this estimation–it would be increasingly difficult to separate IT and telecom technologies.

Maybe, the reason why the most visible trend in the telecom industry as far as IT is concerned is that this is the only vertical that has overwhelmingly turned to outsourcing as the predominant IT management technique–with all but one large private operators not going for it. It is difficult to say, however, whether outsourcing is the cause of effect of the increasing IT-ization of telecommunications.

Where’s IT?

Telecom is the only segment other than banking in our analysis, where the basic product can be converted to electrons and/or waves. While the overall spending on IT may still be less in telecom, as compared to banking, it already has gone past banking when it comes to IT spending as a percentage of revenue.

According to our estimates, the telecom industry spent a total of approximately `5,300 crore on IT in FY12, and is likely to see a growth of 13-14% in FY13, despite the confusion and slowdown. As pointed above, it is the penetration and not expansion that will drive the growth.

Notice that as a percentage of the total industry revenue, it is close to 3%. And that is significantly higher than even banking’s spend on IT, though what explains this is, in banking, there are different types of banks and the disparity among them is very high. That is not the case in telecom.

Contrary to popular belief that everything is outsourced in telecom, the total outgoes to outsourcing providers out of this is less than half. The rest is what is spent on areas that are ‘strategic’, ‘pilot’, or ‘part of the solution’.

All IT spending by telecom service providers can be broadly classified into 4 areas: OSS/BSS (the traditional IT application areas); enterprise IT (same as in other industries but increasingly being integrated with BSS and OSS); new services (such as VAS); and solution offerings with IT at the core (SaaS, IaaS, data center hosting, etc).

Enterprise IT spending for a telecom operator is increasingly targeting areas hitherto not penetrated, such as efficiency of field force, energy management (energy is a big spending head for a telco), and providing predictive input for decision making. But the way it is different is that since all actual business (that is customer usage and network) is already generating huge volumes of data, the expectation is huge; data collection per se–a challenge in most other industries–is not a problem at all. Most telcos are spending on this front. Solutions include BI and analytics.

While no major investment is being made on basic OSS/BSS systems–not because they are satisfied with them–but because the migration is a big task and most operators are continuously adding to the capability, especially on the BSS side. Newer CRM apps, customer analytics, and even social media interfaces are being experimented with, though the actual usage of social media is still restricted to branding and grievance management. It may be noted here that all the large operators are among the most responsive brands in the social media circuit–especially Twitter.

The third major area is the creation of new services. Traditionally, not called IT, we have also not included this in our estimation of the IT spend. Most operators are worried about the way 3G is unfolding. They now realize the need for applications and content. This is where the traditional IT outsourcing cannot help much. A lot of experimentation is happening, though any killer app has not emerged.

Since most businesses are now going for some kind of mobility, there is a thought that may be 3G solutioning for them would unlock its value; but the efforts of most operators are focused on searching for the ‘potentially big’ killer consumer apps, which continues to evade them. If 4G comes, they can no more ignore the business and government applications.

Finally, fixedline operators are realizing that the only way to have margins is by providing enterprises what they want. Most fixedline operators have gone ahead building enterprise IT offering to their customers–yes, they compete with and complement the typical IT infrastructure players–by building huge data centers and offering data center hosting, applications as a service, and even infrastructure as a service.

Reliance and airtel have been very aggressive on the infrastructure outsourcing front while Tata Teleservices has built a solution portfolio to offer a lot of applications as a service.

We believe that IT in telecom is a journey, as the lines blur even further. With consumerization of IT in enterprises as well as greater penetration of newer consumer devices, the industry needs to quickly innovate, looking beyond building fatter and fatter pipes, and becoming a gatekeeper to a collection or share of anyone who innovates. If anything, they will have to actively encourage ecosystems.

If the telecom industry moves out of the confusion and uncertainties, we expect it to work with emerging areas such as financial inclusion in banking, remote education, and areas such as governance and healthcare to potentially create killer solutions. A lot of IT will go into those.