Recent and Upcoming Telecom Mergers

Last month, Etisalat, a UAE operator, bought 45% stake in Swan Telecom for $900 million. Swan Telecom is a new operator in India and obtained 2G licenses in 13 telecom circles (out of 22) at the beginning of the year. This deal values Swan Telecom at around $2 billion. The valuation has caused severe heartburn to the Finance ministry as a pan-India 2G license was given at Rs. 1650 crores, while the company’s current value stands at Rs. 9000 crores without any infrastructure on the ground. Note that Indian laws permit Foreign Direct Investment of up to 74% in telecom firms.

In the middle of September 2008, reports emerged that Telecom Italia acquired a 49% stake in Unitech Wireless, another new operator who recently received 2G licenses. This agreement is valued at $2 billion although initial reports suggested that Telecom Italia was insisting a value of $1 billion for the company. However, Telecom Italia has denied the news that they have forged a deal with Unitech. Norway’s Telenor was also in the running to buy a stake in Unitech.

Videocon’s Datacom, yet another of the six new operators who were given 2G licenses, has been in talks with AT&T and Verizon to form a joint venture. Datacom has decided to use CDMA technology for its services but has not divulged any details on the buyout. Datacom is apparently valued at $1.5 billion, a lower number because of the internal rift between the two major partners.

Tata Teleservices (TTSL), an incumbent operator, has decided to find a strategic partner by offloading a minority stake in the company. Japan’s NTT DoCoMo and Europe’s France Telecom are vying to invest around Rs 5000 crores to obtain a stake of around 12%. According to The Economic Times, the deal may be announced within the next one month.

Wireless Subscribers in India in August 2008

According to a TRAI release, the total number of telephone connections (both fixed and mobile) in India stood at 343.87 million at the end of August 2008, corresponding to a tele-density of 29.83%. This includes 305.24 million wireless subscribers and 38.63 million wireline subscribers. The total broadband subscriber base reached 4.73 million by the end of August. A whopping 9.16 million subscribers were added in August 2008 although it declined relatively to the 9.22 million subscribers added in July 2008.

In comparison, China had 616.02 million wireless subscribers as of August 2008 according to China’s Ministry of Industry and Information Technology. This accounts for 45.6% of the total population.

3G and WiMAX Spectrum Allocation

The allocation of 3G and WiMAX spectrum in India has reached a feverish pitch with the auctions likely to happen in August. The rollout of 3G services is expected by the beginning of 2009. Several issues such as the available carrier frequencies, reserve prices for 3G spectrum, and the inclusion of foreign bidders have delayed the auction for quite a few months but the Department of Telecommunications (DoT) and the Telecom Regulatory Authority of India (TRAI) are finally seeing eye-to-eye.

For 3G spectrum, five blocks of 2 x 5 MHz in the 2.1 GHz frequency band are available for auction and each successful bidder will be allocated only one block. In addition, two 1.25 MHz blocks in the 800 MHz band will be auctioned. The DoT has fixed the reserve price for each 2 x 5 MHz block at Rs. 2260 crore (~ 550 million USD) for a pan-India license. However, the operators feel that the reserve price is meaningless as the bids will far exceed the minimum reserve price. The allocation of spectrum for WiMAX services will likely be limited to just three players, which include the state-run BSNL. Three 10 MHz blocks in the 2.5 GHz band have been assigned for WiMAX services with the reserve price pegged at approximately Rs. 840 crore (~ 200 million USD). BSNL has already initiated efforts for the rollout of WiMAX.

After the DoT decided in favor of open auction over the traditional subscriber-linked allocation, one of the critical issues that has further plagued the auction process is whether international bidders without operations in India must be permitted. The TRAI had originally recommended that bidding should be restricted to operators within India in order to enable faster rollout of services and to keep the telecom tariffs low by avoiding a bidding war. However, the DoT and the finance ministry are of a different view and have decided to permit international telcos. This move will certainly add significant revenues to the exchequer. It is estimated that over 300 companies will participate in the bidding process.

Indian subscribers can now confidently look forward to using data services on their mobile phones by 2009. Given the high reserve prices and global bidding for 3G, it will be interesting to wait and observe whether India will continue to remain as the market with the lowest tariffs in the world.

Telecom Infrastructure Sharing in India

With increasing competition in the mobile telephony space, competing operators around the world are resorting to cooperation by sharing their telecom infrastructure such as the towers and base station equipment. Telecom infrastructure sharing is already a key enabler of the impressive growth story witnessed in India’s mobile communications industry. This component assumes more significance with the impending introduction of 3G services such as UMTS and HSDPA, and with 4G services such as WiMAX and LTE to follow suit.

Infrastructure sharing can be broadly categorized in to active sharing and passive sharing. While passive sharing refers to the sharing of cell towers, buildings, and power supply, active sharing allows operators to share radio equipment such as the antenna, NodeB (base station in UMTS), and Radio Network Controller (RNC). In addition, there are other forms of sharing such as spectrum sharing, where an operator leases out his spectrum to another, and backhaul sharing.

According to the Telecom Regulatory Authority of India (TRAI), India, the second largest wireless market in the world after China, had approximately 100,000 telecom towers in April 2007 and this is estimated to increase to 330,000 towers by 2010. Because the 3G services to be introduced are likely to operate at higher frequency bands (>2 GHz), the required number of cell towers may be even higher. Also, India, which currently has around six major mobile operators, will see the entry of at least six new operators before the end of this year. All these new operators were allocated 2G spectrum at the beginning of this year. It is possible that up to 15 operators may be offering 2G/3G services in the coming years and this places a burden on the cell tower infrastructure.

The demand for cell towers has prompted the existing mobile operators with their own towers to exploit this golden opportunity. The biggest tower company in India today, Indus Towers, is a joint venture between three major operators – Bharti Airtel (42% stakes), Vodafone-Essar (42%), and Idea Cellular (16%) - for sharing of passive infrastructure. Indus Towers owns around 70,000 towers in 16 telecom circles and is followed by Bharti Infratel with 20,000 towers in seven other circles and Reliance Telecom Infrastructure, which owns around 13,000 towers around the country. Apart from these, the Ruias (Essar group) have also started their own company with 4000 towers. The Tata group has also ventured in to this territory by beginning a new company, while Quipo Infrastructure Equipment is injecting $1.6 billion to deploy 25,000 towers over the next couple of years. The Indian market has also caught the attention of international tower companies such as the American Tower Corporation and Global Tower, who are in the lookout for entering the business.

The enterprise value of Indus Towers is estimated very optimistically to be around $30 billion while Reliance’s business is valued at $5.4 billion. The average occupancy of Bharti Airtel’s towers before the joint venture was around 1.26 occupants per tower as against an occupancy of over 2.5 in the United States. According to a Booz Allen Hamilton report, capital expenditure (capex) savings through simple site sharing in India over the next couple of years can exceed a staggering $4 billion if operators achieve double tenancy.

The Department of Telecommunications (DoT) in India announced, in April 2008, a set of guidelines for active and passive sharing of infrastructure to reduce the telecom tariffs, which are arguably the lowest in the world even today. However, DoT has also specified that spectrum sharing between operators will not be allowed. Active sharing will be limited to antenna, feeder cable, NodeB, Radio Access Network, and transmission system only. Most operators have hailed this move as a positive step forward. Given the increased emphasis on infrastructure sharing, the cell towers business in India is set to grow enormously in the next 3-5 years.

Acknowledgments: Richa Dham, Naveen Arulselvan

Average Revenue Per User (ARPU)

A key performance indicator of mobile operators is the Average Revenue Per User (ARPU). ARPU refers to the revenue generated by a single user per month and includes the income both due to the services availed by the user and due to the incoming calls to the user. Although ARPU is a metric used to measure profitability, in some cases, an operator with a lower ARPU can be more profitable than another with a higher ARPU because of a larger subscriber base.

According to a report from the Telecom Regulatory Authority of India (TRAI), the ARPU for GSM operators in India was around $6.12 at the end of 2007, while it was $4.12 for CDMA operators. An ARPU below $5 is generally considered unviable. In comparison, operators in the Japan, US, and Western Europe have an ARPU of approximately $55, $50, and $46 respectively. These higher numbers are mainly fueled by higher usage of data services. China Mobile, the largest operator in China, enjoys an ARPU of $12.5.

Interestingly, some operators claim that up to 35% of their revenues are generated from data services. According to a market research report, China has a data ARPU of $2.3 but the same for India is $0.70. Clearly, these numbers will increase after the introduction of 3G and WiMax services. For example, 3 UK has declared a data ARPU of $29 and other major operators with 3G services have a data ARPU of around $20.

New Mobile Technologies

In this post, we will discuss briefly about the new technologies that Indian wireless subscribers can expect within the next one to four years. While technologies such as High Speed Packet Access (HSPA) and CDMA Evolution – Data Only (EV-DO) will be deployed by 2009, Long Term Evolution (LTE) may appear only in 2012 or later.

It will be useful to know that there are three main standards organizations that are developing mobile technologies for us. Third Generation Partnership Project (3GPP) is responsible for the creation of the GSM family of standards that comprises of:

• GSM: Global System for Mobile Communications (second generation technology – 2G)
• GPRS/EDGE: General Packet Radio Service/Enhanced Data Rates for Global Evolution (2.5G)
• UMTS: Universal Mobile Telecommunications System (3G)
• HSPA: High Speed Packet Access (3.5G)
• LTE: Long Term Evolution (4G)

Similarly, Third Generation Partnership Project 2 is the standardization group for the CDMA family of standards:

• CDMA IS-95: Code Division Multiple Access Interim Standard (2G)
• CDMA 1x: (2.5G)
• CDMA EV-DO: CDMA Evolution – Data Only (3G)
• UMB: Ultra Mobile Broadband (4G)

WiMax Forum is yet another new organization that has been working on Fixed and Mobile WiMax (Worldwide Interoperability for Microwave Access - 4G).

Indian operators may directly deploy HSPA and bypass UMTS to offer high speed data services. HSPA can offer peak data rates of up to 14.4 Mbps in the downlink and 5.7 Mbps in the uplink for a 2 x 5 MHz spectrum. Compare this with the GPRS/EDGE data rates of 177 kbps and 118 kbps in the downlink and uplink, respectively. In effect, HSPA can be used for faster downloading/uploading of data, voice over IP, and even live TV streaming on your mobile.

While CDMA 1x is already being offered by a few operators, CDMA EV-DO will be natural next step for these operators. EV-DO provides similar performance to HSPA with a downlink throughput of 14.7 Mbps for a 5 MHz spectrum. Reduced latency makes this technology suitable for video telephony and streaming.

WiMax is a fairly new and advanced near-fourth-generation technology with superior performance. Again, fixed WiMax is now available in India through a few operators. However, the more interesting mobile WiMax can be seen next year. India can become the first country to adopt this new technology in a large scale. Mobile WiMax is capable of delivering up to 70 Mbps data rate with very low latencies in a 20 MHz spectrum. Later versions are claiming even higher speeds. Clearly, interactive real-time gaming on your mobile looks quite possible!

LTE is being touted as the ultimate broadband 4G technology and some companies are claiming data rates as high as 150 Mbps downlink and 80 Mbps uplink data rates for a 20 MHz spectrum. LTE may be a perfect replacement for our DSL as nearly all applications can be run successfully on an LTE mobile. Gaming, video streaming, video conferencing, and instant downloads will certainly be possible. The operators may not deploy this technology at least until 2012 as they would want to recover their investments in 3G before venturing in to 4G.

In sum, we have plenty of options to look forward to in the near future. We only hope that the 3G spectrum auction happens quickly and efficiently so that Indians are not deprived of thrilling end-user experiences.