BRIC Spotlight Report

Communications Sector in India: Scorching Growth

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December 2009 The Indian communications industry is one of the most celebrated among emerging market success stories in recent years. After being dominated by a government-owned monopoly for many decades, the Indian communications services market is now one of the most competitive anywhere in the world. It is a classic example of how the right combination of new technology, innovation, and supportive government policies can transform an industry. Through the industry’s success, India’s large consumer market potential was boosted, attracting investments into several other sectors of the economy. For the smaller emerging countries, it has been an exemplary model, which illustrates the benefits of introducing pro-market industrial reforms and encouraging competition. In the not too distant past, a telephone connection was a luxury for most Indians. Since government-owned companies had a monopoly, only the affluent and the politically-allied could get a connection on demand. Others had to wait for months or even years and often bribe the telephone company employees to make a call. When they finally had a connection, callers were typically burdened with high call rates and erratic service.

Fast Facts India is the fastest growing telecommunications market in the world now. Over the last year, average monthly sales of new mobile phone connections have exceeded 10 million. Call rates are the cheapest in the world, and can be as low as ¢1.25 per minute under some plans. The Indian market is intensely competitive with seven large service providers, most of them present throughout the country. Several smaller players focus on select regions. Competition is poised to increase as more global firms are entering the market. Communication services now account for 5.7% of India’s GDP, and are expected to increase to over 15% by 2015. Despite the exponential growth over the last decade, market penetration remains relatively low at 45telephone connections per 100 people. Broadband internet penetration is even lower, with only 7.4 million users for the entire country.

The contrast to the present day can hardly be wider. India is the fastest growing market in the world now, with nearly 17 million new telephone connections added in the month of October 2009 alone, all of them mobile telephones. For more than a year now, over 10 million new connections have been established each month. With more than 500 million users across the country, India is now second only to China in total number of telephone connections. With several service providers even in rural markets, Indian consumers are spoilt for choice. Equipment availability and service reliability are comparable to any developed market, while the call rates are the lowest in the world.

Growth Drivers: Evolution and expansion

The seeds of the communications revolution in India were sown in the mid-nineties when the government allowed private firms to offer mobile telephone services. The first licenses were issued in 1995 for the four largest cities, followed by 18 other geographies by 1998. Though foreign ownership was restricted to 49% in these firms, many large foreign telecommunication companies partnered with Indian companies to enter the market. However, high call tariffs and regulatory restrictions limited growth for several years. Frustrated by the slow growth and large financial costs, most foreign companies exited the market.

The regulations were further eased in 2003, which removed regulatory bias in favor of select technologies and allowed firms to expand across the country under a single license. As the businesses achieved scale and with better technology, call rates came down substantially. This kick-started a virtuous cycle where the increased number of users improved economies of scale for service providers and lowered call charges, which attracted even more users.

Top Communications Firms in India Rank Firm Foreign Partner Wireless Customers (in millions) 1 Bharti Airtel Singapore Telecommunications 113.21 2 Reliance Communications None 88.21 3 Vodafone Essar Vodafone 85.83 4 BSNL (government-owned) None 59.43 5 Idea Cellular None 53.36 6 Tata Teleservices NTT DoCoMo 50.66 7 Aircel Maxis Communications 27.75 Customer data as of October 2009 Source: Telecom Regulatory Authority of India

The high degree of innovation by the service providers also played a fair part in sustaining the boom in India. Most large firms now outsource almost all of their network and other infrastructure, to instead concentrate on marketing and customer support. This trend has opened up opportunities for global equipment manufacturers like Nokia and Ericsson, besides technology service providers like IBM. Service providers also share infrastructure like transmission towers, which helps them expand to new territories quickly and manage costs better. Attracted by the opportunity, independent transmission tower operators are now entering the market.

Market Structure: Growth attracts intense competition

The spectacular growth in new customers has made the top Indian telecom firms among the largest in the world. Though their average revenues per customer are substantially lower than firms in mature markets, their massive customer bases offer a huge potential for future growth. This has lifted the business valuations of these firms, which have now become attractive targets for global telecom firms seeking a foothold in India. Recent acquisitions include the buyout of Hutchison Whampoa’s majority holding in the third largest mobile services provider by Vodafone for nearly $11 billion. More recently, NTT DoCoMo acquired 26% of Tata Teleservices for over $2.5 billion.

Last year, the government awarded new licenses which attracted several more firms, while some of the regional firms acquired licenses to operate across the country. Some of the new licensees are majority-owned by foreign firms, including Telenor of Norway, Sistema of Russia and Etisalat of the UAE. As the new firms have launched their services, competition has intensified. To attract customers, the new operators have priced their services very aggressively. This will likely cut into industry profitability and extend the breakeven period for the new entrants. Number portability, or the flexibility for customers to switch operators without changing their telephone number, will be another challenge for the industry leaders, when implemented by the end of this year.

The fast expanding market for mobile handsets has attracted global manufacturers to India. India is now the second largest manufacturing base for Nokia, the global leader in mobile telephone handsets. Some of the larger Indian firms are also trying to expand their global footprint. Bharti Airtel, Reliance Communications, and Tata Communications already own extensive undersea cable networks across the globe, providing voice and data services to bulk consumers. The first two are actively on the lookout for acquisition opportunities in other emerging markets, while Tata Communications has operations in South Africa.

Besides the new jobs generated directly, the communications industry has also created a large number of small businesses which provide support services in sales and equipment servicing. The growth of the industry has also contributed significantly to overall economic growth in India, by facilitating activity in other sectors. Reliable and cost-effective communication services have opened up new markets for farmers and small businesses in other parts of the country, while ensuring faster dissemination of prices and other information. As the market penetration in India is still relatively low and the bulk of the services are still basic, the communications industry will likely continue to enjoy high growth rates for several more years.