SESSION 2012-2013

M.J.P.R. UNIVERSITY BAREILLY

SUN INSITITUTE OF MANAGEMENT & TECHNOLOGY

7Km Milestone Bareilly Road ,N.H .24 SHAHJAHANPUR

SUBMITTED TO; Miss. ENA maam (Assist. Prof. SIMT) Shahjahanpur

SUBMITTED BY FAKHER ABBAS BBA6TH Sem Roll no. 11514508

Executive Summary
The rapid growth in Indian telecom industry has been contributing to Indias GDP at large. Telecom industry in India started to set up in a phased approach. Privatisation was gradually introduced, first in value-added services, followed by cellular and basic services. Telecom Regulatory Authority of India (TRAI), was established to regulate and deal with competition (the service providers). This gradual and thoughtful reform process in India has favoured industry growth. Upcoming services such as 3G and WiMax will help to further augment the growth rate.The Indian telecommunications industry is one of the fastest growing in the world and India is projected to become the second largest telecom market globally by 2010. This is evident from the facts of Telecom Industry for example, India added 113.26 million new customers in 2008, the largest globally. The countrys cellular base witnessed close to 50 per cent growth in 2008, with an average 9.5 million customers added every month. This would translate into 612 million mobile subscribers, accounting for a tele-density of around 51 per cent by 2012. It is projected that the industry will generate revenues worth US$ 43 billion in 2009-10. In this report we have tried to capture most of the areas of Telecom Industry. Major highlights of the report are History of Telecom Industry, Current Industry Analysis, Role of TRAI, Spectrum allocation, FDI Regulation, Competitive advantages, Outsourcing in Telecom, Emerging Technologies, Latest Innovation, and Growth Trends, Mergers and Acquisitions.

1 Indian Telecom Industry

1.1 History 1851
Introduction of Telegraph services 1947 to form PTT 1980s: The Beginning Tele-density in 1980-81: 0.3%

Early to Mid 90s: A Messy Affair - Basic telephony service to private operators - 49% FDI - 8 licensees began operations in Aug 1995 Late 90s Birth of a regulator: TRAI

2000+ : 74% (2005) 2007-2009 having the world's lowest call rates the fastest growth in the number of subscribers (45 million in 4 months), a week),

1.2 Quick Facts Total telecom subscribers : 429.72 million (March

2009) Wireless subscribers : 391.76 million Wire line subscribers : 37.94 million Tele density : 36.98 per cent Indias service providers revenue in Q1 (2009): $8.2 billion Indias Rural Mobile Phone Users : 100 Million

1.3 Telecom services

Telecommunication sector in India is primarily subdivided into two segments, which are Fixed Service Provider (FSPs) and Cellular Services. Telecom industry in India constitutes some essential telecom services like telephone, radio, television and Internet. Telecom industry in India is specifically emphasizing on latest technologies like GSM (Global System for Mobile Communications), CDMA (Code Division Multiple Access), PMRTS (Public Mobile Radio Trunking Services), Fixed Line and WLL(Wireless Network Infrastructure Companies: Alcatel-Lucent, Cisco, Ericsson Telecom Service Providers: Bharati-Airtel, Vodafone, Idea, Reliance. Telecom Equipment Manufacturers: Nokia, Motorola, Samsung Telecom Solutions Providers: TechMahindra, Aricent, IBM Indi Wipro, Sasken Telecom 1.4 Industry Sector From holistic point of view telecom industry can be divided to four subsets. The major forces in Indian telecom industry are Service providers. All major telecom equipment suppliers have their R&D centers in India. In last 5 years, global giants in mobile devices have set up their manufacturing facitilities in India. The discussions in this document is mainly restricted to only Telecom Service Providers.

1.5 Growth Avenues

Managed services is another segment that is attracting telecom companies. On account of the rapidly growing subscriber base, service providers find it difficult to manage their infrastructure and network management operations. In such cases, they completely or partially outsource their infrastructure or network management operations. infrastructure sharing offers the following advantages: Improved service quality Increased affordability for customers Faster roll out of services in rural and remote areas Significant reduction in initial set up costs Increased environmental aesthetics Lower operating costs for service providers Enterprise Telecom Services includes key services, such as voice over Internet protocol (VoIP), dedicated telecom communication systems; IT infrastructure enabled unified communication services, etc. Telecom service providers are increasingly targeting enterprises by providing dedicated services and is expected to witness major developments in near future.

Virtual Private Network is a private data network that provides connectivity within closed user groups via public telecommunication infrastructure. Competition is likely to heat up in the VPN segment as DoT has relaxed the norms for private players. 3G The Indian government plans to auction the spectrum for 3G services by inviting bids from domestic as well as foreign players, and creating a competitive environment that offers better services to consumers. Therefore, the 3G spectrum is among the major investment opportunities and growth drivers of the telecom industry. The immense potential for 3G is reflected by the 3040 percent annual growth in Value-Added Services. Cell phone manufacturers are striving to develop USD 100 priced 3G handsets for the Indian market. India expects to replicate its 2G growth in 3G services. WiMAX has been one of the most significant developments in wireless communication in the recent past. Since this mode of communication provides network access in inaccessible locations at a speed of more than 4 Mbps, it is expected to be a major factor in driving telecom services in India, especially wireless services. Thus, it will lead to the increased use of telecom services, Internet, value-added services and enterprise services. WiMAX is expected to accelerate economic growth and assist in providing better education, healthcare and entertainment services. It is estimated that India will have 13 million WiMAX subscribers by 2012. Aircel is the pioneer in WiMAX technology in India. The state-owned player, BSNL, aims to connect 74,000 villages through WiMAX. Bharti, Reliance and VSNL have acquired licenses in the 3.3GHz range to utilise the opportunities offered by this domain. Value Added Services:The VAS industry was worth USD 632 million in 200607. The industry is estimated to grow by 60 percent in 200708 and become an USD 1,011 million opportunity. The VAS industry is currently focussing on the entertainment sector, such as the Indian film industry and cricket; however, there is scope for growth in other avenues as utility-based services, such as location information and mobile transactions. Rural Telephony: As the government targets to increase rural teledensity from the current 2 percent to 25 percent by 2012, rural telephony will require major investments. This segment will boost the demand for telecom services, equipment, Internet services and other value-added services; thereby, offering great market opportunities for telecom players.

1.6 Industry Revenue (2002-2010)

According to a Frost & Sullivan industry analyst, by 2012, fixed line revenues are expected to touch US$ 12.2 billion while mobile revenues will reach US$ 39.8 billion in India. India has become the second country in the world to have more than 100 million CDMA-based (code division multiple access) mobile phone subscribers after the US, which has 157 million CDMA users. The Indian telecommunications industry is on a growth trajectory with the GSM operators adding nearly 9 million new subscribers in

April 2009, taking the total user base to 297 million, a growth of 3.11 per cent over the additions made the previous month. The figures, however, do not include the GSM subscriber additions made by Reliance Telecom Year 2002-03 2003-04 2004-05 2005-06 2006-07 2008-09 2009-10(forecasted) Revenue(US$ billion) 9 10 11 15 20 32 43

1.7 Subscriber Growth

India added 130 million new customers in 2008-09, the largest globally. The countrys cellular base witnessed close to 50 per cent growth in 2008, with an average 9.5 million customers added every month. By April 2009, the total number of telephone connections reached 441.47 million. With this growth, the overall tele-density reached 37.94 at the end of April 2009. According to Business Monitor International, India is currently adding 8-10 million mobile subscribers every month. It is estimated that by mid 2012, around half the country's population will own a mobile phone. This would translate into 612 million mobile subscribers, accounting for a tele-density of around 51 per cent by 2012

1.8 Major Players

Bharti-Airtel leads the wirless market with 24% market share. The company recently achieved the magic figure of 100 million subscribers. However, Bharti-Airtel expects a bloodbath in the Indian telecom market in the near future, and is looking to spread its risks by entering new geographies (Bharti-MTN deal is discussed in Industry Update Section). With 12-13 players present in the market there would be a severe pressure on margins. Be it an Aircel or Etisalat, the new operators would not remain fringe

players in the Indian market, but would try and rock the applecart of existing operators. The growth in Indian market could start tapering off very soon. According to an industry expert the subscriber base will not expand beyond 800 million in coming years from current number 400 million. Also, ARPUs in India have steadily falling($5-$6). There have been talks about 3G and IPTV pushing growth, but it all seems far-fetched. The third generation of mobile services (3G) will be used by telcos to gain more spectrum. Besides, the services will be used only in urban areas.

As on June 30th 2009

24%Bharti Airtel 18%Vodafone Essar 11%BSNL 11%IDEA 5%Aircel 3%Reliance GSM 18%MTNL 1%Loop Mobile 8%Tata Teleservices

1.8.1 Wireless Service Providers (Market share)

Source: www.coai.com

1.8.2 Handset Manufacturers (Market share) India's telecom equipment manufacturing sector is set to become one of the largest globally by 2010. Mobile phone production is estimated to grow at a CAGR of 28.3%, totaling 107 million handsets by 2010. Nokia Leads the market with whopping 60% share. Korean giant Samsung currently at number there is looking forward increase its market share to 20% through aggressive marketing.

60%Nokia 8%Sony 7%Samsung 6%Motorola 5%LG 15%Others

1.9 Major Investments

The booming domestic telecom market has been attracting huge amounts of investment which is likely to accelerate with the entry of new players and launch of new services. Buoyed by the rapid surge in the subscriber base, huge investments are being made into this industry. The Russian government is likely to pick up equity amounting to US$ 670 million-US$ 700 million in Sistema Shyam TeleServices Ltd (SSTL), a joint venture between Russia-based telecom major Sistema and Shyam Group in India, by the end of this financial year. SSTL is also planning to invest US$ 5.5 billion over the next 5 years in India. Norway-based telecom operator Telenor has bought a 60 per cent stake in Unitech Wireless for US$ 1.23 billion. Japanese telecom major NTT DoCoMo acquired a 27.31 per cent equity capital of Tata Teleservices for about US$ 2.6 billion in November 2008. Bahrain's Batelco has signed a deal to buy 49 per cent in Chennai-based S-Tel, a GSM service provider, for US$ 225 million. BSNL, India's leading telecom company in revenue terms, will put in about US$ 1.16 billion in its WiMax project. Vodafone Essar will invest US$ 6 billion over the next three years in a bid to increase its mobile subscriber base from 40 million at present to over 100 million. Telecom operator Aircel, which launched GSM mobile services in Bangalore in February 2009, plans to invest US$ 220.58 million over the next year to set up base stations across the state. Some deals are discussed in detail in industry consolidation section.

1.10 Rural Telephony

Rural India had 76.65 million fixed and Wireless in Local Loop (WLL) connections and 551,064 Village Public Telephones (VPT) as on September 2008. Therefore, 92 per cent of the villages in India have been covered by the VPTs. Universal Service Obligation (USO) subsidy support scheme is also being used for sharing wireless infrastructure in rural areas with around 18,000 towers by 2010.

1.11 Exploring the rural telecom opportunity

It is believed that of the next 250 million people expected to go mobile; at least 100 million will come from rural areas. Though the rural mobile penetration is highest in Punjab (20.69 per cent), followed by Himachal Pradesh (17.09 per cent), Kerala (10.63 per cent) and Haryana (10.20 per cent), most companies are now sweating it out by hard selling their products and services in the rural areas of the region. As a result, the geographical coverage of mobile telephony in India has gone up from 13 percent, a couple of years ago, to 39 percent now

1.12 Policy Initiatives

The government has taken many proactive initiatives to facilitate the rapid growth of the Indian telecom industry. 100% foreign direct investment (FDI) is permitted through the automatic route in telecom equipment manufacturing FDI ceiling in telecom services has been raised to 74% Introduction of a unified access licensing regime for telecom services on a pan-India basis Plan to introduce mobile number portability in a phased manner The government is implementing a program of connecting 66,822 uncovered villages under the Bharat Nirman programme. The government will invest US$ 2 billion to set up 112,000 community service centres in rural India to provide broadband connectivity in 2008-09. The Department of Telecommunications (DoT) has stated that foreign telecom companies can bid for 3G spectrum without partnering with Indian companies. Only after winning a bid, would they need to apply for unified access service licence (UASL) and partner with an Indian company in accordance with the FDI regulations.

2 Telecom Regulatory Authority of India (TRAI)

2.1 Mission
To ensure that the interests of consumers are protected and at the same time to nurture conditions for growth of telecommunications, broadcasting and cable services in a manner and at a pace which will enable India to play a leading role in the emerging global information society.

2.2 Role of TRAI

One of the main objectives of TRAI is to provide a fair and transparent policy environment which promotes a level playing field and facilitates fair competition. In pursuance of above objective TRAI has issued from time to time a large number of regulations, orders and directives to deal with issues coming before it and provided the required direction to the evolution of Indian telecom market from a Government owned monopoly to a multi operator multi service open competitive market. The directions, orders and regulations issued cover a wide range of subjects including tariff, interconnection and quality of service as well as governance of the Authority. The functions of TRAI can be divided as : Recommendatory function and Mandatory Function.

2.3 Recommendatory Functions

Need and timing for introduction of new service provider Terms and conditions of licence to a service provider Revocation of license for non-compliance of terms and conditions of license Measures to facilitate competition and promote efficiency in the operation to facilitate growth in industry

Technological improvement in services by service providers Inspection of type of equipment used by service provider Measures for Technological development Efficient Management of available spectrum

2.4 Mandatory Functions

Ensure compliance of terms and conditions of license Fix the terms and conditions of their inter connectivity between service providers Ensure Technical compatibility and effective inter-connection between different service providers

Regulate arrangements for sharing of revenues amongst service providers

Lay-down the standards of QoS to be provided by service provider,ensure this by periodical survey Lay-down and ensure time period for providing local and long-distance circuits of telecommunication between different service providers Maintain inter-connect agreement register Ensure compliance of USO(universal service obligation)

2.5 Other functions

Levy fees and other charges as determined by regulations Perform administrative functions as entrusted to it by Central government or as per TRAI act Notify in Official Gazette the service rates and message rates within and outside India

Snapshot of TRAI functions

3 Spectrum Auctions in India Vis--vis Worldwide

Spectrum auctions have been used with significant success in many developed countries. From a regulatory and policy perspective, spectrum auctions ensure the efficient use of spectrum by allocating it to those entities that value it most, while also generating revenues for governments. But auctions may lead to unexpected outcomes due to unanticipated problems with their design leading to unexpected bidder behavior such as collusion and over-bidding. The key challenge before regulatory agencies is to design auctions in such a way as to meet the objective of fostering competition while at the same time ensuring that bidders can effectively use the spectrum for their business. With private initiatives increasing in telecom and broadcast service provision, demand for spectrum has increased. Digital technology has increased the scope of applications and created new areas of service provision. Cellular telephony and wireless Internet are examples of such services. Despite technological changes that reduce the demand for spectrum, availability of spectrum continues to be a constraint. In order to allocate spectrum amongst competing service providers, regulatory agencies often use auctions. From the regulatory and policy perspective, spectrum auctions ensure efficient usage by allocating it to those entities that value it most, while also generating revenues for governments. But auctions may lead to unexpected outcomes as, for example, when regulatory agencies have inadequate market information, there may be a mismatch between expected and actual bidder behavior, or auctions may be poorly designed. The key challenge before regulatory agencies is to design auctions in such a way as to meet the objective of fostering competition while at the same time ensuring that bidders can effectively use the spectrum for their business.

3.1 Spectrum Auction Scenario in India

While India was one of the early adopters of spectrum auctions, its success in service provision has been low. Despite this early start, services have been slow to roll out. In India, telecom licences were auctioned for basic and cellular services from 1991 by the Department of Telecom (DoT), the incumbent government policy maker, regulator and service provider. For service provision, the entire country was divided into roughly 20 circles, categorized as A, B, or C depending upon their revenue potential. The circles were mostly co-terminus with the DoTs administrative boundaries and the states. Potential service providers were required to seek foreign partners, as it was felt that no Indian company had

the requisite financial strength and technical know how. For all licenses, bidding was a two-stage process, the first being a pre-qualification based on the evaluation of financial net worth (linked to the category of circle and service bid for) and experience in service provision and the second stage involved evaluation of bids. The bids
were single stage, with the award going to the highest bidder drawn from those that satisfied the prequalification conditions. For cellular licences, Global System for Mobile Communications (GSM) was the chosen technology and for basic services, a combination of fiber optic and wireless in the local loop (WLL) was selected. For cellular services, there were separate licenses for the four major metros of Kolkata (Calcutta), Chennai (Madras), Mumbai (Bombay) and New Delhi. The licenses for the circles containing the metros excluded these cities. For metro licenses, the financial bids were to be evaluated

on the rental to be charged to the customer for the first 3 years.(The airtime tariffs were fixed by DoT.) The licensee fee was a flat amount for the first 3 years and then was linked to the number of subscribers, subject to a minimum amount. Subsequent to the bid opening, the rentals were fixed at Rs. 1561 based on the amounts specified by the winners, even though some winning bids had zero out in metros, and bidders were evaluated on an annual license fee for the duration of the license, converted to its net present value at a specified discount rate. The second highest bidder had to match the highest bid in order to obtain the license. Despite these initiatives, service roll out continued to be slow. The government then set up a group on telecom (GOT), that consisted of top-level bureaucrats, industrialists and professionals to evolve a future policy framework for the sector. This was presumably effected outside the DoT as the government felt that the DoT might not be able to conceive a radically different roadmap or might thwart the involvement of the private sector or produce a regulatory framework crafted in the DoTs vested interest. The GOT drafted the National Telecom Policy in 1999,2 (NTP 99) which presented a roadmap for resolving the impasse. All existing license holders could migrate to a new regime that involved a one time payment as entry fee and an annual revenue share with the government, provided that all operators withdrew their court cases against the government on a variety of issues such as delays in clearances. The entry fee was based on a percentage of the total amount of the original bid. This change greatly facilitated private sector participation and several operators subsequently commenced services. As a part of the package,the operators also agreed to allow the government to increase the number of players in their service areas.

3.2 Gaps in Indian Spectrum Auction Licensing Scenario

The absence of clear separations in DoTs responsibilities for policy, regulation and operations led to several delays and lowered the credibility of the government. Like all incumbents, it saw its position threatened by impending private participation and set impediments in the service roll out, whereas in its role as a policy maker, it was required to design the auctions to facilitate service provision. Confusion in DoT was also evident from the manner in which it handled the interconnect issues. Managing the caps on the number of circles or delays in clearances after the bids were opened showed a lack of adequate preparation in the auction design process. The establishment of TRAI and NTP 99 brought about major changes to the licensing process and converting the licence fee to a revenue sharing regime signaling the governments changing perspective and willingness to bear a part of the market risk. Subsequently, an interconnect framework has been put in place (although problems persist) and service provision has accelerated.

3.3 3G Spectrum allocation policy in India in 2009

In the conducive business environment, India Inc. awaits the rollout of 3G services. The Indian government plans to auction the spectrum for 3G services by inviting bids from domestic, as well as foreign players and creating a competitive environment that offers better services to consumers. Therefore, the 3G spectrum is among the major investment opportunities and growth drivers of the telecom industry. -40 per cent annual growth in value added services -priced 3G handsets for the Indian market 3G services. The Indian market is well poised to leverage the 3G service offerings in content categories such as sports, games and music. In the present context, 3G technology is extremely relevant for India. ve times higher than that of 2G services. Therefore, it is an ideal platform for low-cost cellular services

-speed data and content rich services in the urban landscape

In addition, it will be a good solution for education, telemedicine, etc. Even if 2 per cent of the 180 million cellular subscribers adopt 3G technology as soon as it is launched, it is likely to create an initial subscriber base of 3.6 million. The market is slated to capture more than 11.3 per cent of all mobile subscribers by 2010, i.e., 21.3 million people. Therefore, it would not be incorrect to assume that 3G is poised to create the next mobile revolution in India. In the race towards lowering the entry barrier for 3G services, companies plan to offer bundled service packages with subsidised handsets.With regard to its business potential, many national players have already completed 3G trials. BSNL has charted out a plan for launching 3G services in 250 cities. Private players, such as Bharti, Reliance and Idea, are also ready to offer this service in 10-20 major Indian cities. However, Airtel and MTNL are very keen on leveraging their first mover advantage in this field.

In June 2009 the DoT (Department of Telecom) in India has announced the radio spectrum that will be made available when 3G licenses are eventually auctioned off.It could be the case that just 4 Operators are given radio spectrum around Delhi - given that two incumbents (BSNL and MTNL) already have some licenses in each zone, then that would be just the possibility of two new Operators coming to play. In other areas, there is apparently going to be more provision for private players - meaning up to 11 Operators could enter business. The greater availability of spectrum in these other zones is due to the Defence Ministry giving up some of its Spectrum.
There is still much to-ing and fro-ing to be done though over the 3G licenses themselves - currently there are disputes over how many Operators can exist per zone, and whether the relevant spectrum is sold in tranches, or in one go. Hopefully something will be resolved soon, as India is beginning to really lag behind in 3G technologies, particularly as many other countries are already at HSPA (3.5G) level, and going to HSPA+ (3.75G) soon.

3.4 Comparison-Spectrum Allocation Policy in UK

The UK 3G auction took the necessary steps to design the auction appropriately,keeping in mind the past discrepencies. In the UK, there were already four established mobile players that had 2G licenses covering nearly 97 percent of the area and 90 percent of the population. Incumbents who won a 3G license, could provide roaming services over the existing 2G network to new 3G customers. In contrast, a new entrant needed to establish a roaming arrangement with the incumbent 2G providers. The incumbents could thwart competition by denying or delaying roaming facilities to the new entrants. The government felt that new entrants needed certainty regarding their ability to be able to provide roaming over the existing networks and, therefore, mandated that incumbents would have to provide roaming to the new entrants. Such a mandate necessitated a change in the existing licenses that was undertaken for the dominant providers. The incumbents sought several changes to the originally proposed roaming conditions which would be to their advantage. The FCC, the Radio Communications Agency that conducted the 3G auctions in UK and Oftel (the UK regulator) went through a detailed public discussion involving industry, academia and other interested parties in designing the auctions. This allowed regulatory agencies in these countries to auction spectrum for all services rather than having to choose allocation mechanisms separately for various services

4 Indias Competitive Advantage

An analysis of the Indian telecom industry under the Porters Diamond Model reveals that India offers a competitive advantage for firms operating in the country. India is the fastest growing free market democracy in the world. It has a mature and dynamic private sector, which accounts for 75 per cent of Indias GDP, and a market with enormous potential due to its large size and diversity. It is also expected to achieve the highest growth rate among the BRIC countries (Brazil, Russia, India and China). India offers significant business opportunities to the services, as well as the manufacturing sectors. This is because India offers benefits such as cost advantage in product development and back-office processing and the large-scale availability of skilled English-speaking professionals. The middle class population is also a significant market for any business entity. AT Kearney ranked India as the second-most attractive democracy in its FDI confidence index. The success of MNCs is a proof that India is an attractive investment destination. Indias huge domestic market and buoyant economic growth have always attracted foreign investors. Some of the key advantages of investing in India are outlined below. Some of the key advantages of investing in India are outlined below.