India 3G rollout (forecasts and market shares 2011-2015) - 3G connections to hit 400 million by 2015, representing 30% of the market

In 2010, the Indian government received a colossal US$15 billion from the auction of 3G spectrum. Aircel, Bharti Airtel, Vodafone Essar, Idea Cellular, Reliance Communications, Tata Teleservices and S Tel all won 3G licences and are expected to invest a combined US$2.5 billion in network rollouts between Q4 2010 and Q4 2011. The prospect of such a substantial investment in new high-speed networks and services is raising concerns about profitability in what is an acutely price sensitive market dominated by prepay users.

GSMA Intelligence forecasts that India will reach around 400 million 3G connections (including CDMA2000) by the end of 2015, which will represent almost 30 percent of total connections. Over 80 percent of 3G connections will be WCDMA/HSPA in five years, with the remaining 20 percent on CDMA2000 1X and CDMA2000 1X EV-DO Rev. A networks. All mobile operators that acquired 3G spectrum last year will have commercially launched their WCDMA/HSPA networks by June 2011.

This report updates our earlier India 3G Market Assessment study from October 2009 in light of the latest industry data and trends.

3G rollout by service area

Circle A and B service areas currently contribute 75 percent of total 3G connections, compared to 15 percent for Circle C service areas and 10 percent for Metros. We do not expect any significant change in these shares between 2011 and 2015 (see charts below).

The dominance of the Circle A and B service areas reflects the high level of demand in populous states such as Punjab, Bihar, Andhra Pradesh and Haryana. Initially operators have covered technology hubs such as Bangalore and cities with high levels of tourism e.g. Agra, before expanding coverage to rural areas to satisfy license obligations. However, ultimately the locations of operator network rollouts are dependent on their respective allocation of bandwidth per circle: Bharti and Reliance provisionally won spectrum bandwidth in 13 circles, Idea in 11, Vodafone and Tata in nine, and S Tel in three – with an average of three WCDMA operators per circle.

3G operator market shares (2011-2015)

According to our forecasts, Bharti Airtel, Vodafone Essar and Idea Cellular – which had all launched services by March 2011 - will contribute a combined 41 percent of total 3G connections by 2015. We expect them to strike a network sharing and roaming agreement via their joint-venture, Indus Towers, which will enable them to offer pan-Indian 3G coverage. In the meantime, both state-owned operators BSNL and MTNL – which launched WCDMA/HSPA services in early 2009 – initially benefited from a first-mover advantage but will represent only a combined 13 percent of total 3G connections in five years as competition intensifies. BSNL – which operates in all circles except for Delhi and Mumbai - has reached just 3 million WCDMA/HSPA connections two years after launch, and MTNL just 634,000. Including CDMA2000, their total 3G connections stood at 8 million and 1 million respectively at the end of 2010.

CDMA operator Tata Teleservices launched its GSM network under its Tata DOCOMO brand in Q3 2009 and in just one year since launch had managed to grow GSM to 53 percent of its installed base, compared to 58 percent at Reliance Communications. Between 2009-10, both operators considerably reduced their CDMA2000 customer base, which totaled 39 and 53 million connections respectively by the end of 2010 - of which 10 percent and 3 percent respectively were CDMA2000 1X EV-DO Rev. A. Both operators have been offering 3G CDMA services for almost a decade along with BSNL, MTNL, MTS and HFCL. Tata Teleservices and MTS are the only two players to offer EV-DO handsets whilst other CDMA operators are mainly focusing on mobile broadband services via dongles, datacards and modems. Such services today include Tata Photon+, Reliance Netconnect+, Virgin vFlash, MTS MBlaze and BSNL EVDO. With up to a dozen WCDMA/HSPA services expected to launch in the coming months, CDMA2000 connections are likely to reduce further as operators continue their aggressive migration towards GSM and WCDMA/HSPA networks. Nevertheless, we expect Reliance Communications, Tata Teleservices and MTS to contribute 35 percent of total 3G connections in the country by 2015 (including CDMA2000).

At present, we understand that EV-DO datacards are locked onto one service provider’s network which does not allow users to re-use their devices (which can cost up to US$45). In contrast, WCDMA/HSPA datacards are expected to be sold unlocked so that users can re-use them by simply switching SIM cards. In addition, EV-DO data plans are more expensive than WCDMA/HSPA data plans which allows for unlimited usage for US$15-16 per month under BSNL or MTNL, compared to US$21-33 for 5-15GB per month under Tata Teleservices. On top of that come constraints such as activation fees and network coverage.

3G market potential

A number of demographic, commercial and technical factors must be taken into account when assessing India’s 3G rollout and potential for growth. Significantly, some 75 percent of the Indian population lives on less than US$2 per day with around 200 million inhabitants living below the poverty line. Yet despite such challenging market conditions, mobile operators are expecting average revenue per user (ARPU) generated from 3G services to reach US$11 – compared to US$4 at present for existing voice services. Hence, to trigger the fast adoption of high-speed network services, operators will have to focus on two key factors: affordability and availability. Notwithstanding the fact that generic price per megabyte has already reached a low of INR 2 (US$0.04), we estimate that a postpaid 3G subscription and the purchase of a 3G-enabled device may account for up to 20 percent of a consumer’s annual budget, reflecting the scale of the challenge faced by operators. Reliance Communications and Bharti Airtel have both reported that non-voice revenues contribute 12-13 percent of total revenues at present and that they are aiming for 25-30 percent over the next two to three years. Reliance is not anticipating a price war in the 3G segment and will offer services from US$5 to US$55 per month. In contrast, Bharti Airtel and Tata DOCOMO are expecting intense competition and are offering voice services on their 3G networks at the same rate or less than their 2G tariffs, in order to leapfrog the barrier of entry on 3G voice and messaging and trigger a faster adoption of 3G services.

In summary, as we stated in our previous report, 3G will remain a niche market for some time in India, and 2.1GHz networks will be mainly used to improve voice quality and reduce the existing network congestion - an approach also supported by Sanjeev Aga, Managing Director of Idea Cellular. In addition, Aga was quoted last year as saying that India is an unsubsidised market and handset subsidies will not play any significant role in the adoption of 3G networks.

Finally, one of the most important success factors behind 3G services in India is likely to be network sharing. The Indus Tower joint-venture is likely to reach a network sharing and roaming agreement giving Bharti Airtel, Vodafone Essar and Idea Cellular access to pan-Indian 3G coverage. We also understand that Aircel, Tata Teleservices and Reliance Communications are looking for similar partnerships, while state-owned MTNL is currently finalising an agreement to share its 3G network with a private service provider. MTNL expects annual revenue of US$66 million from 3G roaming agreements with operators that do not have spectrum in its home markets of Delhi and Mumbai.

Further technology trends in the shape of TD-LTE and mobile WiMAX are likely to change market dynamics in the near future. Reliance Industries has invested US$1 billion in BWA spectrum auction last year (via a 95 percent stake in Infotel Broadband) and is expected to spend a further US$1 billion to roll-out TD-LTE networks this year. Bharti Airtel, Aircel, Tikona Digital Networks and Augere are also likely to commercially launch TD-LTE post-2012. LTE device availability and affordability are the immediate factors limiting any initial uptake of LTE services in the country. At present, BSNL, MTNL and other operators charge US$45 for a USB dongle or datacard on WCDMA/HSPA or EV-DO networks, which is substantially lower than the US$250 retail price for an unsubsidised LTE USB dongle in the US. Lastly, as operators such as Reliance switch focus to TD-LTE, BSNL is likely to remain the only mobile WiMAX player in the country. BSNL began deploying its network in February 2009 and covers seven circles: Assam, Gujarat, Maharashtra, Rajasthan, Delhi, Kerala and Punjab.