Indian 3G market assessment

India is the second largest cellular market in the World and has been registering tremendous growth, adding around 10 million connections every month. The introduction of data services will open the door to currently untapped opportunities, but mobile operators will have to contend with unique market challenges in order to succeed.

In this report, we focus on the regional development of cellular networks across India to estimate the potential market size for WCDMA (including WCDMA HSPA) and CDMA2000 1X EV-DO connections in the short to medium term. We also provide details of the assumptions behind our 3G forecast scenario and measure the latest advancement in 3G deployments from the state-owned operators – BSNL and MTNL.

By setting the “economic value” of 3G licenses at US $5 billion, the government is hoping to partially address the country’s need for short-term investment. Mobile operators will be expected to bridge the digital divide and contribute to India’s economic and social growth. However, market conditions are difficult and telecom players will have to overcome the challenges presented by a dominant and price-sensitive prepaid market in which growth is driven by demand in unconnected rural areas.

The basic facts underpinning Indian market potential are well known. 75% of the Indian population lives on less than US $2 per day with around 200 million inhabitants living below the poverty line. But 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 $5 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. However, with a 3G license floor-price at US $715 million per operator and the impending high cost of deploying 3G networks across the Indian territory, return-on-investment is not likely to happen until operators have tapped the mid-term market potential, which we estimate will come more than three years after launch.

Since early 2009, the market has been tested by BSNL and MTNL who have already been granted 3G spectrum. The early results are showing signs of a slow adoption of 3G services with pricing strategies already under pressure only a few months after launch. The generic price per megabyte has already reached a low of INR 2 (US $0.04), and we estimate that a postpaid 3G subscription with the purchase of a 3G-enabled device may account for 20% of a consumer’s annual budget.

Despite the uncertainty surrounding the 3G license auction process, we expect that Bharti Airtel, Vodafone Essar, Idea Cellular and Reliance Group are likely to join BSNL and MTNL in the race for data services. Based on a number of assumptions regarding network coverage, device and service offers, regulation and marketing efforts, our forecast scenario estimates that the total 3G market in India will reach 60 million connections in 2013 (WCDMA and CDMA). At a regional level, Metros will lead the growth in the initial phase of development but will be outpaced by demand in the A and B Circles as privately-owned operators launch their networks by the end of next year.

Hence, there is clear evidence that 3G can help to bridge the digital divide in India, but it will take time for mobile operators to reach mass market and develop users’ appetite for data services.

India: a giant and unique cellular market

India’s cellular market, the second largest in the World, is about to pass the 500 million connections mark in early 2010, adding over 125 million yearly net additions. The country has recorded tremendous year-on-year growth, around 40% every quarter, and has reached 40% market penetration. By 2013, we expect India to accommodate over 800 million connections more than three times the level of Russia, Indonesia or Brazil.

In terms of revenue, Bharti Airtel (India’s leading operator with a 24% market share of connections) has been generating around US $1.5 billion total revenue every quarter since mid-2008 with EBITDA margins averaging 30%. Although such performance reflects the huge opportunity in India, profitability remains a challenge since mobile operators have to commit to substantial investments to connect India’s 1.1 billion inhabitants. Last year Bharti Airtel’s quarterly capital expenditure stood at just over 50% of revenues while operating expenditure represented over 60% generating negative cash flow. In fact, according to our calculations, the operator only started to report positive annual cash flow last year for the first time since 2004.

In terms of challenges, network coverage is only the first piece of the puzzle. Mobile operators will then have to adapt their offers to a market which is 85% prepaid with an ARPU of US $5, making it amongst the lowest in the World. These trends are creating difficult market conditions where cost control is a key success factor. In addition, competition is fierce in India as the country is home to 15 cellular networks with various levels of presence across the territory and GSM maintains its lion’s share with 77% of total connections. Competition has been galvanized by the liberalisation of the market in the early 90’s which triggered a steep drop in average price per minute to one of the lowest in the World. More recently, the introduction mobile number portability (MNP) – under review by regulator - and customs tax exemption on mobile handsets are also expected to change market dynamics.

India is also a unique cellular market in the way that it has been geographically divided into 23 telecom service areas on the basis of their revenue generating potential: category A, B, C Circles (which have five to seven circles each) and Metros which breaks out the four biggest cities in India - Chennai, Delhi, Kolkata and Mumbai. It is interesting to note that half of the 23 telecom service areas in India have a population base almost equal - if not higher - than the United Kingdom. Such a geographical structure has helped to manage regulatory initiatives such as spectrum allocation and monitoring levels of development across the territory. Furthermore, demographics can also be analysed at the Circle level. When assessing India’s cellular market, it is indeed critical to take into account that – according to official reports – 20% of the population lives below the poverty line (around 200 million inhabitants), and that approximately 75% of India’s population lives on less than US $2 a day, more than double the same poverty rate in China.

A Circles

A Circles are spread across western and southern India and include Andra Pradesh, Gujarat, Karnataka, Maharashtra and Tamil Nadu. It represents approximately 34% of the total cellular connections in India and has recently passed the 150 million connections mark. We have estimated that market penetration in category A Circles will reach 55% by the end of 2009 which positions it as the highest penetrated telecoms service area. It is also the area with the highest percentage of urban population with an estimated 33-35% of inhabitants living in urban areas.

The A Circles are home to nine operators and quarterly connections have been growing on average by 8% throughout 2009 compared to 10% in 2008. During the first half of 2009, Aircel launched its GSM network in Andra Pradesh, Karnataka and Maharashtra, whilst Idea Cellular and MTS (Sistema Shyam Teleservices) have launched in Tamil Nadu. It is interesting to note that all five A Circles show well balanced penetration rates (averaging 53%) and also share on average 20% of the connections market size in the Circle. Cellular connections in Gujarat are expected to register the fastest yearly growth in 2009 with 40% against an average of 32% in A Circles.

By year-end 2009, we estimate that Bharti Airtel will remain the largest operator in A Circles with a 26% market share, followed by Vodafone Essar and Reliance CDMA with 19% and 16% respectively. Aircel is expected to register the fastest connections growth with 49% between 2008 and 2009, closely followed by Reliance CDMA at 48% and Spice and Vodafone Essar at 40%.

B Circles

B Circles include Haryana, Madhya Pradesh, Punjab, Rajasthan and Uttar Pradesh located in central and northern India, as well as West Bengal in eastern India and Kerala in southern India. The B Circles are the biggest telecoms service area across the territory and represents 38% of total cellular connections in India with what we estimate will be just below 160 million connections by the second half of 2009. Market penetration in B Circles is however not as high as A Circles, reaching 40% by year-end suggesting that there is still a substantial untapped market. The fact that approximately 75% of the population in category B Circles lives in rural areas also emphasizes the market potential and challenges; India’s connections growth in the near term is expected to be driven by demand in rural areas where millions of users are still waiting for the networks to reach them.

11 operators are offering voice services in the B Circles and quarterly connections growth averages 10% throughout 2008 and 2009. During the first half of 2009, Aircel launched its GSM network in Kerala and Uttar Pradesh, whilst MTS (Sistema Shyam Teleservices) has launched in Kerala and West Bengal, and Vodafone Essar in Madhya Pradesh – which is considered by IFPRI to have an “extremely alarming” level of hunger (2008). As a matter of fact, Madhya Pradesh records the second lowest penetration rate in B Circles this year of 32% but, nonetheless, it is following a rapid development cycle with expected yearly connections growth of 38% between 2008 and 2009. West Bengal is showing the lowest level of market maturity with an anticipated 27% penetration by year end despite being the fastest growing circle in B Circles (50% yearly growth over the same period alongside Uttar Pradesh and Punjab).

By year-end 2009, Bharti Airtel is likely to remain the largest operator in the B Circles with a 22% market share, closely followed by Vodafone Essar at 21%. Reliance CDMA will keep its third position with a 16% market share following an estimated 58% yearly growth.

C Circles

The C Circles are the smallest but fastest growing telecoms service areas. It includes six circles across northern and eastern India - namely Assam, Bihar, Himachal Pradesh, Jammu & Kashmir, North East India and Orissa. It represents only 13% of total connections in the country but is expected to grow by 66% in 2009 to reach around 64 million connections. Market penetration in category C Circles is a low 36% but – similar to B Circles – over 80% of the population in this territory lives in rural areas which offers substantial connections growth opportunity.

The C Circles are home to eight mobile operators and quarterly connections growth has been averaging 14% throughout 2008 and 2009. During the second half of 2008, Vodafone Essar launched its GSM network across all circles in C Circles, with Jammu & Kashmir closing the loop in early 2009, Tata Indicom followed the same process by launching in Assam, Jammu & Kashmir and North East India late last year, Idea Cellular launched in Bihar in Q4 2008 and in Orissa in Q2 2009. Bihar is the largest C Circle cellular market as it represents 47% of the connections, whereas Himachal Pradesh, Jammu & Kashmir and North East India only own 6%, 8% and 7% respectively.

By year end 2009, Bharti Airtel will outweigh other operators with its 34% market share, widening the gap against BSNL at 14% and Aircel and Reliance at 13%. It is interesting to note that the top four mobile operators own almost 75% of the cellular market in C Circles but the fastest yearly connections growth is expected to come from Vodafone (962%) and Idea Cellular (627%) in 2009.

Metros

Chennai, Delhi, Kolkata and Mumbai are the four biggest cities in India and form a unique category of telecoms service areas, Metros. This group of four cities represents 15% of total connections in India which is as big as the six C Cirles across north and east India. Metros are by far the most developed and competitive telecom services area in the country as penetration has been propelled way above the logical maximum (+160%) due to the high prevalence of prepaid connections – which includes a large proportion of inactive and redundant SIM cards. In 2009, we estimate that Metros will follow a connections growth of around 29%, some way below the national average of 43%.

Chennai is home to six mobile operators, Delhi and Kolkata seven and Mumbai has witnessed the launch of eight mobile operators. Even though competition is intense in these cities, a number of new launches have taken place over 2008-9 such as Aircel’s GSM network in Delhi, Kolkata and Mumbai, Idea Cellular in Mumbai and MTS (Sistema Shyam Teleservices)’s CDMA network in Chennai and Kolkata. Two thirds of the Metros connections base is located within Delhi and Mumbai which are recording penetration rates just below 150%, unlike Chennai and Kolkata which average a distorted 250%. Connections growth in those markets is mainly driven by multiple prepaid connections per user with Chennai expected to report the highest yearly growth rate this year at 40%. We recently discussed this phenomenon in western Europe and North America in our recent report, Multiple connections per user: The impact on penetration and ARPU.

State-owned operator MTNL - which operates exclusively in Mumbai and Delhi - has a 6% market share of Metros and we estimate that it is about to report the slowest growth in the area with 16% between 2008 and 2009. Unlike in Circles A, B and C, Bharti Airtel is not the leader in Metros with Vodafone Essar gathering 20% of the market but it is sharing second position with Reliance CDMA at 19% market share. Tata Indicom’s CDMA network is expected to reach 14% market share this year in Metros, its highest across all telecoms service areas (8% in A and B Circles and 6% in C Circles).

Indian 3G: Regulation and market testing

India’s 3G license auction has followed a rather unusual process which has led to many delays. The auction schedule – which was originally unveiled in mid-2008 - has been postponed numerous times due to a dispute between the government and the regulatory body over the spectrum pricing structure, and the reluctance of the defence ministry to release, in a timely manner, radio bandwidth used for internal communications. Recently, more signs of delay appeared when the government failed to release the revised information on the bidding terms – planned for publication for 29th of September – suggesting that the auction will not take place in December 2009. However, the department of telecommuncications recently announced that the 3G license auction will be finalized by the end of the financial year, in March 2010. According to official reports, the government hopes to generate US $5 billion from the auction, with each license having a floor-price set at US $715 million per operator – against US $415 million as originally planned in 2008.

It is still unclear how many licenses will be auctioned since the original plan was to allocate an average of four spectrum blocks per circle but, according to latest official reports, the Department of Telecommunications (DOT) can allocate at least the initial 5Mhz radio bandwidth to three players in a Circle.

Nevertheless, whilst privately-owned operators await the much debated auction for 3G licenses, the government has already granted 3G spectrum to the two state-owned operators – BSNL and MTNL –with the hope that they will gain a first mover advantage. They will also be required to pay a price equal to the highest price achieved in the auction. But since launch in early 2009, both operators have failed to generate any kind of significant uptake in the adoption of high-speed network services.

MTNL 3G roll-out

Mahanagar Telephone Nigam Ltd (MTNL) is exclusively present in Delhi and Mumbai Metros. The operator – which only owns 6% of Metros – launched its WCDMA and WCDMA HSPA networks during the first half of 2009. However, six months down the line, it has only been able to attract 400 subscribers (Q2 2009) due mainly to limited network coverage, and we predict that its total WCDMA subscriber base will reach just below 180 thousand by year end. In 2010, we expect it to increase to half a million subscribers as network coverage improves and marketing efforts fuel momentum.

As we said prior to network launches in late 2008, affordability will be the key success factor in a market which has mainly a prepaid subscriber base, and that is exactly what has been challenging MTNL so far. At launch, the operator’s 3G tariff plans started from INR 249 per month (US $5.4) with free data usage worth INR 650 (US $14), up to INR 2,500 (US $54) under which users have “unlimited” data usage. On top of that, 3G-enabled devices have been reported to cost between INR 4,000 (US $86) to INR 8,000 (US $172). This price segmentation highlights the affordability challenge characterized by 75% of the population living under less than US $2 per day and India’s GDP per capita of US $1,016. In a continued effort to reach a balanced portfolio, MTNL has been forced to slash prices by more than 50%, only a few months after launch, offering a postpaid plan at INR 99 (US $2) with a 100MB allowance.

In June 2009, MTNL launched its mobile broadband offer under its “always on” banner. HSPDA cards sell for INR 5,000 (US $107), data plans cost INR 149 (US $3) per month and line activation a one-off INR 300 (US $6). A few months after launch, MTNL partnered with Dell to embed Ericsson’s 3G modules in Dell’s laptops and netbooks, along with MTNL’s Micromax 3G plug & play datacard.

Over the same period, the operator inevitably launched its prepaid offer branded “3G Jadoo” with a Starter Kit for Delhi and Mumbai at INR 99 (US $2); 50MB free data usage, valid for 15 days. Later, this offer was changed to 100MB data usage and 30 days validity. HSDPA data recharge coupons were also available at launch for INR 149 (US $3) with 60MB data usage and valid for 30 days – beyond the free limit, users are charged INR 3 per megabyte. But under continued pressure to balance pricing, MTNL had to introduce a coupon worth INR 50 (US $1) which offers 30MB data usage valid for 30 days, and extra per-megabyte charges have been reduced to INR 2 from INR 3.

During the last week of September, MTNL even introduced a promotion that offered free 3G access to all users until the end of the month. Prepaid and postpaid users could access 3G services for free during the trial period and even have their line activation fee waived off (INR 300) if they decided to continue using it.

On top of this price reduction initiatives, MTNL published a tender in early September to franchise its 3G network to a more experienced mobile operator. The aim was to outsource – under a revenue sharing agreement - marketing efforts to a mobile operator that is already successfully running profitable 3G networks. According to the tender, the chosen partner will then have to commit to generate average revenue per user (ARPU) of INR 500 (US $11) over the first three years to reach total 3G revenues of INR 2.4 billion (US $52 million) in both Delhi and Mumbai.

BSNL 3G roll-out

Bahrat Sanchar Nigam Ltd (BSNL) is present across all telecom Circle categories and Metros (excluding Delhi and Mumbai) and has passed 50 million GSM subscribers during the first half of 2009. In Q2 2009, six months after launch, its total WCDMA subscriber base reached 10,733 and we expect it to increase to just below 100 thousand by the end of Q3 and around 775 thousand subscribers by year-end 2010.

BSNL has now launched its WCDMA network in cities across Chennai, Andra Pradesh, Uttar Pradesh, Haryana, Jammu & Kashmir, Himachal Pradesh, Punjab, Bihar, West Bengal, Orissa and Tamil Nadu. However, mobile broadband seems to be only available in Ambala (in the State of Haryana) which is a city strategically located to serve as a gateway for tourists travelling by road or rail to Himachal Pradesh, Punjab, Uttar Pradesh and Jammu & Kashmir. This coverage has been chosen to test the market while generating substantial revenues from data roaming.

BSNL is understood to have actively begun marketing and advertising 3G services in June/July 2009 when network coverage reached over 100 cities. The operator explained that 3G services are first aimed at improving voice quality and reducing congestion in the existing network. The operator’s tariff plans are targeting the prepaid as well as postpaid market with 3G prepaid voice offers starting at INR 120 (US $3) and postpaid offers at INR 225 (US $5). 3G prepaid data plans span from INR 249 (US $5.4) to INR 2,999 (US $65) with the former voucher allowing 50MB data usage and the latter offering “unlimited” usage. All prepaid data vouchers are valid for 30 days and any extra usage outside data allowance costs INR 2 per megabyte. BSNL has also introduced two trial packs which cost INR 60 and INR 120, allowing for 60MB and 130MB data usage respectively over a 15 day period.

Opinion: What are Indian mobile operators' expectations?

In a recent discussion with the Cellular Operators Association of India, we asked Mr TV Ramachandran – Director of the COAI – what his expectations are with regards to 3G service adoption in the country.

Mr Ramachandran explained that “the key factors that will drive the fast adoption of 3G in India will be affordability and availability of relevant applications and content. 70% of India’s population lives in the villages and for 3G to reach mass market, rural consumers have to come on board – to subscribe to and actively use high-speed network services.” Mr Ramachandran believes that 3G can be the platform to bridge the digital divide, pointing out that “the value addition that 3G can offer rural consumers is phenomenal since it has the potential to bridge and overcome the lacunae in the infrastructure and services that have yet to reach the majority of the Indian population.”

According to Mr Ramachandran, “for mass adoption at the rural level, mobile operators will have to focus on the affordability of services, handsets pricing and the availability of local content in regional languages.” In this context, 3GPP (3rd Generation Partnership Project) has approved a revision of its SMS specifications to include support for sending and receiving messages in all 22 official Indian languages.

To conclude, Mr Ramachandran told GSMA Intelligence that “the 3G market in India reflects a huge potential but it will take some time to kick off. It is expected that as an initial phase, the 2.1GHz spectrum will be used to offer voice services, alleviating the severe spectrum crunch being faced by operators”. He also added that “3G is initially expected to be a niche market and will take off once the average Indian consumer develops an appetite for data services.”

Indian 3G: GSMA Intelligence forecast scenario

To assess the speed of adoption of high speed networks and services in India, GSMA Intelligence considered the following assumptions:

Network Coverage

We considered that the 3G license auction will happen in early 2010 to allow the first wave of commercial launches by the closing quarter of 2010. Any further delay in the auction schedule will obviously push back our adoption patterns. As originally planned, two spectrum blocks will be made available for WCDMA and WCDMA HSPA networks in both Delhi and Gujarat, one block only in West Bengal, three in Himachal Pradesh and four in all other circles - with the exception of Rajasthan and North East India which do not have radio bandwidth. Three spectrum blocks will be made available for CDMA2000 1X EV-DO in each circles. As a result, Bharti Airtel, Vodafone Essar, Tata Indicom, Idea Cellular, Aircel and Reliance are most likely to bid for 3G spectrum blocks. By 2010, MTNL will benefit from its headstart to reach 560 thousands subscribers, whilst BSNL will have expanded its network coverage to attract 773 thousand users.

At launch, we expect most operators to cover mainly the densest urban areas. Network expansion to rural areas will take some time and will not be a priority in the initial phase of 3G network deployment. Nonetheless, we expect mobile operators to commit to the license obligations under which they are required to cover 90% of Metros five years after spectrum allocation, and 50% of district headquarters or cities in the service area – of which 15% should be in rural areas.

During the initial phase of development, 2.1GHz networks will be mainly used to improve voice quality and reduce the existing network congestion. This trend will emphasize the prevalence of WCDMA (UMTS-only) networks and devices in operators’ portfolio mix. WCDMA HSPA networks will be rolled out in strategic urban areas targeting the business segment at launch.

Finally, one of the most important success factor in India will be network sharing. GSM networks already consider it a key element in their strategies, especially to overcome long-term cost management issues, one of the best examples being the Indus Tower initiative between Bharti Airtel, Vodafone Essar and Idea Cellular. We expect such initiatives to fuel the speed of adoption of 3G networks in rural areas and help operators to manage capital and operating expenditure.

Regulatory Initatives

In terms of regulation, mobile number portability is already being implemented in Metros and is expected to arrive in the rest of the country by Q1 2010 to boost competition and galvanize the adoption of 3G services. On top of that, throughout 2010, the government is extending its full exemption from additional custom taxes on components and accessories for mobile handsets to ensure affordability.

Mobile Devices

Even though mobile operators will focus on entry-level WCDMA devices (below US $150), notably via partnerships with Original Design Manufacturers (ODM), we expect them to target the high-end consumer segments at launch to counter inevitable collapsing margins. We also expect mobile operators and vendors to create an ecosystem that will ease localisation (22 regional languages) to reach mass market. India will also benefit from a wide range of 3G-enabled laptops and netbooks already available which, along with mobile devices, will be for many users the first mean to access the Internet. Equally, we assume that there is already an installed base of WCDMA handsets in India – typically, users who own a smartphone but currently run on a GSM network. Such an installed base often inflates the initial uptake of 3G services, distorting annual growth in the 12-month period following launch.

Services and Marketing

Considering the prevalence of the prepaid segment in India and its price sensitivity, we expect mobile operators to launch a wave of innovative prepaid 3G offers – unlike in developed markets where operators have been reluctant to do so judging that consumers in the prepaid segment are not willing to pay for 3G services. From a marketing perspective, we expect mobile operators to launch a number of joint advertising campaigns and co-branding with handset vendors. Such partnerships will also push to educate consumers on the benefits of 3G services, substantially increasing operating expenditure. Furthermore, mobile operators are likely to promote a free migration from 2G to 3G along with the possible introduction of SIM-only monthly offers which are proving to be successful in developed markets.

During the initial phase of commercial deployments, mobile operators are likely to report a substantial uptake of 3G services linked to the success of free trial offers. In the mid-term, they can sustain their position by introducing consumer loyalty programs under which 3G offers will be pushed forward.

Based on those assumptions, we expect that WCDMA, WCDMA HSPA and CDMA2000 1X EV-DO will add up to 2.6 million connections by the end of 2010 in India. By 2013, we predict that the market for high-speed networks will reach 60 million connections or 7% of total cellular connections in the country. That will place India as the 10th largest WCDMA (Family) operator in the World – almost as big as the market in the Philippines, the United Kingdom and Russia.

The distribution of market share shows that Bharti Airtel is likely to lead the group of 3G operators with a 31% share closely followed by Vodafone Essar with 24%. BSNL will benefit from its first mover advantage to hold third position with 14% market share whilst Idea Cellular and Reliance Group will be fighting for fourth position at around 10%.

WCDMA HSPA connections are expected to total 21 million by the end of 2013 against 31 million WCDMA (UMTS-only) connections. The growth of WCDMA HSPA networks depends on spectrum availability, network coverage and affordability of devices and services. At present, there is clear evidence that some of these factors will take time to materialise.

During 2009 and 2010, Metros will remain the largest 3G market in India with just below one million 3G connections, driven exclusively by BSNL and MTNL’s head-start. However, we estimate that in two years time, when privately-owned operators will have launched their networks, then growth from A and B Circles will rapidly outpace Metros in terms of 3G connections, totalling 3.8 million and 4.2 million respectively – against 2m connections in Metros. In 2013, A and B Circles will represent 72% of the total 3G market in India compared to 16% for C Circles and 12% for Metros. The first wave of 3G network launches from privately-owned operators is likely to happen in Metros although it represents a small share of total connections in India (15%). Moreover, its high level of penetration (160%+) suggests that mobile operators growth will stall in this area in the coming years. Metros’ growth is already registering rates under the national average (29% compared to 43%) and its 3G adoption will rapidly be driven by replacement and the success of prepaid offers.

Finally, we would like to remind our readers that GSMA Intelligence’s 3G forecasts in India do not include any future new entrants’ launches and are only based on the existing 15 networks. Our findings are based on precise assumptions clearly listed in this report and are subject to modification depending on operators’ go-to-market strategies.