Network shutdowns to reshape Indian mobile market - 2G licence cancellations and regulatory uncertainties curbing Indian mobile growth

The shock decision last week by India’s Supreme Court to order the cancellation of 122 regional mobile licences could impact almost 10 percent of the country’s mobile users, according to GSMA Intelligence.

The licence cancellations will serve to put the brakes on growth in the world’s second-largest mobile market, which is already slowing following regulatory uncertainty in the wake of the so-called ‘2G licensing scam.'

Since Q1 2008, 120 networks have launched across India’s 22 circles, including most of the start-up networks using the 2G licences issued under controversial circumstances by the office of disgraced former telecoms minister, A Raja.

Among incumbent operators, six launched networks in additional circles during this period: Aircel (14 circles), Idea Cellular (11), MTS (21), Tata Docomo (three), Vodafone (seven) and Loop Mobile (12), while four new operators have launched: Etisalat’s Cheers Mobile (15), Telenor’s Uninor (15), S Tel (five) and Videocon Mobile (17). Several of these new operators now face having to shut down within the next four months following the Supreme Court’s ruling - unless they are able to buy-back licences in the court-ordered reauction of the cancelled licences.

These network launches have helped the market triple in size since 2008 with annual connections growth peaking in 2009 (51 percent year-on-year), before slowing dramatically last year.

According to the latest GSMA Intelligence data, total Indian mobile connections grew by 19 percent year-on-year in 2011, less than half the 48 percent average growth recorded over the previous three years. Total yearly net additions in 2011 declined to 141 million from 227 million a year earlier. The slowdown was even more pronounced in Q4 2011, where quarterly net additions were recorded at 20 million, compared to 60 million a year earlier.

A number of factors have triggered this slowdown, including regulatory uncertainty ahead of the finalisation of the ‘New Telecom Policy’ announced in the wake of the licensing scandal; the DoT’s intention to delink future spectrum allocations from operator subscriber bases; delays in the allocation of additional numbering resources; and rule changes introduced by operators regarding the activity period allowed for prepaid users.

Previously, users would see their services terminated if they had not recharged their prepaid cards or placed/received a call within a period of 180 days. Late last year, both Bharti Airtel and Vodafone reduced this period to 60 days while state-owned BSNL reduced it to 90 days last month. Airtel stated that this change was necessary in order to free up unused numbering allocations for new customers given the overall country-wide shortage. These changes are expected to have a negative effect on connections growth over the coming quarters.

The slowdown has seen many operators begin to report negative net additions. In Q4 2011, Tata Docomo recorded a 5.3 million decline in connections compared to previous quarter, while new entrants Videocon Mobile at (-826,398) and Ping Mobile (-32,461) also saw declines.

Meanwhile, the Telecoms Regulatory Authority of India (TRAI) has identified that almost 30 percent of the estimated current total of 900 million mobile connections in country are inactive, putting the total number of ‘active’ connections at about 650 million.

Joss Gillet, Senior Analyst, GSMA Intelligence:

Total Indian mobile connections passed 900 million in January and are expected to reach 1 billion by year-end. However, the large share of inactive SIM cards in the country’s installed base shows that real penetration (on an active users basis) will by this stage stand at 58 percent rather than the current projection of 82 percent. This is evidence that India’s market size has been inflated and its growth opportunities largely diluted, and thus the next step for regulators and operators is to re-install a climate of confidence in the market to stimulate much needed investment. This daunting task has been kicked-off by operators which are slowly easing the long-lasting price wars which have brought mobile tariffs and ARPU in the country down to the lowest levels in the world. Last July, a number of operators raised their prepaid tariffs by around 20 percent in an effort to boost profitability and reassure investors about return-on-investment prospects. At present, it is clear that future growth in the country will come from demand in rural areas. According to the TRAI, rural penetration in India only increased by 17 percentage points between 2009-11 to 36 percent, while urban penetration has increased by 58 percentage points to 161 percent over the same period. This is a clear indicator that urban areas have been at the centre of competitive efforts from mobile operators and that demand in rural areas – which to date represent only one third of the country's total connections – is still largely untapped. However, market uncertainty will remain for some time - or until market consolidation has materialised. The recent disruption brought by the cancellation of 122 licences will push a number of operators to exit the market while the government’s ‘New Telecom Policy’ – currently scheduled to be published in mid-2012 – will install new rules surrounding M&A, taxes, licence conditions and spectrum allocations.

India net additions, annual, 2001–2011
Source: GSMA Intelligence