Rural areas to drive Indian 3G growth - Indian 3G focus to switch from Metros to Circles in 2010 says new study

Consumers outside of the main urban centres in India will quickly account for the majority of 3G connections following the rollout of the first private 3G networks next year, according to new GSMA Intelligence research. But the study warns that the high cost of acquiring spectrum and rolling out the new networks into rural areas means that return-on-investment is not likely to happen until operators have tapped the mid-term market potential, which is estimated to take at least three years.

The new GSMA Intelligence study – Indian 3G Market Assessment– estimates that the total 3G market in India will reach 60 million connections by 2013, accounting for an estimated 7.5 percent of total mobile connections by this point. It predicts that leading operators such as Bharti Airtel, Vodafone Essar, Idea Cellular and Reliance Communications will acquire spectrum in the January 2010 auction and will commercially launch their first high- speed networks towards the end of next year.

In the meantime, the early focus for India 3G will be in the Metros (the large cities of Chennai, Delhi, Kolkata and Mumbai), where the state-owned operators BSNL and MTNL have already been allocated spectrum ahead of the private auction and have been testing 3G services since the beginning of the year. Both state-owned and private 3G networks are expected to initially target niche customer segments such as affluent consumers and business users, which will concentrate activity in the urban areas in the short term.

The research shows that the Metros will account for over 50 percent of India 3G connections by the end of this year, but will be quickly outpaced by demand in the other three service areas over the next four years. By 2013, we predict that the B Circles (mainly central and northern India) will account for 38.2 percent of 3G connections, while the A Circles (western and southern India) will account for 34 percent. The C Circles - currently the smallest but fastest- growing category - will also outstrip the Metros by 2013, accounting for 16 percent of 3G connections. While 3G connections growth will differ across the four service areas the market shares of the main operators is expected to remain broadly in line with current (2G) market share trends. The study found that Bharti Airtel is likely to be the largest player by 2013 with a 31 percent share closely followed by Vodafone Essar with 24 percent. BSNL - the larger of the two state-owned operators - will benefit from its first mover advantage to hold third position with a 14 percent share, while Idea Cellular and Reliance Group will be fighting for fourth position at around 10 percent. The larger operators are expected to have higher market shares in rural areas where there is less competition.

However, the study highlights several challenges that may curb 3G connections growth outside of the urban areas. The first concerns the problems faced by the new 3G operators in delivering 3G services and devices at affordable price points in a market that is 85 percent prepaid and where ARPU levels are among the lowest in the world (currently around US$5 per month). Fierce competition among India’s many mobile operators is also further eroding margins in several service areas, and competition is set to increase with the introduction of Mobile Number Portability, expected to come into force early next year.

To counter such pressures, GSMA Intelligence predicts that the new 3G operators may look to forge 3G network sharing agreements with each other to make network expansion beyond the urban centres commercially viable. It also forecasts that, in the initial phase of development, the new networks will be mainly used to improve voice quality and reduce the existing congestion in the country’s 2G (GSM) networks. Meanwhile, 3G data services are expected to remain a niche service in the short term, targeting specific market segments such as business users.

Joss Gillet, Senior Analyst, GSMA Intelligence:

The new 3G operators will be expected to bridge the digital divide and contribute to India’s economic and social growth. However, market conditions are difficult and operators 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. This will be a challenge in a country where 75 percent of the population live on less than US$2 per day with around 200 million inhabitants living below the poverty line. But despite such challenging market conditions, operators say they expect ARPU 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. Even though mobile operators will focus on entry- level WCDMA devices (below US $150), notably via partnerships with Original Design Manufacturers (ODMs), we expect them to target the high-end consumer segments at launch to counter inevitable collapsing margins. Our research demonstrates that 3G services will help bridge the digital divide in India as the new networks move outside the urban areas. However, it will take time before 3G data services move from being a niche segment to mass market adoption.