Indian cellco growth dries up

Indian government restrictions on importing telecoms equipment are adding to the woes of the country‘s carriers, as they grapple with fraud probes, rockbottom ARPUs and lack of spectrum capacity.
Now, they are also finding it hard to raise financing to enhance their networks in order to improve often lamentable quality of service, or to upgrade to 3G (where they have the licenses).
Rajan Mathews, director general of the Cellular Operators Association of India (COAI) trade body, said the situation was worsened because members were not free to shop around freely for foreign equipment. He told local reporters that orders for telecoms equipment have “come to a screeching halt” after the government made it mandatory for operators to go through a complex pre-approval process to buy any imported kit.
The Indian government wants to make the country more self-sufficient in key infrastructure by restricting imports, and also cites security concerns, but the homegrown industry is inadequate to meet operators' needs.
All these factors are limiting cellcos' ability to support new users and are squeezing revenue growth. Mathews complained that foreign direct investment, as well as local bank lending, have almost dried up, making liquidity “a big issue” for operators.
Cellcos cannot meet demand growth profitably
Although India has 881 million mobile users, and was adding 15 million new subscribers a month in early 2011, this pace of growth has slowed because the networks are overloaded and the carriers lack the resources to keep pace with rising demand. Net user adds have dropped to around 7 million a month over the past few months, and Mathews expects the level to remain between 7 million and 9 million during 2012 if cellcos' issues are not addressed.
That means revenue growth will remain slow considering the potential of this market – he expects mobile service revenues to rise by 15% to about $23 billion (€17.9 billion) in the financial year to the end of March 2012 (up from 13% in the previous period), but growth will then slump to just 7% in the year to March 2013.
The Indian picture is always skewed by the huge level of dual-SIM devices and of inactive subscriptions in an almost entirely prepaid base. In a recent survey, research house Analysys Mason predicted that India‘s mobile subscriber base would reach 1.36 billion by 2020, from 812 million connections (SIMs at the end of 2011.
Of these connections in 2020, 3G and 4G technologies are expected to account for 57.1% and 10.7%, respectively. However, unique mobile user penetration will only reach 54%, up from 34% in 2011.
“Operators need to understand the multiple-SIM phenomenon and inactivity drivers in emerging markets in order to evaluate their true revenue potential,” lead consultant Sourabh Kaushal states. “The current market structure has resulted in a high proportion of multiple SIMs and inactive users, which camouflages the country‘s actual teledensity and makes it difficult to evaluate the market‘s true revenue opportunity.”
Currently, 30% of SIMs are inactive.
Impact of 3G
The main positives for operators, especially those with 3G services, are that churn is reducing, and data offerings are halting the ARPU freefall of recent years – overall ARPU is now stabilizing to around 135 to 160 rupees per month. However, this only really applies to those with 3G or BWA (broadband wireless) spectrum, capable of supporting new-style services.
At least there may be a new batch of airwaves in the 2.5GHz band coming to market, since state-owned telco BSNL - which was given early access to those frequencies in order to hasten broadband wireless rollout - has handed back its spectrum in nine of its 20 circles or operating regions.
This will set back original Wimax-based 4G availability by over two years, but it will enable the regulator to offer a nationwide BWA license, likely to support a second TD-LTE network alongside that planned by the other national holder, Reliance Infotel (whose holdings are in 2.3GHz).
All the major operators are desperately short of spectrum, but the major cellcos either missed out on the 2.3GHz/2.5GHz band because they had spent so much on 3G licenses, or gained BWA holdings only in a few of the country‘s 22 circles.
Some will hope to increase their stockpile by acquiring frequencies from smaller owners – Qualcomm plans to sell its licenses in 2012, for instance, and there are reports that the other state carrier, MTNL, could hand back its spectrum in Delhi and Mumbai (the only markets where BSNL does not figure). A new opportunity is now on the table with the BSNL decision.
The government could combine the returned licenses with unused spectrum from its own reserves in order to achieve a national franchise. According to local newspaper the Economic Times, the sale of one block of BWA spectrum could fetch about $2.4 billion, while BSNL is expected to get an 80% refund for the frequencies it returned. Its requirement to pay for its national allocations has been a drain on the lossmaking operator.
Meanwhile, according to IDC, the Indian cellphone market grew by 12% between the second and third quarters of 2011, and almost 14% year-on-year in Q3. “Notwithstanding a sharp decline in the mobile service subscription adds during July to September, the mobile phone shipments witnessed a spurt, as vendors built channel inventories ahead of a long festival season,” commented IDC India research director Deepak Kumar. Dual-SIM handsets saw the fastest growth, at more than 25% sequentially.
Nokia, which has always had massive market share in India, has seen a fallback in recent quarters as it came under pressure from low cost Asian vendors at the bottom, and Android midmarket smartphones at the top.
But in Q3 it grew its share by 6.8% compared to the second quarter, achieving a market lead of 31.8% of the total shipments, ahead of Samsung, which grew by 5% to take 17.5%. In smartphones alone, Nokia's share was 35.3% and Samsung's 26%, with Nokia‘s transition from Symbian allowing its Korean rival to narrow the gap.
And several low cost manufacturers saw their share decline as 3G spreads and Indian consumers look for more advanced handsets. Homegrown OEMs Spice and MAXX were the main exceptions, with sequential growth of 34% and 10.5% respectively.
Overall, smartphone shipments were up 51.5% year-on-year, though they still account for only 6.5% of total sales. Android overtook Symbian to take the market lead, with 42.4% share and 90% sequential growth. Apple, by contrast, has always struggled with India‘s low handset prices and almost entirely prepaid model, and grew its share of the smartphone segment only slightly between Q2 and Q3, from 2.6% to 3%.
For handsets as a whole, 2011 is expected to close with total shipments of 184.4m units in India, rising with a CAGR of 13% a year until 2015, when the figure will hit 301m. Smartphones will enjoy CAGR of over 63% during the same period, reaching 77.5 million units by 2015.