telecom sector analysis
TRANSCRIPT
Private Equity Pulseon Telecom
November 2009
Private Equity Pulse on Telecom
PageContents
Executive Summary
Opportunities for PEs in Emerging Mobile Telecom Landscape - by Neeraj Jain, KPMG
3G - The Next (r)evolution in Indian Telecommunications - by Prashant Chopra and Sandeep Gill, Deloitte
Opportunities in Mobile VAS Space - by T C Meenakshisundaram, IDG Ventures India
Cable TV - The Money's in the Last Mile. - by Nithin Kaimal, New Silk Route
Development of Indian Cable Industry - Potential for Growth via Consolidation and Triple Play - by Kunal Bajaj, BDA
Legal and Regulatory Challenges facing the Telecom Sector in India - by Rajesh Begur, ARA Law
Listing of Investors with Special Focus on Telecom
Listing of Advisory Firms with Special Focus on Telecom
Entrepreneurs' Perspective
Private Equity and M&A in Telecom
What PE/VC Investors Think
2
3
5
8
12
13
17
21
29
36
45
47
24
T industry perspective. he telecom story in India has been a
phenomenal case study on the benefits of Prashant Chopra and Sandeep Gill of Deloitte
private competition to all stakeholders insist in their article that 3G has great potential to
and the economy as a whole. Telecom has also alter the dynamics of the Indian telecom market.
been a “game changer” of sorts for the Private Besides the expected adoption in the metros, the
Equity industry in India with the stupendous poor infrastructure on the fixed line side means
returns delivered by Bharti Airtel for its Private that an increasing number of consumers are
Equity investors (who sold their stakes in 2004 & going to rely on their mobile phones for data
2005) serving as a key catalyst in channelling driven services, leading to a massive uptake as
huge dollops of global capital towards PE and when the infrastructure becomes available.
investments in the country. Additionally, as companies expand their
operations to semi-urban and rural areas, In recent months, despite record mobile revenue from enterprise clients stands to gain subscriber additions month-on-month and 3G significant ground as their dependence on mobile licensing round the corner, several experts services will become critical.believe the Indian telecom industry has reached a
key inflection point. They point out how intense Mobile Value Added Services (MVAS)
and rising competition levels, declining Average companies, which have thus far been struggling
Revenue Per User (ARPU), high costs of 3G in the shadows of the largely voice-focused
licenses and the impending introduction of mobile operators, are looking forward keenly to
Number Portability, place significant challenges the advent of 3G which promises an opportunity
before the industry. This concern is also reflected to enhance their revenues including via new
in the Venture Intelligence survey of leading types of services. In this context, TC
Private Equity (including Venture Capital) Meenakshisundaram of IDG Ventures India
investors who have invested over $5 billion in analyses the emerging scenario in which VAS will
telecom services and related companies over the get its rightful priority in the operators’ focus to
past five years. maintain or increase their ARPU and profitability.
On the positive side, almost 70% of the investors
surveyed felt that Indian telecom operators would
be able to find and profitably serve the next 100
million mobile consumers from rural areas. A
majority of investors are also willing to bet that the
introduction of 3G services can be a game
changer for various players in Indian telecom.
While the appetite for investments into mobile
operators is still high, investors are scanning for
“downstream” opportunities including Mobile
VAS, Telecom Software and other service
providers to telcos.
In his article, Neeraj Jain of KPMG points out the
various opportunities and challenges ahead for
PE investments across various segments within
Telecom. He concludes that while the industry
will continue to provide attractive returns that PE
investors seek, the landscape is likely to remain
dynamic and somewhat uncertain over the
foreseeable future from market, regulatory and
Executive Summary
3
The Venture Intelligence investor poll reveals that
a majority of investors, given the unorganized
nature of cable TV distribution in the country,
believe that several opportunities still exist in this
space. In his article, Nithin Kaimal of Private
Equity firm New Silk Route Advisors (NSR),
highlights how the battle over the "last mile" in
cable TV networks is hotting up with the entry of
Direct to Home (DTH) services. He feels the
success of the cable model over DTH in other
markets as well as the performance of organized
cable players like Asianet and Ortel provides
ample evidence of the economic attractiveness of
this model. The next step is for these companies
to roll out multiple services like digital TV,
broadband and value-added services by
leveraging their last mile access, lower cost and
higher bandwidth.
Telecom-focused consulting firm BDA weighs in
with a meaty analysis of the various technology
options and investment scenarios for the cable
TV sector.
In his article on the legal and regulatory
challenges facing the telecom industry, Rajesh
Begur of ARA Law outlines the regulatory
framework and rules relating to foreign
investments, M&A-related issues as well as
recent developments like spectrum allocation
and 3G licensing.
For the convenience of entrepreneurs, the report
provides a listing of PE/VC investors who have a
special focus on telecom as well as advisory firms
who provide value-added intermediation
services.
Executive Summary
4
35
30
25
20
15
10
5
0
2000
1800
1600
1400
1200
1000
800
600
400
200
0
20052006200720082009-H1
PE Investments in Telecom - By YearAmount (US$ M) No. of Deals
1%2%6%
7%
35%
49%
By Sector - Value*
* Jan '04 - June '09
Telecom Infrastructure
Mobile Services
Hardware
Broadband
Mobile VAS
Communications Tech
By Sector - Volume*
2%4%4%
43%25%
16%6%
8
7
6
5
4
3
2
0
1600
1400
1200
1000
800
600
400
200
0
20052006200720082009-H1
PE Investments in Telecom InfrastructureAmount (US$ M) No. of Deals
US$ M
illions
2.5
2
1.5
1
0.5
0
1400
1200
1000
800
600
400
200
0
20052006200720082009-H1
PE Investments in Mobile ServicesAmount (US$ M) No. of Deals
US$ M
illions
14
12
10
8
6
4
2
0
140
120
100
80
60
40
20
0
20052006200720082009-H1
PE Investments in Mobile VASAmount (US$ M) No. of Deals
US$ M
illions
5
4
3
2
1
0
140
120
100
80
60
40
20
0
20052006200720082009-H1
PE Investments in Communications TechAmount (US$ M) No. of Deals
US$ M
illions
10
9
8
7
6
Private Equity and M&A in Telecom
Others
5
M & A Action in Telecom
Top PE Investments in Telecom*
Company Business Description Amount(US $ M)
Investor (s) Date
Bharti Infratel Telecom Infrastructure 1,000Temasek, Macquarie,(Towers) Goldman Sachs, AIF,
India Equity Partners, Others
Idea Cellular Mobile Services 966Providence, Sequoia Capital, Oct-06ChrysCapital, Spinnaker Macquarie, 2i Capital, TA Associates, Spinnaker, Others
Aditya Birla TelecomMobile Services 428Providence May-08
Tata Teleservices Mobile Services 360Temasek Mar-06
Reliance TelecomTelecom Infrastructure 338New Silk Route, Aug-07 Infrastructure (Towers) Galleon Group,
Fortress Capital, HSBC Principal Investments, GLG Partners, Quantum Fund
Dec-07
Source: Venture Intelligence PE Deal Database; * Jan 2005 to June 2009 – by Investment Size
M&A in Telecom - By Year
18
16
14
12
10
8
6
4
2
0
20042005200620072008H1-2009
8
2
5
16 16
10
Source: Venture Intelligence M&A Deal Database
Private Equity and M&A in Telecom
6
Top M&A Deals in Telecom*
Target Co. Acquirer Sector Amount(US $ M)
Date
Source: Venture Intelligence M&A Deal Database; * Jan 2004 to June 2009 – by Investment Size
Hutchison Essar Vodafone Mobile Services 11100 67Feb-07
Unitech Wireless Telenor Mobile Services 1430 67Nov-08
Aircel Maxis Mobile Services 1080 100Mar-06
BPL CommunicationsEssar Group Mobile Services 1000 64Jul-05
Idea Cellular Aditya Birla GroupMobile Services 990 48Apr-06
Stake%
M & A Deals in Telecom - By Volume
5%
5%5%
5%
2%
9%
9%16%
25%
19%
Mobile VAS
Mobile Services
Telecom Infrastructure
Hardware
Telecom Services
Broadband
Cable Network
Communications Tech
ISP
Satellite Communications
*Jan 2004 to June 2009Source: Venture Intelligence M&A Deal Database
*Jan 2004 to June 2009; By VolumeSource: Venture Intelligence M&A Deal Database
Outbound
Domestic
Inbound
M & A in Telecom - By Deal Type*
46%
21%33%
Private Equity and M&A in Telecom
7
Here are the key highlights of a poll conducted Investors chose Mobile VAS, Mobile Telecom
among Private Equity & Venture Capital firms for services, Mobile Broadband and Telecom
this report. Fund managers from over 50 firms Software companies, as well as companies
participated in the poll. providing services to telcos as among their
favourite sectors within the industry.
What PE/VC Investors Think
Most Attractive Sector for Investments14
12
10
8
6
4
2
0
Mobile VAS
Service Providers to Telcos
Mobile Telecom
Services
Mobile Broadband
Telecom Software
Telecom Tow
er
Cable / Satellite TV
Fixed Broadband Services
Mobile Recharge Services
Mobile Phones / Devices
Telecom Manufacturing
Telecom Hardw
are
Mobile Retailing
Fixed Telephony
How Investors Rated Each Sector100
80
60
40
20
0
Service Providers to Telcos
Mobile Broadband Services
Mobile VAS
Mobile Telecom
Services
Telecom Software
Cable / Satellite TV Networks
Telecom Tow
er Infrastructure
Fixed Broadband Services
Mobile Phone / Devices
Mobile Recharge Services
Telecom Hardw
are Equipm
ent
Telecom Manufacturing
Mobile Retailing
Fixed Telephony
20
40
60
80
100
120
% (<5)
% (>5)
8
Bullish on Rural Penetration
Most PE investors seem to feel expansion of
mobile telecom services into semi-urban and
rural areas will keep the industry in high-growth
mode for the next several years.
Almost 70% of investors surveyed felt that
telecom operators would be able to find and
profitably serve the next 100 million mobile
consumers from rural areas. Investors who are
positive on rural telephony insist that for rural
users, mobile services are a means to increase
their incomes and hence, there is a huge pent up
demand. Plus, they believe Indian operators have
worked out low cost operation models – including
especially via infrastructure sharing – that is
required to serve rural areas profitably.
PE investors are also bullish on the expansion of
Indian telecom operators into other developing
markets – something that leading players like
Bharti, Reliance and the Essar group have
embarked upon. Their experience in the highly
competitive Indian market (especially in handling
large volumes and a diverse consumer base),
combined with their low costs and ability to
continuously innovate, will stand Indian operators
in good stead while expanding into markets like
Africa.
What PE/VC Investors Think
NoOpinion14%
No18% Yes
68%
Will Rural India Deliver the Next 100 Million Subscribers Profitably?
NoOpinion30%
No14%
Yes56%
Will Indian Operators be Succesful in their Overseas Forays?
9
What PE/VC Investors Think
A majority of PE investors are however not so
bullish on the prospects for the New 2G licensees
as they feel the current players are too well
entrenched. Some investors however indicated
that new factors like infrastructure sharing and
the introduction of Number Portability as well as
the fact that the majority of Indian subscribers are
in any case pre-paid (who switch operators quite
often) are likely to favor the new entrants. While
consolidation might be inevitable in the long run,
given the overall market size, some of the new
entrants would be able to sustain – if not thrive –
as niche services or regional players.
When it comes to fixed broadband services,
investors seem to believe that over a period of
time, the integrated nationwide telecom
operators - given the scale advantages of their
combined offerings - will edge out independent
standalone broadband service providers.
However, here again, some investors see the
potential for at least a few independent
broadband service providers to do well as
regional players.
A majority of investors are also willing to bet that
the introduction of 3G services can be a game
changer for various players in Indian telecom –
especially since it presents an opportunity to
enhance revenues for value-added services
(including new types of services like gaming) and
other data services quite significantly.For
operators, 3G will help increase ARPUs
especially in the Metros and Category 'A' circles.
3G services can also truly enable mobile users
who do not have prior exposure to a PC to access
Internet-based services. Investors who disagree
that 3G will be a game changer cite the high costs
and lack of compelling applications as the main
reasons that will slow down adoption of 3G-
based services.
Will 3G Services be a Game Changer?
No32%
Yes52%
NoOpinion16%
Can Independent BroadbandServices Thrive?
No50%
Yes26%
NoOpinion24%
Will the New 2G Licencees be ableto gain significant Market Shares?
Yes20%
No54%
NoOpinion26%
10
A majority of investors believe that given the unorganized nature of cable TV distribution in the
One of the biggest concerns of investors in country, there are several opportunities still in this Telecom, the Venture Intelligence poll showed, is space – including in DTH, IPTV and other the regulatory uncertainty and “arbitrariness” of innovative distribution and business models. The government policies - especially when it comes to naysayers believe the market is too crowded and their big-ticket investments into mobile in the long run, the large integrated offerings – like operators, Cable TV, etc. those from the telcos - will prevail.
Interestingly, when it comes to investments into Mobile VAS companies, the main challenge perceived by investors is the “monopolistic behaviour” of the operators. Plus, the investors are not able clearly see an exit route for their investments into VAS companies.
A majority of the investors surveyed felt that the rich valuations being accorded to independent telecom tower infrastructure companies currently were not justified since these companies were likely to only provide “utility” or “lease rental” like returns over the long term.
Macro Challenges
Some opinions conveyed in the survey:
What PE/VC Investors Think
Are there Further Opportunitiesin Cable / Satellite TV?
No16%
Yes58%
NoOpinion26%
Are Telecom Tower Investmentsa Gamble on Valuations?
No32%
Yes52%
NoOpinion16%
11
"For VC deals in telecom, execution is a very important part. We have seen VC investments stagnating because the companies could not implement in a timely manner."
"High capital intensity, well entrenched incumbents and high spectrum and other charges will reduce returns on new investments. However, providers of innovative products and services will generate good returns making them attractive investment opportunities."
"Profitable ventures are high capex; lower capex ones are not supported in the current ecosystem."
Entrepreneurs' Perspective
EAddressing Investor Concerns
the IPO. “With a PE firm already on board, when ntrepreneurs who have already
the company goes for a listing it is quite familiar in partnered PE/VC investors, indicate the
dealing with investor expectations,” says relatively easy access to capital that will
help them grow to “industrial Quippo’s Sunil Kanoria.
scale” as one of the key
reasons for choosing to go in
for this type of financing. “We The poll conducted by Venture Intelligence
needed capital for growth among the PE/VC community indicated that the
and VC financing is the least “monopolistic” behavior of operators, intense risky capital from an competition and the lack of a clear exit route are entrepreneur's perspective” among the common concerns when it comes to says Anupam Mittal,
investing in the Mobile VAS segment. Founder of Mauj Mobile, one
Anupam Mittal of Mauj Mobile feels, in the of the biggest Mobile VAS (M-
absence of regulatory intervention, the best way VAS) companies in India.
for M-VAS companies to address these Entrepreneurs mention several value additions
challenges is to build “must-have” applications made by PE/VC investors besides their ability to
that would fetch them better provide quick access to “bargaining power” vis-à-vis capital. Sunil Kanoria, telecom operators. Probir Director of Quippo
Roy, Director & Co-founder Telecom Infrastructure,
of Paymate, feels says PE investors - with
entrepreneurial start-ups – their sectoral knowledge
and experience - add being nimble players due to
value to the organization on a regular basis. “VC their very nature - should
financing helps not only in terms of the money, view these issues as an
but also the kind of business perspective and the opportunity and come up board-level intelligence we get,” adds Chaitanya with disruptive innovations, applications and Nallan, CEO, mGinger.
business models. For its part, mobile advertising
firm mGinger circumvents telecom operators by Apart from their insights and
reaching advertisements directly to consumers experience in dealing with
diverse market spaces, who have opted in to receive these messages.
entrepreneurs consider the Another major concern mentioned in the polls by
credibility, international PE/VC investors was the overvaluation of deals in
exposure and contacts of the the telecom infrastructure space. Sunil Kanoria of PE/VC to be very valuable for Quippo feels this opinion stems due to a lack of both business development knowledge about the tower business. He feels and future fund-raising. The
that valuations should be viewed in the context of perspective of a PE/VC
the developing environment and not be partner also helps
entrepreneurs to time their IPOs appropriately compared to those in mature markets where
and deal better with investor expectations post there is not much growth.
Anupam MittalMauj Mobile
Chaitanya NallanmGinger
Sunil KanoriaQuippo Telecom
Probir RoyPaymate
12
W
Outsourcing
Infrastructure sharing
(refer chart 1). Hence, both the above trends ith 450 MN wireless subscribers in would lead to declining market for rollout services August 2009 and CAGR of 64% from resulting in vendor rationalization – private equity FY 2005-09, India is the second investors should size up the ability of target / largest and fastest growing market globally. The portfolio companies to sustain / grow their market is characterized by high competitive business based on quality of service, strength of intensity, falling ARPUs, low penetration and relationship and other softer parameters. impending entry of more wireless operators. All
these factors are likely to drive subscriber
additions – some estimates suggest a subscriber
base of 800 MN by FY12. This scorching pace of
growth presents unique challenges and
investment opportunities (of varying degree)
across the telecom value chain. Passive
infrastructure sharing, outsourcing of post rollout
functions and consolidation amongst mobile
operators are factors that are likely to have
significant impact on investments that are
consummated within the next 6-12 months with
an exit horizon of 4-5 years.
At the outset, it is pertinent to draw distinction
The level of infrastructure sharing has steadily between rollout-related and post-rollout
increased, starting with sharing of passive outsourcing. Whilst operators outsource
infrastructure to the current sharing of active / network rollout activities as an established
fiber networks and ongoing debate on spectrum practice, they are now increasingly looking to
sharing. Both incumbents and new operators outsource post rollout activities as well. Bharti
have embraced infrastructure sharing in a big has been a front-runner in applying the
way. With significant increase in tower tenancy outsourcing model, having outsourced several of
forecast by FY12 (from 1.2-1.3 in FY08 to 1.8-1.9 its processes including network maintenance,
by FY13), the level of infrastructure spend per customer service etc. Other incumbents have
BTS required in future is likely to be substantially increasingly begun adopting the outsourcing
lower compared to historical trends. model. Similarly, new operators, devoid of the
Furthermore, unless 3G BTS rollout kicks-off shackles of legacy processes / structures and
exponentially, the number of 2G+3G BTS rolled given the need to aggressively focus their energy
out post FY11 are likely to witness a steep decline on customer acquisition activities, have chanted
95
153145
171157
113
FY07A FY08A FY09A FY10E FY11E FY12E FY13E
No.
of
BTS
in '0
00
Chart 1: Total No. of BTS rolled out each year
160
140
120
100
80
60
40
20
180
60
Source: KPMG Analysis
by
Neeraj JainOpportunities for PEs
in Emerging Mobile
Telecom Landscape
Opportunities for PEs
in Emerging Mobile
Telecom Landscape
13
Opportunities for PEs in Emerging Mobile Telecom Landscape
the outsourcing mantra in a big way. Given companies to address the post-rollout
expected slackening in pace of rollout and opportunity would be important to maintain /
increased propensity of operators to outsource enhance shareholder value.
post rollout, capability of target / portfolio
Sr. No.Operator DescriptionVendor Area
1. S.Tel Reliance Communications
Passive infrastructure sharing
Covers 6 circles covering 10,000 sites and fiber optic network
2. Etisalat DB Telecom
RCom; Tech Mahindra
Passive infrastructure; IT applications
Reliance Infratel - involves sharing of 30,000 towers across 15 circles over a 10-year period, in a deal estimated at Rs 10,000 crore
Tech Mahindra - for providing system integration and managed services for 15 circles spread over a period of 10 years, valued as USD 400 MN
3. Sistema Shyam Teleservices
Aegis BPO; IBMCustomer care operations; datacentres
Entails the managing of both voice and back-office processes
4. Datacom Solutions
Tata Teleservices-Quippo, Aircel; Huawei
Passive infrastructure and transmission services
Tata-Quippo - leverage the existing and future tower and backbone infrastructure (25,000 towers across India)
Aircel - access to 5,000 mobile masts in a deal valued at approximately USD 400 million
Note: The above table is an indicative list of recent announcements by new operatorsSource: media reports
Consolidation rationalization and cost cutting measures by
operators, steep reduction in demand for telecom By FY11 the Indian landscape may be
infrastructure and outsourced services and an characterized by the presence of around 12
increase in bargaining power of operators. operators on average per circle, which is quite Companies with the 'right' mix of exposure to high a number compared to 4-5 operators in incumbent and new operators would be more mature mobile telecom markets. Despite the size
attractive than the ones solely dependant on new of the Indian market, both analysts as well as
operators or incumbents. This is so because industry participants concur that the industry is
while incumbents are more likely to continue likely to go through a consolidation phase in the
generating business post-consolidation, new medium term. Consolidation is likely to create a
operators could offer immense business ripple effect through the entire telecom value
opportunities in the near to medium term.chain as a result of implementation of
14
Opportunities for PEs wishing to exploit this potential opportunity
should critically examine the likelihood of Whilst a meaningful stake in telecom operators continuance of spectrum scarcity in light of for PE players may not be possible given multi-
ongoing discussions around spectrum farming / billion dollar valuations, there exist several
move towards technology agnostic spectrum opportunities across the value chain – tower
and impact of defence forces vacating spectrum companies, telecom ancillary providers, VAS
service providers etc – with investment size over the next 2-3 years
ranging from a few million to hundreds of million Overall, the telecom sector holds good potential
USD. and offers the opportunity for the kind of returns
Telecom towers - would benefit from rollout of PEs look for. However, the landscape is likely to new operators and from new service remain dynamic and somewhat uncertain over technologies e.g. 3G and WiMax. With most of
the foreseeable future from market, regulatory the new players in advanced stage of rolling out
and industry perspective. Private equity investors their network, investors should critically examine
need to evaluate the impact of key developments the ability of their target's assets to host multiple
and trends that may significantly alter the telecom tenants and more importantly their ability to win
landscape to make an informed investment / exit quality* tenants.
decision.Telecom ancillary (rollout and post rollout
Note: *operators who would roll out and not services providers for passive infrastructure) - become victims of consolidationCompanies with a sole focus on rollout could run
out of steam because of slackening pace of
rollout. Investors should critically examine the
capabilities of companies in this space to
increase their share of the market, diversify into
post rollout services space or into other sectors
(eg power, railways etc.)
VAS - would benefit from increased penetration,
increase in 2G base and increased sophistication
of applications post uptake of 3G services. Given
that VAS companies of scale are well funded, the
segment may have limited funding opportunities
of size that PE investors typically invest in. While
secondary deals and consolidation of smaller
companies are opportunities that PE players can
look at, VCs can target early stage companies
with innovative and scalable applications.
New operators – robust growth in subscribers
coupled with spectrum scarcity could result in
significant valuation increase for new operators
that have been allocated spectrum. Investors
Opportunities for PEs in Emerging Mobile Telecom Landscape
15
Opportunities for PEs in Emerging Mobile Telecom Landscape
Neeraj joined KPMG in June 2008 and leads the Telecom vertical for Transaction Services in India. He gained extensive experience in strategy consulting and due diligence work in London with Ernst & Young (2 yrs) and global strategy consulting firm -L.E.K. Consulting (2 yrs). Prior to that and an MBA, Neeraj worked for Siemens (Mobile division) in India, SE Asia and Africa for 8 years wherein he gained extensive exposure to both consulting and implementation of large infrastructure and telecom networks. Neeraj has an MBA from INSEAD (Dean's List), France and a B.E. - Electronics & Communication (Hons.) from C.R. State College of Engineering, India
Neeraj Jain
Director
Transaction Services
+91 90083 44446
About the Author
Vikram Utamsingh
Executive Director and Head
Private Equity Advisory
Vikram leads KPMG India's Private Equity Advisory business . His focus is to work with Private Equity firms through the life cycle of their investments. Vikram has a deep understanding of transaction issues, deal structuring and negotiation issues relevant to private equity transactions. Vikram is quoted on his views on the Private Equity industry in India in leading newspapers and international PE and deal magazines . He recently led KPMG India's Private Equity survey which was published in February 2008.
Head of Private Equity
Sanjay has been at KPMG for 18 years and has worked at the offices in London, Silicon Valley, Frankfurt and will soon be arriving in Mumbai to lead the Transaction Services business in India. He has significant experience in the Media, Telecommunications and IT sector having worked for clients such as Virgin Media, Bertlesmann's Avarto division and Logica. He also leads our relationship with Goldman Sachs Capital Partners across EMEA.
Sanjay Thakkar
Partner
Transaction Services
Head of Transaction Services
16
W
India: Mobile subscriber base vs. fixed-line 1users and internet users
continues to evolve, and content, rather than hen mobile phones were first hardware, becomes the driving force, mobile launched in India, it would have been phones are perfectly positioned to be the key almost unthinkable to imagine the access point for this content, whether it is crop transformational impact they would have on the prices for farmers, GPS for fishermen or the latest Indian telecoms sector. As a nation, we have movie trailers for the teen population in the embraced this technology as none before. metros. Once again, it's a perfect example of Whereas in other economies, the traditional
‘development curve’ has seen firstly a growth in
wireline usage and fiber to home connections,
followed by increasing usage of mobile devices,
India has leapfrogged a number of milestones on
this curve. Today, the number of mobile phones in
India is disproportionate large relative to
landlines, broadband connections, computers, or
any other form of communication in general. In
addition to this, mobile connections continue to
grow at a phenomenal rate, by far the highest in
the world.
leapfrogging, as it significantly bypasses the
evolution of increased wireline usage, fiber to As the communications value chain in India
home connections etc.
However, how will this happen? With current
mobile phone download speeds, sending and
receiving photographs can be painful, let alone
streaming videos or getting real-time traffic
information. The current penetration of data
services is extremely low, and growth has been
hampered by existing infrastructure limitations.
100%
80%
60%
40%
20%
0%
2006 2007 2008 2009 2010 2011 2012
Voice Data
India: Mobile voice vs. data revenue (2006 – 2012)
Num
ber
of s
ubsc
ribe
rs (
'000
)
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0Mobile
Internet
Fixed Line 2006 2007 2008 2009 2010 2011 2012 2013
by
Prashant ChopraSandeep Gill
3G - The Next
(r)evolution
in Indian
Telecommunications
3G - The Next
(r)evolution
in Indian
Telecommunications
17
The obvious, and much clichéd answer, is 3G adoption in the metros, the poor infrastructure on
(and subsequently 4G). As 3G has been rolled the fixed line side means that an increasing
out over the world, it’s been a win-win situation number of consumers are going to rely on their for everyone. 3G has had a beneficial impact on mobile phones for data driven services, ARPU as 3G customers spend more than potentially leading to significant uptake as and 2G/2.5G customers. In fact, a number of global when the infrastructure becomes available. operators have realised considerable revenue Additionally, as companies expand their gains from the 3G rollout. Almost all have seen an operations to semi-urban and rural areas, uptick in data usage and in several cases (KDDI, revenue from enterprise clients stands to gain
DoCoMo, 3 UK, O2 UK etc.), data services significant ground as these clients’ dependence contribute more than 30% to overall ARPU. on mobile services will become critical. Handset manufacturers are able to sell higher
This provides the operators with great cross-sell value handsets, consumers are getting access to and up-sell opportunities and provides impetus better content and finally, the content providers for enhanced product development. It will also have a market that demands and pays for higher be the foundation for introducing the next quality and value.generation of wireless technology, such as LTE.
This remains by far the most cost effective lever to
manage ever increasing demand, something that 3G has great potential to alter the dynamics of the
Indian telecom market. Besides the expected would be of great short term help for all operators.
3G and India
3G - The Next (r)evolution in Indian Telecommunications
Objective:
Key considerations:
Identify at a granular level customer segments most likely to purchase the products and their usage of these products
- Consumer purchases of products is strongly correlated with spend and demographic characteristics
-The usage of products by business varies significantly based on business size, location and industry vertical
-Convergence of home, business and elsewhere domains determine unique usage
CUSTOMER
Objective:
Key considerations:
Detemine the competitive need for spectrum based on their business model
- Current spectrum holding and the need for additional spectrum
-Marketshare information
-New products contemplated
-Financial Strength
-Growth targets
COMPETITION
Objective:
Key considerations:
Identify the products that will be offered by incumbent and new entrants.
-Value of existing wireless products is different for incumbent wireless players than for new entrants.
-Ability of incumbent players to bundle existing products with new products
-Ability of new players to deliver new products e.g. integrated wired and wireless gaming and seamless handsets
PRODUCTS
VALUATION RANGES FOR 2.1 GHz / 2.3 GHz SPECTRUM
18
The 3G Spectrum Auction
The way forward
Will 3G lead to a spate of mergers, alliances,
acquisitions?
3G in India still remains
somewhat of a mystery. There is uncertainty Before 3G becomes a reality in India, there is the about its core customer base, usage patterns, small matter of the spectrum auction. Already adoption rates, pricing structure etc. There is delayed, the auction has become the cynosure of considerable appetite to share this risk, rather telecom related eyes in India. The Government is than face it alone.following a global auction route, allowing existing
and new entrants to participate, leading to The spectrum auction has the
potential to raise entry prices for 3G sky high. expectations of a high spectrum value
This has been seen in the past in some other However, new entrants are at somewhat of a markets. The network rollout and disadvantage as they have to pay large UASL marketing/sales costs are further added to this. fees, do not get any 2G spectrum, and face large For the bigger players such as Bharti, this is less capital expenditure as they have to ensure a of a problem, but for relatively smaller players, significant rollout (90% in metros, 50% in smaller with smaller pockets, it might make sense to cities) within 5 years, without the brand and scale partner and share the costs.advantages of the existing major players.
Additionally, there is increased possibility of the
Government blocking the sale of a major stake Though 3G presents tremendous opportunity for before network rollout, decreasing chances of all the players in the value chain, it also requires a investment based auctioning. very strong enabling ecosystem. Without this
ecosystem in place, the whole ball of wool can
unravel quite quickly. Here are some key points
for the concerned players to keep in mind:Entering and sustaining a strong position in the
3G market is something that requires a large Though it is easy to keep raising
the minimum price for spectrum allocation, it is amount of investment as well as technical and
also easy to kill the goose that lays the golden business know-how. For this reason, it is fair to
egg. Spectrum pricing must be fair so that there assume that the market might see more
can be a healthy level of competition among old transactions such as Tata-DoCoMo. Some key
and new entrants.determinants of these alliances/stake
acquisitions are as follows: Though it is easy to use the
allocated spectrum for 2G services, operators
must make a concerted 3G presents a natural opportunity for Indian and
effort to roll out the foreign players to work together. The technical
required infrastructure expertise of a more established foreign player
and services as soon as coupled with the market knowledge of a local
possible. Additionally, player presents great opportunities for synergy.
while the metros would The Tata-DoCoMo deal is a great example of this.
be the obvious starting Tata has already set up the network while
point, the semi-urban DoCoMo has great understanding of
and rural areas provide technologies, market development and
immense potential for competition. When Tata enters the 3G space,
3G adoption and usage.DoCoMo's expertise will add tremendous value.
Risk Mitigation:
Price/cost:
Government:
Operators:
Technical expertise and market experience:
3G - The Next (r)evolution in Indian Telecommunications
19
Handset manufacturers:
Content providers:
There is a definite
need for out of the box thinking as far as
handset strategy is concerned. This could be
a result of closer collaboration between the
manufacturers and operators (subsidies,
shared go-to-market thinking etc.), enhanced
manufacturing capabilities or just pure pricing
plays by the manufacturers. In order to get
sufficient scale, 3G handsets have to be sold
at appropriate prices, ideally at an entry price
range of Rs. 4,000-5,000.
Once the hardware and
the access points are in place, the key remains
the content. Currently, operators take a major
share (60% and up) of content related
revenues, but as higher quality content gets
developed, it is essential to reach a fair
agreement so that there is enough incentive
for content developers to produce good
quality content. Without relevant content,
examples being entertainment and sports for
the metros and agricultural related information
for the rural areas, it will be hard for consumers
to understand the real value of 3G.
3G has the potential to completely transform
the way people use their phones – but needs
the right stars aligned to really gain traction,
and fully realize this potential.
Sandeep Gill is the Managing Director of
Deloitte Corporate Finance, India. He has
carried out financial due diligence on
several key telecoms transactions in India
and South East Asia.
e-mail: [email protected]
Mobile: +91-98200-25244
About the Authors
Prashant Chopra is a Director with Deloitte
Consulting in India, and leads the Telecom,
Media and Technology vertical for the
firm's Strategy & Operations offering. He
has spent his consulting career advising
global telecom clients on growth strategy,
M&A and sales and marketing
effectiveness.
e-mail: [email protected]
Mobile: +91-97119-77717
3G - The Next (r)evolution in Indian Telecommunications
20
India is the 2nd largest and fastest growing offerings. The recent spate of price cuts to
mobile market in the world with over 440 1ps/second plans forced by the new operators
million connections as of September 2009. It does not give any scope for the ARPUs to go up
is expected to cross 500 million connections by from voice services in the next 3 years. It is
March 2010. anybody’s guess as to when SMS would also go
free. Given this background, it is expected that India has been predominantly a voice market with
VAS will get its rightful priority in the operators’ Value Added Services (VAS) contributing below
focus to maintain or increase their ARPU and 3% of revenues as against 15-25% of total
revenues in developed markets. However, this is profitability.
expected to grow fast to reach approx. 10% of Of the 100+ VAS services that have been
mobile operators revenue at Rs.20-25,000 crores launched in India in the past 10 years, only a
(US$ 4-5 billion) by 2012/13.handful have so far been very successful, namely,
Average Revenue per User (ARPU) for Indian SMS, Caller Ring Back Tones (CRBT), wall mobile telecom operators is one of the lowest at papers, ring tones, off-line games and limited full less than Rs.250 (US$ 5) per user per month, as
track downloads as part of VAS 1.0 under 2/2.5G. compared to US$ 30-60 per user per month in
Other than SMS and CRBT which were served as different developed markets. New additions at an
a service, other applications have not generated ARPU of Rs.100-150 (US$ 2-3) per user per
meaningful revenue for the operators and the month are further reducing the already low ARPU.
service providers, as wall papers, ring tones and
While Indian mobile telecom operators have games were downloaded from Internet and redefined the business model for delivery of shared freely amongst the users. However, the mobile telecom services at the lowest capital as
key success factors for VAS 2.0 in 3G will be very well as operating costs per minute, thereby
different from those for VAS 1.0.achieving 40% EBITDA on their low ARPUs, they
Currently there are only about 20 million users are very close to hitting the bottom in terms their who consume data services through their GPRS cost efficiencies and should now focus on
connection. This is expected to reach 75 millions increasing their ARPU to maintain if not improve
by 2012/13 accessing data through 3G and their profitability in the coming years.
GPRS connections.This increase in ARPU could come either from
I am discussing below some of the key enabling increase in usage pattern of the consumers in
voice markets or from consumption of VAS factors for the success of VAS 2.0:
by
T C MeenakshisundaramOpportunities in
Mobile VAS
space
Opportunities in
Mobile VAS
space
21
3G Roll-out timelines:
Operators’ focus/attitude:
Rich applications:
Revenue share dynamics:
Delivery:
Go-to-Market:
Despite the initial “unlimited” data plans and the mobile payments
infrastructure provides the ability to bill and euphoria and the demonstrated speed, the start
collect from the mobile users directly.date for 3G roll-out by private operators has
shifted from Mar 2010 to Sep 2010, assuming In the past 10
there are no delays to the 3G auction deadline of years, operators were quite busy with new
mid-Jan 2010. This will push the scaling of 3G customer acquisition that has seen the mobile
across category A and B circles to Apr 2011. Any user base crossing 400 million users. This focus
further delays will contribute to additional helped improve cost efficiencies and opex model
cascading with the unviability of the new for core infrastructure to manage the high cost of
operators to sustain their losses.network roll-out as well as complexities
In VAS 2.0 applications for associated with the same. This focus crowded
3G have to be feature rich and utilitarian or out the attention of the business heads towards
entertainment oriented such as Mobile TV*, multi- customer service and VAS as a revenue
player online games, mobile social net working, opportunity with VAS contributing <3% of the
mobile commerce, mobile enterprise total revenues. This is expected to change with
applications etc, with higher level of interactivity. the tapering of consumer growth after crossing
The applications should be easy to download and 500 million users, rapid drop in ARPU in the past 2 use with over-the-air update. years and limited scope to drive cost efficiencies
further, resulting in the operators focusing on *IDG Ventures India is an investor in Apalya additional revenue streams through VAS.Technologies, India’s #1 mobile TV service
provider connecting 8 mobile operators and 70+ A consequence of TV/Video content channels. operators’ apathy towards VAS was lack of their
appreciation of VAS business economics Most of the services will be delivered resulting in keeping a revenue share of 50-70% of on online basis from the Operator / Service VAS revenues, where the VAS providers were Providers’ servers. This will ensure that the treated as vendors to be squeezed instead of as products/services are not commoditized or
partners to help drive additional revenues and threatened by free distribution amongst the
profitability leaving very little to be shared users. Further, these applications will have to
between the VAS content providers/creators and leverage the OS environment to ensure that the
VAS aggregators. In developed markets downloaded applications are locked to the
operators retained between 25-40% of VAS phone/SIM to avoid piracy.
revenues, which led to a vibrant and profitable There is a mutual
VAS providers industry. interdependence between the mobile operators
With the expected focus on VAS revenues, VAS and VAS 2.0 service providers as VAS 2.0
providers will be treated as partners and the applications are expected to drive higher ARPU
operators’ revenue share climbing down to below and profitability while mobile operators need to
50% in the next 2 years, but substantial increase offer data heavy VAS 2.0 applications bundled
in absolute VAS revenues on larger audience. within their data plans to promote consumer
Early signs of this have been seen in VAS 2.0 usage. The VAS 2.0 service providers and content
services where the content and cost of delivering providers will have an opportunity to directly
market their offerings to the consumers only after them is appreciated with operators offering
higher revenue share to the VAS providers.most of the consumers have moved to
Opportunities in Mobile VAS Space
22
Billing:
Location Based Services and Advertising:
Privacy concerns:
VAS 2.0 applications being rich in
features with heavy data usage should have the
ability for tracking, reporting and billing data
usage under different billing plans for a
day/week/month. There should be an option to
bill “snack size” usage to attract the large pool of
pre-paid consumers.
As
the technologies for identification of the mobile
user’s location have become affordable, there
would be opportunities for leveraging this
information to offer new services. Advertising
based on the context of usage including user’s
location will be a new opportunity. However,
advertising is expected to take-off only after
critical mass of “paying users” is achieved.
While the VAS 2.0 will deliver
rich data on the users including their usage
patters, it increases the concern on privacy of
personally identifiable information. Applications
that address this concern adequately including
data security will be very critical for increase in
use of VAS 2.0.
In conclusion, VAS 2.0 to leverage the 3G
networks would change the Indian mobile
industry and bring VAS to the center of the
operators’ strategy for revenue and profitability
growth. Any aspirants to provide VAS services
should keep in mind some of the above points to
make a successful business out of VAS 2.0
opportunities.
Opportunities in Mobile VAS Space
T C Meenakshi Sundaram (TCM) is founding
Managing Director of IDG Ventures India, a
US$150 Million early-stage technology
venture capital fund backed by IDG, the
world’s largest IT-focused media company.
He currently serves on the Board of
Directors at Apalya Technologies, Aujas
Networks and ConnectM.
Previously, TCM spent three years with
Walden International’s India investment
team working on investments in companies
such as Mindtree Consulting, Venture
Infotek, Jobstreet and Webvisions, across a
range of technology sectors.
Prior to joining IDG Ventures India, TCM
served as Chief Financial Officer and
President - Corporate Services at Venture
Infotek, a leading payments processing
company in India. He also worked for
fourteen years with Wipro, India’s leading
global IT services firm.
TCM is a Chartered Accountant by
qualification.
Phone: +91 80 4043 4802
Mobile: +91 99001 81261
Fax: +91 80 4132 9226
Email: [email protected]
About the Author
T C MeenakshisundaramFounder & Managing Director
23
Indian Cable TV subscribers are estimated to competitor on his own turf. It explains why MSOs
with ample PE funds have shied away from have paid approximately Rs. 13,000 crores (USD
2.8 billion) in subscription charges in 2008. Over building a local organization to compete with the
80% of this is estimated to have been pocketed LCO. Instead, most MSOs have tried to co-exist,
by the local cable operator (LCO). The economics in an uneasy marriage with their LCOs. With an
for the average LCO are compelling: increasing number of suitors, LCOs have been
switching from one MSO to another, depending The LCO uses differential pricing to
upon the bait offered. Clearly, the large number of capture 70-80% of TV households in his locality
secondary subs that are claimed by major MSOs (have you ever asked your cook/maid how much
in India are broad estimates and could prove to be she pays for cable-note that she gets the same
ephemeral. A LCO could easily take his network product/service as you)of thousands of subscribers to another MSO,
His subscriber base is a black box – there almost overnight. is no formal record of who his customers are or
The fragmented India cable industry has tried to how many there are. Consequently, take a shortcut to quick profits by large scale programming cost payouts are low; with even acquisition of secondary subscribers and using more upside if multiple MSOs (Multi System carriage fees from broadcasters to subsidize the Operators) are vying for the LCOs loyalty in his losses incurred in their base cable TV business. marketHowever, even in this landscape, there have been
Minimal operating costs due to absence a few islands of excellence. A few operators have of basic customer service features like call taken the tougher road of building their own, centers, bills etc. standards based and fully owned last mile
networks. They have made steady progress Low corporate overheads and a cash towards building professional, corporate business with minimal taxes.structures and are trying to emulate world
Capex is a fraction of what a top quality leaders like Comcast in building a world class network would require with little adherence to customer centric communications company standards or licenses for legal Rights of Way. (Comcast, incidentally, reported EBITDA margins
of 40% in 2008).Good understanding of his local area
coupled with quick service; in many cases ready In this article, we lay out the expectations of TV to resort to muscle power and other unethical
households from their cable (or DTH/satellite) practices to defend his territory.
operator, compare different models being used
to deliver against this expectation, assess cable Needless to say, his P&L would show a very fat operators’ success in actually delivering against profit margin and this explains the presence of an these expectations and showcase a few players estimated 60,000 LCOs in the country. Though
who standout from the crowd on these metrics.derided by everyone, he has proven to be a tough
by
Nithin KaimalCable TV -
The Money's in
the Last Mile.
Cable TV -
The Money's in
the Last Mile.
24
What does the average TV household expect from his cable operator?
As more cable TV households start to own PCs/laptops, high quality broadband services are
A scan of various offerings being made to TV becoming an essential need for such households. households in India reveals the following However, the customer has various options to expectations/needs that a cable operator could choose his broadband service provider, and the fulfill: cable operator’s broadband offering would need
to be competitive to be considered the default In most cases,
choice.customers of the average cable operators have no identity – no customer ID, no bills, and no Cable TV offers receipts. Customer service is rudimentary with no a unique platform for operators to create content easy access to the cable operator’s personnel. tailored for the local population. Low capex/cost
content channels can be created catering to the No distortions, ghosts etc. while
local news, local language music and regional viewing channels he’s paying for. And no
language entertainment space. This not only downtime please.
creates a valuable differentiation versus DTH, but also enables the operator to earn additional advertising income. Digital customers make up
70% of Comcast’s cable TV customers. It may take a while to reach those levels in India; but
The trend towards early there is a clearly a large enough segment of
monetization of movies through alternate customers that value the benefits of digital TV,
mediums holds significant potential for operators and are even willing to pay higher ARPU for this
to enter into revenue sharing arrangements with feature (larger bouquet of channels, EPG, DVR
movie production houses. Similar opportunities facility etc.).
exist with education.
The customer needs more than cable TV:
Basic customer service:
Customers love local content:
Quality signals:
The customer needs more than plain vanilla analog cable TV:
Customers will pay for valuable value added services (VAS):
Cable TV: The Money's in the Last Mile
25
Who is best positioned to deliver against
these expectations?
Cable may be best ‘positioned’, but what
does it take for cable operators to ‘deliver’
against customer expectations?
a digital one capable of offering triple play:
Operators need to invest in quality equipment for
the head-end, network infrastructure all the way A comparison of the various business models to the customer’s premises, software for shows that cable operators with last mile
CRM/billing, capex for content creation, EPG etcownership are best positioned to deliver against
the chart below (Exhibit 1) Recruitment of trained and qualified
personnel (technical, managerial and However, converting the theoretical superiority of
administrative)the last mile cable model to a valuable customer
proposition is not easy to deliver.Creating a customer centric mindset
across the organization: All functions –
technology, maintenance, sales, operations etc.
– need to be trained to think from the customer’s
point of view and KPIs need to be framed
accordinglyAny operator who can deliver on the above is well
poised to deliver a compelling proposition for his Visionary and ambitious promoters / customers, thereby generating significant loyalty
entrepreneurs and investors who are prepared to and robust revenues and profitability as a reward.
think longer termHowever, delivering this would require:
Clearly, these have proved to be a steep ask from Ability (and willingness) to commit capital
to transition from a low quality analog network to most cable operators in India.
CustomerService
Digital TV
Broadband
Local Content
VAS
Direct Control overSubscriber
Cable-Last Mile
Direct Control overNetwork Quality
Able to providecable and
broadband on a single cable
Easy to aggregate andprovide local content
Return path exists
Direct Control overSubscriber
DTH
However, can bundlewith parallel
broadband rollout
Therotically possible,but economically
feasibility not clear
Complicated, need touse mobile / internet
for return path.
Difficult for MSOs tocontrol LCOs
Cable-Franchise
No control over LCOnetwork quality
Rollout easy, butconflict of interestmay exist between
MSO and LCO
Most LCO networksnot broadbandready. Need torollout parallel
network.
Can't use LCOnetwork for return
path
- Poor - Mediocre - Excellent
Exhibit 1: Comparison of alternate business models to delivercontent to TV homes
Signal Quality
Cable TV: The Money's in the Last Mile
26
Why haven’t most cable operators delivered
against customer expectations?
Will last mile have the last laugh?
Who are the exceptions and what can other
players learn from them?
last mile presence in over 15 locations by
adhering to the above design principles. Despite
the enormous challenges associated with Unfortunately for cable TV customers, most
entering new markets with the ‘last mile’ business LCOs are sub-scale and operate in near
model , the Company has stuck to its game plan monopoly situations. They never felt the need to
and used its superior value proposition to invest substantial capital and deliver a superior
customers to secure market share in these proposition to the customers (existing cash
locations. This business model has translated inflows were rich enough).
into healthy margins, short working capital cycle
and low customer churn, thereby providing rapid All national players in the cable industry (Master
MSOs or MMSOs) have chosen the (relatively) payback of capital deployed.easy way out and pursued a strategy of acquiring
or taking significant stakes in numerous
State/District level MSOs. MSOs have got sweet While DTH has gained subscribers on the back of deals as part of this race to acquire such stakes. oceans of red ink, it has demonstrated that the The battle between MSOs for LCO loyalty has Indian customer is looking for a high quality, value also resulted in ‘happy days’ for the LCOs – with
added cable service. The technological MSOs offering significant rebates on the amounts
advantages that the “last mile fat pipe” cable due from LCOs. In the meanwhile, MMSOs used
model provides over DTH is well established in carriage/placement fees from broadcasters to
several developed markets around the world. keep their ship afloat. In pursuit of immediate
Similarly, the performance of Asianet, Ortel and valuations, the customer (and thereby the more
other niche players who have stuck to the ‘last difficult though profitable route of ‘last mile
mile ownership’ model in cable is ample evidence ownership’) took a back seat.
of the economic attractiveness of this model on
the back of customer and supplier (broadcaster) The advent of DTH has, however, changed the
rules of the game. By providing high quality satisfaction and goodwill. The next step is for signals, variety of bouquets tailored to meet these companies to roll out multiple services like different segments, reasonable pricing, exclusive digital TV, broadband and VAS which fully utilize content (education channels) and value added their control of their customer’s homes and the services (movie on demand, temple darshan) lower cost and higher bandwidth that is available along with the trust associated with a national to them. brand, they have been able to wean away 15
The slowdown over the past 18 months is a million cable subscribers over to their side.warning to MMSOs about the ephemeral nature
of carriage fees. They have made progress in
deploying digital STBs in parts of their network
(albeit at no incremental ARPU). They are also While there are no national players who have likely to use part of the funds being raised through bothered with the ‘last mile ownership’ model, IPO/private placements to aggressively acquire select regional operators have been successful in LCOs across their network. MMSOs need to rolling out many elements of the above package, move rapidly to first match the product/service albeit in limited geographies. Asianet and Ortel offering provided by DTH and then upstage them are two examples of such players who have built by milking the benefits of the ‘fat pipe’ entering high quality networks that provide fat pipes to the customer’s premise. their customer homes and control all elements of
their service offering, end to end. There is no doubt that ‘last mile’ will have the last
laugh – the actions of the cable industry will Ortel Communications (a portfolio company of
decide whether the cable or DTH players will NSR) has successfully made the transition from a
laugh louder.single location LCO to an operator with a strong
Cable TV: The Money's in the Last Mile
27
Cable TV: The Money's in the Last Mile
Nithin has been with New Silk Route Advisors for close to two years and focuses on private equity opportunities in the Indian sub-continent out of the Mumbai office. He looks at investment opportunities in the consumer services, financial services and infrastructure verticals and is part of the Ortel deal team.
Nithin was previously an Engagement Manager with McKinsey & Company, Mumbai. During his tenure of five years, he served clients across several industries including infrastructure, oil & gas, power, media, metals & mining, telecom, automotive and food products. Before joining McKinsey, Nithin completed his MBA from the Indian Institute of Management (IIM), Calcutta. Nithin is also a qualified Chartered Accountant from the Institute of Chartered Accountants of India and a Bachelor of Commerce from Mumbai University.
Office: +91 22 6618 0953
Email: [email protected]
About the Author
Nithin KaimalSenior AssociateNew Silk Route Advisors
28
Cable TV penetration in India is growing
rapidly; however, cable service providers
are not able to leverage its full potential due
to business model and other operational
constraints
Alternate solutions for both digital TV and
broadband services have started gaining
traction and thus are becoming a threat for
cable service providers in retaining their
subscribers and in leveraging their
infrastructure for broadband services
implemented; also high Capex requirements do
not make viable business case for LCOs to invest
independently. For MSOs, it does not make a
viable business case if LCOs continue to under-
report the subscribers.
All these constraints have resulted in loss of Cable TV has attained a fairly high penetration in existing cable TV subscribers to other India, with 86 mn households, representing 64% technologies such as DTH, particularly for those of all TV households. Leveraging high penetration customers who are quality conscious.and ownership of last mile connectivity, cable
industry players are well positioned to offer both
digital TV as well as broadband services.
However, these service offerings have been
constrained due to multiple business model and
operational issues existing in the value chain.
The primary challenge in the cable industry is
under-reporting of subscribers by LCOs. The With TRAI mandating implementation of CAS cable TV distribution in India is highly fragmented (Conditional Access System) in some parts of and unorganized. Currently, 15+ Broadcasters, 7 metro cities and major telecom service providers large MSOs and 60,000 LCOs under 7,000 head- launching DTH services, digital TV penetration in ends service around 86 mn households. The India has reached 19% in 2009. Though LCOs, who control the last mile up to consumers' implementation of CAS remained limited due to homes, enjoy virtual monopoly in most regions. subscribers reporting issues between LCOs and This results in under-reporting (estimated at 80% MSOs, DTH has started gaining traction with ~0.7 levels) of subscribers by LCOs and uneven mn households added per month in 2009 as revenue distribution between LCOs (83%), MSOs compared to ~0.3 mn households added per (13%) and Broadcasters (4%). month in early 2008.
Moreover, there exist issues related to insufficient In the broadband market, EvDO based data cards network infrastructure and lack of financing launched by Reliance Communications and Tata models to enable network upgradation. Existing Teleservices have started gaining traction. infrastructure owned by LCOs does not support Though the current installed base remains low, high bandwidth services (such as digital TV & launch of 3G in early 2010 will drive their
broadband) and both LCOs & MSOs are not penetration significantly. Given this growth trend
willing to commit the required investments. For of wireless broadband and existing wireline
LCOs, it results in loss of revenue share because broadband, if cable service providers do not act
soon enough, it would be difficult for them to get of the inability to modify actual subscriber
significant market share in broadband services.reporting once a conditional access system is
Development of Indian Cable Industry - Potential for Growth via Consolidation and Triple Play
by
Kunal BajajDevelopment of Indian Cable Industry - Potential for Growth via Consolidation and Triple Play
29
Development of Indian Cable Industry - Potential for Growth via Consolidation and Triple Play
In addition, converged service offerings such as subscriber share, cable service providers can
bundle other premium services such as high IPTV, providing voice, data and broadband over
speed internet and voice along with their existing single connection, have also been introduced by
cable TV offering. Offering premium services not telcos such as Bharti and BSNL. Though current
only enables service providers to increase their adoption remains low because of limited reach
revenue, but also helps in retaining existing and unavailability of sufficient infrastructure, it is
customers. Also, cable service providers have the likely to gain traction especially among high
income households. Thus, if the legacy cable advantage of an existing customer base of 70 mn
technology and operating models continue, cable households (81% of overall cable TV households)
service providers are expected to lose market and established last mile connectivity which they
opportunity for both digital TV as well as can leverage to compete with other triple play
broadband services. service providers such as telcos.
A similar strategy has been adopted by players
internationally such as Comcast and Time Warner
Cable in the US to compete against DTH
providers such as DirecTV and telcos such as
Verizon. Offering triple play services in 2006,
Comcast increased its annual subscriber net The Indian cable TV distribution space is likely to
additions from 2.64 mn to 4.94 mn. Also, its cable witness steady growth in digital TV penetration.
video ARPU increased by 32% due to adoption of With consumers wanting to shift and services like
premium services such as video on demand DTH and IPTV becoming readily available, the
(Exhibit 1).LCOs have no other option but to move to digital
cable even though it results in increased However, the existing cable network
subscriber declaration and lower revenue share infrastructure in India cannot support such high
for them. end services. Both backend infrastructures with
MSOs as well as last mile network with LCOs Rather than upgrading their analog based cable
need to be upgraded before the network is ready system to only digital TV and competing head on
for such offerings.with satellite and other cable companies for
Going forward, bundling broadband and
voice with digital TV can be a potential
service offering for cable service providers
to retain their subscriber base and increase
their revenues
2003 2004 2005 2006 2007
2.52 2.67 2.64
4.94
6.50mn
Source: Analyst Reports, Company Website
Chart 1.1
2003 2004 2005 2006 2007
4750 53
5862
USD
Chart 1.2
Exhibit 1: Comcast’s Revenue Generating Units Net Additions (mn) (Chart 1.1) and Cable Video ARPU (USD) (Chart 1.2)
30
Cable services providers can select from
multiple technology solutions to upgrade
their network to support triple play services.
The business case for each technology
option depends upon the size of its
addressable market and the Capex
requirement
cable connection extending to the home.
Depending on the way the last mile connectivity is
offered, several technology options are available:
FTTH (Fiber-to-the-Home), FTTB (Fiber-to-the-
Building), FTTN (Fiber-to-the-Node) and HFC
(Hybrid Fiber Coax) (Exhibit 2). Adoption of a
There exist two models for MSOs / LCOs to offer technology option will depend upon the required
triple play services. In the first model (Pure Play investment in rollout and the size of addressable
Service Model), all three services (voice, data and subscriber base.
video) are offered through a single dedicated
network. While in the second model (Hybrid Capex per
Service Model), the cable TV connection is subscriber in FTTH technology is as high as USD
integrated with a broadband connection to 2,500 as fiber is laid until the consumer access provide interactive on-demand services, voice &
point and the roll out time is long due to delays in data.
getting municipal clearances for activities such as
trenching and digging. Thus building a business In a pure play service
model, both Digital TV and VoD services are case will require high ARPU customers and a
delivered using internet protocol over the fiber / dense urban rollout in premium localities (Exhibit 3).
FTTH (Fiber-to-the-Home):
Pure Play Service Model:
Source: BDA Analysis
Exhibit 2: Technology Architecture for Pure Play Service Models
Development of Indian Cable Industry - Potential for Growth via Consolidation and Triple Play
MPLSRouter
Existing Core Network
MultiplayBRAS
OLT System
RPR L2 SwitchSwitch Gateway1:5 Aggregator
Passive Optical Network (PON)Optical Distribution Network (ODN)
(Splitters can be colocated or distributed)
1:4 1:8 ONU / ONT
CAT5 cableLast Mile NetworkMAN
Main Activities Main Activities
Digging ManholesDucting - Horizontaldirectional drilling (HDD)Blowing & SplicingBitumen and WBM cuttingReinstatement (HDD)
Digging & Ducting (Opentrench)Reinstatement (Opentrench)
30 - 40 Man-Days per km10 - 15 Man-Days per km
Official Clearance3-12 months
Official Clearance3-12 months
Capex / Sub (USD)
FTTH ~2,500
~1,400FTTB
~800-2,200FTTN
~200-900HFC
Access Sub network HomeNetwork
ServiceSub-network
Legend - Fiber - CATS
1. Official clearance time is in addition to deployment time, and can be done simultaneously for both network segments.
31
FTTB (Fiber-to-the-Building): HFC (Hybrid Fiber Coaxial):
Hybrid Service Model:
FTTN (Fiber-to-the-Node):
Capex per Capex per
subscriber in FTTB technology is ~USD 1,400, subscriber in HFC technology for fiber rollout and
lower than FTTH because fiber is laid until the other upgradation at both the MSOs and LCOs
building or complex and ethernet cable is used to ends is ~USD 900 for underground rollout of last
provide connectivity to individual houses. Also, mile coax. However, aerial rollout of coax reduces
FTTB rollout is not as time intensive as FTTH Capex per subscriber to ~USD 200, thus allowing
rollout, as digging within residential colonies is quick rollout for a large user base of existing cable
not required. However, addressable market for TV users. The last hop in case of HFC rollout is
FTTB also remains restricted due to limited also in range of 0 – 5 Km from consumer premise
building clusters in India outside cities such as (Exhibit 3).
Mumbai (Exhibit 3).In the hybrid service
model, cable TV is broadcast via analog cable or Capex per
subscriber in FTTN technology ranges from USD satellite (DTH). Delivery of other interactive triple
800 to USD 2,200 depending on the reach of the play services (voice, video and internet) is done
last hop and requirement of copper deployment. through a separate broadband connection. On-
Also, distance of last hop from consumer premise demand services requiring high bandwidth such
and the quality of copper determines the as Video on Demand are offered either by
throughput on the network. The closer the last preloading the content on a subscriber's digital
hop is to the end consumer premise, the better is video recorder for access when requested or
the throughput. The last hop in case of FTTN is in through on-demand stream & buffer in which the
the range of 0 – 5 Km from customer premise subscriber can begin to view the content when a
(Exhibit 3). sufficient amount has been buffered.
Technology SummaryCapacity(Mbps)
Time toRollout
Capex perSub
ExpectedARPU
OperationalIssues
AddressableMarket
FTTH
FTTB
FTTN
HFC
Favorability of Parameter: Very High High Medium Low Very Low
Exhibit 3: Comparison of Multiple Delivery Options for Pure Play Service Model
Source: BDA Analysis
Development of Indian Cable Industry - Potential for Growth via Consolidation and Triple Play
32
Interactive HITS + DOCSIS:
DTH / Unidirectional Cable + Broadband:
Capex per subscriber declaration restrict its adoption by
subscriber in HITS rollout is ~USD 144. Under LCOs. Also, delivery of services varies with the
HITS technology, LCOs access digital TV through type and quality of broadband connectivity. DSL
HITS platform and connect to an ISP gateway for or WiMAX connectivity is required for offering
voice and data and then offer triple play services bandwidth intensive services such as Video on
through a single coaxial cable extended to Demand and Video conferencing; 3G can only
individual home (Exhibit 4). support light data applications such as browsing
and simple interactive gaming.
Capex per subscriber in this technology will
depend upon the type of broadband connection.
Capex for xDSL ranges from USD 40 to USD 80
depending upon the loop length and copper Among all the pure play models, HFC has the best
quality, while for WiMAX and 3G connection, it is business case based on required investment,
greater than ~USD 200 and ~USD 370 rollout time and size of addressable market in
respectively (assuming 500,000 subscribers per India. Adoption of FTTx technologies is
city, bandwidth allotment of 10 Mbps per sub and constrained because of high Capex, limited
contention ratio 1/10) (Exhibit 4).addressable base and other operational issues.
Also, demand for hybrid service models will Though hybrid service models require less Capex
remain restricted because of limited adoption of as compared to pure play service models,
3G, WiMAX and DSL technology and limited constraints in delivery of wide range of services
including Time Shift TV and the requirement of service offerings on these networks.
Among all technology options, HFC rollout
has the best business case and market
opportunity for MSOs and LCOs in India
Exhibit 4: Comparison of Multiple Delivery Options for Hybrid Service Model
Source: BDA Analysis
Development of Indian Cable Industry - Potential for Growth via Consolidation and Triple Play
High Level Architecture Services Supported Deployment(Example)
InteractiveHITS + DOCSIS
Coax
ISP
HITSOperator
LCO
Over digital coax- Digital TV (SDTV & HDTV)- Video on demand- VAS
AT&T (USA)
WSNet (USA)
DTH + BB
DTHOperator
ISPDSL / 3G /WiMAX
Over DTH- Digital TV (SDTV & HDTV)
Over Broadband connection- Video on demand- VAS
Direc TV (USA)
Sky Brazil
UnidirectionalCable + BB
CoaxLCO
Over analog cable- Analog TV
Over broadband connection- Video on demand- VAS
ISP
CoaxMSO
33
HFC rollout will require investments by all players short term due to decreased share in revenue,
across the value chain for it to succeed (Exhibit 5). but, over the long term, it increases the net
Carriers need to invest to upgrade their existing revenue to LCOs due to the increased ARPU
infrastructure to scale up the network capacity associated with bi-directional interactivity
and link to MSOs / LCOs, MSOs need to upgrade available on digital cable. Possible investment
to digital headends, and LCOs need to upgrade scenarios include
their existing co-axial cable network to support In this
interactive services. Finally at the consumer end, scenario, LCOs and small MSOs consolidate
investments will be required for home wiring and under one MSO and the larger MSO will invest in
set-top-boxes.upgrading the network infrastructure to offer
digital TV. The scale achieved through
consolidation will lower the required investment
per subscriber for large MSO, the actual
subscriber declaration by LCOs and higher ARPU
will increase the revenue, thus making a viable Rolling out an HFC network can have multiple
business case. Developed markets such as US investment scenarios depending upon the LCOs’
witnessed such consolidation when Comcast willingness to invest. The LCOs have option to
acquired AT&T Broadband and other cable invest independently or consolidate under MSOs
operators in 2002. In India, small scale / telecom operators. However, having only a
consolidation has started recently with MSOs limited number of cable subscribers per LCO
such as DEN and WWIL partnering with smaller increases the Capex per subscriber for an LCO to
MSOs / LCOs and installing digital STBs for both invest independently. Partnership with MSOs or
telecom operators results in revenues loss in the analog and digital TV services.
LCOs can either invest independently for
HFC network deployment or partner with
telcos or MSOs in which case, the latter will
make the required investment.
Consolidation among LCOs and MSOs:
Exhibit 5: Business Case Components for a HFC Network Deployment
Source: BDA Analysis
Development of Indian Cable Industry - Potential for Growth via Consolidation and Triple Play
OpticalNode
HFC
OFC
From Broadcasters'Satellites
OFC
Voice
Internet
DigitalHeadend
STB
Network Vendor
RevenueElements
OpexElements
CapexElements
Revenue share to MSOfor broadcasr content
Revenue share toNetwork Vendor
Revenue share to carrierfor voice and data
Revenue share toNetwork Vendor
Revenue Share to LCO
Revenue share toNetwork Vendor
Voice revenueBroadband RevenueVideo SubscriptionInteractive services (eg.movies on demand)PVR Subscription
Home wiring
Network maintenanceSales and distributionCustomer careMarketing
Network maintenanceContent charges
Network maintenanceBilling
Customer acquisition(STB)STB installationMaintenance
Scaling up the networkcapacity
Up-gradation ofbackhaul and headendto digital / opticalsystems
Up-gradation of coaxialcable network to HFC tosupport interactiveservices
CarrierGateway
34
However, there exist certain challenges for MSOs developed markets. This can be built out by a to supplement their digital TV offering with voice large MSO or a consortium of MSOs who can and high-speed internet. MSOs will have to either aggregate multiple LCOs under their fold and obtain UASL and ISP licenses to offer voice and make the required investments in the back-end broadband or adopt a similar strategy of network. Consolidation of LCOs under telcos partnering with small players offering these may not be feasible given that the LCOs will not services. be inclined to let telcos ‘own’ their customers and
potentially bypass them in the future.
In this scenario, telecom operators Irrespective of which business model option partner with multiple LCOs to offer triple play becomes mainstream, the cable industry is services and incur the required investment. In expected to look significantly different from its India, BSNL / MTNL and Bharti Airtel offer IPTV current state in the next few years and could services, however, the reach is limited to only few become a formidable competitor to telcos for parts of Metros and Tier 1 cities. The partnership providing broadband and triple play offerings in will add last mile connectivity to the operators’ India.existing backend infrastructure thus enabling them to rollout their IPTV services faster and with a marginal upgrade to the cable network. Telecom operators can leverage their existing back end, core and edge network infrastructure in offering triple play services. However, lack of existing relationships with LCOs remains a key challenge for telecom operators to compete against MSOs.
In this scenario, LCOs make the investment. Though this option allows LCOs to directly compete with DTH and digital TV offered by telecom operators and MSOs without compromising on their current margins, limitations of scale increases the Capex per subscriber thus making the business case unviable especially for low ARPU customers. Also, similar to MSOs, LCOs will require UASL and ISP licenses to supplement their digital TV offering with voice and broadband, further increasing the required investment.
Given the constraints of high Capex requirements and limited subscriber base per LCO, the business case for LCOs making investments on their own to upgrade their network is not viable. Consolidation among LCOs and MSOs offers a viable business case - however, for offering triple play, UAS license and provision of toll quality voice-over-IP will be required, as in other
Consolidation of LCOs under telecom operator:
Independent investment by LCOs:
Similar to other developed countries, consolidation is expected to drive the future growth of India cable industry as business case of independent LCO operation is not viable in the long term.
Development of Indian Cable Industry - Potential for Growth via Consolidation and Triple Play
About the Author
Kunal BajajManaging Director
Kunal Bajaj is Managing Director at BDA and leads BDA’s India operations. BDA is a strategy consulting and investment advisory firm based in New Delhi and Beijing, with primary focus on the Telecom, Media and Technology sectors. Prior to BDA, Kunal has advised on projects in India for TRAI, the World Bank, multi-national companies, venture organizations and start-up companies. Projects included consulting on spectrum management policy, rural telecom development, wireless broadband technologies, telecom infrastructure and investment advisory. Since launching BDA in India, he has advised a variety of global organizations in the TMT and investment industries on their core India strategies. He also has prior experience as an entrepreneur in the telecom and internet space in India and US. He is currently also the founding Co-Chair for the Mobile Marketing Association’s India Council.
Tel: +91-11-4700-3100E-Mail: [email protected]
35
Sector Overview:
Regulatory framework:
The Telecom Regulatory Authority of India
(TRAI):
The Telecommunication The Wireless Planning and Coordination Wing of
Sector in India has witnessed unprecedented the DOT deals with the policy for spectrum
growth in the past two decades owing to the management, wireless licensing, frequency
reform oriented policies of the Government. assignments, international coordination for
Currently India is well poised as the second spectrum management and administration of largest wireless network and third largest telecom Indian Telegraph Act 1885, for radio network (wireless and wire-line collectively)
communication systems and Indian Wireless globally. (Source: DOT Annual Report 2008-09).
Telegraphy Act 1933.
The Telecom Sector is Monitoring, vigilance and security is coordinated
governed by the Ministry of Communications and and administered through the Telecom
Information Technology (“MCI”). The most Enforcement, Resources & Monitoring (TERM)
significant and authoritative body of the MCI is Cells which function as the subordinate offices of
the Department of Telecommunications (DOT) the DOT. These Cells play a significant role in
which is responsible inter-alia for policy verification and authentication of mobile formulation, licenses and regulation of wireless spectrum related data which is important in the transmission and enforcement of telecom laws in
currently prevailing ‘subscriber based’ systems India. The role of DOT has been strictly that of a
for spectrum allocation i.e. allocation being regulator post divestment of its telecom services
dependent upon the number of subscriber a business into BSNL. DOT functions through
service provider records.various units including the Wireless Planning and
Coordination Wing, the Telecom Engineering
Centre, TERM, etc. TRAI is an independent regulatory body
set-up in 1997 under the Telecom Regulatory
Authority of India Act, 1997. DOT seeks
consultation of TRAI on various licensing issues
and policy formulation though TRAI’s
recommendations are non-binding in nature.
TRAI has been instrumental in most of the
telecom policy decisions including inter-alia
spectrum allocation and pricing, internet
telephony, unified licensing system, inter-
connections chargeability.
Ministry of Communication & IT
TelecomEnforcement, Resource and
MonitoringCells
TelecomEngineering
Centre
WirelessPlanning andCoordination
Wing
Public SectorUnits (BSNL,
MTNL, ITI Ltd.)
Department of Telecommunication
Legal and
Regulatory Challenges
facing the
Telecom Sector
in India
by
Rajesh Begur
Legal and
Regulatory Challenges
facing the
Telecom Sector
in India
36
Telecom Disputes Settlement & Appellate
Tribunal (“TDSAT”):
Types of licensing:
FDI Policy in Telecom Sector:
Annual Report 2008-09) notwithstanding the
recessionary trend faced by the economies Gauging the need for an
independent dispute resolution body, the judicial globally.
authority of TRAI has been divested to TDSAT However owing to the sensitivity of the sector, a
which adjudicates on disputes related to the foreign investor still requires prior FIPB consent
telecom sector essentially between the for acquiring majority control (>49%) in Indian
regulators, the services providers and telecom company other than telecom equipment
consumers. manufacturing entities. Under the said FDI laws,
Historically, the National foreign investments upto 49% is permissible
Telecom Policy, 1994 marked the beginning of under the ‘automatic route’ and beyond that and
the policy initiative on modernisation and upto 74% under the ‘approval route’ for telecom
privatisation of telecom services in the country services (i.e. Basic, Cellular, Unified Access
and the trend continues under the current Services, NLD/ILD, V-Sat, PMRTS, GMPCS and
National Telecom Policy 1999 (NTP 99). NTP 99 other value added Services) and for ISPs (with
specified various types of licenses which could gateways).
be issued to telecom service providers. NTP 99 FDI in Infrastructure Provider Category – I (IP-I)
was further revised in 2003 for categorising and ISPs (without gateways) is permissible upto
licenses under the head (1) Licenses for Unified 100% with FIPB approval however with a caveat
Access (Basic & Cellular) Services; and (2) for public divestment of 26% over a period of 5
License for Unified Telecom Services as depicted years in case the investor is listed on an overseas
in the adjacent table.exchange. DOT has discontinued licensing of
Infrastructure Provider – II Category (IP-II) of
licensing with effect from December 2005 and the
services provider under this category have been
subsumed into ILD/NLD licensing category as the
case may be.
Telecom sector always mandated that
investments even from alternative avenues
(portfolio investments, FCCBs, ADRs, GDRs,
With the advent of unified licensing system, no convertible preference shares) would be included
for calculating FDI into a telecom company. separate cellular and basic service licenses are
being awarded now by DOT. However, with the advent of the much debated
Press Note 2 (2009 Series) in February 2009, Telecom Sector indirect FDI on proportionate basis through has been one of the busiest sectors for strategic Indian promoters/investing companies has been FDI into the country. This is quite evident from the made redundant though it is unclear if fact that the sector has magnetized around INR consequential changes have also been 273,000 Million of FDI since August 1991 to inculcated in the licensing agreements required August 2008 with INR 14,568 Million itself coming to be entered into by telecom service providers in the period of April to August 2008 (source DOT with the Government.
Types of Licences
Unified AccessService Providers
Unified TelecomService providers
(All types oftelecom services)
Fixed Line ServiceProviders
Cellular MobileService Providers
Cable ServiceProviders
Legal and Regulatory Challenges facing the Telecom Sector in India
37
The recent changes in FDI laws also allows Telenor’s operations in not so friendly
indirect foreign equity participation in neighboring countries of India.
downstream Indian companies (without any The M&A market
sectoral caps) in the event the foreign investor for the telecom sector of India has been a volatile
holds less than majority stake/management market in the recent years. With the advent of
control in the holding company. This has opened global players in the Indian market and cross
up the back door entry route for FDI in telecom border acquisition by Indian telecom players, the
sector in downstream Indian companies. market seems to be well poised as a global
Depending upon the regulators' view point on leader. After China, India is the second fastest
this, the loop hole can be plugged by the telecom growing global telecom market. Yet, lack of full
authorities reiterating the earlier framework which exploitation of rural market leaves potential for
took into account indirect FDI on a proportionate further unprecedented growth.
basis. The leeway provided by the aforesaid On the regulatory front, the DOT has on April 22, changes in the FDI laws permits various 2009 issued revised guidelines on intra-service shareholding related structuring options to area mergers for service providers. Under the promoters and foreign investors of Telecom current M&A guidelines, other than pre-clearance companies and it needs to be seen if the from DOT, it is also important that mergers should regulators would raise a concern on indirect not result in a licensee acquiring more than 10% ownership of non-resident entities in the telecom shares (substantial equity) in another licensee sector companies. entity in the same circle. Some of other features
Apart from the above, it is also important to note that are key drivers for M&A transactions are: (1)
that the FDI laws mandate that the board of Indian Permissions for mergers are granted only after
telecom companies needs to be Indian controlled completion of three years from the date of issue of
with the Chief Security Officer and Chief Officer license. (2) market share (both subscriber based
(Network operations) also being resident Indian and revenue based) of the combined entity not to
citizens. Notably such security conditions are exceed 40% on the market share in the circle. (3)
applicable to all licensee companies irrespective merger should not result in the number of service
of the FDI level though it needs to be seen the providers falling below four in a circle. (4) the
extent to which such conditions are adhered to by combined entity to meet with the spectrum
companies seeking indirect FDI as explained allocation criteria within 3 months of approval or
above.else surrender the excess spectrum.
Applications made to FIPB for approval to invest
in telecom companies and/or appointment of
foreign nationals as key officials
(MD/CFO/Chairman/CEO) would also be subject
to prior clearance of the Ministry of Home Affairs.
This leads to timeline issues for FDI investments
into the country as was evident in the recently
approved Telenor investment in the joint venture
with Unitech. The MHA took time to grant its
approval as it had security concerns owing to
Merger and Amalgamations:
Legal and Regulatory Challenges facing the Telecom Sector in India
38
Apart from the telecom laws, M&A transactions spectrum allocation, reserve price and the
would also be required to meet the requirements number of circles to be auctioned, the new
of Competition Act, 2002, which has been timelines for auction have now been released on partially notified. The Competition Act is likely to
September 11, 2009 setting a fresh timeline for have significant impact on cross border
release of information memorandum by transaction given the size of transactions ($11.1
September 29, 2009. Reserve price, on which the billion for Hutch-Vodafone and $23 billion for
Ministries of Finance and Telecom had locked Bharti-MTN) in the telecom sector and the parties
would have to factor in the additional time horns, has finally been decided by the Group of
required (if the Competition Act provisions were Ministers recently and the price has been set as to apply) for clearances from the Competition
INR 3,500 crores for pan India 3G license and INR Commission, constituted under the Competition
1,750 crores for WiMax license. (Source: Act.
Business Line date August 28, 2009). If Another key legislation in the M&A sphere to
newspaper reports were to be believed, the watch out for would be the SEBI Takeover Code
telecom ministry believes that the auctions could that mandates an acquirer to make an open offer
draw around Rs 25,000 crores for the exchequer. to acquire minimum public shareholding prior to
the acquirer acquiring more than 15% stake in a In the first phase of the 3G auction, a maximum of
listed company. This assumes importance in light five licenses in each of 22 telecom areas is
of the called-off Bharti-MTN transaction that proposed to be auctioned apart from one slot
earlier received SEBI’s blessing that the Takeover
reserved for BSNL and MTNL. Similar auction Code would not be triggered on issuance of ADR/
GDRs. However, SEBI subsequently plugged the process is also being following for Wimax. It
loophole by revising the Takeover Code bringing seems that the criticism of ‘subscriber based’
the ADRs/GDRs under its ambit. systems for spectrum allocation from various
quarters, has forced the regulators to follow the
auction based mechanism for 3G and WiMax In technical terms,
3G (or 3rd Generation), is a mobile rollout.
telecommunications standard which offers users Experts believe that the WiMax rollout would help
a wider range of more advanced services with India to become the key market in the next five improved spectral efficiency. Whereas WiMax,
years. Such anticipation and also participation by (Worldwide Interoperability for Microwave
Access), provides wireless transmission of data foreign players in the bidding process is likely to
through various transmission modes, from point- make the 3G and WiMax to-multipoint links to portable and fully mobile
market highly competitive internet access.
for the local players.The DoT initially released guidelines for both the
3G and WiMax spectrum license auctions in
August 2008. After several postponements owing
to the ongoing inter-ministerial disputes on
Recent initiatives
3G & WiMax rollout:
Legal and Regulatory Challenges facing the Telecom Sector in India
39
Challenges faced by the telecom sector:
Mobile Number Portability (MNP):
Export Promotion Council:
Spectrum Allocation:
IPTV licensing:
Rural reach:
The resources for implementation of USO are
MNP allows the mobile subscribers to retain the raised through a Universal Service Levy (USL),
existing mobile telephone number but switching which is 5% of the Adjusted Gross Revenue
to other service provider, irrespective of (AGR) of all Telecom Service Providers.
technology, in a licensed service area. DOT has in
Notwithstanding the customer anxiety towards consultation with Ministry of Commerce set up
such developments, the implementation the Telecom Equipment & Services Export schedule has been delayed to December 31, Promotion Council (TEPC) in November 2008. 2009 owing primarily due to technicalities in
TEPC is meant to provide necessary support to customization and up-gradation of existing
the telecom equipment manufacturing and network. MNP has already been implemented by
services sectors for promoting exports.more than 50 countries globally. Introduction of
MNP in the Indian market is expect to help
increasing competition between the service Spectrum providers and acts as a catalyst for the service
management and allocation is based on the providers to improve their quality of service.
National Frequency Allocation Plan formulated The Ministry of
and monitored by the Standing Advisory Information & Broadcasting in September 2008
Committee on Radio Frequency Allocation issued guidelines for IPTV services in India. Under (SACFA), a high power committee of all major the said guidelines, Telecom service providers,
wireless user ministries. Further, in terms of ISPs or other telecom service providers
telecom penetration, India has been able to authorized by DOT have been permitted to
achieve a tele-density of 36.98% in March 2009 provide IPTV services. For providing such
as compared to 26.22% in March 2008 and as services, the telecom licensees will be required to
comply with the applicable guidelines issued by low as 0.8% in 1994 thanks to aggressive pricing
DOT as well as the Ministry of Information & by telecom service providers. However, this has
Broadcasting. also resulted in the telecom sector facing huge
concerns on ‘spectrum allocation’.Rural telephony and
accessibility of telephones to remote areas was Amongst other reasons, the efficiency of one of the benchmark set in NTP, 99. Under
spectrum usage by different technologies (GSM Bharat Nirman (program formulated for rural
vs. CDMA) aggravates the spectrum allocation reach), a target of providing Village Public
issue. The major bone of contention was that Telephones (VPTs) in 66, 822 uncovered villages
CDMA, being more efficient technology in was visualized. Out of this, 57, 181 VPTs have
spectrum usage, should not be treated at the been provided till March 2009 alongwith a tele-
same footing with GSM in ‘subscriber based’ density of 15.11%. (Source: DOT Annual Report systems for spectrum allocation which is 2008-09). Also, keeping in line with the NTP, 99,
currently prevalent. The GSM players also Universal Service Obligation (USO) Fund has
disputed the policy of technology neutrality been set up w.e.f. June 1, 2002 for the purpose of
permitting CDMA based service providers to also implementation of Universal Service Support
Policy aimed at funding non-viable sector reach. provide GSM services.
Legal and Regulatory Challenges facing the Telecom Sector in India
40
However, such disputes have been put to rest by
TDSAT in its judgements including the recent Based on the TRAI recommendations in
2007, the DOT had amended the licensing judgment in March, 2009 (COAI & Ors. v. UOI &
conditions thereby removing restriction on Ors), wherein the Tribunal upheld the technology
number of service providers in a service area. neutral system on the premise that the NTP 99
However the ‘no cap’ policy has once again come has already envisioned this for the telecom
under scrutiny by the telecom regulator, thanks to sector. In the judgement, TDSAT also
the ‘spectrum scarcity’ and consequential reprimanded TRAI and DoT for implementing the
observations made by TDSAT judgement (supra). ‘subscriber based’ systems for spectrum
In its judgement, TDSAT has questioned the allocation in a non transparent manner which
sanctity of ‘no cap’ policy given the ‘spectrum seemed to be biased towards CDMA service scarcity’ issue and comfortable number of providers transgressing to unified licensing players available in each circle. system.
DOT has on July 22, 2009 sought TRAI’s
recommendation in view of the judgement and at There have been multiple this stage has been advised by TRAI to keep in attempts by the Government in the past few abeyance issuance of any further licenses till the years’ to deal with the spectrum allocation issue. time the policy is reconsidered. This is surely to
However, the heavily criticized ‘subscriber affect adversely the service providers who have
based’ systems for spectrum allocation is likely to already applied for and await additional spectrum
be replaced by auction based system as TRAI allocations based on subscriber pattern and
having concurred that with advent of new possibly result in more litigation.
technologies and services (such as Mobile TV, Notwithstanding this, reinstatement of ‘cap’ on
broadband access services and 3G services) it number of service providers in a circle may result
would be difficult to segregate subscribers based in cooling off the price war which would be a
on each type of services. respite to the service providers.
The recently formed DOT committee has DOT has recently
proposed sweeping changes including replacing decided that the existing variable license fee
the existing system to auction-based system for which is based on the circle in which the service
spectrum allocation which the industry believes provider operates will be replaced with a uniform
may solve the crisis. The Committee has also license fee of 8.5% for all types of services.
recommended that no single operator to hold However, as reported in the leading newspapers.
more than 25% of aggregate spectrum available (Source: Economic Times) TRAI has objected to
in a circle. the change since it believes it would adversely
However, it needs to be seen to what extent and affect the exchequer as well as the service
when such recommendations would be providers and ultimately the consumers. TRAI has
implemented by the regulators. Time lag by the advocated that the current regime of variable
Government in formulating its view of this license fee be continued since the change would
controversial subject is likely to adversely affect adversely affect the margin of Circle ‘c’ service
the existing services providers who have queued providers. However, it is yet to be seen if the
upon for additional spectrum allocation based on regulator would change its decision based on
TRAI’s view point.their eligibility.
Entry of new players and ‘no cap’
policy:
‘Subscriber based’ systems for
spectrum allocation:
Uniform license fee:
Legal and Regulatory Challenges facing the Telecom Sector in India
41
Security threat facing the Telecom To conclude:
sector:
Infrastructure service:
The telecom industry of
DOT has made it mandatory for all mobile India continues to be one of the most dynamic
service providers to reject traffic flowing from industries globally with an evolving regulatory
handsets without IMEI (International Mobile environment. However, the challenges faced by
Equipment Identity) code. These codes are the telecom sector calls for greater innovation
issued by GSMA (Global Systems for Mobile and transparency in policymaking by the
Communications Association) worldwide. These Government. Notwithstanding such bottlenecks,
codes are mainly missing from low cost mobiles the recent changes in the regulatory framework
imported from China which poses a threat to the and active participation by private players (both
national security norms. However, rejection of domestic and foreign players) are likely to ensure calls would also mean loss of consumers and that the “Telecom Growth Story” is here to stay.revenue to the service providers. Considering
these factors, DOT has given the telecom service
providers and subscribers time till November 30,
2009 to comply with the national security norms.
However, it needs to be seen if the service
providers and the subscribers would be able to
meet with the extended deadline set by DOT.
Service
providers in this category are required to be
registered with DOT as ‘Infrastructure Provider
Category – I (IP – I) and the services include
providing assets such as dark fibre, right of way,
duct space and more specifically towers.
The Telecom Sector demands a robust
infrastructure for a geographically large country
like India. Optimum number of towers (cell sites)
allows service providers to maximize spectrum
utilization by permitting re-use of spectrum.
However, setting up towers has its own set of
limitation given the fact that governments are
contemplating to ban mobile phone towers in
school and hospital premises and directed
cellular firms to take permission from residents’
welfare associations before setting up base
stations in residential areas, in efforts to limit the
harmful effects of electromagnetic radiation
exposure.(Source: Economic Times). Though the
concern of the Government is genuine and
actions taken are a necessity, setting up towers
(and providing decent network coverage) at
places with high density of populations especially
metros becomes a challenging task.
ARA LAW is a vibrant and dynamic first
generation law firm established in February 1996,
in Mumbai. Firm’s niche practice areas are private
equity, capital markets, banking and finance,
mergers and acquisitions, real estate
infrastructure and telecom, media and
technology.
The Firm's sharp growth and excellent reputation
has been achieved in a short span of time and
bears testimony to the Firm's exceptionally high
standard of legal work, client service and
satisfaction. The Firm has a domestic and
multinational client base that includes
commercial banks, financial institutions, Fortune
500 companies, equity and venture capital funds,
government and public authorities and industrial
and commercial companies in a variety of
business sectors ranging from market leaders
and large corporate to fledgling operations and
start-up ventures.
Rajesh N. Begur
Managing Partner
Ph: +91 22 6619 9800
Email: [email protected]
Legal and Regulatory Challenges facing the Telecom Sector in India
42
Winner Of :-
Rajiv Gandhi Shiromani Award (2008)
Indira Gandhi Sadbhavana Award (2008)
43
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Aureos India Advisers
303, Vaibhav Chambers,
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Jacob Ballas Capital India
1F, Commercial Plaza,
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+91 11 431 53100
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www.jbindia.co.in
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+91 44 2432 9864
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Baring Private Equity Partners India
9th Floor, Infinity Tower A,
DLF Phase II,
Gurgaon - 122 002.
+91 12 4432 1100/ 11/ 22/
33/ 44
+91 12 4432 1155
www.bpepindia.com
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Listing of Investors with Special Focus on Telecom
46
Listing of Advisory Firms with Special Focus on Telecom
Avendus Capitalwww.avendus.com
IL&FS Financial Centre, B Quadrant, 5th floor,
Bandra-Kurla Complex, Bandra (E), Mumbai - 400 051
91 80 6648 3600
91 80 6648 3636
Delhi, Bangalore, New York and London
Amit Singh
Website:
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Tel: +
Fax: +
Other Office Locations:
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& Email:
Avendus Capital is a leading financial services firm offering mergers & acquisition, private equity syndication, structured finance, capital markets and institutional broking advisory to a large client base that include large and small corporations, listed & unlisted companies and ultra & high net worth individuals.
Deloitte Corporate Finance Serviceswww.deloitte.com
Maker Towers 'E', 4th Floor, Cuffe Parade,
Mumbai - 400 005
+91 22 6622 0500
+91 22 6646 6524
Gurgaon, Bangalore
Sandeep Gill
Prashant Chopra
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Deloitte provides strategy, operations and M&A based financial advisory services across the entire spectrum of the telecom industry, including operators, handset manufacturers and content providers.
47
KPMGwww.in.kpmg.com
Lodha Excellus , Apollo Mills Compound, NM Joshi Marg , Lower Parel, Mumbai - 400 011
+91 22 3989 6000
+91 22 3983 5040
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+91 98923 33385
Neeraj Jain
+91 90083 44446
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Providing advisory support to Private Equity and Corporate in Telecom transactions and M&A in India and globally.
Price Waterhousewww.pwc.com/India
Lovelock & Lewes\Price Waterhouse Building 8, 8th Floor
Tower B, DLF Cyber City, Gurgaon, Haryana - 122 002
+91 11 4135 0509
Global
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Our transaction services group helps telecom
companies make acquisitions, divestitures and
strategic alliances, and to access the global capital
markets. In each case we have the same overriding
objective: to help clients maximise the return on
their deal. With more than 2,400 dedicated
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Listing of Advisory Firms with Special Focus on Telecom
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B-3, Bali Bhawan, 2nd Floor, Lajpat Nagar II,
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+91 11 2981 0219 (Kavish),
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