Is India Ready for 4G?

Recently, India successfully auctioned 3G spectrum and fetched Rs. 67,719 crores - double than originally estimated by the government. Soon afterwards, the telecom regulator of India – the Telecom Regulatory Authority of India (TRAI) - had announced its plan to bring out the recommendations on 4G technology by the end of the year. According to TRAIChairman J. S. Sarma, it will be ready with recommendations on 4G by 2010 end.

But it would be prudent to weigh the viability of existing cellular technologies. Will the cost-conscious Indian consumers embrace higher-end technologies so quickly? Is it also possible for telecom players to go for more investments when they are already burdened with heavy debt?

The Telecom Revolution

Indian telecom market is one of the biggest and fastest growing in the world. With over a billion people, it comes only second to China. The country, however, is yet to reach saturation. India was a late-starter in the telecom arena. Very little was done in terms of infrastructure during the period of the 1850s to 1990. However, the true telecom revolution took place after 1990s.

The introduction of the New Economic Policy (NEP) in 1991 was a landmark in the history of the telecom industry in India. The 1990s, which is synonyms with Indian economic reforms as well, saw the government decentralizing manufacturing of equipment pertaining to telecom sector and several value added services were introduced into the market. The telecom services were also divided into basic telephony, radio paging, and cellular mobile. The TRAIwas established as an independent regulatory body pertaining to the telecom sector. This allowed growth of private sector participation in the sector.

Later, the Indian government also introduced the New Telecom Policy in 1999 – hailed as the third phase of the telecom revolution. The 1999-step gave more powers to the TRAIand the concept of revenue sharing was introduced to replace the fixed license fee. It also introduced National Long Distance and International Long Distance schemes. These series of reforms have gradually allowed a host of private sector players to venture into the sector – making India one of the most competitive markets in the world.

Telecos’ Paradise?

India is the second-most populated country and nearly half of the population is youth under the age of 40. This makes India one of the most promising markets for any company.

Now considering the fact that the tele-density of India is only 54.1 per cent as of April 2010, there is a huge population still to be reached by telecom companies. Total telephone subscriber base has reached 638 million as of April 2010. The second largest telecom market after China is adding averagely 8.5 million to 10 million new mobile subscribers to the network every month to also emerge as one of the fastest growing telecom markets in the world.

Despite such huge penetration, India is still to achieve its full potential. The vast rural areas are still to be penetrated. Exploration of the rural areas is now being seen as the possible next telecom revolution in India. Notably, the tele-density in the rural India is just eight percent as opposed to 50 percent in urban centers, the hinterland offers good scope for expansion.

The government is also planning to roll out high speed broadband in rural areas and the reform of the Telecommunications Service Obligations (TSO). According to some analysts, enterprise VAS, mobile commerce and mobile finance services, mobile-based entertainment, gaming, location-based services, and mobile advertising are going to be big revenue generators for telecom companies in future.

Also, given the high value offerings with 3G, the Average Revenue per User (ARPU) might go northwards. According to an industry report, 3G ARPU is projected to reach $18.30 by 2013 with revenues totaling $12.8 billion in the same year. Data is expected to contribute 29 percent to 3G ARPU from handset users.

However, with telecos taking on huge debt during 3G auctions, they have a lot to think about. “The Rs. 67,700 crores coughed up by telecom companies for 3G licenses could be a choker on their balance sheets, the cure for which is not in sight for at least a couple of years. The listed companies are likely to feel the pain of interest and amortization costs,” an article in an Indian newspaper said just few days ago.

Call rates to in India have touched their lowest levels, which are hitting the profitability of the mobile companies. It now stands less than $4 per month, which is 7.5 times less than that of United Kingdom – the Average Revenue Per User in the U.K. is $30 per month. Recently, the sector saw one of the fierce battles among telecos to vie for each others’ customers. Reliance Communication – held by billionaire Anil Ambani – slashed prices to Rs. 1 per second – fomenting a series of price cuts by other companies.

The government is all set to introduce the Mobile Number Portability (MNP). When introduced, this MNPscheme will allow consumers to switch operators while keeping their current mobile number. This could be another major headache in waiting for the operators as it will intensify the ongoing battle for numero-uno position. Leading telecom player, Bharti Airtel has recently reported a 28 percent drop in Average Revenue Per User (ARPU) for to Rs 220 a month compared to Rs 305 a year ago in its fourth-quarterly announcement. Looking at this, it will be increasingly difficult for the telecos, to recover the amount so quickly let alone going for 4G or any other higher technology.

The Problems Ahead of 4G Services in India

India, though one of the fastest growing countries in the world, is yet to have a comfortable per capita income. Abig chunk of its people live below the poverty line. The telecom companies are relying on the large number of middle income groups to drive their revenues. Surely the affordability factor will be at the top most of the agenda for all the operators. 4G handsets will come expensive, so do the services. There will be a question mark on who will opt for 4G facilities.

Some say the post-paid subscribers will switch to the 3G segment as they are already spending a higher amount on their telephone bills. But only 5 percent of total mobile phone users in India have post-paid connections. Anewspaper has suggested that operators providing 3G services, in order to post profit, must generate at least Rs 500 per user.

Others even suggest that India should have skipped 3G altogether. In fact, it should have leapfrogged from existing 2G to 4G. It could have saved telecom companies from investing hugely in building infrastructure for 3G. 4G is designed to enable high speed Internet anytime, anywhere. It will facilitate higher bandwidth, higher data rate, and will support a higher level of user-level customization. 4G will allow users to stream mobile multimedia with speeds of up to 10 times that of 3G technology.

So what would be the use of 3G once we have 4G?

Will the operators agree to another spectrum auction with such a little time gap? The federal Communications Minister A. Raja had told a newspaper that the government will start the 4G auction as soon as operators start rolling out 3G services. Notably, Germany has recently started the auction of its 4G spectrum, 10 years after auctioning 3G spectrum.

Questions are also being raised about operators getting the desired spectrum for 4G operations.

Existing versions of 4G technologies such as LTEwill require at least 2x 20 MHz per operator to meet the need for high bandwidth services, which will be a tough task for any operator. Also, at present there is no clarity on the spectrum band that is best suited for 4G as the U.S. and Europe are using different frequency bands. Unlike 3G air waves, which are synergized globally in the 2.1 GHz band enabling vendors to supply handsets at less than $100, 4G has no global synergy at all. This may push up prices of devices and the network.

Considering the brouhaha over 3G auctions, it is unlikely that policymakers will expedite opening up new bands such as 700 MHz. Lack of clarity on global 4G standards is another issue. However, according to a section LTEwould enable reuse of 2G and 3G spectrums, while promoting the efficient roll out and cost reduction by more than 50 percent for 3G networks.

So it is now up to the industry and the government to decide on the right time for 4G rollout considering the uniqueness of the Indian market.