Could India be the Next China?
By Steve Wallage, Tue Nov 12 08:45:00 GMT 2002

India is the obvious heir to China as the next big mobile success story. However, it is dwarfed by problems and shows no signs of repeating the success of China. Other global markets, though far smaller, can offer far more opportunity.

The success of the Chinese mobile market has been phenomenal. The market is still growing at around 6 million subscribers a month, and over 28 billion SMS messages were sent in the first half of 2002. The biggest untapped market now is surely India. It has nearly 20% of the world's population, and yet had a tiny 8.5 million mobile users at the end of September. This represents just 0.83% of the population. Can India now show the sort of growth that we have seen in China?

A Complex Market

India is a vast and complex market. The Indian Department of Telecommunications classifies the country's telecom markets into "metro" and "A", "B" and "C" circles or zones, based on how many potential subscribers they have. For example, the C circles refer to rural areas and are the least attractive sectors with very little wealth. The 1999 National Telecom Act defined a phased telecom deregulation with national operator, VSNL, privatized in April 2002.

The cellular market is divided into 4 metro areas, 5 circle A areas, 8 circle B areas and 5 circle C areas. When all the cellular licensees become operational, India will be served by 77 networks. This segmentation of the market and licensees has certainly not helped the growth of the Indian market.

An even bigger problem has been the fixed providers. Unlike most developing countries, fixed subscribers far outweigh mobile subscribers. According to ITU figures for the end of 2001, there were nearly six times as many fixed subscribers. In fact, the problem is even worse for the Indian mobile industry. Fixed providers are also allowed to offer 'Limited Mobility Services.' These LMS services are based on CDMA Wireless Local Loop, and offer service within a 25km area. This is perfectly adequate for users in large towns and cities. As part of the CDMA push, Qualcomm has invested $200m in Indian operator, Reliance Communications.

The Indian regulator, the Telecom Regulatory Authority of India (TRAI), has also been very generous to the LMS providers. It has allowed them to offer services for a monthly fee of just 200 rupees (around 4.10). Outgoing calls for LMS phones cost just 0.40 rupee per minute and incoming calls are free. By contrast, mobile users need to pay for both incoming and outgoing calls.

Regulation A Roadblock?

The LMS issue is now being put in front of the Honourable Supreme Court of India. Financial analysts, Kotak Securities, have analysed the cost differential between LMS and mobile users. They believe that a pre-paid user spending 300 rupees a month (around 6.15) would 143 minutes of use as a LMS user compared with 42 minutes of use as a mobile user. The figures show the clear cost advantages for the LMS users, and also supports the view of Indian mobile operators that they are competing in one of the lowest tariff markets in the world.

The Kotak Securities figures suggest that competition and regulation will decrease mobile ARPU from 1,493 rupees a month in 2000 to 775 rupees in 2002 and 433 rupees in 2006. This trend is also caused by the rise in pre-paid which now account for 80% of new subscribers.

Financial analysts UBS Warburg believe the Indian market will follow other global markets and see a wave of consolidation. They believe that, within 12-18 months, there will be three to four strong mobile operators. These will include Bharti (which includes SingTel as an investor), Reliance and Hutchison. Interestingly, Hutchison is the only one of the leading operators not following a 'converged' strategy and also offering Internet and fixed services.

The Cellular Operators Association of India (COAI) also believes that mobile operators face a number of other regulatory obstacles. These include high interconnection fees, abuse by the incumbent operator and lack of spectrum. A particular area of irritation is high Government taxes and levies, including high license fees. The COAI estimates that 35-42% of mobile operators' revenues go to the Indian Government despite the fact that they are still not making profits.

The Road Ahead

So how quickly will the Indian market grow? The economy is still doing reasonably well with the Confederation of Indian Industry (CII) expecting the country's GDP to grow by 5.4% during 2003.

Gartner estimate 31 million mobile subscribers by 2005, and UBS Warburg 35.5 million by 2006. Although these estimates represent nice annual growth rates of 50-60% this is misleading. These figures would represent just 3% penetration in 2005. Unsurprisingly, the COAI is more upbeat. They predict 50 million subscribers by 2005, and 120 million by 2008.

India is very unusual in less developing countries in the low mobile penetration, particularly compared to fixed penetration. Looking at the ITU statistics for the end of 2001, in Africa 53% of telephone subscribers were mobile. Globally, the figure was 47.5%. Supporting the Indian mobile operators is the most efficient way to raise teledensity as a whole.

In metropolitan areas, Indian operators have introduced SMS and have plans to trial MMS. However, the real focus has got to be on growing the overall market and getting 'the basics right'. An example is that the Indian mobile operators suffer from very high churn rates - Bharti has a churn rate of around 3.5% a month. MMS is not going to be the saviour of the Indian operators.

Although India is already a World Trade Organization (WTO) signatory it has not done enough to control the market for mobile handsets. Analysts have estimated the legal handset sales at less than a quarter of the total in a market which is swamped by cheaper "grey" sets.

The Indian Government and TRAI are absolutely responsible for the growth rates of the Indian mobile market. They must understand the importance of the mobile operators and make the playground as fair and open as possible. Regulatory moves do not appear to be discriminating against non-Indian operators, but against the mobile market in general.

There appears to be no good reason why the Indian mobile market cannot grow far more quickly than current estimates if regulatory and competitive obstacles can be removed. The bottom line for the Indian Government must be that if they have mobile penetration of just 3% in 2006, they will be seriously undermining their economic position. Growing the overall mobile market is far more important than trying to protect incumbent businesses or driving tariffs so low the market becomes unprofitable.

Other Main Global Opportunities

India dwarfs all other countries in terms of population and the mobile opportunity. China has 1.7 billion people but already has around 200 million mobile subscribers. According to the World Bank, the gross national income per person in India was $450 in 2001, compared with $890 in China. The Chinese economy may be twice as strong, but there are nearly twenty five times as many mobile users.

A market like Brazil has 170 million people but around 35 million subscribers. African countries, though suffering from many economic challenges, are very open to the idea of using mobile networks to increase telephone usage.

However, the Indian market is still focussed on subscriber growth, and users revenues are still very low. In fact, Kotak Securities estimate that, even in 2010, the ARPU in India will be just 441 rupees a month (around $9.05). This is virtually identical to the 2006 estimate, and less than one quarter of the 2000 figure. By contrast, the UMTS Forum forecasts that the Brazilian market for 3G services will be worth some $6 billion annually within the next ten years. IDC project that, by 2004, there will be 24 million Brazilian SMS subscribers.

These countries are effectively competing for the attention of foreign investors into their mobile markets. The Indian Government needs to work much harder to ensure that it is not ignored in this global battle.

Steve Wallage works and writes for the451. Steve has more than 13 years of experience as a technology analyst specializing in telecommunications.