INDIA HALCYON DAYS AHEAD IN A FOUR-OPERATOR MARKET CONTENTS EXECUTIVE SUMMARY INTRODUCTION UNSTABLE AND UNSUSTAINABLE FINALLY, CONSOLIDATION RELIANCE JIO MARKET CONSOLIDATION SCENARIOS CCS INSIGHT SURVEY MOBILE NETWORK OPERATORS NETWORK EQUIPMENT SUPPLIERS DEVICE SUPPLIERS CONSUMERS TOWER COMPANIES CONCLUSION India: Halcyon Days Ahead in a Four-Operator Market EXECUTIVE SUMMARY The consolidation process in India is moving along at a rapid pace. In February 2017, Bharti Airtel agreed to acquire Telenor India; a month later, Vodafone and Idea Cellular announced they would merge their activities. Consolidation is bringing to an end almost two decades of market chaos, although the recent aggressive entrance by Reliance Industries’ Jio unit is continuing the market disruption — for now. 68% A survey of telecom executives by CCS Insight found that 68 percent believe the market will consolidate to just four operators over the next three years. In this report, we examine believe the what a stable, consolidated market would look like and its implications for mobile market will network operators, suppliers of network equipment and mobile devices, infrastructure consolidate companies and consumers. Notably, the survey also found that a slim majority believes to just four that Vodafone will still be in India in five years’ time. operators over the next With a population of more than 1.25 billion people, India represents a huge market for three years mobile communications. It has attracted many billions of dollars of investment since the mid-1990s from domestic and international companies. Some players have survived, but many have invested and subsequently withdrawn, often losing most of their investments. After a decade of initial consolidation until the mid-2000s, a much-publicized and criticized auction of 2G licences in 2008 resulted in as many as 15 operators owning spectrum in at least one of India’s 23 operating circles, with up to 10 operators competing in an individual circle by 2010. This untenable situation led to bankruptcies and market consolidation, with a smaller cluster of national operators remaining. CCS Insight believes market consolidation will be a positive outcome for network operators, consumers and manufacturers of infrastructure and handsets, but perhaps less positive for the companies that operate cell towers in India. © CCS Insight 2017 India: Halcyon Days Ahead in a Four-Operator Market INTRODUCTION The modern-day Indian mobile communications market came into existence after the 1994 National Telecommunications Policy, which introduced the concept of “telecommunications for all”. The country was divided into 23 operating circles and liberalization of the industry started, with operating licences awarded to bidding companies. The companies had to be majority-owned by an Indian entity, with foreign investors allowed to own up to a 49 percent stake. The 1995 auction in India of GSM spectrum was a bidding frenzy. Largely financed by the considerable operating profits of incumbent foreign operators, companies were invited to bid for one of two operating licences per circle. AT&T, BellSouth, Bezeq, BT, France Telecom, Hutchison, KPN, Singapore Telecom, Swisscom, Telecom Italia, Telstra and Vodafone (including AirTouch) all invested heavily in the industry at some point between 1995 and 2007. Most withdrew with large investment write-downs; the lucky few made a return. Growth in the market’s early years was slow. The author of this report was, at the time, working as a banker advising one of the European operators on its licence bids and subsequent financing. Business plans were largely based on the precedents of the newly liberalized markets of Europe and South-East Asia, and the subsequent take-up of demand in India was disappointing. Intensive government intervention, fixed licence fees — as opposed to revenue-share fees — and the practice of “receiving party pays” some of the cost of a call acted as bottlenecks. Fortunately, a series of crucial policy changes provided a much-needed stimulus to the mobile industry. In 1997 the government established the Telecom Regulatory Authority of India (TRAI) with the intention of creating a more independent regulatory body. In 2000, the state-owned operator Bharat Sanchar Nigam Limited (BSNL) was corporatized rather than being run as a government department. © CCS Insight 2017 India: Halcyon Days Ahead in a Four-Operator Market Millions of connections The period from 1999 to 2008 saw further policy measures being introduced. These are summarized in Figure 1. 1 Fixed licence fees changed to revenue share 584 2 Third and fourth mobile operators introduced FIGURE 1 3 Launch of wireless local loop/CDMA service Millions of Millions connections of Connections 4 Unified access licensing introduced and cut in licence revenue share 1 1 Fixed licence fees changed to revenue share 584 398 5 Micro2 prepaid2 Third and and fourth long mobile validity operators plans introduced 3 Launch of wireless local loop/CDMA service 6 Continued3 falls in tariff and handset prices 4 4 Unified access licensing introduced and cut in licence revenue share 9 7 Technology migration permitted 398398 274 5 5 Micro prepaid and long validity plans 8 Mobile6 virtual6 Continued network falls in operators tariff and handset allowed prices 8 7 7 Technology migration permitted 274274 9 Launch of 1p per second tariff 172 8 8 Mobile virtual network operators allowed 7 9 9 Launch of 1p per second tariff 172 94.5 6 94.5 45.1 31.8 32.2 5 33.5 35.8 32.5 32 24.7 27.2 2 29.43 4 29.2 31.4 30.8 18.8 21.5 1 17.2 45.1 27.2 12.329.4 31.8 32.229.2 33.5 35.8 32.5 32 31.4 30.8 4.518.8 21.57.5 24.7 8.9 27.2 29.4 29.2 33.5 31.4 30.8 3.1 18.8 21.5 17.2 7.5 8.9 12.3 1998 19993.1 4.52000 7.5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Fixed Fixed line line Mobile Mobile Measures such as increasing competition in circles from two to four operators, allowing foreign companies to own up to 75 percent of operating companies, establishing licence fees based on revenue shares and permitting technology migration between GSM and CDMA stimulated growth. Mobile connections rose from 50 million in April 2005 to over 10 times that amount five years later. Finally the industry was thriving. © CCS Insight 2017 India: Halcyon Days Ahead in a Four-Operator Market UNSTABLE AND UNSUSTAINABLE Despite this background of rapid subscriber growth and strong competition, it is worth pausing to remember that in the first 10 years after TRAI’s creation, there were many casualties. By 2007, many of the international investors that entered the market in the mid-1990s had lost patience and withdrawn. Some got their money back. Most didn’t. By 2008, through a combination of more licences being issued and technology migration, many circles had five or six operators. In a bid to increase competition even further, the government issued another 122 licences across the 23 circles on a first come, first served basis. More international operators such as Batelco, Etisalat, NTT DoCoMo and Telenor entered the market with local partners. Table 1 and Figure 2 show how the industry looked in March 2010. Incredibly, 11 operators had acquired spectrum to enable services to be launched in almost every circle in India. A growing sense of concern became widespread among those working in the telecom sector. This industry structure was unprecedented and appeared unsustainable. TABLE 1 Operator Circles in which Circles in which Major shareholders Connections (M) licensed licences already held Bharti Group (45.3%); Bharti Airtel 23 23 127.62 SingTel (30.4%) Anil Dhirubhai Ambani Reliance Communications 23 23 102.42 Group Vodafone (67%); Essar Vodafone 23 23 100.86 Group (33%) BSNL 21 21 Government-owned 69.45 Tata Group; NTT Tata Teleservices 23 23 65.94 DoCoMo (26%) Aditya Birla Group Idea Cellular 23 21 (46.2%); Axiata Group 63.82 Holding (20.0%) Aircel 23 18 Maxis Malaysia (74%) 36.86 MTNL 2 2 Government-owned 5.09 Telenor (67.25%); Unitech Uninor 23 8 4.26 (32.75%) Sistema Shyam Teleser- 23 11 Sistema (74%) 3.78 vices Loop Mobile 23 1 Essar Group 2.84 Sterling Infotech Group S-Tel 6 3 1.01 (51%) HFCL Infotel 1 1 HFCL Group 0.33 Videocon 21 6 Videocon Group 0.03 Joint venture between Etisalat 15 9 0.0004 Etisalat and DB Realty Mobile network operators, India, March 2010 Source: TRAI, COAI © CCS Insight 2017 India: Halcyon Days Ahead in a Four-Operator Market FIGURE 2 3% 6% 22% Bharti Airtel 11% Reliance Communications Vodafone Bharti Airtel BSNLBharti Airtel Reliance Communications Tata TReleleseriancevi ceCosmmunications Vodafone BSNL Idea CVelodlualaforne 11% Tata TeleservicesAircelBSNL Idea Cellular OtheTrsata Teleservices Aircel 18% Others Idea Cellular Aircel Others 12% 17% Mobile network operators, India, March 2010 Source: TRAI Worse was to follow. The following years witnessed allegations of corruption around the 2008 licence issuance process, with the Supreme Court ultimately cancelling all issued licences. Many network operators, investors, financiers and other parties were confused and angry. Batelco and Etisalat walked away. Telenor reapplied for its licences and struggled on gamely for a few more years. The industry had started to lose its credibility. One of the biggest constraints for operators was limited frequency spectrum. So in 2010 the government started a process to auction off 3G spectrum. Auctions over a 34-day period raised $15 billion. Although operators and investors were understandably concerned about the costs of the auction, it was conducted in a transparent manner that was much-needed after the 2008 experience.