India plugs in
Matt Walker
Business Spectator, Australia
Several years ago, Asia gained a reputation as global broadbands petri dish, a bounded environment where operators were testing a variety of technologies, business models, and network architectures to see how the market would grow and evolve.
Now India is verging towards this status for the emerging worlds telecom industry. Indias carriers are adopting new operating models, sharing network resources, and leapfrogging technology in pursuit of results rather than industrial policy, and the country is emerging as an anchor of global networks.
Improved profitability at Indias increasingly ambitious private telcos, combined with the economys continued resilience, further support this notion.
Revenues, capex, and income jump in 2007
Indias big four private telcos continue to dominate. For 2007, total company (wireline and wireless) revenues for Reliance, Bharti, Idea, and Spice amounted to $12.05 billion, up 50 per cent from 2006.
Capex jumped 63 per cent in the same period to $7.31 billion, pushing capital intensity further (and unsustainably) skyward to 61 per cent.
Net income growth, though, exceeded revenues, resulting in an average net margin for the year of 25.0 per cent, up from 20.8 per cent a year earlier.
Operating cash flow, defined here as revenues less opex less capex, was negative due to the high capex burden of build-outs: it sank from -$1.3 billion to -$2.31 billion.
Looking beyond Indias big four private telcos and to South Asia as a whole (adding in MTNL, VSNL, Tata Teleservices Maharashtra, Sri Lanka Telecom, and PTCL of Pakistan), 2007 results were broadly consistent with those of the big four.
Group revenues grew 34 per cent to $16.03 billion, net income grew 44 per cent (i.e. a bit faster than revenues) to $3.10 billion, capex grew 49 per cent to $8.24 billion, and operating cash flow dropped from -$1.00 billion to -$2.10 billion.
Results for the subset and the group are consistent largely because Indias top four private telcos dominate the data set, accounting for 75 per cent of 2007 South Asia revenues and 89 per cent of capex.
Capex strategy
Looking at India, the picture is of large, ambitious carriers spending ahead of demand in hopes that revenue growth and operational efficiencies will allow them to meet their future debt burdens with ease.
We have seen this before many times, most similarly in China during the first half of this decade. There, though, competition despite the outside impression of vigor and chaos is heavily controlled by the state, and key carriers are national in scope and centrally managed.
India is much more of a free-for-all, with private carriers, state-owned, and formerly state-owned (e.g. VSNL) carriers competing under a patchwork of licensing and competitive regimes across the country. (Details can be found at the Telecom Regulatory Authority of India (TRAI) website; its quarterly Performance Indicators reports are especially useful.)
If anything, the contrast with China may make investors jittery about Indias relative unpredictability. Much of Indias current capex relates to carriers race to blanket the countryside with cellular base stations. Given the size of the country and the large, scattered rural element, this is a huge task. On the plus side, though, this is a job which is about to be eased due to pending regulatory allowance of inter-operator sharing of the active elements of mobile networks: antennas, feeder cables, nodes, radio access network, and transmission.
Leasing/sharing of passive infrastructure is already widespread: one carrier, Spice, booked 30 per cent of its 2007 revenues on passive infrastructure leasing/rentals. High capex also stems, though, from the global network expansion of Reliance (via its Fibre Linkup Around the Globe subsidiary, or Flag); capex incurred by Indias other global giant, Tata/VSNL, is not counted here since Tata does not publish the data, but it is similarly high.
Some of these build-outs are huge: Reliances four-stage FLAG Next Generation Network (NGN) will cost $1.5 billion to complete. If you can make money here, you can make it anywhere.
We all know Indias mobile sector has boomed over the last few years, with multibillion-dollar contracts almost becoming the norm.
For vendors, though, unless they have immense scale in wireless infrastructure able to match the sub-$100/line prices demanded by the market (in GSM, anyway) India is sometimes viewed as a toss-up, a take it or leave it proposition.
This is a mistake. Vendors cant afford to ignore India. The attraction is not simply in getting some small slice of carrier capex. It is true that Indias share of global telecom capex is under 5 per cent, Indian carriers are even more price-sensitive than others around Asia, and entry barriers can be high.
However, India is in many ways a window to the vast untapped developing world. Those who thought China would provide this lesson should think again: China is a world unto itself, with a whole different set of rules and its own telecom infrastructure industry.
For those who think theyve missed the boat in India, consider that 3G is not there yet, and the internet barely exists. The question of how to spread internet connectivity to the masses, given the countrys low income and PC penetration levels, is still unsolved.
Nokia espouses its multimedia computers (i.e. the N-series mobile handsets) as a possible solution, but theyre too expensive and limited. Whether we like it or not, computer monitors remain an essential part of the internet experience.
Low-cost computers such as the One Laptop Per Child (OLPC)-designed hardware, along with Intels Classmate PC, could help to bridge gaps and bring new revenues to operators able to think innovatively about services. But with fewer than 40 million fixed lines (a number thats shrinking each quarter) and a 2010 target to reach 10 million broadband subscribers, there is still much work to do in terms of connectivity, devices, and services.
A major challenge is lowering the cost of building wireless infrastructure in suburban and rural areas. NSNs Village Connection (VC) program, which envisions using individual households to host miniaturized base stations and giving household owners a share of usage revenues, is one small step among many others being taken. The point is not whether NSNs VC program will work, as it very well may not, but the fact that innovation is needed from both a technology and business model perspective to economically serve Indias population, and the next billion after that.
Petri dish?
Because of its scale, openness, policy flexibility, and relatively small technology industry (thus avoiding the marriage between telecom and industrial policy seen in China), India is becoming a vital testing ground for how some telecom technologies and business models can perform in the developing world.
Factors in support of an Indian role as a petri dish include the following:
WiMax
Very soon there will be multiple nationwide fixed WiMax rollouts aimed at bridging the copper gap, offering in many cases wireless DSL (equivalent) service.
Among private players, Tata/ VSNL is most aggressive on this front, but BSNL has allocated up to $750 million for a build-out that includes a franchise option to accelerate deployment.
Perhaps more than any other large market worldwide, India is well positioned to exploit the benefits of WiMax as an access technology. Given that many developing markets in Africa, Indonesia, CALA, and elsewhere lack strong copper infrastructure, India will be an important testing ground for the technology and its support infrastructure.
For instance, many optical vendors (ZTE, ECI, Nortel, etc.) are positioning themselves to play into WiMax backhaul markets in India.
Leapfrogging
Other than WiMax, there are a fair number of cases across the technology spectrum where Indian carriers are positioned to be on the leading edge of new deployment. The baseline reality of low average return per user (ARPU) cannot be ignored, but Indian carriers are nonetheless often more flexible and innovative about technology deployment than others. For instance, PBT (provider backbone transport ethernet enhancement) is of high interest in India, and 40G network technology is also being considered.
Infrastructure sharing
As noted above, Indian carriers, with regulators facilitation, are about to engage in an infrastructure-sharing experiment unlike any tried to date elsewhere on a large scale.
This sharing is both the only way to meet government rollout targets, and potentially a much more efficient way to run the networks, allowing carriers to focus on the user interface and all that it entails (billing, services, portals, etc.).
Prior to this, private telcos had already been actively pursuing alternative internal operating models, with Bharti leveraging IBM and Wipro for services, and Tata securing its TCS sister companys assistance with activities usually done with direct staff. In a sense, Indian carriers have the opportunity to redefine what it means from an operational perspective to be a telco, and bring this experience elsewhere around the developing world.
Global connectivity
Reliance/Flag and Tata/VSNL have vast undersea cable assets and are building a strong case to compete directly with AT&T, Verizon Business, and BT on the global enterprise/ISP/wholesale services front.
The fact that both have a large domestic market, highly valued by overseas enterprises for things like business process outsourcing services, is a big plus to them.
Reliances purchase of Yipes and Tatas rumored rollout of national Ethernet services in India further both their cases to compete in the big leagues. As these carriers become larger players globally, vendors will benefit from having close relations with them.
Macroeconomic climate
Indias economy is less centrally managed than Chinas, yet as of late it is performing similarly. Real economic growth is in the neighborhood of 8-10 per cent, with the Finance Minister projecting 8.8 per cent for the fiscal year ending March 2009.
Venture capital
Roughly $1 billion of international venture capital flowed into India last year. Beneficiaries include some telecom equipment/design firms such as Tejas and Telsima, but fortunately for foreign vendors, most of the funds targeted the services sector, with a heavy lingering slant towards outsourcing.
Matt Walker is a senior analyst with Telecommunications and software consulting firm Ovum
