ICRA Rating Feature

3G TELEPHONY SERVICES: IMPLICATIONS FOR INDIAN OPERATORS

Contacts: Summary Opinion

Anjan Ghosh Third Generation or 3G mobile telephony services have been introduced
[email protected] in over 100 countries worldwide. As in August 2009, there were around
+91-22-30470006 870 million 3G subscribers globally. In India, with the auction of the 3G
Vikas Aggarwal spectrum expected to be held in January 2010, telecom operators are
[email protected] expected to launch 3G services shortly. Although the introduction of 3G
+91-124-4545301 services is expected to benefit Indian telecom operators in the long term,
they would have to overcome several challenges in the short term.
Manita Singh
[email protected]
+91-124-4545366
The implementation of 3G services would require significant investments
in 3G spectrum fees and in the establishment of the 3G network and
infrastructure. Besides, operating costs in terms of marketing expenses
would also be high even as larger handset subsidies would have to be
offered to customers to ensure increased adoption of 3G services. Thus,
in the short term, the implementation of 3G services would imply higher
funding requirements and lower returns on investment for telecom
operators. The benefits of 3G would accrue only in the long term via
higher data and value added services (VAS) revenues (especially in a
scenario of falling average revenues per user, or ARPUs), competitive
advantage over 2G players, and higher spectrum efficiency.

December 2009
The likely impact of the proposed introduction of 3G services in the
Indian market on the credit profiles of telecom operators is discussed in
the following bullet lists.

Impact in the Short Term

 Funding requirements to increase for investments in 3G
spectrum fees and network: Like many European countries, India
has also decided to follow the auction model for the allocation of 3G
spectrum. After much debate on the reserve price for 3G spectrum,
the Empowered Group of Ministers has fixed a reserve price of Rs.
35.0 billion for pan-Indian operations; however, the actual price paid
by telecom operators could be higher especially in the Metros and
Category A Circles, given the limited number of slots to be auctioned
and the attractiveness of these Circles. ICRA expects the funding
requirements of telecom operators to increase in the short term on
account of investments in 3G spectrum fees and in building 3G
network and infrastructure. This is expected to lead to greater
reliance on debt and pressure on return indicators in the short term
Website (as commensurate returns are expected only over a longer period).
www.icra.in
 High marketing costs in initial years of launch of 3G services:
As for any new service, 3G services would also require investment in
development of new service platforms and successful marketing.
Further, ICRA expects competition to be higher in the initial years,
given that all telecom operators would strive to acquire customers.
Thus, telecom operators are expected to incur significant
expenditure on marketing of 3G services in the initial years.

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3G Telephony Services: Implications for Indian Operators

 Operators expected to provide handset subsidies: India being a price sensitive market, one of the
key challenges for the successful adoption of 3G services would be the availability of affordable 3G
handsets. To ensure wider adoption of 3G, telecom operators are expected to offer significant handset
subsidies in the initial years, which in turn would increase their cost of providing services.

Impact in the Long Term

 Data services and other applications to provide new avenues for revenue generation: The ratio
of “data revenues to total service revenues” for Indian telecom operators is currently 6-7%, which is
significantly lower than that in developed telecom markets (25-30%). Following increased adoption of
3G services, telecom operators the world over have witnessed a rise in the contribution of data
revenues to their total service revenues. In India too, as 3G services get increasingly adopted, the
contribution of data revenues to total service revenues is expected to increase in the long term.
 3G to help tide over spectrum constraints: Besides providing scope for increasing data revenues,
3G would enable operators manage their 2G spectrum more efficiently. 3G has higher voice carrying
capacity and will help alleviate spectrum crunch especially in urban areas, thereby improving the
quality of service. This is also important, as spectrum congestion remains one of the main challenges
for operators in the Metros and Tier I Cities. Moreover, migration of subscribers from 2G to 3G would
lead to more 2G subscribers being accommodated on the bandwidth that gets released.
 Telecom operators to seek competitive advantage via 3G: Given the competitive landscape of the
Indian telecom industry, 3G service offerings would provide a competitive edge to telecom operators
going 3G over pure-play 2G players. This is so because attracting and retaining higher ARPU
customers is essential for the profitability of telecom operators. 3G offerings like video telephony, video
and music streaming, and high speed internet access, besides providing new revenue streams to
telecom players, would also assist them in attracting and retaining high ARPU customers. Moreover,
with the implementation of Mobile Number Portability (MNP) in India in the coming months, high ARPU
subscribers would be more likely to switch to operators providing 3G services.
 Handset subsidies to come down as volumes increase, prices decline and 3G services find
more subscribers: As the volumes build up for subscribers to 3G services, 3G handset volumes
would also increase, thereby bringing down the average selling price for a 3G handset. This in turn
would enable telecom operators gradually withdraw handset subsidies, which would have a positive
impact on the profitability of 3G operations.

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 3G Telephony Services: Implications for Indian Operators

Methods of 3G spectrum assignment: India to follow the auction model

3G mobile services have been implemented in more than 100 countries worldwide. As spectrum is
considered a scarce and valuable resource, countries the world over have adopted various methods for the
assignment of 3G licence and spectrum, with such methods being based on market mechanisms (like
auctions) or administrative procedures (like assignment and beauty contests):
 Auction: Telecom operators engage in competitive bidding and spectrum is assigned to the highest
bidders.
 Assignment: Licence and spectrum are assigned to all existing telecom operators. In this method, the
Government assigns 3G spectrum without charging any fees (as in the case of Japan).
 Beauty Contest: The regulator invites applications that are rated according to some pre-set criteria.
Licence/spectrum is allocated to telecom operators who meet the stated requirements. The telecom
operators are required to pay licence fees as decided by the Government or regulatory authority.

These methods of 3G licence/spectrum allocation have met varying degrees of success across countries
worldwide. Table 1 lists the methods of assignment of 3G licence in some European and Asian countries.

Table1: Basis of Assignment of 3G Licence and Spectrum in Some European and Asian Countries
#
Country Date of Allocation Method No. of 3G Licence Fee License
Licences Per Capita Fee/GDP
Allocated (US$)
Europe
Spain Mar 2000 BC 4 11.8 0.08%
UK Apr 2000 A 5 576.5 2.34%
Netherlands Jul 2000 A 5 156.5 0.65%
Germany Aug 2000 A 6 561.7 2.43%
Italy Oct 2000 A 5 193.6 1.01%
Austria Nov 2000 A 6 76.2 0.31%
Norway Nov 2000 BC 4 10.0 0.03%
Switzerland Dec 2000 A 4 16.1 0.05%
France Jul 2001+Dec 2001 BC 3 318.0 1.29%
Asia
Japan Oct 2001-Dec 2002 Assignment 3 0.0 0%
Malaysia Jul 2005-2008 BC/A 2 1.0 0.01%
South Korea Oct 2000-May 2001 Assignment/BC 3 62.9 0.57%
India A 2.8* 0.26%
#
A: Auction; BC: Beauty Contest
* based on the number of slots available per Circle and reserve price per Circle
Source: ICRA Research

While most European countries have followed the auction method for the allocation of 3G licences, most
countries in Asia have opted for the assignment or beauty contest method. So far, licence fees for 3G have
been the highest in the UK (at US$576.5 per capita), followed by Germany (US$561.7 per capita). High
licence fees along with the significant
Chart 1: Total Debt and Credit Ratings of Telecom Operators investment required to set up 3G
in Europe infrastructure placed a significant strain on
70000 10
Aa1 the financials of telecom operators in
Aa2 9
60000 Europe. Further, delay in 3G rollout and
Moody's Long Term Rating

8
50000 Aa2 lower than expected demand for 3G
Total Debt - £million

A1 7
services in the initial period caused the
40000 A2 A2 6
returns on investment to remain low.
A2 5
30000 4
As Chart 1 shows, some of the large
20000 Baa1 3
telecom operators in Europe were saddled
2
10000 with debt post-auction of 3G licence. This
1
along with aggressive acquisitions during
0 0
2000-2002 led to deterioration in the
FY 1999 FY 2000 FY 2001
financial profiles of some of these
Vodafone Group British Telecom France Telecom Deutsche Telekom AG companies, thereby warranting change in
their credit ratings.
Note: Total Debt represents consolidated debt. Large debt to fund 3G
licence/spectrum fees was one of the reasons for downgrade.
Source: ICRA Research

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3G Telephony Services: Implications for Indian Operators

India has chosen the auction method for assignment of 3G spectrum to telecom operators. Spectrum for
offering 3G services would be auctioned in the 2.1GHz band (for GSM) and 800 MHz band (for CDMA).
The auction is expected to be held in January 2010, one year from the initially planned timeline for 3G
spectrum auction in the country. Table 2 summarises the key features of the 3G spectrum auction process
to be followed in India.
Table 2: Proposed 3G Spectrum Auction in India

Auction Rules Only one entity to be allowed to bid from the same Group.
Eligibility  3G spectrum – 2.1 GHz band
o Any entity holding Unified Access Service (UAS)/Cellular Mobile Telephone Services
(CMTS) Licence; or
o Any entity having previous 3G experience whether directly or through a majority-owned
subsidiary and undertaking to obtain a UAS licence prior to commencement of operations
 3G spectrum – 800 MHz band
Any existing UAS licensee that offers CDMA services in any telecom service area can bid for 800
MHz spectrum in that telecom service area
Frequency Bands  2 x 5 MHz in the 2.1 GHz band (maximum of 5 blocks per Circle)
 2 x 1.25 MHz in the 800 MHz band (maximum of 1 block per Circle)
Reserve Price Reserve Price for pan-Indian operations fixed at
 Rs. 35.0 billion for 2.1 GHz band
 Rs. 8.75 billion for 800 MHz band
Auction Process Auction to be carried out in two stages:
 Clock stage to determine the spectrum lot winners
 Assignment stage to assign specific frequency to the winners
Bid Price Increments  Negative demand: 0% increase
 Zero excess demand: 2% increase
 Demand in excess of 1 or 2 bidders: 5% increase
 Demand in excess of 3 or more bidders: 10% increase
Allocation of  Successful bidders are required to deposit 25% of the auction amount within five days of the
Spectrum close of auction and the remaining 75% within the next 10 days
 On full payment, Department of Telecommunications (DoT) will issue a Letter of Intent (LoI) and
would allocate spectrum within 15 days of full payment of the auction amount
 New spectrum winners would be allocated 3G spectrum after they have obtained UAS Licence
Rollout Obligations At the end of 5 years from the date of spectrum allocation or grant of UAS licence (if applicable)
whichever is later, the service provider needs to cover 90% of the Metro areas and 50% of the
District Headquarters (DHQs) or cities in the service areas, out of which 15% of the DHQs must be
rural Short Distance Charging Areas
Spectrum Usage  Spectrum charges for existing players to be the same as the revised spectrum charges for 2G
Charges spectrum. 3G spectrum is not to be counted to arrive at the relative slab of spectrum
 Standalone 3G carriers will be charged 3% of Adjusted Gross Revenue (AGR) after the first year
of allocation of spectrum, which is equal to licence fees paid by a 2G carrier with base spectrum
of 4.4 Mhz of GSM spectrum or 5 MHz of CDMA spectrum
Source: Revised Information Memorandum released by DoT in October 2009

Given the intensely competitive nature of the domestic telecom industry, which has several large players
and offers significant opportunity, a large number of players are likely to bid for the 3G spectrum. These
would include:

 Incumbent operators with established market shares (such as Bharti Airtel Limited, Reliance
Communications Limited, Vodafone Essar Limited, Idea Cellular Limited and Tata Teleservices
Limited) who would bid to maintain their market share and enhance their competitiveness.
 New entrants backed by strong international entities (such as Sistema Shyam, and Unitech Telenor)
who would be looking at gaining market share and competing with the incumbents.
 International telecom operators who are planning to enter the Indian telecom market and are waiting
for the opportune time. International telecom operators would either bid on a standalone basis or invest
in existing telecom operators having 2G licence and spectrum.

A new telecom operator (without a UAS/CMTS licence) who is declared a successful bidder in the 3G
auctions shall be allowed to offer 3G services only after obtaining the UAS licence. The telecom operator
would have to ensure that it satisfies the necessary conditions for the award of UAS licence.

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3G Telephony Services: Implications for Indian Operators

Technology Migration Path for 3G

According to the auction guidelines issued by DoT in October 2009, both GSM and CDMA telecom
operators would be allowed to bid for 3G spectrum in the 2.1 GHz and 800 MHz bands, respectively. The
Chart 2: 3G Technology Platforms for GSM and CDMA
likely migration technology path for GSM and
CDMA operators is depicted in Chart 2.

In the Indian telecom sector, there are pure

GSM Operators CDMA Operators GSM players and there are other players
offering both GSM and CDMA services,
namely Reliance Communications and Tata
3G platform 3G platform Teleservices. While pure GSM players are
likely to adopt WCDMA technology, the latter
are expected to make their choice of
WCDMA CDMA 2000 technology after weighing the benefits arising
from the lower upgrade costs for CDMA
against higher handset subsidies.

Competition expected to be intense in Metro and Category A Circles

The 3G spectrum auction guidelines permit auction of a maximum of five blocks per Telecom Circle {this
includes one slot that is reserved for Bharat Sanchar Nigam Limited (BSNL)/Mahanagar Telephone Nigam
Limited (MTNL)} in the 2.1 GHz band and one block per Telecom Circle in the 800 MHz band 1. Going by
the limited number of 3G slots available and the large number of existing operators it is expected that
competition would be intense among the pan-Indian telecom operators for obtaining 3G spectrum.

Table 3: Circle-wise Number of 3G Blocks Available for Auction

No. of No. Of
No. of No. of
Penet- Blocks Penet- Blocks
Circle Category Players Circle Category Players
ration Available for ration Available for
Operational Operational
Auction≠ Auction≠
2.1 800 2.1 800
GHz MHz GHz MHz
Uttar Pradesh
Delhi Metro 138% 7 2 0 B 31% 7 3 1
(W)
Uttar Pradesh
Mumbai Metro 112% 8 4 0 B 24% 7 4 1
(E)
Maharashtra A 37% 7 4 0 Rajasthan B 40% 7 0 0
Madhya
Gujarat A 45% 6 2 1 B 25% 6 4 1
Pradesh
Andhra
A 41% 7 4 0 West Bengal B 24% 7 1 1
Pradesh
Himachal
Karnataka A 46% 7 4 1 C 55% 7 3 1
Pradesh
Tamil Nadu A 52% 8 4 1 Bihar C 20% 8 4 1
Kolkata Metro 102% 7 4 1 Orissa C 27% 7 4 1
Kerala B 55% 8 4 1 Assam C 22% 6 4 1
Punjab B 56% 7 4 0 North East C 29% 6 0 1
Jammu &
Haryana B 44% 6 4 1 C 37% 6 4 1
Kashmir
≠
Government is validating the frequency available across Circles for the auction. Final details of the frequencies to be auctioned will be
notified before the auction
Source: DoT; ICRA’s estimates

Competition is expected to be higher in the Metro and Category A Circles, given their high mobile and
internet penetration rates and the concentration of relatively high paying customers in them. Further, ICRA
expects competition to be still higher in Circles like Delhi and Gujarat, where only two blocks would be
auctioned. However, telecom operators would have to weigh the costs against the potential benefits from
3G as unrealistically high bids would hurt the industry and also result in slower adoption of 3G services,
given that subscribers would have to pay higher tariffs.

1
in some Circles 3G spectrum will not be auctioned because of the non-availability of spectrum

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3G Telephony Services: Implications for Indian Operators

Investment requirements expected to be high for 3G operators initially

Table 4: Reserve Price per Circle for 3G
Investment in 3G spectrum Besides the spectrum bid amount, telecom
Circle Reserve Price per Circle operators would also have to invest in the
(Rs. billion) rollout of 3G networks, in marketing the new
2.1 GHz 800 MHz service offerings, and in providing handset
Mumbai, Delhi and Circle A 3.20 0.80 subsidies and attractive tariffs. Thus, the 3G
Kolkata and Circle B 1.20 0.30 licence fee along with the investment in network
Circle C 0.30 0.075 rollout and higher marketing expenses is
All-India 35.00 8.75 expected to increase the funding requirements
of telecom operators significantly.

Mobile penetration at ~36% augurs well for industry, but 3G adoption likely to be slow initially
India’s mobile penetration at 36.64% (as on June 2009) and its low internet penetration at 1.20% (as on
June 2009) augur well for the growth of 3G services in the country. A large mobile subscriber base
provides a well penetrated mobile market, while low internet penetration offers an opportunity for increasing
internet adoption. Internet penetration has been low in India on account of constraints such as limited fixed
line penetration and high price of personal computers in relation to average income. Availability of
affordable 3G handsets is expected to overcome these constraints. However, as has been the experience
in some of the other mobile markets, in India too, 3G subscriber growth can be sluggish in the initial years.

Chart 3: 3G Penetration in Developed Markets

90% In some of the developed mobile markets,
79% the 3G adoption rates were sluggish in the
80%

70%
initial years of launch of 3G services (refer
Chart 3). In the initial phase, 3G was
60%
51%
46%
essentially an experimental service for the
50%
early users and 3G adoption picked up
40% pace only from year 3, once the issues of
32%
30% high service cost, affordability of handsets,
20% and network coverage had been resolved.
10%

0%
L L+1 L+2 L+3 L+4 L+5 L+6 L+7

Japan Sweden UK USA

Note: L represents year of Launch

Source: ICRA Research

Operators expected to provide handset subsidies to encourage adoption of 3G in initial years

India is a price sensitive market as is corroborated by the fact that mobile penetration in the country
witnessed a significant increase only when mobile handsets costs came down and there was a substantial
reduction in tariffs.
Chart 4: Mobile Penetration and Average Revenue per Minute (ARPM) Globally, the high cost of 3G-enabled
(Rs.) handsets has been one of the main
40% 2.50 factors deterring large scale migration
35%
to 3G. In the international markets,
2.00 telecom operators have resorted to
30%
offering handsets subsidies bundled
25% 1.50 with attractive tariff packages to
20% increase 3G penetration. Telecom
15% 1.00 operators in India are also expected to
10%
follow a similar model so as to lower
0.50 the entry barriers for customers. That
5%
would however also increase the
0% 0.00 customer acquisition costs for telecom
Mar - 03 operators.
Mobile Penetration ARPM

Source: Telecom Regulatory Authority of India (TRAI)

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 3G Telephony Services: Implications for Indian Operators

Currently, telecom operators and handset manufacturers are trying to reduce 3G handset costs in order to
encourage adoption of 3G services in the emerging markets. For instance, MTNL has partnered with
Micromax (for handset) and Qualcomm (for chipset) to provide 3G handsets bundled with MTNL’s 3G
services at Rs. 5,500 (per handset), which is the lowest in India till date. Moreover, with 3G launch in India
expected to coincide with that in China, the volumes in these two countries are likely to bring 3G handset
prices down. As volumes grow and economies of scale increase, prices of 3G-enabled handsets may be
expected to decline, thereby increasing affordability and enlarging the size of the addressable market.

Large investments and slow subscriber growth initially may keep returns low in the early years
Significant investments in 3G spectrum and infrastructure, high marketing costs (including handset
subsidies), and sluggish subscriber growth in the early years of launch of 3G services are expected to keep
the return indicators low for telecom operators in the initial years. However, in the long term, benefits would
accrue in the form of high revenue contribution from data and VAS, high spectrum efficiency and
competitive advantage over pure-play 2G operators.

3G expected to ease spectrum constraints

As Chart 5 brings out, almost all the major GSM and CDMA operators are facing spectrum congestion in
the Metro and Category A Circles, and have crossed the upper limit on the number of subscribers per MHz
as recommended by DoT. This has also led to poor service quality and sub-optimal customer experience.
Allocation of 3G spectrum would enable operators manage their 2G spectrum more efficiently. 3G, with its
higher voice carrying capacity, is expected to help alleviate the spectrum crunch in urban areas and enable
delivery of satisfactory service quality. Moreover, migration of subscribers from 2G to 3G would result in
more 2G subscribers being accommodated on the bandwidth that gets released.

Chart 5: Spectrum Constraint in Metro and Category A Circles

Subscribers per MHz for GSM Carriers in a Sample Metro Subscribers per MHz for CDMA Carriers in a Sample Metro
and Category A Circle and Category A Circle
1.20 1.20
Subscriber per MHz (mn)

1.00 0.89 0.94

Subscriber per MHz (mn)

1.00 1.0
0.82
0.80 0.80
0.60 0.54 0.54 0.58 0.58
0.43 0.5 0.60
0.37 0.33
0.40 0.28 0.40 0.4
0.22
0.20 0.2
0.20
0.00 0.00
Metro Category A Circle Metro Category A Circle
GSM Carrier 1 GSM Carrier 2
GSM Carrier 3 GSM Carrier 4 CDMA Carrier 1 CDMA Carrier 2

Note: Black dotted line indicates DoT Criteria for maximum number of subscriber per MHz (at 10 MHz spectrum for GSM
and 5 MHz for CDMA)

Source: 3G & BWA: The Next Frontier, a joint report by Federation of Indian Chambers of Commerce and Industry (FICCI)
and BDA

Launch of 3G expected to enable telecom operators tap avenues for increasing data revenues
The ratio of “data revenues to total service revenue” for Indian telecom operators is 6-7%, which is
significantly lower than that for operators in the developed telecom markets. Till date, the growth of data
services in India has been low as compared with other nations, largely on account of the following reasons:
 Technological constraints: The existing technology is not capable of handling high bandwidth data
downloads and offers low speed.
 Content constraints: The VAS market is not yet mature in India, which limits the content options
available to service providers.
 Marketing constraints: Telecom operators in India have been largely focusing on expansion of
coverage and increasing their market share. Consequently, focus on marketing for VAS has been low.

With greater adoption of 3G services, telecom operators the world over have reported increase in the
contribution of data revenues to their total service revenues. For instance, the data revenues of NTT
DoCoMo, which launched 3G services in Japan in 2001, increased from 16.6% of total service revenues

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 3G Telephony Services: Implications for Indian Operators

prior to 3G launch to 21.5% post-launch and further to 27.2% four years after launch. A similar trend was
also observed for Vodafone in the UK, for whom data revenues rose from 16.1% of total service revenues
prior to 3G launch to 18.4% post-launch and further to 28.4% four years post-launch. For SingTel of
Singapore, data revenues increased from 19.0% of total service revenues prior to 3G launch to 32% four
years post-launch.

Table 5: Ratio of Data Revenues to Total Service Revenues Pre and Post-Launch of 3G
L-2 L-1 L L+1 L+2 L+3 L+4 L+5
Vodafone UK 14.4% 16.1% 18.4% 21.3% 24.3% 28.4%
Vodafone Germany 16.4% 17.4% 18.1% 21.7% 24.4% 26.3%
Vodafone Italy 11.3% 13.3% 14.6% 18.0% 20.4% 23.1%
Vodafone Spain 0.0% 11.4% 13.7% 15.1% 16.0% 16.1%
NTT DoCoMo 10.2% 16.6% 21.5% 25.0% 26.0% 27.2% 30.0% 34.6%
SingTel 17.0% 19.0% 19.1% 24.5% 29.0% 32.0%
Note: L represent the year of launch of 3G services
Source: ICRA Research
Globally, most operators have reported
2 higher ARPUs from their 3G customers
Chart 6: Comparison of 2G and 3G ARPU of NTT DoCoMo
than their 2G subscribers because of the
12000 70% higher uptake of data and VAS. For
60%
3G ARPU Premium over 2G ARPU instance, in Japan, which is one of the
10000
mature 3G markets, APRUs from NTT
50% DoCoMo’s 3G subscribers have been 58%
Yen / Sub / month

8000
40% higher on an average than APRUs from its
6000 2G customers for the last three years.2
30%
4000
20% With the adoption of 3G in India, the
2000 10%
contribution of data revenues to total
service revenues is expected to increase.
0 0% However, growth of data ARPU will hinge
FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 on growth in the number of subscribers,
2G ARPU 3G ARPU 3G ARPU premium over 2G ARPU
quality of subscribers and penetration of
3G across Circles. These in turn will
Source: ICRA Research; Company reports
depend on the cost of handsets and the
pricing of services for the ultimate users.

As in the case of voice services, tariffs for data and VAS are also expected to come under pressure as the
competitive intensity in the mobile services market increases further. This in turn could impact the
operators’ profitability. Nevertheless, with the introduction of 3G services, the share of data revenues in the
total service revenues of the operators is also expected to increase.

Overall, going by the international experience, data ARPUs in India are also expected to reach an inflection
point only after affordable feature-rich handsets and differentiated services have been introduced.

Overall, wide adoption of 3G to hinge on affordability of handsets and service differentiation

In addition to affordable handsets, new and innovative service offerings would also serve to catalyse
subscriber growth for 3G. Operators would have to provide an array of VAS like movie and music
downloads, video streaming, video calls, and gaming and then focus on developing applications that
appeal to a larger market. The degree of adoption of different services will vary by consumer segment. With
high-speed internet access, web-based services and e-mails are expected to report greater uptake almost
immediately, especially in the corporate and professional segment. However, for the mid-market consumer
to opt for 3G, affordable entertainment-led applications would have to be developed. Popular VAS
applications such as games and music are expected to drive 3G adoption among youth.

As Table 6 shows, the Indian market has a clear preference for entertainment-based content, as opposed
to information-centric content, which the mature 3G markets prefer. Thus, adoption of 3G by the mid-
market segment in India may be expected to be driven by innovative entertainment-based services.

2 1 US$ = 86.4428 Yen (as on December 1, 2009)

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 3G Telephony Services: Implications for Indian Operators

Table 6: Consumer Preferences across 3G Countries

US Europe China India Brazil Russia
Email Email Entertainment Entertainment Email Entertainment
(65%) (46%) (55%) (55%) (57%) (55%)
Top 5 Weather News/Politics Games Games Entertainment Search
Website (41%) (26%) (36%) (38%) (55%) (29%)
Categories Search Search Music Email Music Email
(% of (29%) (25%) (31%) (33%) (27%) (24%)
Mobile News/Politics Weather News/Politics Music Games Music
Internet (26%) (24%) (26%) (18%) (18%) (24%)
Users) City Sports Business/Fina Sports Movies Games
Guides/Maps (22%) nce (18%) (15%) (12%) (24%)
(24%)
Source: 3G & BWA: The Next Frontier, FICCI

As handsets are an integral part of the consumer experience, the availability of feature-rich handsets at
affordable prices or bundled with attractive tariff packages is likely to further drive adoption of VAS.

ICRA expects operators’ Return on Investment (RoI) to hinge on 3G subscriber base and ARPU
ICRA has estimated the ARPUs that would be required (at different 3G subscribership levels) by a telecom
operator to recover its investment in 3G spectrum and infrastructure over a period of ten years on the basis
of the following assumptions:
 3G spectrum fees of Rs. 35.0 billion for pan-Indian operations
 3G capital expenditure3 of US$904 per subscriber
With these assumptions, ICRA has estimated the ARPUs required for a telecom operator to break even5
over a period of 10 years at the following levels of 3G subscribership:
 3G Subscriber base of 10 million in a period of 10 years
 3G Subscriber base of 20 million in a period of 10 years
 3G Subscriber base of 30 million in a period of 10 years
 3G Subscriber base of 50 million in a period of 10 years

Further, for each of the above scenarios, the required ARPUs have been estimated, considering operating
margins of 20%, 30%, and 40%.
Chart 7: ARPU Levels Required for Break-even As is evident from Chart 7, at lower levels
of 3G subscribership and lower margins,
20% Margin 30% Margin 40% Margin higher ARPUs will be required for break-
1200
even. For instance, with a subscriber
1000 base of 10 million and with 20% margins,
ARPUs of around Rs. 1,060 per
ARPU - Rs./ sub / month

800 subscriber would be required to break

even. As against this, an ARPU of around
600 Rs. 270 would be required to break even
at the subscribership level of 50 million
400
and an operating margin of 40%. Thus,
200 return on investment (RoI) for 3G services
would depend on 3G penetration and the
0 premium that 3G services are able to
10 20 30 50 command over 2G. These would in turn
Million subscribers hinge on factors like affordability of
handsets and service differentiation.

3
3G Capex can vary with the extent of tower sharing.
4
Exchange rate of 1 US$ = Rs.46.50 has been assumed for calculations
5
In our analysis, break-even implies that Net Present Value of future cash flow stream is zero at a discounting
rate of 12%.

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3G Telephony Services: Implications for Indian Operators

Conclusion
While telecom operators are likely to benefit from the introduction of 3G services in the long term, in the
short term their RoI would depend on the price paid for the 3G spectrum, availability of affordable handsets,
and offer of innovative services that increase 3G penetration. As for higher revenues from data services
post-3G, going by the international experience, In India too this is expected to reach an inflection point only
after affordable feature-rich handsets have been introduced and service differentiation achieved. The
impact of the investment required for the implementation of 3G services on the credit profiles of telecom
operators would depend on their financial strength, the financial flexibility they have to raise resources, and
on their ability to successfully market 3G services. Successful implementation of 3G technology would pave
the way for evolving technologies like 4G, which is now being implemented in some developed markets.

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3G Telephony Services: Implications for Indian Operators

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