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Abstract

For long, 3G has been touted as the next big thing for the Indian telecom industry.

From videos to games, from trading to movies, 3G was supposed to be the panacea

for all. The arrival of 3G in India was signalled via an announcement about the

spectrum allocation bidding process in August 2008. However, 17 months and many

revised notifications later, India is yet to have a competitive bidding process for the

spectrum allocation. Meanwhile, state owned telecom companies MTNL and BSNL

were allocated spectrum and rolled out their 3G services last year. But the

subscriber base for these services has been disappointing to say the least. But

considering these are state-owned companies, its important to analyse the decision-

making factors for the telecom companies to bid for the spectrum and the effects of

3G on the Indian telecom sector in genera

Advent of 3G and its implications for Indian

telecommunication industry

Telecommunication in India

Before the introduction of mobile phones

Telephone made a modest entry in India in 1882 with the establishment of telephone exchanges in Calcutta,

Bombay and Madras in 1882 . Subsequent growth in the Indian telecom sector was relatively slow. Till early

1990s, people had to wait for about 10 years to get a new telephone connection. The number of telephone

connections registered a compounded annual growth rate of just over 1% per year and number of telephone

connections rose from 82,000 in 1947 to 8 million in1994.

In order to improve the state of telecom sector in the country, the Government of India announced a new

telecom policy in 1994, through which private investment in public sector company Videsh Sanchar Nigam

Limited (VSNL) was permitted. Most significant feature of the policy was the decision to launch mobile phone

service in the country.

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History of mobile phone service in India

Mobile phone service was introduced in India in 1995. During the initial years, prices of mobile handsets, tariffs

and activation charges were very high and therefore beyond the reach of common people. In 1995, a mobile

handset cost about Rs.40,000 and tariff was as high as Rs. 17 per minute. As a result, the growth of mobilephones in India was sluggish and the number of mobile phone subscribers was about 1.6 million in 1999.

Since 1997, the government took a number of decisive steps to increase the popularity of mobile phones in the

country. Firstly, government reduced its involvement in deciding the tariffs after the formation of Telecom

Regulatory Authority of India in 1997. It also slashed the taxes on mobile phone handsets and services. By

2002, Government reduced its stake in VSNL to 26%. These developments resulted in significant reduction in

mobile phone tariffs and made mobile phone affordable to the middle class people. Today Indian mobile phone

industry has 543 million subscribers, and it is the third largest mobile phone industry in the world. India is

expected to have more than one billions mobile phone subscribers by 2015. Today Bharti Airtel, Reliance, Tata,

Vodafone and Idea, along with BSNL and MTNL are the major players in Indian mobile phone industry. Bharti

Airtel is the largest mobile telecom company in India and in 2009, attempted largest M&A deal of MTN.

History of mobile phone technology

Attempts to invent a mobile phone had been made since late 1940s at AT&T BellLabs. Motorola developed the

first workable model of mobile phone in 1973.However the first commercial model of the mobile phone could be

launched only in1979 in Japan. Scandinavian countries like Denmark, Finland, Norway and Sweden followed

suit and launched commercial mobile phones in 1981.

Features of 3G

Due to the potential of data transmission at very high speeds, 3G technology is capable of bringing internet

connectivity on mobile phones. Following are the most important features that 3G technology can offer -

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i. Enhanced multimedia in terms of audio and video signals: Potential applications are video conferencing,mobile TV and related applications such as video on demand.

ii. Integration of internet and mobile phones and ability of internet surfing, sending e-mails and e-commerce on mobile phone.

iii. Mobile phone can be used to make financial transactions and money transfer.

Risks involved with 3G

In spite of these attractive features, 3G technology also has serious concerns.Currently, there is no mechanism to monitor 3G calls on real time as data transfers and voice calls are

encoded in 3G and cannot be decoded. As a result, 3G

technology has the following risks associated with it.

a) Misuse by terrorists

Terrorists can use 3G technology for better coordination and sending audiovisual signals in real time

in order to carry out terrorist and subversive activities.

b) Misuse by money launderers

Since mobile phone can be used for making real time financial transactions,money launders and drug

peddlers can deposit money in overseas bankaccounts before being detected by enforcement

agencies.

c)Misuse by sex offenders and paedophiles

Since 3G technology offers real time transmission of pictures and videos, the technology can be used

by sex offenders and paedophiles for their unscrupulous activities. This can not only reactivate the

previous offenders but also attract new offenders as detection is more difficult.

d) Compromise of data security

3G network, being essentially an IP network, it is vulnerable to all the securityissues associated with

traditional internet network, such as hacking, viruses, Trojans, spam and data interception. Due to

difficulty in decoding the data on3G, these concerns assume more serious dimensions on 3G.

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Government and law enforcement agencies will have to come up with effectivemeasures to tackle the

risks associated with 3G. Security of 3G networks cans been hanced by using protocols that limit the

number of users to a single cell site.

Government policies on 3G

3G technology works on transmitting radio waves in digital format. The bandwidth of the spectrum

needed for 2G is up to 200 KHz while the requirement for 3G is of the order of MHz In India, the

radio frequencies are confined between 9 KHz and3000 GHz and are allocated for different services

like fixed communication, mobile communication, broadcasting, radio navigation, and satellite

communication. Most of the radio spectrum is controlled by the defense establishments for their

wireless transmission. Presently, 25 MHz spectrum in 900 MHz band and 75 MHz in the 1800 MHz

band are allotted to GSM services. However, large part of this band is still not available for

commercial applications as it is yet to be vacated by the defense establishment. Similarly two 20

MHz spectra in the 800 MHz band are allotted to CDMA service providers. According to guidelines

issued on August 1, 2008, Government has allocated 2X5 MHz blocks in 2.1 GHz band for 3G. This

gave a natural advantage to BSNL and MTNL over other players as the spectrum was allotted to

them without having to participate in auction. The allocation of spectrum to private players will be

done on the basis of competitive bidding. Though BSNL and MTNL did not have to participate in

auction, they will have to pay the same bidding amount as the private telecom companies in the

auction.

Participation of foreign players

On October 25, 2009, Government of India issued a notification stating that foreign firms would be

allowed to bid for spectrum for 3G. According to the notification, foreign entities can operate

telecom services in India only through an Indian subsidiary with not more than 74 per cent foreign

share holding, subject to the approval of the Foreign Investment Promotion Board (FIPB). Along

with that, the government also stated a roll-out obligation - in the metros, the licensee to whom the

spectrum is allocated shall be required to provide service in at least 90 per cent of the area, within

five years.

Issues with auction of the spectrum

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On August 7, 2008, government preferentially allotted the spectrum blocks to BSNL and MTNL. The

spectrum block is of 2X5 MHz in 2.1 GHz and in the bandwidth of2.5 GHz at 2645.0 MHz The

bidding for the remaining blocks in the spectrum allotted to 3G was to be started in 2008. However

the bidding for the spectrum auction had to be delayed because of a number of reasons including

delay in vacating of the radio spectrum by defense establishment, differences on number of private

players allowed to participate in the auction, number of slots in the spectrum, and bureaucratic

hassles such as failure to fix auction date and modalities. Contentious issue of reserve price was

sorted out between Finance and Telecom ministries and the reserve price of 3G auction was fixed on

Rs. 4040crores in June 2009. However pending the resolution of other issues, concern has been

raised about 3G not being effectively launched in India in the year 2010.

Tax Riddle

There is no specific provision in Indian tax laws governing the deductibility of the payments made

for acquiring spectrum. There have been several debates going on whether payment for spectrum is

in the nature of capital expenditure or revenue expenditure. Also, there is no clarity on issues like

whether it would be available for depreciation if considered as a capital expenditure or whether

deduction would be allowed if it were to be considered revenue expenditure.

Launching of 3G in India

3G was formally launched in India in December 2008 by Prime Minister Dr.Manmohan Singh.

MTNL launched its 3G services, Jadoo, in Delhi and Mumbai, while BSNL launched its 3G service

in 11 cities across India. Along with voice calling and local/std sms, it also features services like

video calls for both local and STD services. Further, it is also exploring services such as mobile

broadband, mobile television and other mobile commerce services. BSNL has made initial

investments to the tune of Rs.2700 crores and is targeting 20 million broadband customers by the end

of 2010.

Other investments needed for 3G

Establishing 3G network and infrastructure would have to be taken up on a high priority basis by the

successful bidders. This would lead to a greater dependence on debt and loans and mount pressure on

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the companies in the short term. Another important aspect is availability of 3G enabled mobile

handsets at affordable rates. One of the main reasons for the rapid spread of mobile usage across the

country was easy availability of cheap handsets, but most of them are not 3G compliant.

Currently the telecom companies are in the middle of a severe price war in the telephony sector,

resulting in prices as low as 1paise/second. If such a price war erupts in the 3G sector too, then it

would bleed the telecom companies even further. Also, initially in order to acquire customers,

telecom companies would have to go in for aggressive marketing, then increasing advertising and

marketing expenditure.

Effect of 3G on Indian Telecom Industry

Though India is the third largest mobile network globally, there is not much presence of internet or

broadband among Indian customer base. 3G will have plenty of market as the expected subscriber

base is expected to reach 746 million customers by2013. Broadband requires extensive capital

investment for establishment of lines, licenses and regulations, it is expected that the internet

connectivity in the rural India will be primarily driven by wireless broadband services. Other

technologies for broadband are available for free in the Indian market.

Prices

The telecommunications industry in the present market is driven by cost efficiencies and lowering

prices. Hence the 3G service providers would come under immense price pressures. It is expected

that the cost of a mobile with its first year of services would only cost USD25-30. 3G providers

would not only have competition amongst them but would also have to face the tough competition

from 2G and especially 2.5G service providers.

National Carriers

Since the terms of the 3G bandwidth auction are such that there are equal costs for both regional and

national players, there are presently no rules on roaming. Providers can choose to charge their

customers for roaming services in other cities, or might not want to charge them. So now the national

carriers will have more appeal because it provides a seamlessall-India service.

Services provided

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The cost for such carriers is presently going to be driven by the voice services. Since the demand for

data based applications like video conferencing are driven by the data packets transferred, there are

not many takers for them so far. Hence telecom companies that are providing 3G services will have

to have higher operational efficiencies than the providers of other services so that they can cover the

higher fixed cost. Also the customer surveys and predictions show that the usage pattern in

developing country like ours is different from that of developed country. Right now the focus of 3G

provider would be to enhance the experience of existing consumers rather than bring a drastic change

in application patterns like usage of video conferencing. They would concentrate on providing better

browsing, downloading, surfing and buffering experiences.

Types of Incremental customers

Both public sector and private players are present in this market. The private players are targeting the

urban consumers with high ARPU and will be present in about 100Tier I cities. While in case of

public sector enterprises, the target is to expand the geographical reach and to cover as many cities as

possible.

It is estimated that the top 9% of mobile subscribers contribute to approximately 29%of circle

revenues and more importantly 45% of margins, and therefore this customer segment will be the

prime focus for carriers for migration to 31. The main target segments by 3G are the corporate and

the youth in the short term, mid market segment in the medium term and rural and incremental

subscribers in the long term.

Handset prices

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Right now, the biggest deterrent for 3G market is the high prices of the handsets supporting 3G

services. The prices of 2 G handsets are comparatively lower. 3G can be made competitive by

bundling wherein we bundle either talk-time/services/content etc with the handset.

Key facts from earlier 3G implementations across the globe

Europe went ahead with spectrum auctions in the year 200-2001. The auction process turned out to

be a fiasco, with a huge disparity in the prices per capita indifferent companies. Initially, there was a

huge hype surrounding 3G, with all telecom companies wanting to get into the rat race. Another

reason for this was hat public started investing in shares of companies which they knew were bidding

for 3Gand hence backing out at the last moment would have resulted in the stocks of such companies

plummeting. In the UK bidding, the spectrum was auctioned for 650Euros per capita. Germany too

managed to auction the spectrum for around 615Euros per capita. However, the hype failed in many

countries and the end result was that a country like Switzerland, which is both rich and centrally

located, managed to auction its spectrum for only around 20 Euros per capita.

Future of Indian 3G mobile phones industry

The reason that 3G has created a buzz among the youth of the country is due to the wide segment of

features that it proposes to provide. Along with voice and data transmission, video conferencing,

stock quotes, traffic information, trading, ticketing,etc can easily be accessed. Entertainment has a

huge revenue generating potential in our country, hence movies and songs download, cricket

broadcasts, gaming, ringtones, chat rooms can be a source of attraction to the youth. Also, corporate

customers can be targeted because of fulfillment of business needs like videoconferencing, mailing

facility, etc. However, adoption of 3G technology will not lead to immediate increases in subscriber base

of the telecom companies. The gestation period will be high and cash registers wont be set ringing

immediately. There are many key infrastructure issues that need to be addressed and reach has to beincreased. Also, tie-ups with good content providers who can provide superior mobile content and data

features are essential. The cost of 3G enabled mobile phones has not come down and this might act as a

deterrent for price-sensitive consumers in the Indian market.

RELIANCE COMMUNICATIONS LTD (RCOM)

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Reliance Anil Dhirubhai Ambani Group, an offshoot of the Reliance Group founded by Shri Dhirubhai H Ambani (1932-2002), ranks amongIndias top three private sector business houses in terms of net worth. The group has business interests that range from telecommunications(Reliance Communications Limited) to financial services (Reliance Capital Ltd) and the generation and distribution of power (Reliance

Infrastructure Limited).

Reliance ADA Groups flagship company, Reliance Communications, is India's largest private sector information and communicationscompany, with over 100 million subscribers. I t has established a pan-India, high-capacity, integrated (wireless and wire line), convergent

(voice, data and video) digital network, to offer services spanning the entire infocomm value chain.

Other major group companies Reliance Capital and Reliance Infrastructure are widely acknowledged as the market leaders in their

respective areas of operation.

MISSION

We will create world-class benchmarks by:

y Meeting and exceeding Customer expectations with a segmented approach

y Establishing, re-engineering and automating Processes to make themcustomer centric, efficient and effective

y Incessant offering ofProducts and Servicesthat are value for money and excite customers

y Providing a Network experience that isbest in the industry

y Building Reliance into an iconic Brand whichis benchmarked by others and leads industryin Intention to Purchase and Loyalty

y Developing a professional Leadership teamthat inspires, nurtures talent andpropagates RCOM Values bypersonal example

BUSINESS OF RCOM

VISION

By 2015, be amongst the top 3 most valued

Indian companies,

providing Information, Communication& Entertainment services, and being the

industry benchmark in

Customer Experience, EmployeeCentricity and Innovation.

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Business

India s leading integrated telecom company Reliance Communications is the flagship company of the Anil DhirubhaiAmbani Group (ADAG) of companies. Listed on the National Stock Exchange and the Bombay Stock Exchange, it is

Indias leading integrated telecommunication company with over 100 million customers.

Our business encompasses a complete range of telecom services covering mobile and fixed line telephony. It includesbroadband, national and international long distance services and data services along with an exhaustive range ofvalue-added services and applications. Our constant endeavour is to provide an enhanced customer experience and

achieve customer satisfaction by upscaling the productivity of the enterprises and individuals we serve.

Reliance Mobile (formerly Reliance India Mobile), launched on 28 December 2002, coinciding with the joyous occasionof the late Dhirubhai Ambanis 70th birthday, was among the initial initiatives of Reliance Communications. It markedthe auspicious beginning of Dhirubhais dream of ushering in a digital revolution in India. Today, we can proudly claimthat we were instrumental in harnessing the true power of information and communication, by bestowing it in the hands

of the common man at affordable rates.

We endeavour to further extend our efforts beyond the traditional value chain by developing and deploying complete

telecom solutions for the entire spectrum of society.

WIRELESS

With over 100 million subscribers across India, Reliance Mobile is Indias largest mobile service brand. Reliance Mobileservices now cover over 24,000 towns, 6 lakh vill ages, and still counting.

We have achieved many milestones in this short journey. In 2003, AC Nielsen voted Reliance Mobile (formerlyReliance India Mobile) as Indias Most Trusted Telecom Brand. In July 2003, it created a world record by adding onemillion subscribers in a matter of just 10 days through its Monsoon Hungama offer.

What sets Reliance Mobile apart is the fact that nearly 90 per cent of our handsets are data-enabled, and can accesshundreds of Java applications on Reliance Mobile World.

Reliance Mobile has ushered in a mobile revolution by offering advanced multimedia handsets to the common man atvery affordable rates. This innovative low pricing has increased the number of mobile phone users and its result is

clearly reflected in the meteoric rise in Indias tele-density over the past four years.

Our pan-India wireless network runs on CDMA2000 1x technology, which has superior voice and data capabilitiescompared to other cellular mobile technologies. CDMA2000 1x is more cost-effective as it util ises the scarce radiospectrum more efficiently than other technologies do. Enhanced voice clarity, superior data speed of up t o 144 kbps

and seamless migration to newer generations of mobile technologies are some of its key di fferentiators.

R World

The R World suite of Reliance Mobile is a unique Java-based application. Its uniqueness lies in the fact that it enablescomplex Internet application to be introduced in mobile phones effectively and quickly. R World receives over 1.5 billion

page views per month from Reliance Mobile users.

R World offers a wide array of applications that include hourly news updates, high quality headline video clips,downloadable multi-lingual ring tones, seasonal updates including festival specials, c ity and TV specials, exam results,astrology, mobile banking, bill payment.With over 150 data applications offering varied services - unique to any wireless service in India - R World is truly atreasure house of knowledge, information, entertainment and commerce.