Regulating Networks – The Indian Telecommunication Experience

ICRIER SEMINAR – JUNE 2006

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Telecom Growth – The Changing Scenario

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5

10

15

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Stage I II III IV

Tel

e-d

ensi

ty

Year Ending

6

11.5

22.5

1948 19982003

20052007

0.021.94

1948

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Stages of Telecom Regulation

Stage I - Monopoly provision by State incumbent : No regulation 1948-1998

Stage II - Cost – plus tariff regulation 1998-2003

Stage III - Competition regulation 2003-2006

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Cost plus Tariff Regulation to Competition Regulation

Stages:

• Till 2003, Telecom Tariffs were fixed/permitted by the

Regulators.

• In a number of other countries, even today, tariffs are

approved by the Regulator

• These tariffs are mostly fixed on a cost plus basis – on the

incumbent’s data

• This is done by the Power Regulators in India also.

• USA and UK Power Regulators did this till a few years back.

• We made the change of moving to Competition Regulation in

place of Tariff Regulation in 2003.

• This step made all the difference to the Indian Telecom

Sector.

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Components of Competition Regulation

• Technology neutrality • Appropriate Interconnection Neutrality• To increase competition between operators working in the same

network - Cost based rentals- Cost based ICU charges – no profits- Termination charges lowest possible based on actual termination

cost - Entry fee – 2G, 3G case- Equal Access to scarce resources – spectrum, ROW, Towers,

Last Mile etc.- Removal of barriers to efficient network build up e.g. infra-

structure sharing restrictions- Critical network resources available at fair and non-discriminatory

prices- Establishing network elements at fair prices- Fair play conduct- Mergers and acquisitions – transparent rules -regulate only those

who are Significant Market Players (SMPs)

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What does Cost plus lead to?

1999 : Rs. 32 per minute tariff 2003 : Rs. 4 per minute tariff High ADC – Rs. 8 per minute etc No ADC for mobiles Very high Domestic Leased Line Tariffs due to monopolistic conditions Very high IPLC tariffs due to monopolistic conditions

In other sectors, cost plus tariffs have led to :-- Power Sector - inappropriate fuels, locations and technology - padding of cost and taxation - No efforts at cost reduction both for equipment and fuel

- Steel Sector - Prices determined by public sector’s cost - Inappropriate locations and technology

- Fertilizer - Retention price policy continues - Inappropriate technologies - Input prices continue to be high leading to higher subsidy bills

- Imported - Very high cost Fertilizer - No incentive for efficiency in handling and sale Handling

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TRAI facilitated huge reduction in forborne tariffs in 2003-05 Measures indicated in boxes – and by increasing competition Also, by allowing handsets sales in instalments. Mobile growth stepped up significantly – once mobile and fixed line tariffs became

equal Mobile then became the telephone of the working class Mobile growth in 2003-04 and 2004-05 > average mobile growth in earlier years X 12

Cellular Mobile Growth and effective charge per minutefor 250 outgoing MOU/month

1.2 1.20

13.00

33.60

65.07

75.92

52.17

0.88 1.20 1.88 3.586.50

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Sep-05 Dec-05

Eff

ec

tiv

e c

ha

rge

(in

Rs

. pe

r m

in.)

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Mo

bile

su

bs

cri

be

r b

as

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in M

illio

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Fixed (Rs./min.) Full Mobile (Rs./min)#REF! Mobile Subscriber base (Millions)

NTP

Telecom Tariff

3rd & 4th cellular operator

WLL introduce

CPP introduced

Lowering of ADC from 30% to

10% of sector

0.85

8

17.821.59

26.5132.44

38.1643.17 46.48

52.08 53.2457.17

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20

30

40

50

60

70

1998 1999 2000 2001 2002 2003 2004 2005 July2005

Dec2005

Financial Year

Subs

crib

er B

ase

(mill

ion)

PSU’s Operators Subscriber base

Growth 1998-2005 = 34.28 million subscribers

Fixed 40.70 million

Mobile 16.47 million 5million/year in comparison to 0.35 million/year in pre-reform period.Only difference – competitive environment

PSU operators have shown remarkable growth in competitive environment.

Phase I Phase II

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0.88 1.22 2.02 3.856.81

11.45

30.06

46.33

53.76

67.68

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20

30

40

50

60

70

80

1998 1999 2000 2001 2002 2003 2004 2005 July2005

Dec2005

Financial Year

Su

bsc

rib

er

Ba

se (

mil

lio

n)

Private Operators Subscriber base

Growth 1998-2005 = 45.45 million subscribers

Fixed 8.22 million

Mobile 59.46 million

Private operators have contributed very largely to post 1998 growth

Private operators have contributed primarily in mobile growth due to lower costs

Liberalisation aimed at private participation and investment in telephony

Private telephones overtook public telephone in July 2005 only a few years after liberalisation

This was possible due to appropriate regulatory regime

Phase I Phase II

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Investment in Telecom Sector and Subscriber Numbers

 

Approximate Investment upto March 2005

(Rs. In Thousand

Crores)

No. of Subscribers

Market share(%age)

PSU Operators

94 57.17 45.79

Private Operators

51.5 67.68 54.21

Aim of liberalization was more investment/growth.Has this been fulfilled in telecom sector?

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Growth of Mobile Subscriber base with reducing ARPU

1.88 3.58 6.54 1333.7

5275.921319

1113884

634 469 407 3740

20406080

FY2000

FY2001

FY2002

FY2003

FY2004

FY2005

Dec-05

Subs

cribe

r Bas

e (m

illion

)

0

500

1000

1500

ARPU

(Rs./

mon

th)

SubscriberBase(Million)

ARPU(Rs./month)

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As ARPU has fallen, revenues have grown

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200

400

600

800

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FY 2000 FY 2001 FY 2002 FY 2003 FY 2004 FY 2005

AP

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(R

s./m

on

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15000

20000

25000

30000

Rev

enu

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ob

ile

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ors

(Rs.

Cro

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ARPU (Rs./month) Revenue of Mobile Operators (in Crores of Rs.)

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Name of the country

Call charge per minute

Minutes of Use per

subscriber per month

ARPU (Average Revenue Per User)

Termination rates per minute

        Fixed Mobile

  US$ Minutes US$ US$ US$

Australia 0.24 159 43 0.016 0.152

Brazil 0.11 92 11 0.020 0.080

China 0.04 261 10 0.010 0.025

Switzerland 0.45 119 59 0.017 0.163

Japan 0.33 156 63 0.022 0.130

India 0.04* 309 11 0.007 0.007

Call charges per Minutes of Use, ARPU and Termination Rates per minute for mobile service in different countries (June 04)

* Has come down to 0.03 in 2005 – lowest in the world

Since the tariffs are low – there is huge unmet mobile demand in rural areas – only mobile towers have to reach

Some low end ARPUs being offered by operators are $ 4 per month and entry cost (handset price) $35

At these rates, huge market is waiting to be tapped

Our lowest termination rates encourage aggressive competition at origination of calls

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31.1332.8

1.96

9.86 10.4

26.2

21.3

14.3

12.210.4

4 4.85.8

6.98.2

1.741.71.51.20.90.70.50.40.30.31.94

9.08

7.04

5.14.33.6

2.92.31.91.61.3

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35

Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Jun-05 Sep-05

Urban Teledensity Rural Teledensity Total Teledensity

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Mobile coverage beyond the urban population in selected countries, by region, 2002.

Region Country Pop. Covered by mobile signal

Africa Cape Verde 90%

  Togo 90%

  Zambia 50%

     

Americas Eucador 86%

  Mexico 90%

     

Arab States Jordan 90%

  Morrocco 95%

     

Asia-Pacific Korea-Rep. 99%

  Malaysia 95%

  Philippines 70%

     

Europe Azerbaijan 94%

  Czech Republic 99%

  Slovak Rep. 98%

  India 20%

Source:- ITU World Telecommunication Indicators DatabaseIf mobiles can cover high population % in other developing countries, in India also they canOnce higher population coverage is achieved, growth will be further acceleratedFor larger mobile coverage we have to go to rural areas, where 70% of our population lives

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Present Coverage of Mobile Networks (2004-05)(Population Coverage 25-30%)

____________________________________________________________________By area Population Coverage

____________________________________________________________________Towns ~1700 out of 5200 ~275 Million____________________________________________________________________Rural areas Negligible Negligible____________________________________________________________________

Proposed Network Coverage by 2006; operators plan(Population Coverage 75%)

______________________________________________________________________________________________________

By area Population Coverage_______________________________________________________________Towns ~4900 out of 5200 ~300 Million_______________________________________________________________Rural areas ~350,000 out of ~450 Million

607,000 villages______________________________________________________________________________________________________

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Substantial Growth for all

Excerpts from Morgan Stanley Report: Are present tariffs predatory?

• “Even at monthly ARPU of US$5, Wireless Operators can make money”

• “ … with telecom equipment cost having fallen globally, and most of the GSM operators being allotted higher spectrum, the incremental capex/sub in India has fallen.”

• “ We have performed a sensitivity to capex cost and ARPU. A consumer yielding a monthly ARPU of US$5 provides incremental ROCE of 16% based on capex/capacity of US$60.”

The present ARPU is around $9 per month, hence operators can profitably expand into non-covered and rural areas. In any case operators are already offering $ 4 / month ARPU tariff packages.

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No. of households with key durables (in

million)

S. No.

All India

Urban + semi-urban

Rural Urban + semi-urban

Rural

Total Households(Millions)

192 54 138

1 Bicycle 44% 46% 43% 24.84 59.34

2 Radios 35% 44% 32% 23.76 44.16

3 Television 32% 64% 19% 34.56 26.22

4 Two wheelers(Scooters & Motorcycles)

12% 25% 7% 13.5 9.66

The rural areas have demand Demographical Analysis (2001):

Penetration of households with key consumer durable assets

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Urban/Rural income-wise distribution of households(In millions)

Income Group Rural Households Urban Households

Lower 5887 (47.94%) 931 (18.96%)

Lower Middle 4277 (34.83%) 1658 (33.76%)

Middle to High 2116 (17.23%) 2322 (47.28%)

Total 12281 (100%) 4911(100%)

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Number of cable homes and number of fixed line telephone subscribers

Figures in million – (Year 2003)

S. No.

Name of the country

No. of cable TV + DTH subscribers

No. of fixed line connections

1 Australia 1.55 10.82

2 China 105.00 # 263.00

3 United Kingdom 10.50 34.90

4 Japan 8.10 71.15

5 Korea 11.94 22.88

6 Taiwan 5.30 13.36

7 Thailand 0.43 6.60

8 Unites States 94.97 181.6

9 India* 61 47

India numbers are for 2005.

There is no country other than India where cable TV connections exceed fixed line phones

This indicates a huge demand in India for entertainment and multi-sourced news and information

Hence triple play networks in India will be hugely successful

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Existing USO regime – Implementation till 2010

• Public Telephones in Villages – 3,344• Rural Telephones – 22,010• ADC for rural telephones to be

covered under existing USO regime from 2008 to 2010 – 5,000

Total - 30,354• In addition, funds have already been given

from ADC since 2003 and some more may be allotted till 2008 ~12000

• After the investment shown above, we will achieve a rural tele-density of 4%

(Figures in Rupees Cr.)

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Proposed USO regime

• One-time subsidy for 20,000 BTSs – 7,200

• Bandwidth subsidy – 2,080

Total – 9,000

(Figures in Rupees Cr.)

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Collection and Disbursement of USOF

Financial Year Collection Disbursement Balance

2002-03 1653.61 300 1353.612003-04 2143.22 200 3296.832004-05 3457.73 1314.58 5439.98Total 7254.56 1814.58 5439.982005-10 37541 17936.80 25044.2

Collection and Disbursement of USOF

(Rs in crore)

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Parameters Korea Malaysia China India

Internet connections per 100 persons

27 12.2 2.7 0.46

Broadband connections per 100 persons

26 0.68 1.5 0.02

Charges per 100 kbps per month (US$)

0.25 7.61 3.07 15.63

GDP (US$ Per capita) 10,000 4,000 965 465

OVERALL ICT PENETRATION IN INDIA STILL LAGS BEHINDOTHER COUNTRIES

Key internet and broadband indicatorsJune 2004

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Service provider Approx. Capacity – Dark & Lit Fiber (2005)

Present Lit Capacity (2004)

Utilization

Tata (SAFE, SMW3, SMW4, Indicom)

5.15 0.014 Less than 0.010 Tbps

Bharti (i2i, SMW4) 8.5 0.160

Reliance (FLAG, FALCON) 3.0 0.005

Total 16.7 0.180

SUFFICIENT INFRASTRUCTURE ALREADY EXISTS AND IS GROWING, BUT UTILIZATION NEEDS TO BE INCREASED

International ConnectivityCapacity in Tbps; 1 Tb = 1,000 Gb

National Connectivity

• 670,000 route KM of fiber has been deployed across the country

• BSNL alone has reached 30,000 of its 35,000 exchanges with fiber

• There is a possible capacity of up to 20 Gbps to each of these 30,000 locations

• Using wireless, satellite and other technologies, these 30,000 exchange locations can be leveraged as hubs for distributing broadband connectivity to all the surrounding villages

• Many routes between major cities (approx. 150) with > 1 Tbps capacity, and utilization less than 3 Gbps on average

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THANK YOU