School of Management Studies

CUSAT

BUSINESS ENVIORNMENT

TELECOM INDUSTRY

Presented by

Divya Jacob
Divya P.V
Gargi Jose
Godwin Mathew
Hamna Ashraf
Jayakanth C V
Jinumon J Tharayil

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TELECOM INDUSTRY

In the last few years the Indian Telecom sector has experienced a tremendous
growth. It is the fourth largest telecom market in the world after China, Japan and
South Korea. The Indian telecommunications industry is one of the fastest growing
in the world. According to the Telecom Regulatory Authority of India (TRAI), the
number of telephone subscriber base in the country reached 706.37 million
telephone (landlines and mobile) subscribers and 670.60 million mobile phone
connections as of Aug2010. It is also the second largest telecommunication network
in the world in terms of number of wireless connections after China. The wireless
subscriber base has increased to 617.53 million at the end of May 2010 from 601.22
million in April 2010, registering a growth of 2.71 per cent.

The Indian Mobile subscriber base has increased in size by a factor of more
than one-hundred since 2001 when the number of subscribers in the country was
approximately 5 million [to 670.60 Million in Aug 2010.

HISTORY OF INDIAN TELECOMMUNICATIONS

1851 First operational land lines were laid by the government near Calcutta (seat of
British power)

1881 Telephone service introduced in India

1883 Merger with the postal system

1923 Formation of Indian Radio Telegraph Company (IRT)

1932 Merger of ETC and IRT into the Indian Radio and Cable Communication
Company (IRCC)

1947 Nationalization of all foreign telecommunication companies to form the Posts,

Telephone and Telegraph (PTT), a monopoly run by the government's Ministry of
Communications

1985 Department of Telecommunications (DOT) established, an exclusive provider

of domestic and long-distance service that would be its own regulator (separate from
the postal system)

1986 Conversion of DOT into two wholly government-owned companies: the Videsh
Sanchar Nigam Limited (VSNL) for international telecommunications and
Mahanagar Telephone Nigam Limited (MTNL) for service in metropolitan areas.

1997 Telecom Regulatory Authority of India created.

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1999 Cellular Services are launched in India. New National Telecom Policy is
adopted.

2000 DoT becomes a corporation, BSNL

FEATURES OF INDIAN TELECOM INDUSTRY

The Indian Telecommunications network with 203 million connections is the

third largest in the world and the second largest among the emerging economies of
Asia. Today, it is the fastest growing market in the world. The telecommunication
sector continued to register significant success during the year and has emerged as
one of the key sectors responsible for India’s resurgent India’s economic growth

 Telecom sector accounts for 1 percent of India’s GDP. Likely to double in 2- 3

years
 Telecom services contribute 30 percent to India’s total service tax revenue
 The Indian telecom sector gives direct employment to more than 4,00,000
people, compared to about 6,00,000 people in China
 Not just the enabler of software, BPO and ITeS companies, it is also the
lifeline of a fast growing E-commerce space
 State-of-the-art telecom infrastructure has led to the rise of cities like Mysore,
Mangalore, Jaipur, Ahmadabad, Kochi on the software services map
 This has helped spread the benefits of a booming Indian economy to beyond
metros and large cities, and wealth creation is happening in tier-2 cities

POLICY DEVELOPMENTS IN TELECOMMUNICATIONS

The Government had announced a National Telecom Policy (NTP) in

1994allowing private sector participation in basic services. The policy sought to
achieve the basic objectives of telephone on demand, provision of world class
services at affordable prices, ensuring India’s emergence as major manufacturing
base / export base of telecom equipment and universal availability of telecom
services to all villages. Within this framework, the Ninth Plan envisaged a much
greater role for the private sector.

As it happened, private sector participation failed to take off as desired due to

several constraints, the more important being artificially high license fee liabilities
for the operators resulting from competitive bidding process and the actual demand
being much lower than the projections assumed by the private operators. While there
was a rapid roll-out of value added services like cellular phones, radio paging etc.,
and their growth and quality of services suffered heavily. For basic services just six
licenses were issued after three rounds of bidding and till recently only three
operators had commenced operations in a limited way. As a result most of targets of

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NTP 1994 could not be achieved. In addition, there have been far reaching
developments on a global scale in the recent past in telecom, IT, consumer
electronics and media industries. . Convergence of both markets and technologies is
a reality that is forcing realignment of the industry. This necessitated a re-look into
the existing policy frame work. A summary of the reforms undertaken thus far is in
the following Box. However, there are a few issues left which need to be addressed
further.

NATIONAL TELECOM POLICY 1994

The national telecom policy covers the following objectives:

 Telephone should be made available everywhere which will be in need of it

 All the villages should be entitled to universal telecom services, that is, all the
people should be able to enjoy the telecom services at low-priced range
 The telecom services should be of global standard and all the grievances from
consumers, disputations and public interface should be taken care of at the
earliest possible time
 India being one of the biggest country should encompass a major
manufacturing unit as well as exporter of the telecom products across the
globe
 The telecom department is also responsible for the security issues of the
country

At present, about 0.8 percent of Indians possess telephones as compare to

around 10 percent of telephone owners per hundred persons. The statistics is also
quite less than many developing countries of Asia such as, China which has 1.7
percent of persons possessing telephones, Pakistan with 2 percent, and Malaysia is
having 13 percent of the same. The government of India has planned up for a revision
of the VII Telecom plan for 1997 and set some new targets for it. The targets for the
revised telecom plan demands the availability of telephone as per the requirement,
by 1997 all the villages should be availed the telecom facilities, a PCO should be set
up within the range of every 500 persons in urban areas, the globally organized value
added services in the telecom department should also be introduced in India to make
its standard at par with the global market.

Policy Initiatives by Govt. of India in the Telecommunication Sector also

include the new telecom policy which was formulated by the government of India in
1999 has been designed by the government of India with the aim to create an
ambiance that will attract foreign direct investment and will also permit
infrastructure for communication purposes by making investments on technological
development. The following sectors in the telecommunication department should be
licensed:

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  All the telecommunication or telegraphed services should be licensed that
might cover any geographical region by using any kind of technology
 License for an integrated access to cellular services within a specific area.

Policy Initiatives by Govt. of India in the Telecommunication Sector also

covers broadband policy effective from 2004 that implies availing Internet
connectivity in the houses as per their requirement as well as tele-calling services.
The broadband service offered by the telecommunication department includes tele-
education, tele-medicine, e-governance, entertainment along with employment
generation with the help of high-speed access to information and web-based
communication.

NEW TELECOM POLICY 1999

The objectives of the NTP 1999 are as under:

 Access to telecommunications is of utmost importance for achievement of the

country's social and economic goals. Availability of affordable and effective
communications for the citizens is at the core of the vision and goal of the
telecom policy.
 Strive to provide a balance between the provision of universal service to all
uncovered areas, including the rural areas, and the provision of high-level
services capable of meeting the needs of the country’s economy;
 Encourage development of telecommunication facilities in remote, hilly and
tribal areas of the country;
 Create a modern and efficient telecommunications infrastructure taking into
account the convergence of IT, media, telecom and consumer electronics and
thereby propel India into becoming an IT superpower;
 Convert PCO’s, wherever justified, into Public Teleinfo centers having
multimedia capability like ISDN services, remote database access, government
and community information systems etc.
 Transform in a time bound manner, the telecommunications sector to a
greater competitive environment in both urban and rural areas providing
equal opportunities and level playing field for all players;
 Strengthen research and development efforts in the country and provide an
impetus to build world-class manufacturing capabilities
 Achieve efficiency and transparency in spectrum management
 Protect the defense & security interests of the country
 Enable Indian Telecom Companies to become truly global players.

In line with the above objectives, the specific targets that the NTP 1999 seeks to
achieve would be:

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  Make available telephone on demand by the year 2002 and sustain it
thereafter so as to achieve a teledensity of 7 by the year 2005 and 15 by the
year 2010
 Encourage development of telecom in rural areas making it more affordable
by suitable tariff structure and making rural communication mandatory for all
fixed service providers
 Increase rural teledensity from the current level of 0.4 to 4 by the year 2010
and provide reliable transmission media in all rural areas
 Achieve telecom coverage of all villages in the country and provide reliable
media to all exchanges by the year 2002
 Provide Internet access to all district head quarters by the year 2000

Provide high speed data and multimedia capability using technologies including
ISDN to all towns with a population greater than 2 lac by the year 2002

SATCOM POLICY

The SATCOM Policy shall provide for users to avail of transponder capacity
from both domestic / foreign satellites. However, the same has to be in consultation
with the Department of Space.

Under the existing ISP policy, international long distance communication for
data has been opened up. The gateways for this purpose shall be allowed to use
SATCOM.

It has also been decided that Ku frequency band shall be allowed to be used
for communication purposes.

The government has taken many proactive initiatives to facilitate the rapid
growth of the Indian telecom industry.

 In the area of telecom equipment manufacturing and provision of IT-enabled

services, 100 per cent FDI is permitted
 No cap on the number of access providers in any service area. In 2008, 122
new Unified Access Service (UAS) licenses were granted to 17 companies in
22 services areas of the country
 Revised subscriber based criteria for allocation of Global System of Mobile
Communication (GSM) and Code Division Multiple Access (CDMA) spectra
were issued in January 2008
 To provide infrastructure support for mobile services a scheme has been
launched to provide support for setting up and managing 7,436 infrastructure
sites spread over 500 districts in 27 states. As on December 31, 2009, about
6,956 towers had been set up under the scheme

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 According to the Consolidated Foreign Direct Investment (FDI) Policy
document, the FDI limit in telecom services is 74 per cent subject to the following
conditions:

 This is applicable in case of Basic, Cellular, Unified Access Services, National/

International Long Distance, V-Sat, Public Mobile Radio Trunked Services
(PMRTS), Global Mobile Personal Communications Services (GMPCS) and
other value added Services
 Both direct and indirect foreign investment in the licensee company shall be
counted for the purpose of FDI ceiling. Foreign Investment shall include
investment by Foreign Institutional Investors (FIIs), Non-resident Indians
(NRIs), Foreign Currency Convertible Bonds (FCCBs), American Depository
Receipts (ADRs), Global Depository Receipts (GDRs) and convertible
preference shares held by foreign entity. In any case, the 'Indian' shareholding
will not be less than 26 per cent
 FDI up to 49 per cent is on the automatic route and beyond that on the
government route. FDI in the licensee company/Indian
promoters/investment companies including their holding companies shall
require approval of the Foreign Investment Promotion Board (FIPB) if it has a
bearing on the overall ceiling of 74 per cent. While approving the investment
proposals, FIPB shall take note that investment is not coming from countries
of concern and/or unfriendly entities
 The investment approval by FIPB shall envisage the conditionality that the
Company would adhere to license Agreement
 FDI shall be subject to laws of India and not the laws of the foreign
country/countries

FOREIGN DIRECT INVESTMENT IN TELECOM SECTOR

The liberalization measures post-1990 have changed with foreign investments

radically, now portfolio as well as Foreign Direct Investment are not only allowed but
also actively encouraged. During the decade of the nineties, the 'ceilings' on FDI in
different sectors were progressively raised. In 2001, 100 per cent foreign investments
were allowed in several industrial sectors. Also, 100 per cent Foreign Direct
Investment is allowed in almost all the infrastructure sectors.

FDI can enter India through two possible channels:

 The automatic route under which companies receiving Foreign Direct

Investment need to inform the Reserve Bank of India within 30 days of receipt
of funds and issuance of shares to the foreign investor
 For sectors that are not covered under the automatic route, prior approval is
needed from the Foreign Investment Promotion Board (FIPB).

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 The foreign direct investment in telecom has been hiked up from 49% to 74%.
This move is positive for the sector , as it require investments of Rs 700 –900 million
over the next 5 years. FDI inflow by 2004 was 9950.94 cores in telecom. Countries
like Europe, Korea, and Japan telecom are likely to enter India, as India is seen as
fastest growing telecom market in world.

Their is restrictions related to remote access, transfer of network information

outside India and international transit routing of Indian traffic. It has been decided
to enchance the FDI in telecom services in areas like basic telecom, cellular unified
access services, Nat /intranet, long distance Vast, public mobile, radio service &
gmdcs.

DOT will have the authority to restrict the license company from operating in
any of the sensitive areas of the country.

Effect of FDI in telecom

 Telecom service at Subsidized prices

 FDI inflows will allow multiple benefits such as technology transfer, market
access and organizational skills.
 In India where 70% of population still resides in rural areas, there is a dire
need of infrastructure in telecom, which FDI can provide.
 Foreign currency flowing in the country
 Harmonious relationship with country from which foreign investment is being
made
 There will be increase in competition with local players, which will benefit
consumers
 It will have a multiplier effect
 Telecommunication facility at reasonable price, affordable to many
 More technological inflow, will improve voice & data quality
 Free flow of capital is good for Indian consumer

Doubts in the new FDI regulation

 According to the policy, majority of directors and board members including,

chairman, MD and CEO will be resident of India.
 foreign firm owns 74 per cent of the Indian telecom, it still has to appoint the
chairman, managing director and CEO "in consultation with serious Indian
investors", and a serious Indian investor is defined as someone who owns at
least 10 per cent of the firm's equity - why even bother to invest in India if
someone else decides who's going to run the firm?
 At a time when the country's police/investigative arms find it impossible to
trace people at times, telecom firms "must provide traceable identity of their
subscribers".
 The policy says "No accounting information will be send outside India"
imagine a foreign invester wants to check the usage pattern, clouding, he will
not be able do it so India will be seen as a black hole for foreign BPO.
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  It also says that network cannot be managed from overseas & the ironical part
is that India is fighting tooth and nil to win Contract to maintain global
network out of India

No wonder it has been one year since the announcement of an increase in FDI
limits in telecom from 49% to 74% has been made , and there are still no taker.

TELECOM TARIFFS IN INDIA

Telecom tariffs in India include a deposit at the time of registration, a non-

reimbursable fee for initial connection, bi-monthly rentals whose amount depends
on the capacity of the local network size, charges for local calls (in excess of free
calls), charges for national and international calls, charges for manual trunk calls,
and miscellaneous charges (including one year’s rental being kept as deposit).

Two systems for charging tariffs are used in India, a flat rate and a measured
rate. Under the former, the subscriber has to pay a fixed monthly rental irrespective
of the number of calls made. In the latter, the subscriber is charged a lower rental
plus a usage charge per call. A specified number of calls are allowed free. At present
250 free calls per billing period are provided for rural subscribers, and non-rural
subscribers are provided 150 free calls. Thus, the average number of free calls per day
range from two and a half for non-rural subscribers to about four for rural
subscribers.

STD calls are metered and charged according to a specified formula based on
the time when the call is made and the distance covered by the calls.

Indian telecom tariffs have normally focused on revenue and social objectives,
while incorporating certain cost considerations in the pricing methodology. A higher
tariff is charged for covering a longer distance, calls at peak times are charged more,
as are calls of a longer duration. A noteworthy feature in this context is that with
modern technology costs have become largely independent of distance. Instead, costs
depend more on the volume of telecom traffic. This is reflected, for example, in the
tariff structure in OECD countries (Chart 6).

India’s tariff structure shows a sharp rise in tariffs as distance increases, with
the highest rate for national long-distance calls being 90 times the lowest rate (see
Table 4 and Chart 7). Moreover, there are escalating tariffs, i.e. higher the number of
calls made by the user, higher is the tariff (Table 5). There is also a significant
difference between tariffs for peak time and non-peak time usage (Tables 6 and 7,
and Charts 8 and 9). Table 10 shows the pulse rates applied to international calls
(peak and off-peak times), and indicates that the international call rates for most
countries are higher than the upper limit of the tariff for domestic long-distance
calls.

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 Discounts are offered for certain categories of customers. For example, lower
tariffs are applied for rural subscribers for number of calls ranging between 150 to
450 (Table 5 and Chart 10).

Rental is subsidized in general. Even the highest rental charged is significantly

below the estimated rental that will cover cost. Informal estimates suggest that if the
current average rental is increased to cover the relevant cost, it would have to rise by
100 to 200 per cent.

The rental rates in India differ on the basis of the capacity of the subscriber’s
exchange (Table 8 and Chart 11). At present subscribers in India linked to exchanges
with lower capacity are charged a lower rental, and in the case of exchange capacity
from 100 to 999 lines the rental for rural subscribers is less than that for others
(Table 8 and Chart 11).

Tariff structure for calls covering different distances

The present tariff structure for national STD shows a sharp increase in tariffs
as distance increases. As mentioned above, with the advent of new technology, costs
do not increase much after a particular distance is covered; and this distance is
substantially less than the range that is specified for the Indian tariff structure: see
for instance, Chart 6 which provides the OECD tariff structure linked to distance, and
compare it to Chart 7 which shows a similar information for India; this comparison
also has implications for a reconsideration of the international call tariffs. Thus,
there is a need to consider whether this tariff structure should be altered to
correspond more closely to the difference in costs that arise with a change in
distance. Similarly, a related question is whether the tariffs for international calls
should be oriented towards costs.

Cost-orientation of national STD tariffs would require reducing the distance

for which the maximum tariff rate applies, and determining the various tariff rates
for different distances on the basis of costs. If the national STD tariff structure were
to be changed to better reflect costs, it would be necessary to also consider whether
to retain the discrete distance-slabs as in the present structure of tariffs, or to use a
more continuous and smooth increase in tariffs as the distance increases. If the
distance-slab system were to be retained, even then one would need to determine
how many slabs (and over what ranges of distance) should be considered for any
revised tariff system.

Comparison of national STD and operated-assisted trunk call rates

Though the distance slabs are largely similar, there is a dis-similarity in the
charging pattern: Table 9 shows that there is no consistent structure regarding the
difference between the national STD tariffs and the operator-assisted trunk call
tariffs over different distances. Hence, we need to consider whether the tariffs for
operator-assisted trunk calls should be made more consistent with the national STD
tariffs.

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 Greater consistency with the national STD tariffs would imply that any other
changes in the these STD tariffs for the reasons mentioned above would also involve
a change in the trunk call tariffs.

BROADBAND POLICY

Broadband connectivity is more than double that of a voice telephone

connection. The regulator and industry bodies came with specific recommendations
for the need for broadband emphasis and the possible targets along with the
approach required to achieve the same in 2004. Government came out with its
Broadband policy in 2004 but the emphasis was essentially on the targets. Despite
recommendations of the regulator indicating that wire-line based broadband could
only be used to meet a relatively small segment of the target and the need to have 3G
and BWA wireless systems to fully achieve the targets, the auction for 3G spectrum
has just been completed and BWA spectrum auction is on now. As a consequence,
the broadband connections number only 9 million today. The need for developing
appropriate applications is strongly felt to boost the demand for broadband
connections. What has been achieved so far is that the ratio of broadband
connections to Internet connections is now a healthy 1:2. With the impending
introduction of 3G and BWA services, it is expected that the broadband growth will
now get a philip.

3G SERVICES

 The Department of Telecom has taken the pioneering decision of launching of

3G services by BSNL and MTNL and initiation of process for auction of
spectrum for 3G services to private operators. Allocation of spectrum for
third-generation (3G) and broadband wireless access (BWA) services was
done through a controlled simultaneous, ascending e-auction process.
 All the 71 blocks that were put up for auction across the 22 service areas in the
country were sold, leaving no unsold lots. Auction for 3G spectrum ended on
May 19, 2010 after 183 rounds of intense bidding over a span of 34 days. The
Government is expected to morph revenue worth US$ 14.6 billion. All the
available slots across 22 circles have been sold to seven different operators.
 A pan-India bid for third generation spectrum stood at US$ 3.6 billion. The
Anil Ambani-led Reliance Communication bagged the highest number of 13
circles at a cost of US$ 1.9 billion, followed by Bharti Airtel in 12, Idea in 11
and Vodafone and the Tata’s in nine circles each, according to the Department
of Telecommunications.
 MTNL and BSNL will have to pay US$ 1.42 billion and US$ 2.2 billion
respectively.

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  It is expected that the Government of India would allot 3G spectrum on
September 1, 2010 to successful bidders. Letter of intent (LoI) has already
been allotted to the 3G winners by the Department of Telecommunications
(DoT), said Telecom Secretary P J Thomas.

The following table gives details regarding the subscriber base of each
Mobile Service Provider in India as of 31 July 2010:
Operator Subscriber base Market Share

Bharti Airtel 139,220,882 21.34%

MTNL 5,255,444 0.81%

BSNL 73,781,448 11.31%

Reliance Communications 113,315,831 17.37%

Aircel 43,296,659 6.64%

Sistema 5,582,683 0.86%

Loop 2,947,288 0.45%

Unitech 6,873,798 1.05%

Idea 70,748,936 10.84%

Etisalat 30,023 0.005%

Videocon 2,777,396 0.43%

Stel 1,423,043 0.22%

Tata Teleservices 74,850,220 11.47%

HFCL Infotel 851,887 0.13%

Vodafone 111,465,260 17.08%

All India 652,420,798 100%

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THE ROAD AHEAD

According to a report published by Gartner Inc in June 2009, the total mobile
services revenue in India is projected to grow at a compound annual growth rate
(CAGR) of 12.5 per cent from 2009-2013 to exceed US$ 30 billion. The India mobile
subscriber base is set to exceed 993 million connections by 2014, growing at a CAGR
of 14.3 per cent in the same period from 452 million in 2009. This growth is poised
to continue through the forecast period, and India is expected to remain the world's
second largest wireless market after China in terms of mobile connections.

"The Indian mobile industry has now moved out of its hyper growth mode, but
it will continue to grow at double-digit rates for next three years as operators focus
on rural parts of the country," said Madhusudan Gupta, senior research analyst at
Gartner. "Growth will also be triggered by increased adoption of value-added
services, which are relevant to both rural and urban markets."

Mobile market penetration is projected to increase from 38.7 per cent in 2009
to 63.5 per cent in 2013, according to Gartner.

CONCLUSION

Indian telecom is world’s fastest growing telecom expected grow three fold by
2012.Tremendous strides in this industry have been facilitated by the supportive and
liberal policies of the government. Especially the Telecom Policy of 1994 which
opened the doors of the sector for private players. Rising demand for a wide range of
telecom equipment has provided excellent opportunities for investors in the
manufacturing sector. Provision of telecom services to the rural areas in India has
been recognized as another thrust area by govt. which also helps for the enormous
opportunities in this sector.

Telecom has played a key role in facilitating economic growth not just directly,
but indirectly. Its contributions to the national GDP has increased from 1.7 per cent
in 1997 to more than 2.7 per cent in 2006. Gross valued added (GVA) of the industry
as a percentage of GDP has increased from 0.8 in 2000 to 1.8 in 2006. Direct
employment by Indian telcos stood at 432,771 in 2006 with the state-owned players
employing almost 85 per cent of them.

The Government should instil confidence in the industry by planning standard

policies for the sector. We suggest that telecom policy should be integrated with the
national planning process undertaken by the Planning Commission.

The next three years are likely to be difficult for the industry as players enter
different geographies and socio-economic regions to spur growth. That’s when the
problems will hit home harder.

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