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Is India’s broadband future in jeopardy: Nikolai Dobberstein, Head, Telecom Practice, A.T. Kearney Limited
Over the last year, broadband has received significant attention. Operators have rolled out 3G, the Government has announced the deployment of fiber to over 250,000 villages, and the industry is abuzz with speculations about RIL’s 4G plans. To cement India’s broadband ambitions, the New Telecom Policy targets 600 million broadband users by 2020.
This focus is commendable and reflects the criticality of broadband and Internet access to India’s societal development and economic growth. As we have seen in other markets, Internet access can contribute between 5 per cent and 10 per cent of GDP growth. India is still far behind in its broadband infrastructure and ranks only 14th in A.T. Kearney’s broadband readiness index for Asia Pacific.
While the Government has announced many plans with respect to mergers, spectrum allocation, local equipment manufacturing, skill development, and use of USO funds for broadband deployment, it is, however, not clear whether they will be compelling enough to achieve the fittingly ambitious broadband penetration targets. On the contrary, there are strong reasons to believe that broadband is going to fall very short of these expectations and that the current plans will deprive India of the much needed broadband impetus. Here the reasons why:
The future of broadband in India is all about mobile. A rollout of fixed broadband will only be viable in high-density metros and not on a mass market and pan-India scale. As such, mobile broadband is the only feasible way forward and, as we have seen in other emerging markets, also preferred by consumers due to the ease of getting a connection and the option of mobility.
The problem is that mobile broadband is not only very costly, but also a spectrum guzzler. Investment requirement are very significant to provide deep in-building coverage and deploy the capacity needed to deliver decent download speeds and volumes. Our work with mobile operators shows that future capex will be more than 30 per cent higher than historical spend, with coverage and capacity accounting for two-thirds. Most critically, spectrum requirements will be, at least, four to six carriers for successful broadband operators, well beyond the currently allotted 1 carrier for 3G and 2 carriers for 4G.
And here is where the discrepancy between India’s broadband ambitions and current actions becomes painfully apparent. Neither do Indian operators have the financial capabilities to fund a sustainable broadband rollout nor do they have any clear line of sight of how to get the required spectrum, and at a viable price.
The Government and industry players are well aware that the current industry structure is not sustainable. With 15 operators, India is one of the most competitive and cheapest mobile markets in the world, not just for voice but also for data. As a result, EBITDA margins and net profits of India’s top 5 players are well below global peers and for the remaining 10, EBITDA margins are highly negative, in most cases well beyond -150 per cent. Consequently, several operators seem to have slowed down the rollout of 3G and mobile broadband and manage their capex to show a marginal net profit to their investors.
Yet the current Government plans and actions are going to further deteriorate the financial capabilities of even the top operators. Spectrum charges are going to increase both for existing and new spectrum, merger policies focus on 2G, but are silent on the more critical 3G and 4G and rule spectrum pooling/roaming out between operators, and future data spectrum in the 700-800 MHz core mobile broadband spectrum is intended to be given to non-incumbent operators. The Supreme Court cancellation of 2G licenses and direction as auction as the only mechanism for spectrum allocation might also further drive up future 3G and 4G spectrum prices.
While some of these actions are somewhat understandable in light of the 2G scandal and the desire to rule out any favoritism, it is short-term oriented and will most likely and very seriously set back the future of broadband. At this stage, it is unclear how even the most capable operators in India will be able to fund a highly desired aggressive rollout of mobile broadband or have sufficient spectrum to deliver any good customer experience in the long term.
Therefore, the Government should start rethinking their broadband plans and create an industry structure and approach that fuels an accelerated broadband growth and balances the long-term development goals for the country with the short-term income need for the government. This will entail three focus areas:
- Ensure the industry is producing healthy margins and investing aggressively in the deployment of a broadband infrastructure. This requires a review of the number of competitors per circle (regardless whether 2G, 3G or 4G), spectrum charges and taxes, but also the creation of both incentives and more stringent rollout obligations for an accelerated 3G and 4G rollout.
- Establish a 10-year plan for mobile broadband spectrum and account for the compatibility and equipment availability of technologies in different spectrum ranges. This will make it not only easier for operators, but also for device penetration and consumers.
- Ensure successful broadband operators continue to receive sufficient spectrum based on merit, i.e., number of broadband subs and volume of traffic. Spectrum charges do not have to be low, but need to be in line with the expected future broadband returns. This should also allow for market-driven M&A, without any restrictions for data and broadband spectrum. However, operators who do not utilize their spectrum ought to be penalized and risk losing their spectrum.
Unfortunately, the Supreme Court direction to use auctions for spectrum allocation could here turn into a major stumbling block in making sure that successful operators have sufficient spectrum to deliver good broadband experiences.
600 million broadband users and up to 10 per cent of GDP growth are at stake. With the New Telecom Policy being finalized, it is opportune time to lay the groundwork for a strong broadband infrastructure and digital future in India.
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