'The 700 MHz spectrum auction will be interesting'

India is currently the world’s second-largest telecommunications market, in terms of subscribers.  Voice services have seen consistent growth over the past decade—fuelled by a service that addressed the need of Indians to talk to each other. 

While they continue to talk, the Indian subscriber is now demanding quality access to the internet for various information and entertainment needs.  Subscribers are replacing their handsets with smart phones and are demanding quality internet experience. 

For instance, users across urban, semi-urban and rural areas are trying to access their favourite song, a clip of a movie or their favourite television serial on their mobile device. Users across the length and breadth of the country have migrated from catching up with their latest cricket scores on the radio or the television to real time streaming. Children watch their favourite cartoons and stream their lessons online. Children as young as four or six years old are accessing their favourite shows by using voice activated controls on popular applications such as YouTube. 

Incredible usage
An average user in India is estimated to spend in excess of 2.5 hours a day on a smartphone including nearly 72 minutes on mobile applications. There are more than 130 million active social media users in India, and over the top applications (OTT) such as Facebook and Whatsapp are increasing in usage.

Such increase in demand for data services has fuelled a rapid rise in data usage. However, under 2G (‘G’ referring to generation of standard) or 3G, content heavy usage such as video streaming has not delivered satisfactory customer experience. Buffering of videos and slow downloads have frustrated users leading to slower uptake of 3G services in India. Any increase in speed has a direct correlation to customer experience, thus leading to the need for 4G networks.

4G networks have shown 5x to 8x incremental download speeds. These downloads could extend for upto 45 Mbps (megabits / second). Users would be able to download a movie in about 8-12 minutes or view high definition videos. 

Telecom Regulatory Authority of India (Trai) expects the total number of 4G users are approximately one million as at the end of December 2015—however, that is expected to grow exponentially.  In the next three to five years, a substantial component of mobile internet subscribers are expected to adopt 3G and 4G. 

Advent of Airtel
4G networks require contiguous and large blocks of spectrum. Reliance Jio was the only operator that had pan-India spectrum that enabled 4G services. Last week, Bharti Airtel acquired 20 Mega Hertz (MHz) in the 2300 MHz band spectrum in eight circles from Aircel.  This is in addition to 10 MHz in the 1800 MHz band spectrum acquired from Videocon last month. With these acquisitions, Bharti Airtel now has an ability to offer 4G across all 22 operating Circles across India.

Pan-India coverage would be important for any telecom operator in India, due to the ability to provide a seamless and distinct customer experience across geographies. Prices of smart phones have been declining steadily leading to greater number of subscribers being exposed to the possibilities of quality internet access.  Pan–India deployment could assist in synergies derived on capital expenditure to enhance network. The operator also be able to secure better content at lower prices.  Most of all, the operators could insulate themselves against the price of spectrum in the upcoming 700 MHz auction. 

From a customer standpoint, increased customer experience would drive greater usage. Operators would be able to increase revenues with increased usage.  Globally, with the exception of Korea, 4G adoption in Asian markets hasn’t increased blended average revenue per user (ARPU). Indian operators have already priced 4G at 3G bundles or lesser—making it difficult for operators to monetise the incremental value of high speeds and quality experience. 

Reliance Jio is building an entire ecosystem of devices, apps and content around its yet-to-be launched operations. Vodafone India and Idea Cellular are in various phases of their Long-Term Evolution (LTE) service launch. BSNL has plans to launch 4G service in 14 circles where it has spectrum. Telenor India too is ramping up its network capability with the proposed launch of narrowband-LTE service.

Interesting auction ahead
This makes the upcoming 700 MHz auction interesting as operators with a serious outlook towards deploying networks of the future would be considering acquisition of spectrum even at high costs.
700 MHz is a much sought-after band for 4G deployment around the world due to its spectral efficiency and higher propagation characteristics inside buildings. The lower frequency provides wider coverage, which reduces the number of towers required, significantly cutting capital expenditure. The cost of delivering mobile services is approximately 70% cheaper than that at 2,100 MHz making it a valuable resource that is essential to providing service. 

However, almost all operators have huge debt which has been accumulated to procure spectrum from earlier auctions. As rates are likely to decline with the impending launch of Reliance Jio’s services, few players will have the muscle power to bid for costlier spectrum.

Even as 4G remains a nascent technology in India, it’s future potential cannot be underestimated. The Digital India programme and the mushrooming growth of mobile applications will boost the demand for high speed services.  The real success of 4G will depend on strategic decisions by operators to focus on customer acquisition coupled with superior experience.
(The author is the Head of TMT Practice at KPMG India)