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Telecom Sector : Why the Phone Will Keep Ringing ?

Recent recommendations of the Trai, if accepted, will connect the 330 million plus mobile and fixed-line phone users to computers and usher in a new era of net telephony. It will also give subscribers freedom to choose a carrier of their choice for STD and ISD calls.  There is apprehension that Trai directives are bound to affect the bottomlines of major telcos. In addition to increasing competition among service providers, new formidable competitors such as PowerGrid, RailTel, Sify, AT&T, British Telecom, Gail and Tulip Telecom who have fibre networks in India, are expected to emerge on the overcrowded Indian telecom landscape. But what is forgotten is that the basic concept of Internet telephony has to spread in India, for existing competitors to feel the pinch.  A PC is required to take advantage of the STD and ISD facilities; however, PC penetration in India is very low. One also needs a good broadband connection and reliable power supply, all deficient in this country.  The stock market seems to believe this is negative for telecom companies.  However, I believe the telecom industry still has great times ahead.   Here’s why ?

   India has emerged as the fastest growing mobile market.  Over 7 million new connections are added every month.  Focus has so far been on the subscriber additions per month.  As the telecom market reaches maturity stage, their valuations are getting eroded. Most analysis of the telecom sectors centers around MOU (Minutes of usage) per subscriber per month and the ARPM (Average Revenue Per Minute).  Bharti Telecom has recently announced that the average revenue per minute which had fallen 5 per cent to 72 paise in the March 2008 quarter, fell further to just 66 paise in the quarter ended June 31, 2008, a drop of 8 %.  However, the MOU (Minutes of usage) per subscriber rose from 507 in the previous quarter to 537 in the quarter ended June 31, 2008.  Every time a telco announces its results, it is given a thumbs-up or thumbs-down by the capital markets depending on whether its Minutes of usage per subscriber and subscriber additions are in the positive or negative. This method of stock valuation is, in my opinion, taking a very parochial view of the tremendous potential of the telecom sector.

    I believe Indian telcos are positioning themselves well for changing trends. Bharti Telecom and RCOM are selling part of their stakes in the towers infrastructure or to spin off their towers infrastructure into a separate subsidiary, and thus realize value for their shareholders.  Nokia, the world’s largest maker of mobile phones, has been experiencing extraordinary rates of growth (recently reported 13 % year-on-year rise in earnings) thanks to its presence in emerging markets which has kept it relatively insulated from any western downturn. The current spread of global meltdown to the Asian continent is somewhat tapering off its growth targets though.

What is forgotten is that the global telecom sector is fast changing and the world’s biggest telecom companies are rushing to add capacity (even though they are located in matured markets) to add capacity on inter-continental routes, to meet escalating demand fuelled by consumers downloading bandwidth-hungry video content from YouTube, iTunes and other sites over broadband networks. Disruptive technologies that have begun to surface in the telecom sector will power rapid growth in this sector and result in significantly higher stock valuations, when the capital markets of the world finally recover and gather momentum.

According to TeleGeography Research, the Washington, DC-based telecoms consultancy, “the increasing capacity requirements on subsea cable systems connecting the continents of the world has been driven by the emergence of content-rich network applications and the growth of the internet, which in turn are warranting upgrades to existing routes, as well as construction of new cables on the less served routes”.  According to Gary Breuninger, Global Crossing’s chief marketing officer, “With more than a terabit of capacity in the Atlantic, Global Crossing has experienced annual increases of more than 60 per cent in demand between 2004 and 2008”.  It has made strategic investments in enhancing capacity on its mid-Atlantic crossing undersea fiber-optic cable system to meet growing demand for internet protocol and Ethernet transport among its corporate and other customers.

 There is also need to build additional “redundancy” into the network undersea cables as a protection against damage and failure.  The disruption in internet service in Middle Sea and South Asia that was the fallout of three undersea cables getting damaged is a grim reminder.  According to Telegeography, at least 25 new cables, costing about $ 6.4 Billion, will be built between 2008 and 2010. The reasons for cable construction are often a combination of several factors : including dwindling available capacity on some cables, a desire for wider restoration options, the need for physically diverse routes, competition and high capacity prices in some regions of the world.

     In 2001, only 30m households worldwide had access to broadband internet connections.    By the end of 2007, that figure had grown to more than 337 m households.   INDIA will soon see its first spectrum auctions for 3G and for broadband wireless access (BWA). 3G technology has made its mark today in several parts of the world. Prices of network equipment and handsets have fallen, making 3G affordable, and technology itself has improved. High speed packet Access (HSPA), the packet-data upgrade of 3G, delivers today about 5 Mbps average data throughput at each cell tower per 5 MHz of spectrum. The latest evolution of HSPA is claimed to support as high as 15 Mbps throughput. New YouTube-like applications bringing in enhanced revenue become possible. This is the opportune time for Indian operators to embrace 3G.

Video the new driver of internet traffic growth :

   According to TeleGeography Research, the Washington D.C.-based telecoms consultancy, video is now the primary driver of internet traffic growth.  Applications such as YouTube, the iTunes online store, and peer-to-peer such as BitTorrent, are helping internet users consume staggering amounts of bandwidth.  

      DoT has recently cleared allocation of 3G spectrum to BSNL and MTNL and India will soon see its first spectrum auctions for 3G and for broadband wireless access (BWA) services.   Third generation mobile phone services allow users to surf the Internet or download content, including music and video, at speeds faster than current technologies deployed on Indian networks allow.  3G is expected to ring in revolution in the broadband access space and is coming at the right time since the telcos are peaking in terms of new customer additions in the metros. It will also enable the government to achieve the target of 20 million subscribers by 2010 and further its initiatives of e-governance and m-commerce. Prices of network equipment and handsets have fallen recently, making 3G affordable, and technology itself has improved. High speed packet Access (HSPA), the packet-data upgrade of 3G, delivers today about 5 Mbps average data throughput at each cell tower per 5 MHz of spectrum. The latest evolution of HSPA is claimed to support as high as 15 Mbps throughput. New YouTube-like applications bringing in enhanced revenue become possible. This is the opportune time for Indian operators to embrace 3G. Apple’s 3G i-Phone has and will in addition to the factors mentioned above significantly change the way we talk, communicate, advertise and the factors influencing our entertainment, eating habits and investment of monies. The 3G iPhone combines three products in one – a revolutionary phone, a widescreen iPod, and a breakthrough Internet device.  With entertainment being big business in India, 3G with its multimedia applications capabilities does offer a huge potential opportunity.

   

WiMax and Wifi technologies to benefit telecom industry :

   These technologies can offer voice and data to stationary as well as mobile terminals.  WiMax can also be used in conjunction with Wifi for reducing the cost of the terminal equipment for deployment in rural areas. These technologies about to be deployed in a big way will play an important role in implementing e-governance, e-learning and tele-medicine.

 

Mobile/cell phone advertising : The next big thing after online advertising :

   The latest mode to invade the advertising world is AdRBT (Ad Ring Back Tone). Via AdRBTs, each time a person calls, he will hear an ad instead of a ring tone.  This product has the maximum reach as compared to other ad products that include advergaming, adfunded content and WAP advertising.  RCOM created one of the first of its kind AdRBTs for the Reliance Power IPO in January 2008. 

   Reliance Power jingle was estimated to have been heard 800 million to 1000 million times, which is 3-5 times over other traditional media. One of the campaigns of Tata Teleservices was with Parachute advanced hair oil, to promote the balladic flavour of their jingle ‘Tum Ho Gorgeous Hamesha’.  During IPL (Indian Premier League) cricket series, there were 8,00,000 downloads of the jingle ‘Cricket Ka Karmayudh’ in 45 days, thus fetching significant revenues to the telecom operators. AdRBT is non-invasive and has mass reach.

Tracking Stock quotes and mutual fund portfolios/NAVs on mobile phones :   Fidelity AMC and ICICI Prudential AMC have started allowing investors to check portfolio values and transaction details 24*7.  Against the backdrop of complaints of non-arrival of account statements in time, investors can real-time check the NAVs, their portfolio values and even switch and make additions/redemptions from the click of a button. This will enhance the usage of mobile phones and will enable investors to manage their investments anytime, anywhere.

Mobile/cell phone  gaming revenue :  Is it a ‘Home run’  ?

   Research firm Gartner predicts that mobile gaming revenue will experience a compound annual growth rate of 10.2 % between 2007 and 2011 with worldwide end-user spending reaching $ 6.3 Billion in 2011. India is expected to lead among Asian countries in terms of total mobile gaming revenue generated, with the 2007 figure at approximately $ 80 Million.  Mobile gaming revenue is forecasted to reach $ 450 million by 2012.  One can download a high-end game on a mobile for charges varying between Rs 50 to Rs 100.  For a relatively small sum, consumers can enjoy the game again and again, as opposed to paying a huge sum upfront. On a per game basis, Gaming Hungama could charge anything between Rs 20 to Rs 150. The pay-per-play cost with Jump Games (on Reliance) could be anything between Rs 5 to Rs 10.  Players like Breakpoint, Glu Mobile, Gameloft, Player One, Mophun, Electronic Arts are quickly moving in.

Mobile banking to get popular : With almost 41 % of India’s 1.1 billion population “unbanked”, mobile payment platform providers foresee a huge market in facilitating micro-lending services or variants thereof on mobile phones at reasonable costs.  Estimates put customers for mobile banking services at between 50 million and 100 million over the next two years, by when India could be home to nearly half a billion mobile phone users, up from about 300 million today.

Mobile messaging set to replace e-mails : Mobile messaging will help organisations to overcome the physical and economic barriers of mass reach, leading to reduction of costs and increase in efficiencies and productivity through real-time communication.

Rural growth an important growth driver :

 Some two billion new subscribers are expected to start using mobile phones in the next five years, and 80 % of them live in developing world markets.  To power mobile networks in remote areas today, telecom operators pair base stations – the tower-top radio transmitters that form the backbone of mobile networks—with diesel-powered generators and batteries.  The fact that fuel is 65 % of the cost of operating a typical base station acts as a dampener.

 Telecom giants such as Telefon AB LM, Ericsson, Alcatel-Lucent and Motorola Inc. are all looking into how they could tweak existing telecom gear to run on less electricity, or on renewable energy.  Ericsson and Alcatel-Lucent have separately installed about 400 solar-powered base stations in African countries, including Senegal and Uganda.  In India, Ericsson has installed some 40 base stations that run ob biodiesel, essentially recycled cooking oil.  Alcatel-Lucent’s solar base station runs with 750W, while Ericsson’s requires 600W.

VNL (Vihaan Networks Ltd) has developed a simplified base station (costing $ 3500 or Rs 1.5 lakhs) powered by solar panels and consuming just 100W, about the same as an electric bulb. In comparison, GSM stations most widely used today can cost anywhere from $ 40,000 to $ 100,000.  Rural telephony is the opportunity to bridge the digital divide between urban and rural India.

4G technology making its appearance on the scene  :

 

One standard known as IEEE 802.16e (belonging to the Mobile WiMax family) is now commercially available and is a curtain-raiser to 4G. Its cell throughput per MHz of spectrum today may be comparable to that of HSPA; but its total data rate scales with higher transmission bandwidth.  Soon, the next-generation 802.16m will be standardised as a candidate for 4G, and promises to provide data throughputs of the order of 100 Mbps in 15 MHz spectrum. Another OFDM-based standard, LTE  and its cousin LTE-A will become a candidate for 4G with similar throughput. Such a high throughput will enable wireless broadband to compete with copper-based DSL widely available today. India is about to witness a wireless revolution.

Currently underserved areas including Africa, Caribbean and Middle East are fuelling demand for cable capacity addition :

Google, the internet search and advertising company, is one of six groups that announced plans to build a 10,000 kilometre high-bandwidth subsea fibre-optic cable linking the US and Japan.  Other partners in the $ 300 Million Unity consortium include India’s Bharti Airtel, Global Transit, KDDI, Pacnet and SingTel. 

AT&T, the largest US telecoms group, is involved in six international cable consortium projects including the Trans-Pacific Express, which it joined along with Japan’s NTT DoComo in early 2008.  Other participants in that project include Verizon and a handful of Asian carriers including China Telecom, China Netcom, China Unicom, Korea Telecom and Chungwa Telecom in Taiwan.

  Caution must not be thrown to the winds :  HSPA evolved by restricting CDMA techniques to a large extent (limiting it to a spreading factor of 16) and co-opting developments associated with the emerging 3.5G/4G OFDM wireless technology. However, it lacks the wider transmission bandwidth (typically 15-20 MHz); 4G technology is being built brick by brick using OFDM (Orthogonal frequency division multiplexing) technology. The government and the regulators must act not only to ensure that spectrum is not under-valued but also that there is no over-valuation which could in the long run affect the customers and broadband penetration. Almost 30% of what we as consumers pay today goes to the government by way of service tax, licence fees, spectrum charges, USO charges, customs and excise duties, sales tax, and the like. Operators need to understand technology deeply and not go by vendor hype. Such hype had significantly contributed to unrealistic bids for 3G spectrum in Europe.

 
     The disruptive technologies making their mark in the telecom sector have the potential to transform the way we live our lives, ensuring rapid growth and significantly higher telecom stock valuations. It is no wonder that even a market-savvy company like Google which made its mark on the online advertising map and has been a darling of Wall Street has now changed its focus to the mobile / cell phone arena to power its growth in years to come.  It will be in India’s interest to see that both 802.16m and LTE-A compete as 4G standards in the Indian market. India should influence availability of handsets which support both the standards, and priced no more than a single-standard handset. The similarity of the two standards makes this technologically feasible. India is a large enough market to be able to demand convergence.  Google hopes to hook the millions of mobile phone subscribers in India who do not use data or SMS-based services with its voice-based search.  It is in the process of automating voice search service and is collecting voice and dialect samples from users in Hyderabad and Delhi.  Analogous to Just-Dial, another voice-based search engine; consumers will be asked to call up a toll-free number from either a landline or mobile and request the information they need.  Google will either deliver the information through an SMS or read it out.  The mobile phones of the future will be embedded with disruptive technologies that dramatically transform the way we search, analyze and retrieve voice and data.

Note : Mr Sunil Kewalramani is a WHARTON BUSINESS SCHOOL MBA.  He is the CEO, Global Capital Advisors.  He may be reached at worldequity@sunilkewalramani.com.

Mandatory Disclosure : It may safely be assumed that I own telecom stocks in global equity markets, and would have advised my clients on stocks on lines similar to the opinion I have expressed above. 

About the Author

Mr Sunil Kewalramani is a Wharton Business School MBA, a CPA, CA and a leading consultant for multinational companies on global asset management, strategic planning and cross-border mergers and acquisitions

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