Explosive telecoms growth and corruption in India

17 November 2011 |


Experiencing explosive levels of end user growth and infrastructure development, but at the same time weighed down by recent corruption and scandal, Alex Hawkes examines the exciting but erratic Indian telecoms market.

 


The year 2011 has been eventful even by the Indian telecoms market’s standards. With the former telecoms minister Andimuthu Raja being charged for his part in the country’s infamous 2G scandal, which is estimated to have cost India nearly $40 billion in revenue, and the nation’s operators eagerly monitoring the developments of a new telecoms act, which in many ways could help make or break the market’s future, it is perhaps no wonder that the country has consistently remained in the headlines – albeit for mainly the wrong reasons.

The controversies and bureaucratic red tape that have plagued the country’s telecoms sector, however, compare lightly to the vast potential the nation continues to hold. Here is a country that is perfectly positioned to serve as a gateway between East and West, with carriers that have capitalised astutely on India’s geography by deploying vast subsea and terrestrial links, and with a domestic market that is unlike any other on the planet.

As of March 2011, the country’s total number of mobile wireless subscribers stood at over 805 million, which is made even more astonishing by the fact that this equates to a population penetration of only 66.2%.

With a middle class rapidly increasing in size and purchasing power, a booming IT and manufacturing sector, an openness to business and without some of the language barriers found in the other BRIC countries, India has all the foundations for a truly special future.

Regulatory upheaval

Trying to put India firmly on this trajectory is the latest telecoms policy put forward by Kapil Sibal, the telecoms minister that replaced Raja in November 2010. Sibal appears to have adopted the view that the country’s entire regulatory framework is in serious need of wholesale change, and few would argue against him.

India’s telecoms market has not one but two regulating bodies: the Telecoms Regulatory Authority of India (TRAI) and the Department of Telecommunications (DoT), which allocate telecoms licences in as many as 22 operating zones, known as ‘telecoms circles’.

Under existing legislation, a company is not permitted to have a direct or indirect stake of more than 10% in more than one licensee providing the same service in the same circle. Stringent M&A laws intensify the complexity of the regulatory environment further – with M&As being prohibited if the combined entity would subsequently hold more than a 30% market share in terms of either revenues or customers in a single service.

Unsurprisingly, uncertainty and occasionally chaos has ensued – most publicly with the ongoing Vodafone Essar tax dispute, in which Vodafone purchased a majority shareholding in the company worth $5.46 billion, with $880 million being paid to the government in taxes. Both Essar and Vodafone believe this amount was not due.

     
 

Light Reading’s editor Gagandeep Kaur has identified three key areas which the National Telecoms Policy 2011 needs to and should address, the first and foremost being M&A activity: “There are now between 12 and 14 mobile operators in every telecoms circle and it is not possible for all of them to coexist in a competitive market. There are a number of operators which entered the market in 2008, acquired spectrum and still haven’t been able to launch services. Spectrum is a national resource and this is restricting growth,” she says. “Perhaps some of the players bought spectrum thinking they could sell it on, but the M&A policy hasn’t allowed that to happen. The government is now planning an exit policy for some of these players.”

The government hopes to also use the overhaul of the telecoms regulatory environment to promote the country as an ICT manufacturing hub, by veering local operators away from the foreign vendors currently dominating the marketplace: “They want to promote Indian manufactured equipment by having some kind of gap in the procurement process. This is actually a big concern for operators,” says Kaur. “There are not many Indian companies with expertise in the sophisticated products or equipment required.”

Kaur believes what is instead likely to happen is that large multinational vendors, such as Alcatel-Lucent, Ericsson, Huawei and ZTE, will look to form joint ventures with Indian companies. Evidence of this is already starting to emerge after Huawei invested $500 million in its manufacturing unit in India just last year. “I would be very surprised if this recommendation was passed in its present form – there would be tremendous pressure from both vendors and operators alike if it were,” says Kaur.

Thirdly and lastly, the government is looking to integrate security into the new telecoms policy as India’s Ministry of Home Affairs called for tighter measures on the management of networks, equipment and services. The policy is expected to be presented to the Indian government either during this month or the next, but from there Kaur expects it will be “anyone’s guess” as to how long it will take to be passed.

Market consolidation

TeleGeography analyst Richard Faber notes that regulations need to be clarified and streamlined, with a movement away from ‘telecoms circles’ towards more of a pan-Indian network. He also believes, however, that foreign investors are unlikely to be deterred by recent events in the market: “I think the fact that the Indian market is so dynamic is reason for many companies to stay,” says Faber.

This view is shared by bharti airtel’s CEO of global data business Ajay Chitkara who, when questioned upon the challenges which carriers face in the Indian market today, simply retorted: “Companies are operating here as there are more opportunities than challenges.”

Chitkara explains that while the Indian market was once dominated by voice, the market has evolved into a “fully fledged” combination of voice, data and managed services in the last couple of years. This is represented by bharti airtel’s business activities in that period, which include launching 3G and cloud services.

Supporting this transition in the market are the vast subsea and terrestrial cable systems deployed by the likes of bharti airtel. The company can now connect India to the Middle East and Europe via three alternative cable paths: SEA-ME-WE4, IMEWE and EIG. In January, airtel also launched a 40Gbps terrestrial network into China through collaboration with China Telecom.

“We always remain ahead of what the market wants us to deliver in terms of network infrastructure and investing in new cables,” says Chitkara. “Hong Kong and Singapore used to be the telecoms hubs for Asia, but now a lot of the new cables coming in end in India. We believe that this is helping to make India an ICT hub between the Middle East, Asia and Europe. It’s a big change in the
market and we believe we were one of the few initial telcos that have participated in that change.”

Tata Communications can certainly be viewed as another of those “initial” telcos that has helped transform the market. The company’s roots derive from the former incumbent VSNL’s international arm, and Byron Clatterbuck, president of global carrier solutions at Tata Communications, asserts that: “Tata is still the number one international capacity provider in and out of India.”

“If you look at the number of high-speed systems we have invested in, upgraded and will continue to upgrade, then we already have two going east from India to Asia. We are members of two consortiums and have another system going online next month – that will provide a total of three high-speed paths going west to Europe and the Middle East,” says Clatterbuck. The result is what Clatterbuck describes as a “superhighway” all around the world, with India as its starting point. “Beyond that we have built terrestrial fibre into every neighbouring country to India as part of our long distance network,” adds Clatterbuck.

Within India itself, Tata has developed 250 PoPs and more than 50,000km of fibre, which Clatterbuck believes helps drive “the strength of the international networks into the domestic networks”.

Deploying extensive fibre networks within India, however, does pose certain risks. Construction is booming within India, and the development of new highways and infrastructure brings a continuous threat to networks: “We see more cuts and impacts to our fibre network in India than anywhere else in the world, but obviously the sheer scale of our operations there accounts for some of that,” says Clatterbuck.

“There are not the same established processes that you find in the western world, where you need permits and where there will be signs indicating fibre ducts. All these things help minimise disruption to terrestrial networks, which don’t yet exist in India, but they will be developed in time.”

“You have to make sure that your network has enough diverse paths to withstand the impacts,” he adds.

African ambitions

As India emerges as a natural gateway between Asia, the Middle East and Europe, it provides a strong opportunity for Indian carriers to tap into surrounding emerging markets. Africa in particular has featured strongly on the radar of Indian carriers, which have taken noticeable strides to extend connectivity into the continent in the last year.

TeleGeography’s Faber says this is partly driven by an increasingly competitive domestic market, with Africa offering fresh opportunities for Indian carriers.

Bharti airtel signalled its strong intentions for the African market through its $10.7 billion acquisition of Zain’s African assets in June 2010, as well as large investments in both the Eastern Africa Submarine Cable System (EASSy) and SEACOM. Highlighting its belief in the market, the company has targeted generating $5 billion in revenues from its African operations by 2013.

“In the last couple of months, our focus has shifted from India to Africa. We have already invested in existing systems on the east side of Africa, and we are looking at options on the west now, to ensure our infrastructure is strong,” says airtel’s Chitkara.

Tata Communications has likewise made considerable strides in the African market, using its South African subsidiary Neotel as a strong entrance point. In June of this year, the company increased its stake in Neotel to over 60%. The subsidiary recently won a contract to run the primary network operating centre (NOC) for the West Africa Cable System (WACS), which runs between Cape Town and London and is scheduled for commercial service early next year.

The move means Neotel will be connected to all five subsea cable systems that connect into South Africa. “South Africa dominates economically in the continent and so it’s a key anchor for us to invest in the market,” says Tata’s Clatterbuck. “When WACS goes live, it will bring us new opportunities in the west coast to leverage our investment in Neotel.”

The complete picture

With radical changes set to occur in the domestic market, and Indian carriers strongly positioned to capitalise on the development of other emerging markets, the country looks set to become a truly international telecoms gateway.

This requires, however, all pieces of the puzzle to come together: the country’s continued economic and social growth, the development of a liberalised and competitive domestic telecoms market and the evolution of cities like Bangalore, Chennai and Hyderabad into fully fledged IT hubs.

“We have expertise as a telecoms operator and in the IT space, which we can outsource to large European and US carriers in India,” says Tata’s Clatterbuck. “With our vast network and investments in data centres, we have the capability to do things like hosting and cloud services which are huge growth areas.”

“Luckily the dimensions of the world are changing, and we believe India can be in the middle of it,” says airtel’s Chitkara. “All global carriers want to come to emerging markets, and we will align and support them.”