We hosted Telecom Day in New Delhi. We had a series of meetings with the telecom regulator, equipment vendors and service providers to gauge the business/regulatory outlook on the sector. Our key takeaways:
- Based on our discussions with the regulator, we surmise that the Vodafone-Idea merger should be concluded in 9-12 months. However, it could take 4-6 quarters post the merger for network synergies to start kicking in.
- On pan-India basis, the top telecom service operators have data capacity equivalent to 8-10x the current consumption. In the top cities, however, the capacity-consumption gap is lower. Bharti has data coverage and capacity close to RJio’s, but as capacity requirements would be higher in top cities, it would continue to make capital investments.
- The increase in data capacity would be disproportionately high relative to the capex incurred due to (a) lower cost of technology advancement, (b) higher share of investments in low capital-intensive components like software, and OSS/BSS v/s BTS, and (c) reduced optic fiber investments in smaller tier cities owing to better backhaul microwave technology.
- Interconnection usage charge (IUC) is not the key priority for the regulator, but it is likely to announce revised IUC in 3-6 months. Gradually, IUC would be reduced to zero. Call drop is no longer an issue.
Vodafone-Idea merger could happen faster than expected
Based on our interaction with TRAI, we understand that the Vodafone-Idea merger is unlikely to face major roadblocks. The merger should be completed in 9-12 months. The merged entity would have one year from the effective date of merger to comply with the revenue and spectrum market share thresholds. With RJio’s commercial launch in FY18, the revenue market share could get adjusted below the 50% threshold in most circles. Network synergies could take time to accrue, given that Vodafone and Idea have different vendors, different long-term contracts, and different technologies operating on multiple spectrum bands. It could take 4-6 quarters post the merger for the synergies to start kicking in.
Overall data capacity adequate, but room for addition in top cities
Typically, 10% of the sites account for 50% of the data traffic. Circle-wise data consumption indicates that 18-20% of overall consumption happens in the top-3 metros against 10% in ‘C’ circles, implying that data usage in the top-3 cities is twice the usage of all the ‘C’ circle states put together. Thus, despite pan-India data capacity at 8-10x consumption, there could be room for capacity addition in top-tier cities. Based on spectrum and cell sites, Bharti’s capacity is in line with RJio’s and Vodafone-Idea merged would be in a better position than RJio. However, if we bifurcate in terms of geographic reach, RJio cell sites would be spread across Pan India to widen coverage, whereas Bharti and Vodafone-Idea would have higher proportion of broadband sites in top-tier cities. In terms of technology, RJio is completely on 4G sites, while a high proportion of Bharti’s and Vodafone-Idea’s sites are 3G, which need to be upgraded to improve data capacity. Also, Vodafone-Idea has a significant proportion of its operations on the 2500MHz spectrum, for which the ecosystem is not adequately developed.
Data capacity addition to be disproportionately high relative to capex incurred
In 2015, 70-80% of the telecom industry’s investment was going into connectivity, while platform and OSS/BSS each accounted for 10% of investment. In 2017-18, only 40% of the capex would be towards connectivity, while platform and OSS/BSS would account for about 30% each. Incrementally, a higher share of investment would be towards building and advancing the platform and OSS/BSS applications. Incremental technology upgradation would require much lower capex, as all new BTS are technology and band agnostic – incremental capex could be 25-30% of the total BTS cost. The backhaul in the metros would be through fiber, but newer microwave technologies are in the works to increase backhaul capacity. Lower-tier circles would be on e-wave bands, which give 4x the speed (at 1-5gbps) as the current microwave backhaul.
IUC to be revised downwards; call drop issues have waned
The call drop issue is no longer a big worry – post TRAI/DOT intervention, there has been significant improvement. Spectrum refarming and network rejig had impacted call quality, but the call drop issue is largely on the backburner now. On IUC, TRAI is working on the consultation paper issued last year. It is likely to announce the revised IUC in 3-6 months. Over the long term, IUC should be eliminated. Telecom auction could be a yearly phenomenon.
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