EXECUTIVE SUMMARY

The objective of this project is to study the Indian Telecommunications Sector, an emerging growth sector in India. The regulatory framework, the role of Government and investment policies in the development of this industry are studied. The structural model of the telecom industry is looked into. The sequence of events in the evolution of basic and cellular telecom services is discussed. A study of the major competing players in both cellular as well as basic wireline markets is done. Their future expansion and capex plans are also addressed. The prominent technologies that are involved, are discussed. The two core technologies GSM and CDMA are studied in detail and their suitability from the points of view of the customer are studied. The project is being restricted to the cellular and basic fixed line segments.

The future financial profitability of a major, listed player in the industry is predicted. Several contemporary issues facing the telecom industry, which are setting the pace for future developments in the sector, are addressed. A key emerging issue, spectrum management is also addressed and recommendations for further improvements are given. And finally the future outlook of the telecom sector is addressed.

TABLE OF CONTENTS
Sr No 1. 2. Introduction Regulatory Aspects And Government Policies 2.1 Overview 2.2 Government Policy 2.3 Foreign Direct Investment 2.4 Unified License Policy 3. Structural Model of the Telecom Industry 3.1 Duopoly Model 3.2 License Fee (as Percentage of Revenue Sharing) 3.3 Brief Sequence of Events In Basic And Cellular Services In India 4. Major Players In Indian Telecom Market 4.1 GSM Cellular Players 4.2 CDMA Cellular Players 4.3 Basic Serivce Providers 5. 6. 7. Cellular Technologies - GSM Vs CDMA Financials Of A Major Wireless Player Bharti Contemporary Issues Facing Telecom Players 8.1 Consolidation Wave Set In 8.2 Declining ARPU 8.3 High Accumulated losses 8.4 Increased Competition from CDMA services 8.5 Fixed To Mobile Substitution 8.6 Price Convergence 8.7 Rural Telephony Expansion 8. 9. 10. 11. Spectrum Management - A Key Emerging Issue Future Outlook Annexure Bibliography 61 64 66 67 68 69 72 74 82 85 86 32 39 44 49 57 23 25 29 4 7 11 16 Topic Pg No 1

1.

INTRODUCTION

The service sector which contributes significantly to Indias economic output, has seen the telecommunications (telecom) industry emerging into the limelight as a major enabler of the nations infrastructure. The expansion of the telecom industry in India has been fuelled by a massive growth in mobile phone users which can be attributed to the introduction of digital cellular technology and decrease in tariffs due to competitive pressures. Accordingly it is important for the country that there be a comprehensive and forward looking telecom policy that creates a suitable framework for development of this service industry. The availability of infrastructure for electronically transferring and accessing information is perceived as critical for speeding up the realization of economic and social benefits as well as for gaining a competitive advantage.

India, the 2nd largest among emerging economies is the 4th largest telecom market in Asia after China, Japan and South Korea. The Indian telecom network is the eighth largest in the world India. The industry has witnessed an explosive growth in recent years. Tele-density (fraction of the population who are telecom subscribers) has almost doubled from 4.8% in 2002 to 9% in February 2005. However, the average is about 16 in other developing and developed nations.

With the introduction of Wireless in Local Loop (WLL) technology, the market is expected to increase dramatically. The Indian market presents a unique opportunity with a large middle-class population as compared to developed countries, where mobile services are

likely to be complimentary services, as most business and households already have access to fixed line telephones. However in India, mobile telephony can be a substitute to fixed line services, thereby further increasing the attractiveness of the Indian market. Convergence of both markets and technologies is a reality that is forcing an industry realignment. At one level telephone and broadcasting industries are entering into each others markets and at another level, technology is blurring the difference between wireline and wireless systems.

India, like many other countries of the world, have adopted a gradual approach to telecom sector reform through selective privatization and managed competition in different segments of the telecom market. To begin with, India introduced private competition in value-added services in 1992 followed by opening up of cellular and basic services for local area to private competition. Despite asymmetry between public sector players and private operators, the act of opening up of the market has introduced dynamism that was otherwise latent in the sector. This is evident from a number of performance indicators. In terms of overall size of main telephone lines in operation, India ranked 14th in the world in 1995. The rank improved to 7th position in 2001.

Telecom is an emerging industry and the players are expected to grapple with complex issues of new technologies and an evolving regulatory framework. To cut costs and investments, telecom players need to evolve means to share infrastructure. With the rapidly increasing tele-density in urban areas, future growth in subscriber base is expected from semi-urban and rural markets. The different revenue and cost structures of the rural and

semi-urban markets would require reengineering key processes and the right mix of technology and pricing strategies to offer viable and affordable telephony services. Investment in brand building and effective channel management will be key imperatives to maintain customer loyalty. Launch of new products and value added services through continuous innovation can enhance revenues.

The cellular telephony segment has emerged as the fastest growing segment in the Indian telecom industry. In fact, the segment achieved a landmark in fiscal 2003 when for the first time more cellular subscribers were added than fixed line subscribers. A slew of tariff reduction in the past couple of years has helped the segment to gain popularity. The cellular segment is playing an important role in the industry by making itself available in the rural and semi urban areas where tele-densities are low and where the fixed line services would take some time to come because of high capital investments required to build a network.

2.

REGULATORY ASPECTS AND GOVERNMENT POLICIES

The need for a world-class telecom infrastructure was recognized by the Indian Government as the key to rapid economic and social development of the country. It is also anticipated that going forward, a major part of the GDP of the country would be contributed by this sector. Accordingly, it is very important that there be a comprehensive and forward looking telecom policy which creates an enabling framework for development of this industry.

2.1 REGULATORY OVERVIEW The Ministry of Communications and Information Technology is the policy maker for the telecom sector which approaches through two government bodies, the Telecom Commission and the Department of Telecommunications (DoT). The Telecom Regulatory Authority of India (TRAI) is an independent regulator that reports to parliament through the minister of Communications and IT. The telecom commission performs the executive and policy making function. The DoT is the executive and policy implementing body and the TRAI performs the function of an independent regulator. The secretary to the DoT is the ex-officio chair to the telecom commission.

Telecom Regulatory Authority of India (TRAI) The TRAI Act allows the body to set telecom tariffs and fix terms and conditions under which operators can interconnect with other. It also requires the government to seek recommendations from TRAI before issuing a license. A new appellate authority - separate

from TRAI - has been set up to decide on disputes between the government and private operators. Broadly, the new act enhances TRAI's recommendatory powers, strengthens those powers relating to tariffs and interconnection but reduces the body's judicial powers. The new act continues to allow the TRAI to set tariffs.

Department of Telecommunications (DoT) The DoT is a Government of India Department under the aegis of Ministry of Communications. It has its role in policy making, licensing and coordination matters relating to telegraphs, telephones, wireless, data, facsimile and telematic services and other like forms of communications. In addition, DoT is responsible for frequency management in the field of radio communication in close coordination with international bodies. It also enforces wireless regulatory measures for wireless transmission by users in the country. DoT aims to provide the latest in telecom technology and the best of services to its customers.

Association of Basic Telecom Operators (ABTO) The Association of Basic Telecom Operators (ABTO) is the nodal representative body for all the licensed basic telecom operators.

Cellular Operators Association of India (COAI) The Cellular Operators Association of India (COAI) was instituted in 1995 as a registered, non-profit, non-governmental society dedicated to the advancement of communication - in particular of modern communication through Cellular Mobile Telephone Services. Its seeks

to establish and sustain a world-class cellular infrastructure and deliver the benefits of affordable mobile communication services to the people of India. The main objective of the COAI is to protect, promote and upgrade mobile cellular operations in India and also to look after the common and collective interests of its members. COAI has emerged as the official voice for the Indian cellular industry and interacts directly with concerned Ministries, Department of Telecom (DoT), Department of Telecom Services (DTS), Telecom Regulatory Authority of India (TRAI), Financial Institutions (ICICI, IDBI, etc.), Bureau of Industrial Costs & Prices (BICP), Wireless Planning & Coordination Wing (WPC), Indian Chambers of Commerce, International Telecom Union (ITU), CTIA, etc.

The telecom services have been recognized the world-over as an important tool for socio-economic development for a nation and hence telecom infrastructure is treated as a crucial factor to realize the socio-economic objectives in India. Accordingly, the Department of Telecom has been formulating developmental policies for the accelerated growth of the telecom services. The Department is also responsible for grant of licenses to private sector operators for providing basic and value added services in various cities and telecom circles as per approved policy of the Government. The Department is also responsible for frequency management in the field of radio connection in close coordination with the international bodies. It also enforces wireless regulatory measures by monitoring wireless transmission of all users in the country

Telecom Commission The Telecom Commission was set up by the Government with administrative and financial powers of the Government of India to deal with various aspects of Telecom. The Commission consists of a Chairman, four full time members, who are ex-officio Secretary to the Government of India in the DoT and four part time members who are the Secretaries to the Government of the concerned departments. The part time Members of Telecom Commission are the secretaries of the departments of Finance, Planning Commission, Information Technology and Industrial Policy & Promotion.

The Telecom Commission and the Department of Telecom are responsible for policy formulation, licensing, wireless spectrum management, administrative monitoring of PSUs, research and development and standardization/validation of equipment etc. The multipronged strategies followed by the Telecom Commission have not only transformed the very structure of this sector but have motivated all the partners to contribute in accelerating the growth of the sector.

2.2 GOVERNMENT POLICIES

The telecom sector was opened up in the year 1991 and has undergone a number of changes in form of policies regulating this sector.

National Telecom Policy, 1994 The National Telecom Policy, 1994 marked a shift in the focus of the Government, from self-reliance to development of the telecom sector (with the help of supplemental external resources, if required). The policy outlined the following objectives for the telecom sector

 Improved availability of telecom services Universal service with complete coverage of the urban and rural areas. Improved quality of service. And availability of a wide range of services at reasonable prices. Creation of a manufacturing base for telecom equipment.

The policy also revised the Eighth Plan targets and assigned specific time-frames for the achievement of the new targets Telephone lines to be available on demand by 1997. All villages to be covered by 1997. One public call office (PCO) for every 500 persons to be installed in the urban areas by 1997. Value-added services which are comparable with international standards to be available by 1997. A resource shortfall, of Rs 23,000 crores, was identified for achieving these targets. The NTP-94 concluded that private sector investment and participation would be necessary to complement the efforts of the Department of Telecom (DoT). The policy allowed private sector participation in providing basic telecom services. It recognised that foreign investment would be required in the telecom sector and that telecom services would have to be customer-oriented. The telecom policy also stated that conditions for the entry of the private sector in basic telecom services needed to be evolved.

National Telecom Policy, 1999 The main points of the new National Telecom Policy announced in March 1999 include : The problems of the existing basic operators (largely related to the payment of license fees) would be resolved in a manner, which is consistent with their contractual obligations and is legally defendable. In the service areas, where no licenses have been awarded to private service providers, multiple providers would be permitted. The new licensees would have to pay a onetime entry fee and a share of the revenues as the license fee. Direct interconnectivity between any two-service providers in their area of operation, including the sharing of infrastructure, would be permitted.

TRAI would be assigned an arbitration function for resolving the disputes between the Government (as the licensor) and any licensee. The Government would seek TRAIs recommendations on the number and timing of new licenses. A tele-density of 7% by 2005 and 15% by 2010 to be targetted. The national long distance service would be opened up for competition from January 1, 2000. Opening up of international long distance telephony to competition would be reviewed by 2004. A spectrum usage fee would be charged to the users of frequency for wireless transmission. A separate Department of Telecom Services (DTS) would be created by separating the policy and licensing functions of the Department of Telecom (DoT), from the service provision function. The DoT would be corporatised by 2001.

 A universal access levy would be imposed as a percentage of the revenues earned by all the operators. The Indian Telegraph Act, 1885 and the Indian Wireless Act, 1933 would be reviewed and replaced. By 2001-02, most of the guidelines of the National Telecom Policy had been implemented. Segment Fixed Telephone Domestic Long Distance International Long Distance Cellular Paging Market Structure Open Competition Open Competition Open Competition Limited_Competition Limited_Competition Number of Operators Unlimited Unlimited Unlimited 4 4 Service Areas Circles All India All India Metros & Circles Cities & Circles Period of License 20 Yrs 20 Yrs 20 Yrs 20 Yrs 10 Yrs

2.3 FOREIGN DIRECT INVESTMENT (FDI)

Growth in telecom is now one of the key measures to further develop infrastructure and thereby economic development of the nation. Accordingly, the Government of India has accorded priority to investment and development of the telecom sector. Telecom requires very heavy investment and it was not possible for the Indian Government to organize public funding of this sector on such a massive scale. In fact the national telecom Policy 1994, estimated a resource gap of Rs. 23,000 crores to meet the telecom targets of the eighth five-year plan of the Government of India (1992-97).

In order to bridge the resource gap between government funding and the total projected funds requirement and to provide the additional resources to achieve the nation's telecom targets that the telecom sector was liberalized in 1992 and the Government invited private sector participation in telecom.

Telecom is the second largest sector in terms of FDI investment in India. From January 1991 to March 2004, the sector has attracted FDI to the tune of Rs10, 725crore. Within telecom, the cellular industry has attracted most of the foreign investment since 1993, accounting for almost 50% of the FDI inflow into telecom - representing amongst the biggest investments in any one sector in India.

According to the numbers available with the department of telecom, the Mauritius route accounts for the major share of FDI into telecom. About Rs 7,137 crore accounting for 72 per cent of telecom FDI has come from Mauritius as India offers concessions for

companies in Mauritius and also it is a tax haven. Britain and the US are the second and third largest sources of FDI. Out of the total FDI in telecom, mobile players corner a major portion. A total of Rs 2,586 crore has gone into investment in cellular companies, which is about 26.2 per cent of the total telecom FDI. So the proposal is likely to benefit the mobile players more than anybody else.

The Finance minister recently announced the hike in the FDI limit in telecom from 49% to 74%. The impact of this policy is as follows :

Previously the telecom companies were left only with the option of entering into the market or raising debt as the means of raising funds and it was not possible for Indian promoters to arrange huge funds. The hike in the FDI limit would also result in more consolidation and may fuel M&A activities for further expansion of capacity, better technology and widen the subscriber base. This move could straightaway have a two-fold increase in the capacity of the industry. The main companies that stand to gain from this move are Bharti Tele-Ventures, Hutchison and Idea Cellular. This move could reserve the trend in the telecom sector where the FDI inflow has been deteriorating over the past two years from Rs3, 970crore in 2001 to Rs301crore in 2003.

The total FDI investment between August 1991 to March 2004

Sr.No. SERVICE/ITEM 1 Basic Telephone Service 2 Cellular Mobile Telephone Service 3 Radio Paging Service 4 E-Mail Service 5 VSAT Service 6 Cable TV Network+Internet 7 Satellite Telephone Service 8 Radio Trunking Service 9 Manufacturing & Consultancy 10 Holding Companies 11 Other Value Added Services 12 Automatic Route TOTAL Is FDI in telecom a security risk?

FDI 3937 26646 910 688 281 1704 481 71 15784 48420 227 361 99509

% 3.96% 26.78% 0.91% 0.69% 0.28% 1.71% 0.48% 0.07% 15.86% 48.66% 0.23% 0.36%

The Left is determined to oppose the proposal of hiking the FDI limit on the grounds that increase in the FDI would mean that the existing companies might be owned and controlled by the overseas companies. Their contention is that nowhere in the world the overseas players are allowed to have a controlling stake in the telecom industry. USA has a cap of 25 per cent on FDI in any sector. The other countries like France, Japan and Canada also have similar restrictions. But is it more important for a foreign company to run the major service providing companies or is better quality of service coupled with lower cost more important?

Most of us including me would want prefer the latter option. India has a tele-density of nearly 9 which is still quite below that of other developing nations. In order to bridge partially the wide tele-density gap with comparable nations, huge investments of the order of about Rs 50,000 crore needs to be made. Obviously, funds of such enormity are not

available from domestic sources. Hence large huge foreign investments are absolutely essential. It is natural for the Government to have concerns for hiking the FDI limit as it is a strategic sector. However, such concerns could be satisfactorily addressed. Even a foreign company would naturally act in the best interests of the growth of the respective companies and the sector as a whole, as they would directly benefit from it. So security from the ownership perspective does not pose a great threat.

Also an international study had established that for every 1% increase in tele-density, there is a 3% increase in the growth of GDP. So an increase in tele-density would significantly boost the economy, which is possible through only these huge investments.

The increasing the cap on foreign direct investment in telecom to 74 % will not, in any way, compromise the security shield. BSNL and MTNL have more than 95% of the strategic and critical telecom infrastructure in this country. With this safe alternative telecom facility available, there just cannot be any major security risks with higher levels of foreign investments in private telecos. The petroleum and petrochemicals sector is of utmost strategic importance. If privatization is acceptable here, then, increased foreign investments in telecom is equally, if not more, acceptable.

In conclusion, industry is fully supportive of government actions to put in safeguards on control, but, would, at the same time, pleads that the excessive barrier to foreign investments be urgently lowered if India is to significantly narrow the tele-density divide with comparable economies.

Present FDI Policy for Telecom Sector 1. Foreign Direct Investment of up to 100% permitted for the following : Internet Service Providers (not providing international gateways for satellite and submarine cables) Infrastructure providers providing dark fibre Electronic mail service Voice mail service Manufacturing Sector

2. Foreign Direct Investment of up to 74% permitted for the following: Internet service (providing international gateways) Certain Infrastructure providers Radio paging services

3. Foreign Direct Investment of up to 49% permitted for the following subject to grant of license from DoT and adherence by the companies (who are investing and the companies in which investment is being made) to the license conditions for foreign equity cap and lock in period for transfer and addition of equity and other license provisions : National long distance service Basic telephone service

 Cellular mobile service Paging Other value added service

Additional Incentives for the Telecom sector

1. Additional foreign investment through Holding/investment Company. 2. Fiscal incentives and concessions for the telecom sector : Amortization of license fee Tax holiday for a period of 5 years from commencing operations. Scope for tax exemption on financing through venture capital Import duty rates reduced for various telecom equipment

2.4 UNIFIED LICENSE POLICY

The Government has accepted the TRAIs Unified Licensing recommendations in 2003. The recommendations envisaged a two-stage process to introduce a Unified Licensing regime in the country. The first phase implemented a Unified Access Service License at Circle level that covers a single license for cellular and basic services. The second phase aimed at a unified license that covers basic, cellular, domestic and international long distance and internet services is in progress. Key objectives of Unified Licensing Regime This regime involves unification of various licenses and not unification of services. The key objectives of the Unified Licensing is to encourage free growth of new applications

and services leveraging on the technological developments in the Information and Communication Technology (ICT) area. Other main objectives of the Unified Licensing Regime are to : Simplify the procedure of licensing in the telecom sector, Ensure flexibility and efficient utilization of resources keeping in mind the technological developments Encourage efficient small operators to cover niche areas in particular rural, remote and less developed areas in telecom facilities. Ensure a level playing field and easy entry.

In the past regime i.e. service specific licensing regime, the entry fee was a function of type of service and the service area(s). In the unified regime the License Fee is 10%, 8% & 6% of Adjusted Gross Revenue (AGR) for Metros and Category `A, Category `B and Category `C Service Areas respectively.

The main consideration for fixing the entry fee (based on TRAIs recommendations) was the ease of entry on one hand and to deter the entry of non-serious players on the other hand. For Unified Access services the entry fee was fixed at the level of fourth cellular operators entry fee and wherever fourth cellular operator was not there, the entry fee paid by the existing basic service operator formed the basis.

Unified Access Services operators are free to provide, within their area of operation, services which cover collection, carriage, transmission and delivery of voice and/or non-

voice messages over the licensees network by deploying circuit and/or packet switched equipment. Further, the licensee an also provide Voice Mail, Audiotex services, Video Conferencing, Videotex, E-Mail , Closed User Group (CUG) as Value Added Services over its network to the subscribers falling within its service area on non-discriminatory basis. The licensee cannot provide any service except as mentioned above, which require a separate license. However, an intimation before providing any other value added service has to be sent to the Licensor and TRAI.

The salient features of the guidelines for the Unified Access Services License (USL) were : The existing operators shall have an option to continue under the present licensing regime (with present terms & conditions) or migrate to new USL in the existing service areas, with the existing allocated/contracted spectrum. The service providers migrating to USL will continue to provide wireless services in already allocated spectrum and no additional spectrum will be allotted. No additional entry fee shall be charged from Cellular Mobile Service Providers (CMSP) for migration to USL. For Basic Service Operators (BSO), the entry fee for migration to the USL for a Service Area shall be equal to the entry fee paid by the fourth CMSP for that Service Area, or the entry fee paid by the BSO itself, whichever is higher. While applying for migration to USL, the BSO will pay the difference between the said entry fee for USL and the entry fee already paid by it. Those BSOs who do not wish to migrate to the full mobility regime, would only be required to pay the additional fee for limited mobility wireless in Local Loop (WLL-

M), with mobility confined strictly within Short Distance Charging Area (SDCA), as prescribed separately. The Service Areas for USL will be as per the existing Cellular Mobile Telephone Service Licenses. BSO wishing to migrate to USL will be permitted to operate in the service area in which it is already operating.

Impact of Unified License The key aspect in lowering the license fees is the impact of such reduction on the revenue to the Government. But a lower license fee would encourage higher growth, further tariff reduction and increased service providers revenues. International practices also support lower license fee. With increased growth, it could be a win-win situation for telecom industry and Government.

The decision to allow telecom operators to merge their cellular mobile and basic phone services under one license is positive. It was seen as the only way out of the never-ending battles between cellular mobile operators, who felt cheated by the governments decision to allow basic service operators to offer so-called limited-mobility services using wirelessin-local-loop technology, and basic service operators.

Basic services operators opting to migrate to the new license regime will now be able to launch full mobile services after paying an additional entry fee. For example, Reliance Infocomm, which was particularly feared by cellular operators because of its financial strength and perceived ability to influence government decisions, had to pay about Rs

10.96bn plus a penalty of Rs 4.85bn for offering roaming services in violation of its basic service license conditions (just what cellular operators had feared).

The cellular operators were not happy with the decision, which was based on recommendations from TRAI. First, the move allows Reliance Infocomm exactly what it wanted--back-door entry into mobile services, where it will be a formidable player. Second, the cellular operators say, Reliance was charged too little for entry. The additional entry fee (and penalty) was only an equalisation charge representing the cost of capital for the period elapsed. They should pay a premium for consolidation. They base this argument on the fact that other players have had to achieve consolidation through costly acquisitions.

Consumers will benefit Contrary to the general belief that the decision to unify licenses benefits only Reliance and, to a lesser extent, Tata Teleservices, there are several beneficiaries including cellular mobile operators themselves, who will be able to offer 3G (3rd Generation) and basic phone services.

Other beneficiaries will be the limited-mobility subscribers of Reliance Infocomm and Tata Teleservices, who until now were confined to the SDCA. They will now be able to enjoy the full fruits of the CDMA technology used by limited mobility services, including full mobility and country-wide roaming (though they will have to pay more than they do for limited mobility). Consumers will also benefit from the increased competition in mobile services.

All of the operators of basic services viz. Reliance Infocomm, Tata Teleservices, Shyam Telecom, HFCL, Bharti Telenet benefit by getting a license to provide cellular mobile services in the circles in which they operate. They also benefit from the waiver of the obligation to provide services in rural areas under the original basic services license. All licensees, basic and cellular mobile have been granted a license for 3G services.

Impact on Players The most obvious impact on the telecom market is an increase in competition, exactly what cellular operators have been vehemently opposed to. Unrestricted competition already exists in all other services but a maximum of four operators have been allowed for mobile services in each circle. The move towards unified licenses will change that.

Competition, which has so far been restricted to price and service quality, will now also be on the basis of technology. For the first time, GSM cellular operators will feel the full brunt of competition from CDMA operators, who will seek to cash in on their lower infrastructure and call costs, their more efficient use of spectrum compared with GSM technology and their superiority in offering data services. The move should also lead to the emergence of more national players. At the moment only state-run BSNL, Reliance Infocomm, and Bharti have all-India operations. All others are confined to a few circles. Several operators will now seek to extend their footprints.

Consolidation among operators should also speed up based on the new license regime and the decision to allow intra-circle mergers. It is expected that only the large operatorsBSNL, Reliance Infocomm, Tata, Bharti and Hutchison will remain. Under a unified license regime, the smaller operators with limited coverage Spice, Shyam, Escotel, RPG Cellular will be acquisition targets.

A significant impact of the unified license regime would be moving towards a total solution. Unification of licenses would finally result in genuine unification of services as far as the consumer is concerned. The days of worrying over numerous bills from various service providers may finally be over. One-stop shops of service providers offering

attractive discount deals to hard-nosed bargain hunters might be the order of the day.

3.

STRUCTURAL MODEL OF THE TELECOM INDUSTRY

3.1 Duopoly Model

In May 1991, the Indian Government announced its intention of awarding licenses to private operators for providing cellular services in the four metro cities. In July 1992, the Indian Government invited private participation in providing cellular mobile services1 in the country. Initially, a duopoly model of competition was adopted for each service area.

The award of cellular service licenses was planned in two phases through a competitive bidding process. In the first phase, cellular licenses were issued to eight operators for the four metrosDelhi, Mumbai, Kolkata and Chennai which became effective from November 1994. The license for the four metros. In the second phase, cellular service licenses were to be issued for 20 Circles. The telecom Circles were categorised as A, B and C, in accordance with their status of telephony and potential. After a competitive bidding process, 34 additional licenses (besides the eight in the first round) were issued in 18 State Circles.

Metros Delhi Mumbai Calcutta Chennai

Operator 1 Bharti Cellular Limited BPL Mobile Communications Limited Modi Telstra RPG Cellular

Operator 2 Sterling Cellular Limited Hutchison Max Telecom Limited Usha Martin Telekom SkyCell Communications

Category A Circles

Category B Circles

Category C Circles Andaman & Nicobar Islands, Assam, Bihar, Himachal Pradesh, Jammu & Kashmir, North - East, Orissa

Andhra Pradesh, Gujarat, Haryana, Kerala, Madhya Karnataka, Pradesh, Punjab, Maharashtra, Tamil Nadu Rajasthan, Uttar Pradesh, West Bengal

Cellular mobile services were introduced in India on a commercial basis in the four metros during 1995. On August 23, 1995, Modi Telstra (now Spice Communications) launched the first cellular services in the country in Kolkata. The launch of services by operators in the metros was followed by the launch of services in Circles during 1996-1998. The licenses provided for the payment of fixed amounts as license fees and were valid for an initial period of 10 years (subsequently increased to 20 years). In response to industry conditions, the Indian Government approved the New Telecom Policy, 1999 (NTP, 1999) in 1999. Further announcements under NTP 1999 in July 1999 allowed existing cellular mobile service providers (CMSPs) to switch from the previous license fee regime to a new revenue sharing arrangement, subject to the fulfillment of certain conditions.

Third Operator In addition to the existing two operators, the State-owned/controlled operatorsBharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) reserve the right to be the third operator in each of the licensed service areas. MTNL holds the license to provide cellular services in Delhi and Mumbai, and commenced its cellular services during February 2001. BSNL is the third-operator in 20 service areas (including the metros of Kolkata and Chennai but excluding service areas covered by MTNL, 5 Category A circles, 8 Category B circles, and 5 Category C circles). BSNL launched its

cellular services from Kolkata and Bihar during January 2002. Services in other service areas were launched during 2002-03.

Fourth Operator During 2001, the Indian Government also invited bids for the award of licenses (for a duration of 20 years, further extendable by 10 years at one time) to the fourth operator for cellular services in the four metros and telecom Circles, besides filling up of the existing slots of Andaman & Nicobar (A&N) islands and West Bengal (WB). In August 2001, after a `multi-stage ascending bid process, the Indian Government issued licenses to the successful bidding companies, following their payment of the entry fees of Rs. 16.34 billion. Nearly all licensed fourth-operators commenced services during 2002. During February 2003, the Indian Government also invited fresh tenders for grant of 14 licenses for providing cellular services for the vacant slots in 8 circles (A&N & WB, Assam, Bihar, J & K, North-East, Orissa, UP-E, and UP-W). Although 7 companies purchased the tender document, none of the companies submitted their bid.

3.2 License Fee (as Percentage of Revenue Sharing) Prior to their migration to the revenue sharing regime, cellular operators were liable to pay their license fee commitments over the license period. The license fee payments were roughly equal annual payments and imposed a heavy financial burden in the initial years of operations. Pursuant to NTP, 1999, the migration package for existing licensees replaced the fixed fee regime with an entry fee and a continuing revenue sharing arrangement. The license fee payable till July 31, 1999 was to be treated as entry fees. The percentage of

revenue share was to be recommended by the TRAI. In the interim, operators were required to pay 15% of gross revenue as license fee; gross revenue excluded public switched telephone network (PSTN)-related call charges payable to BSNL/MTNL and service tax payable by the subscribers.

In 2000, the TRAI had recommended the license fee as a revenue sharing percentage (as percentage of Adjusted Gross Revenue or AGR) for various operators. AGR was defined as the `Gross Revenue' accruing to the licensee by way of operations of the Cellular Mobile Service, mandated under the license (inclusive of revenue on account of value-added services, supplementary services, and sale of handsets) plus revenue accruing through resellers, franchises etc., plus any revenue forgone through subsidies on handsets or any other rebates, minus the following items : Interconnection/access charges payable to other service providers for carriage of calls Roaming revenues collected on behalf of other cellular operators and passed on or liable to be passed on to them; Service tax paid or payable Sale of handsets.

In 2001, the Indian government declared that existing and additional metro and circle licensees would pay license fee annually at the rate of 17% of the AGR. However, the annual license fee was to be 10% of the AGR for the A& N Islands. The license fee as revenue share also included contribution towards universal service obligation (USO), R&D, Administration and Regulation. It comprised a 2% revenue share towards Wireless and Planning Coordination (WPC) Charges, covering royalty payment for the use of

cellular spectrum up to 4.4 MHz, license fee for handsets and base stations and possession of wireless telegraphy equipment as per the details prescribed by the WPC Wing of the DoT. Any additional allocation of frequency would attract additional license fee as revenue share (1% additional revenue share if bandwidth allocated was up to 6.2 MHz in place of 4.4 MHz, and 2% additional revenue share if bandwidth allocated was up to 10 MHz in place of 4.4 MHz).

In September 2001, DoT issued amendments to the existing license agreements for cellular operators, whereby the annual license fee was 15% of AGR for the period August 99 to Jan 01 and thereafter at 12% in metros & Category A circles, 10% for Category B circles, and 8% for Category C circles thereafter. The fourth operator was also required to pay license fee annually at the rate of 12% in metros & Category A circles, 10% for Category B circles, and 8% for Category C circles. However, these license fee rates were payable only if existing or future fixed-line operators were permitted to provide WLL-Limited Mobility (WLL-LM) services. If WLL-LM were prohibited, the annual license fees payable by all cellular operators was to be at a revised rate of 15% of AGR.

On December 24, 2003, the Indian Government announced fresh concessions for the telecom industry with a focus on cellular operators to compensate them for high license fee. The license fee was been reduced by two percentage points, from 12%, 10% and 8%, across the board for all service providers (excluding national and international long distance operators) and an additional benefit of 2% reduction in revenue share has been granted to first and second circle (and not metro) cellular licensees for a period of four

years. The minimum license fee, however, has been specified at 5%. The package came into effect from April 1, 2004.

Although the migration to revenue sharing and the significant reductions in revenue sharing percentage has resulted in lower costs (and prices) of mobile services, the revenue sharing percentage in India is still high as comparable with other countries. The high revenue sharing costs crowd out the funds available for investment in network infrastructure and expansion. The high fees also reduce the flexibility of operators to reduce prices, and slow down the development of new & innovative services. Further, as compared with private operators, the state owned operatorBSNLhas been granted a significant competitive advantage arising out of reimbursement of any license fee paid by it by the Indian Government. This has proven disadvantageous for the private operators. With a vastly lower cost structure, BSNL can price its services at rates significantly lower than its rivals.

In 2003 some specific actions were taken. They were : TRAI introduced the telecom interconnection usage charges agreement. Cellular industry slashed STD rates by 67% on Mobile-to-Mobile (M2M) calls beyond 200 kms. Cellular consumers to pay airtime + a flat STD charge of Rs. 2.99 per minute for calls for M2M calls anywhere to anywhere in India. Cellular industry announced M2M incoming free on GSM cellular phones all over the country. Following were the call charges introduced at that time :

Local call tariffs were charged at Rs. 1.20 for 2-min call instead of Rs. 1.20 for 3 min call.

Calls from fixed to cellular were charged at Rs. 1.20 for 90-seconds in Metros and Rs. 1.20 per minute in Circles.

Calls from fixed to WLL (M) phones were charged at Rs. 1.20 for 2-minute call similar to fixed calls.

3.3 Brief Sequence of Events In Basic And Cellular Services In India

1994 National Telecom Policy (NTP 94) announced. DoT issued guidelines for private sector entry into basic telecom services in the country. Eight operators were issued licenses to operate cellular mobile services in the 4 metros.

1995 Tenders invited for cellular services in 20 Telecom circles. The circles were roughly analogous to the states of India and were divided into "A", "B" and "C" categories based on their perceived business potential. COAI was set up to promote and upgrade CMTS operations in India and to look after the collective interests of its members. DoT announced a cap on the number of circles in which basic operators can roll out services.

1997 The regulatory body, Telecom Regulatory Authority of India (TRAI) was set up.

 TRAI quashed DoTs move to increase tariffs for calls from fixed line telephones to cellular.

1998 DoT announced extension of license period from 10 to 15 years for eligible circle operators i.e. those operators who are not in default and who have not committed any breach of the terms and conditions of the license agreement. The matter regarding quantum and structure of license fee payable for the extended period of 5 years was referred to TRAI for their recommendations on the same.

1999

New National Telecom Policy 1999 announced. TRAI issued first regulation for interconnection and usage charge. Cellular operators are allowed the use of any digital technology.

2001 4th Cellular Operators License were awarded to players. TRAI recommended that Full Service Providers be allowed to offer Limited Mobility within the Short Distance Charging Area (SDCA) using WLL as part of their fixed licenses. Launch of WLL-M services by basic service providers in the market.

2002

Minister of Communications approves National Frequency Allocation Plan (NFAP) for optimal utilization of frequency spectrum. WPC issues order to allocate additional spectrum to CMSPs.

BSNL launches country wide cellular mobile services and announces tariffs for the same.

Reliance Infocomm launches WLL (M) services

2003

TRAI introduces the telecom interconnection usage charges agreement. Cellular industry slashes STD rates by 67% on Mobile-to-Mobile (M2M) calls beyond 200 kms. Cellular consumers to pay airtime + a flat STD charge of Rs. 2.99 per minute for calls for M2M calls anywhere to anywhere in India.

Cellular industry announces Mobile-to-Mobile (M2M) incoming free on GSM cellular phones all over the country.

4.

MAJOR PLAYERS IN INDIAN TELECOM MARKET

4.1 GSM CELLULAR PLAYES The profile of major GSM players is as follows :

1. Bharti Enterprises Bharti Enterprises has been at the forefront of technology and has revolutionized telecom with its world-class products and services. Established in 1985, Bharti has been a pioneering force in the telecom sector with many firsts and innovations to its credit, ranging from being the first mobile service in Delhi, first private basic telephone service provider in the country, first Indian company to provide comprehensive telecom services outside India in Seychelles and first private sector service provider to launch National Long Distance Services in India. As of December 31, 2004, Bharti had about 10.63 million total customers nearly 9.83 million mobile and 803,659 fixed line customers.

Business Divisions : i. Mobile Services Bharti offers GSM mobile services in 21 out of the 23 circles in India. The 9,826,156 GSM mobile customers in the circles account for a market share of 26.3% of All India GSM market and 20.7% of overall wireless market (GSM + Digital Mobile) respectively, as on December 31, 2004. Bharti recently launched services in the circle of Bihar (including Jharkhand) and have licenses for two additional circles namely Assam and the North East.

ii. Broadband & Telephone Services

Bharti currently provide broadband (DSL) & telephony services (fixed line) in over 50 towns in the circles of Madhya Pradesh, Chattisgarh, Haryana, Delhi, Karnataka and Tamil Nadu.

iii. Long Distance Services Bharti provides national and international long distance services offering data and voice transmission services for calls originating and terminating on most of India's mobile networks. It has over 26,000 km of fibre on national long distance. It has a submarine cable landing station at Chennai, which connects the submarine cable connecting Chennai and Singapore for providing international bandwidth.

iv. Enterprise Services The enterprise services group is a solutions-based communication group, especially created to deliver platinum service to the customers. These comprise portfolio of mobile, broadband & telephony and data & internet solutions. Its services sector businesses include mobile operations in Andhra Pradesh, Chennai, Delhi, Gujarat, Haryana, Himachal Pradesh, Karnataka, Kerala, Kolkata, Madhya Pradesh circle, Maharashtra circle, Mumbai, Punjab, Tamil Nadu and Uttar Pradesh (West) circle. In addition, it also has a fixed-line operations in the states of Madhya Pradesh and Chattisgarh, Haryana, Delhi, Karnataka and Tamil Nadu and nationwide broadband and long distance networks.

Bharti Enterprises also manufactures and exports telephone terminals and cordless phones. Apart from being the largest manufacturer of telephone instruments, it is also the first

telecom company to export its products to the USA. It is expected to be one of the dominant mobile operators in India over the long term.

BHARTI ENTERPRISES

Bharti Healthcare

Bharti Tele Ventures Ltd.

Bharti Teletech

Bharti Global

Mobille Services

Infotel Services

Broadband & Telephony Services

Long Distance Services

Enterprise Services

Bhartis strengths are: 1. A very capable management team that has executed its responsibilities flawlessly. 2. Bhartis financial results offer testimony to Bhartis effective management. 3. A proactive competitive strategy as evidenced by : Bhartis pre-emption of Reliance Infocomms pre-paid launch by launching its own easy recharge scheme with lower denominations starting from Rs50. Bhartis advanced efforts in testing one of its circles for local number portability (LNP) readiness, though LNP is at least a year away.

4. Though we believe Bharti is well positioned to benefit from the strong growth possibilities of the Indian mobile market, we are cautious on Bharti for the following reasons : Intense competition (with six strong operators) is likely to limit margins over the medium term. The potential listings of Hutchison India, Idea Cellular and possibly Reliance Infocomm will reduce the scarcity value of Bharti.

2. Hutchison Established in 1983 the Hutchison Telecom group is now one of the world's leading owners and operators of telecom and Internet infrastructure, offering a wide range of related services in Hong Kong and around the globe. These include mobile telephony (voice and multimedia), paging, trunked mobile radio, fixed-line services, Internet services, fibre optic broadband networks and radio broadcasting.

The Hutch Group with its GSM900 technology has presence in major India cities : In Mumbai, a partnership with local companies Max India and Kotak Mahindra, Hutch operates under the brand "Orange". In Delhi, Hutchison has a tieup with Essar Telecom Ltd earlier called Sterling Cellular Ltd. In Kolkota, Hutchison's interest is in Hutchison Telekom East Ltd (HTEL). It offers its services under the "Hutch" brand.

 In Gujarat, Hutchison's interest, is in Fascel Ltd, Gujarat's number one cellular operator. Fascel operates in Gujarat under the brand name Hutch.

In August 2001, Hutchison acquired additional licenses to operate 1800 MHz mobile phone services in key metropolitan areas, including Karnataka (includes Bangalore), Chennai and Andhra Pradesh (includes Hyderabad) to build on the Group's existing premium footprint with a strong exposure to the South India hi-tech belt. Hutchison has a presence in these areas through Hutchison Essar South Ltd. (HESL), a 49:51 joint venture with Essar Teleholdings Ltd. HESL operates in Andhra Pradesh, Chennai and Karnataka under the brand name Hutch.

It is also the country's largest roaming operator, with a more extensive network in India and around the world than any other operator. It is part of the Hong Kong based multinational conglomerate Hutchison Whampoa Limited, a Fortune 500 company, and one of the largest companies listed on the Hong Kong Stock Exchange. Its operations span 41 countries across the Asia Pacific region, Europe and the Americas.

3. IDEA CELLULAR In the year 2001, the Aditya Birla Group and TATA Group, and the world's largest telecom giant- AT&T Wireless, U.S.A came together to form Idea Cellular.

Coverage Currently, Idea Cellular operates in Andhra Pradesh, Chattisgarh, Goa, Gujarat, Madhya Pradesh and Maharashtra (excluding Mumbai) and Delhi. Its advanced cellular network build-up helps Idea Cellular offer seamless coverage in over 1000 towns and unsurpassed highway coverage across all its circle of operation. In order to increase coverage and spread its network in other states, Idea Cellular acquired 100% stake in Escotel Mobile Communications. This large acquisition includes 6 telecom circles.

IDEA has the widest roaming coverage with over 530 cities in India and in 80 countries around the world. IDEA has huge future expansion plans with its plan to invest around Rs. 1800 crore for expansion.

4. BPL MOBILE BPL Mobile is committed to business leadership in providing world-class technology services and solutions, by focusing on People, Customers, Technology, and passionately driving Excellence throughout the organization thereby creating Value. Established in 1995, BPL Mobile operates in Mumbai, Maharashtra, Goa, Pondicherry, Kerala and Tamil Nadu - with a network spanning across 207 cities currently. Today, BPL Mobile, India's premier mobile phone service provider is among the leaders of the wirefree world.

BPL Mobile has demonstrated its technological leadership by providing world-class technology like Intelligent Network, GPRS (see annexure), MMS amongst others to its subscribers. Pioneering the first true 2.5G network in the country, BPL Mobile has successfully leveraged its Rs. 4000 crore investment in advanced technology to provide

strategic coverage solutions in over 200 of the most important cities in the circles of Mumbai, Maharashtra, Kerala, Tamil Nadu and Goa. BPL uses technology as the chief differentiator in offering quality service.

Committed to using the latest technological advancements in order to increase customer convenience and reliability, BPL Mobile has consistently been the leader in establishing newer standards in mobile telephony. The ability of the company to think aggressively and to think ahead has been the one factor that has propelled it into the unassailable position that it is in today. This is in tune with BPL Mobile's motto of providing Tomorrow's Technology Today (As far as GSM network is concerned).

Best Network Service : BPL Mobile has the lowest call drop rate in India making it the leader in the network superiority by far. It is one of the few service providers that provide a 2.5G GPRS enabled network in the country and the next best being only a 2G network.

Roaming : BPL claims to be the largest roaming network in the world with access to over 400 networks worldwide and the next best being only 340 networks.

Always On : Using the Mobile Networks (GPRS) capability it is very easy to remain connected to the Internet on an always online basis. With the possibility of porting messaging clients on

handheld devices wired world messaging opens up for a person wherever he is, wirefree. Also more and more Mobile Handsets are incorporating the capabilities of a PDA and vice versa. The ratio of Prepaid to Post paid billing in BPL is around 3:2. BPL recognizes the importance of prepaid customers- the driving force behind revenues. Hence the GPRS services are being made available across Prepaid platforms with support for differentiated pricing.

Market Shares As of December 2004, the market share of players in the GSM market were as follows:

GSM Market Share

26.3% 22.6% 19.2% 12.6% 1.6% Bharti Hutch MTNL 4.4% 6.6% 4.0% 2.8% Reliance

BPL

4.2 CDMA CELLULAR PLAYES The major CDMA wireless players in India are Reliance, Tata Teleservices, BSNL and MTNL (Garuda).

1. Reliance Infocomm Reliance Infocomm, launched on December 28, 2002, the 70th birthday of the Reliance

group founder, Shri. Dhirubhai Ambani is revolutionizing telecom in India after offering world-class, complete range of telecom services, including mobile and fixed line telephony including broadband, national and international long distance services, data services and a wide range of value added services which are the outcome of state-of-the-art network technologies in Reliances network. Reliance has banks, financial institutions, telecom companies, Internet service providers and manufacturing shops as its clients. Technology - Reliances Key Strength The Reliance Infocomm network consists of 60,000 kilometers of optical fibre cables spanning the length and breadth of India. These cables can carry billions of bits per second and can instantly connect one part of the country with another. This physical network and its associated infrastructure cover over 600 cities and towns in 18 circles and broadband connectivity to over 190 cities. Reliance has 77 such rings across the country with at least three alternative paths available in metros. Connected on this topology, the service has hardly any chance of disruption in quality. This network consists of the latest switching, transmission and access technologies. The core of the network consists of fiber deployed throughout the country.

Services Offered : Wireless The wireless network allows Reliance Infocomm to offer next generation applications (e.g. data speeds upto 144 kbps) and services (e.g. over the air provisioning, quick net connect). The wireless network has been architected keeping in mind future service and capacity upgrade requirements. Reliance IndiaMobile contains the CDMA 1X - a technology with superior voice quality

(less call drops, reduced background noise, minimal interference with other electronic devices) and high-speed data capabilities. This unique combination of technologies enables Reliance IndiaMobile phones to have hitherto unavailable broadband capability, necessary for audio and video-on-demand services. The multimedia capabilities of Reliance IndiaMobile service are unique in India and the world. With Reliance IndiaMobile, one can enjoy 'always on', high-speed Internet access (up to 144 kbps!) on mobile phone or laptop. Broadband Wireline The communication infrastructure in use currently in India is proving to be inadequate in catering to data-driven communication demands, since it was designed for simple voice calls. The term broadband refers to access speeds of 1.5 Mbps and higher. As content on the Internet and intranet becomes multimedia, broadband technologies are important for accessing the content and to provide video based corporate services. Reliance has deployed broadband based on gigabit Ethernet. Long Distance Reliance Infocomm's fibre optic cables across over 60,000 km of the country's geography are capable of carrying millions of concurrent phone calls. The infrastructure ensures that the highest quality of voice and data communication is maintained. Reliance provides the full range of long distance telephony services, covering inter-city, inter-state, national long distance and international long distance to all types of users from the individual to a large corporation. Internet Services Reliance Infocomm provides the most comprehensive Internet solutions. And with its

dedicated Internet access service, Reliance offers speed efficiency of up to 100 Mbps. Reliance has set up its first state-of-the-art IDC - Internet Data Center of 5,000+ sqm in Mumbai with an equivalent disaster recovery site in Bangalore. The IDC in Mumbai houses the largest computing power in a single location in India with technologically superior, powerful high-end servers with ample storage provision and necessary network equipment. Pre-Paid Services Reliance Infocomms pre-paid service launched in February 2003 with huge TV advertising, has met a strong response.

Reliance Infocomm has announced its plans to launch services in 4,00,000 villages and 5,700 towns to provide services to 650 million people by December 2005. Reliance, which has a subscriber base of 10.3 million at the end of December 2004, has estimated that the current expansion drive will help the company to double its subscriber base by the end of March 2006.

2. Tata Teleservices Tata Teleservices Ltd. (TTSL), a leading integrated telecom company is currently present in the states of Andhra Pradesh, Tamil Nadu, Karnataka, Gujarat, Delhi and Maharashtra and has more than 800,000 customers. It acquired two companies, Hughes Telecom and VSNL, in last few years to establish its strong hold in Telecom. Hughes Telecom is renamed as Tata Teleservices (Maharashtra) Limited while VSNL was renamed as Tata Indicom.

TTSL (Maharashtra)- India's premier broadband network based telecom service provider providing telecom services in Maharashtra (including Mumbai) and Goa. Tata Indicom - the premier provider of international voice and data services. Other services provided by TTSL are Fixed wireless, ISDN, post-paid Internet, DSL, etc.

Tata Indicom Mobile is based on the latest CDMA 3G-1X technology that offers superior voice clarity and congestion-free networks. Previously the postpaid services had an entry price of Rs. 999 only, inclusive of initial handset payment and activation fees. Tata Indicom assures one of no hidden charges or misleading claims - Its strategy is to counter attack Reliance, which is famous for its hidden cost strategy.

TTSL have spent over US $2bn on capital expenditure so far. They plan additional capex to expand its CDMA capacity in existing circles by end of 2006. Their goal is to have 30 million mobile subscribers in four years time. This would imply a 19% market share.

Market Shares As of December 2004, the market share of players in the CDMA market were as follows: CDMA Market Shares
89.6%

7.9% Reliance Tata Tele

1.8% MTNL

0.5% HFCL

0.3% Shyam

4.3 BASIC SERIVCE PROVIDERS

The profiles of the top two basic serivce providers in India are as follows :

1. BSNL BSNL is the one company that connects the four corners of the nation, and much beyond. It is working round the clock to take India into the future by providing worldclass telecom services. Driven by the very best of telecom technology from chosen global leaders, it connects each inch of the nation to the infinite corners of the globe. The services offered by BSNL are : i) Basic Telephone Services The Plain old, Countrywide telephone Service through 32,000 electronic exchanges. Digitalized Public Switched Telephone Network (PSTN) with a host of Phone Plus value additions. ii) Cellular Mobile Service GSM BSNLs project of GSM cellular mobile service supports applications like Voice Mail, E-mail, short Message Service (SMS), Cell Broadcast Service, International Roaming, IN Services like Prepaid Card, Premium rate, free phone, Universal Access number (UAN), Split charging, VPN etc.

Wireless in Local Loop This is a communication system that connects customers to the PSTN using radio frequency signals as a substitute for conventional wires for all or part of the connection between the subscribers and the telephone exchange. Countrywide induction of WLL is under way for areas than are not feasible for the normal

network. It helps to relieve congestion of connections in the normal cable/wire based network in urban areas, it connects the remote and scattered rural areas. iii) Internet Keeping global networks networked, the countrywide Internet Services of BSNL includes Internet dial up / Leased access service, for web browsing and E-mail applications. Internet Telephony services have also started recently. iv) ISDN Integrated Service Digital Network Service of BSNL utilizes a unique digital network providing high speed and high quality voice, data and image transfer over the same line. It can also facilitate both desktop video and high quality video conferencing. v) Intelligent Network Intelligent Network Service (In Service) offers value-added services, such as: Free Phone Service India Telephone Card (Prepaid card) Account Card Calling (ACC) Virtual Private Network (VPN) Tele-voting Universal Access Number (UAN) and others

vi) Leased Lines & Datacom BSNL provides leased lines for voice and data communication for various applications on point-to-point basis. It offers a choice of high, medium and low speed leased data circuits as well as dial-up lines. Bandwidth is available on demand in most cities. Managed Leased

Line Network (MLLN) offers flexibility of providing circuits with speeds of 64 kbps upto 2mbps, useful for Internet leased lines.

Investing Plans BSNL will be investing around Rs.80,000 crore to expand its network capacity to 12 crore line, including fixed and wireless lines in the next 3 years which would account to 200% increase in its network capacity compared to what it has added since independence. BSNL currently maintains a market share of around 19%. Another move towards consolidation in the telecom industry seems to be on the cards with BSNL likely to acquire a majority 52% stake in MTNL.

2. MTNL MTNL which is amongst the foremost public sector undertakings in India, has a strong financial base and has shown consistent improvement in performance over the years. It has market share of about 1.6% of the National Telecom Network.
1986 2003

GSM Service MTNL provides GSM Cellular Mobile Service with a capacity of over a lakh subscribers in each of the two metro cities of Delhi and Mumbai under the brand name Dolphin. The cellular network supports Intelligent Network Services such as prepaid, autoroaming (National as well as International), free phone, premium rate service etc. MTNL has been licensed to operate cellular services in Delhi and Mumbai (including Navi Mumbai & Kalyan). MTNL also provides prepaid service under the brand name TRUMP in Mumbai and Delhi.

CDMA Service MTNL introduced CDMA 1X 2000 Technology under the brand name Garuda, in Mumbai and Delhi in 2001. The CDMA network has 1.5 lakh lines each in Delhi and Mumbai. MTNL has launched prepaid services on its CDMA network over the intelligent network (IN) platform.

Overall Market Shares As of December 2004, the market share of players in the Indian telecom market were as follows :

Market Share of Mobile Subscribers

20.5% 18.5% 15.0% 9.8% 1.6% 1.7%
le h L ar ti EA L

21.2%

3.4%

5.2%

3.1%

Total Telecom Market The subscriber base for telephony services continued to maintain its growth during February 2005 with about a total 2.11 million subscribers being added. In the Mobile segment, with 1.67 million subscribers (including 1.13 million GSM and 0.54 million CDMA subscribers) added in February 05, total count of mobile subscribers reached 51.44

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million a 53% Y-o-Y growth. While in the Fixed segment, with 0.39 million subscribers added in Feb 05 total fixed line subscribers count reached 45.59 million. Thus the total subscriber base touched 97 million leading to a tele-density of almost 9 (total population of about 1100 million). The entire telecom market grew by around 29% over the past year and is expected to grow by around a CAGR of 22%.

5.

CELLULAR TECHNOLOGIES - GSM Vs CDMA

The two most prominent mobile technologies currently prevalent in India are, GSM (Global Standards for Mobile) and CDMA (Code Division Multiple Access). Since the radio spectrum is a limited resource and has to be shared by all the users a number of techniques have been devised to allow multiple access of the same frequency band by different users. These techniques are : TDMA (Time division multiple access) FDMA (Frequency division multiple access) CDMA (Code division multiple access)

MOBILE TECHNOLOGIES : 1. CDMA is a form of multiplexing (access to the same resource will be given to more than one user), which allows the use of a particular frequency for a number of signals, optimizing the use of available bandwidth. It is a cellular technology that uses spreadspectrum techniques. In CDMA technology every channel uses the full available spectrum. Individual conversations are encoded with a pseudo-random digital sequence.

CDMA employs analog-to-digital conversion (ADC) in combination with spread spectrum technology. Audio input is first digitized (ADC) into binary elements. The frequency of the transmitted signal is then made to vary according to a defined pattern (code), so it can be intercepted only by a receiver whose frequency response is programmed with the same code, so it follows exactly along with the transmitter frequency. There are millions of

possible frequency-sequencing codes which enhances privacy and makes cloning difficult. The technology is used in ultra-high-frequency (UHF) cellular telephone systems in the 800-MHz and 1.9-GHz bands.

CDMA was first used during World War II by the English allies to foil German attempts at jamming transmissions. The allies decided to transmit over several frequencies, instead of one, making it difficult for the Germans to pick up the complete signal.

2. GSM is a form of multiplexing, which divides the available bandwidth among the different channels. GSM is a combination of Time and Frequency-Division Multiple Access TDMA/FDMA). The FDMA part involves the division by frequency of the (maximum) 25 MHz bandwidth into 124 carrier frequencies spaced 200 kHz apart. Each of these carrier frequencies is then divided in time, using a TDMA scheme. The fundamental unit of time in this TDMA scheme is called a burst period of a particular duartion. Eight burst periods are grouped into a TDMA frame which forms the basic unit for the definition of logical channels. One physical channel is one burst period per TDMA frame. Thus GSM allows eight simultaneous calls on the same radio frequency. GSM, first introduced in 1991 was the only mobile communication system present in the market until recently before the establishment of CDMA networks.

GSM Vs CDMA - Some Technical Aspects

Basically, the two technologies address differently the same fundamental problem of

mobile communication, how to divide the finite frequency of airwaves between multiple users at the same time, or, how to make more than one person to carry on a conversation on the same frequency without causing mutual interference. In common analogy, imagine a room full of people, all trying to carry on one-on-one conversations. In GSM (TDMA), each couple takes turns talking. They keep their turns short by saying only one sentence at a time. As there is never more than one person speaking in the room at any given moment, no one has to worry about being heard over the background din. In CDMA, each couple talk at the same time, but they all use a different language. Because none of the listeners understand any language other than that of the individual to whom they are listening, the background din does not cause any real problems.

In technical jargon, GSM (TDMA) does it by chopping up the channel into sequential time slices. Each user of the channel takes turns transmitting and receiving in a round-robin fashion. In reality, only one person is actually using the channel at any given moment, but he only uses it for short bursts. CDMA on the other hand, uses a special type of digital modulation called Spread Spectrum, which takes the users voice stream bits and spreads them across a very wide channel in pseudo random fashion. The receiver decodes the randomization in order to collect the bits together in a coherent order.

Services like mobile banking, ticket booking, info services are today exclusively available on GSM (TDMA) networks only. A GSM (TDMA) mobile has a SIM card, which provides more functionality and is convenient (eg, change your phone, but keep your phone numbers and settings). Above all, you can take a GSM (TDMA) phone to virtually anywhere in the

world and keep talking, whereas a CDMA phone does not have a SIM card, and therefore you have to stick to the phone you have been provided with.

Proponents of CDMA claim high communication security, high carrier efficiency meaning that the network can serve more subscribers at a time, smaller phones, low power requirement, ease of operation for the network operators, and extended reach beneficial to rural users. Opponents of CDMA say that due to its proprietary nature, all of CDMAs flaws are not yet known to the engineering community. Also, as CDMA is relatively new, the network is not set up to provide as many facilities as GSM (TDMA). Being the standard for mobile communication in very few countries, CDMA also cannot offer international roaming, a large disadvantage.

CDMA technology has a Soft accommodation feature, that is, when the number of users of the network goes up, the voice quality progressively gets poorer. Though GSM (TDMA) will not accommodate more than a finite number of users (the user will get the Network Busy message if this number is exceeded), there wont any be deterioration in voice quality due to traffic.

CDMA technology facilitates a Soft Handoff, i.e., when a mobile phone has to choose between two cells, and then shift from one of them to another as you travel, the transition is very smooth. In GSM (TDMA), the handoff is a Hard Handoff, i.e., the phone first stops receiving and transmitting on the old channel, and then commences transmitting and

receiving on the new channel. Therefore, if you are making a call during a handoff, the call needs to be dropped.

One of the main problems facing CDMA technology these days is channel pollution, and signal deterioration inside buildings. But CDMA really comes into its elements when you are out in the countryside with few sites covering large expanses of land. CDMA also has a very high data transmission rate, from 153.6 to 614 kbps. Hence the Reliance India Mobiles claim to supply internet at 144 kbps speed. But the GSM (TDMA), which can provide only 56 kbps data transmission speed today, is also catching up very fast, and moving towards the next generation protocols like the GPRS.

Comparison Between The Two Technologies

GSM and CDMA can be compared over the following points : 1. Superior Technology GSM and CDMA are apples and oranges. Both offer the same quality and data access speed. Saying one is superior still gets debated. CDMA uses the entire frequency spectrum and hence can have the broadcast happen at very high signal strength spread over bigger radius. For a city like Chennai (a typical Indian city), the GSM grids requires something like 130 base stations to cover the city. The time slicing circuit is quite costly.

WLL requires some 10 base stations in Chennai as they beam all frequencies received by everyone (something similar to Ethernet broadcast in LAN where every computer listens to

every packet and the intended recipient makes sense of message and acts upon it). Only the Handset, which incorporates the code, can decipher the signal and transmit too. WLL uses CDMA to loop to mobile phones.

CDMA is a proprietary of Qualcomm and is in use where the Mobile service provider will have to serve bigger area like US. GSM is referred where concentration of mobile phone providers across geographic area is more (More than 2 Service Providers in a 500 Km radius) and individual base stations are the best option Europe.

2. Cost The GSM calls for heavy capital investment in the form of costly base stations with negligible operating cost. All the cost we pay them is their capital cost. WLL have very less base stations, cheaper equipment and Shared costs on linking stations like optical fibres etc. This reduction in initial investment enables them to offer mobile outgoing at 1.20 per minute and incoming free (better position to negotiate calling-party-pays formula). In WLL, the mobile handset cannot be reused when you switch suppliers. You are getting an unwritten commitment from the subscriber, which leads to further reduction of charges.

3. Data Transfer Negligible difference in data transfers rates between a GPRS (2nd Generation GSM) and CDMA. In fact, if you get a GPRS phone and activate 4 inward and one outward channel, the instrument is very fast in accessing WAP sites.

4. Security Every software developer will vouch for this. More open a standard, more chances of bugs being pointed out and rectified. This applies for security. More open the security framework, less chances of a bug in it. GSM has a 800 page key encryption algorithms (algos). Basically there are 2 levels of encryption, one is for the frequency (so that any guy with a radio transmitter cannot detect the frequency which is set dynamically) and the other is for content (Even if you receive the frequency, you cannot demodulate to voice). It is possible for someone to put fake base station (Employees of GSM provider?) and it is only a matter of time before a good hacker cracks these mathematical algos. Just like internet is hackable, GSM is clonable. This means somebody can then recreate the SIM card codes and can make and receive calls on your behalf.

CDMA on the other hand says it plainly. I have the code. You can crack this provided you try 1 followed by 33 zeros times. Since it uses entire spectrum, base station snooping is not possible.

From a service provider point of view Since bandwidth is the major problem in the modern times the CDMA has a very clear advantage over the GSM in these terms. The number of channels (users) that can be allocated in a given bandwidth is comparatively higher for CDMA than for GSM. The cost of setting up a CDMA network is also comparatively less than the GSM network. Due to

these advantages there is high probability that CDMA technology will dominate the future of mobile communications.

From a customer point of view If you already have a GSM dont invest on new handset and shift to CDMA. If you dont already have a GSM, go for Cell One or Reliance. But note that GSM prices are expected to comedown in the near future as you are just paying capital cost. Sticking to Reliance (according to me) may not be prudent. But then you never know. The battle between GSM and CDMA technologies in India is hotting up. While the initial tilt was towards the GSM with players like Bharti, Hutch, Spice, BPL, Essar and BSNL preferring it, the TATAs and the Reliance have now entered the market putting their bets on CDMA.

The final conclusion is that it is not so much over technology that a customer decides which network to adopt. It is basically performance. Whichever mobile communication provider puts in better efforts in giving a higher performance, the subscriber is bound to follow that path.

6.

FINANCIALS OF A MAJOR WIRELESS PLAYER BHARTI

The leading GSM player Bharti has reported improving financial figures in recent times. Bharti has surpassed its loss making phase in FY 2004 when it reported positive earnings of about Rs.5.8 bn. Bharti reported a robust Q3 FY2005 with a 70% Y-o-Y revenue growth to Rs.21.53bn. The company added over 1 crore customers in the quarter alone (its highest ever in a quarter) and achieved the distinction of crossing the Rs.1000 crore net profit mark. Looking ahead, EBIDTA is expected to grow significantly by 67% to Rs.28.5 bn in FY 2005 and to nearly Rs.44.8 bn in FY 2007, whereas the earnings are expected to grow by 71% Y-o-Y to Rs.5.39 in FY 2005.

The composition of service revenue forecasted for the fiscal years 2005 to 2007 is given below :
FY 2005E Mobile Services Mkt Share Avg Subscribers (Bharti) Total Subscribers Avg ARPU Mobile Revenue Broadband& Telephone Mkt Share Avg Subscribers (Bharti) Total Subscribers Avg ARPU Broadband& Revenue Long Distance Enterprise Business Total Services Revenue 20.5% 8657850 52740000 515.5 53557 FY 2006E 20.8% 12207200 65397600 489.7 71738 FY 2007E 21.0% 14766778 75861216 479.9 85044

1.8% 739996 45960000 1227.0 10896 14483 817 79753

1.8% 861866 48107400 1300.6 13452 18828 1634 105651

1.9% 911020 49561809 1365.7 14930 23535 2532 126040

Bhartis consolidated Profit and Loss Account

Year Ended 31st March REVENUES Service Revenue Sale of Goods Other Income Total Income EXPENSES Access Charges Network Operating Licence fee & Spectrum charges Cost of Sales of Goods Personnel Sales and Marketing Administrative and Others Total Expenditure EBITDA Interest [Finance Expenses (Net)] Depreciation Amortisation Other Expenses Profit/(Loss) BeforeTax Current Tax Deferred Tax Minority Interest Net Profit EPS (Rs.) Shares (Diluted in millions) FY 2002 14664 341 37 15041 2781 1344 2008 299 1273 1943 1597 11245 3796 1088 2338 1354 972 -1956 84 -321 -29 -1690 -0.91 1853 FY 2003 29876 624 55 30554 6385 3101 3393 572 2754 3171 3544 22921 7634 2730 4801 1774 384 -1762 2 0 286 -2051 -1.11 1853 FY 2004 49308 717 345 50369 11437 4348 5561 654 3721 3873 3722 33314 17055 2693 6847 1947 41 5527 1057 -1379 12 5837 3.15 1853 FY 2005E 79753 803 350 80906 18770 6472 8853 727 5744 6311 5502 52378 28527 2590 9090 2190 55 14603 5184 -600 20 9999 5.39 1853 FY 2006E 105651 875 350 106876 25009 8454 11727 790 7481 8550 7161 69173 37703 2400 11047 2380 55 21821 7637 -600 20 14764 7.97 1853 FY 2007E 126040 937 350 127327 29922 10059 13990 844 8913 10313 8531 82572 44755 2400 12977 2550 55 26772 9370 -600 20 17982 9.70 1853

As of Dec 31,2004 Bharti had around Rs. 35 bn in net debt which has reduced from Rs.40 bn at FY 04. This is attributed to part repayment of debt from the positive earnings. The company has announced one of the largest international funding in the telecom sector of US$354 mn or Rs.14.5 bn in January 2005 for its all India mobile operations at very attractive costs. The interest burden has considerably reduced by around 74% Y-o-Y to Rs.19.1 crore due to refinancing of old debt with new debt at lower interest rates. The company has a reasonably good cash position with a total of Rs.10.48 bn in cash, cash

equivalents and marketable securities, which can be put to use for future expansion projects.

One of the important financial measure for Bharti remains its Capital expenditure (capex). The company is conservatively geared at the end of Q3 FY 2005 at 0.57 and thus can well meet capex requirements through fresh borrowings. The company has a capex target of Rs.40 bn for FY05, Rs.32.5 bn of which is already spent in this fiscal. Assuming the Capex/Sales ratio remains constant (at least) for FY06 as compared to FY05 (which is 0.49), a capex of at least Rs.52.4 bn is expected in the fiscal 2006. This is a positive prospect for growth. Enterprise Value (EV) calculated as EV = Market Cap + Debt Total Cash At end of Q3 FY05, Debt = Rs.34.88 bn, Cash, Total cash = Rs.10.48 bn, EBITDA (ttm) = 26.34 bn, Outstanding shares = 1853.37 mn Therefore EV = (207.7*1.85337) + 34.88 10.48 = 409.34 bn. [Rs.207.7 is price on 18 March 2005] Therefore present EV/EBITDA (a relevant metric in the telecom industry) for Bharti is about 15.5. This ratio globally stands at an industry average of around 9 for telecom service providers. So Bharti may be a little expensive presently, but that is understandable due to the transition from the loss making phase to profitability. However, the forward EV/EBITDA for FY07 is nearly 9.1. So by March 2007 Bharti should probably be in line with global standards. Bharti is steadily getting into a financially sound position

considering the successful transition to profitability and the significant capex plans lying ahead.

Note : EV/EBITDA is a more relevant and comparable metric for comparing telecom service providing companies since globally most of these companies have been in the nonprofitable zone upto recent times. Its been little time that they have turned profitable. So considering the high amounts of debt they have and future capex plans, ratios like P/E may not be applicable. As EBITDA is a measure of the cash flow generated by the company, EV/EBITDA becomes more relevant for comparison.

7.

CONTEMPORARY ISSUES FACING TELECOM PLAYERS

In the present scenario, the trends observed in the telecom market have subjected the telecom players to various issues which are outlined as follows :

7.1 Consolidation Wave Set In : Unlike in many countries (where licenses were awarded on a national or regional basis), the cellular services industry structure in India was fragmented at the outset. The direct consequence of the Indian Governments policy in the first round of bidding in 1995 was that license ownership was fragmented and most of the operators could offer no more than contiguous regional coverage; national coverage could only be provided through a multitude of roaming agreements. Seamless national coverage is an obvious objective for an industry whose goal is to provide mobility, but delivering such a service has been fraught with difficulties.

The ongoing consolidation represents the industrys attempts to redress the situation by creating large regional or near-national coverage. Operators have been accumulating licenses (through alliances, acquisitions and winning of the license for the 4th operator) in multiple markets and contiguous service areas to expand their footprints into new regions in the hope of capitalizing on the various efficiencies associated with economies of scale and the marketing possibilities of multiple product offerings.

The Indian Government has also permitted the transfer of licenses in respect to telecom services, which may take place by way of merger or demerger of companies, subject to certain regulatory conditions. Previously, intra-circle mergers were not permitted. However, in February 2004, the Indian Government also announced the guidelines for merger of Basic, Cellular and USL licenses in a given service area. Salient features were as follows : Merger of licenses shall be restricted to the same service area. Merger of license consequent to mergers/acquisitions or restructuring of the operations shall be permitted for (a) Cellular License with Cellular License (b) Basic Service License with Basic Service License (c) USL with USL (d) Basic Service License with USL and (e) Cellular Service License with USL. There are at least three operators in that service area for that service, consequent upon such merger. Any merger, acquisition or restructuring, leading to a monopoly (i.e. a 67% or more market share) in the given Service Area, shall not be permitted. Consequent upon the Merger of licenses, the merged entity shall be entitled to the total amount of spectrum held by the merging entities, subject to the condition that the amount of spectrum shall not exceed 15 MHz per operator per service area for metros and category A service areas, and 12.4 MHz per operator per service area in category B and category C service Areas.

Drivers to Consolidation : A compelling reason for the ongoing consolidation is network externalities. Network externalities arise when the value that a consumer derives from a product or service

increases as a function of the number of other consumers of the same or compatible products or services. An additional connection to the system increases the benefit of the network to all users. Another possible source of externalities is call externality. When one person calls another, the second person may call a third person, and so on, thereby generating more revenues for the network operator who has all three persons as subscribers. The value of a network to a telecom firm increases faster than its size because the marginal cost of adding additional subscribers is a fraction of the fixed cost of building the backbone of the network. Importantly, the value of the service provided by the network to the customer also increases exponentially with the size of the network.

Consolidation in the Indian cellular telecom industry will be driven by the benefits of gaining economies of scale through a broader geographic reach. This would help the operator by spreading marketing and operating costs over a bigger subscriber base. Operators also have more flexibility with regional pricing plans since they are not subject to the typically higher roaming charges charged by other operators. A contiguous regional coverage could make an offering more marketable to business consumers who may have heavy roaming patterns. By owning the networks, operators have more flexibility in pricing plans. Such pricing plans and bundled, state-of-the-art cellular service increase the value of a subscription to a consumer. The more value-added a service, the less likely a customer will defect to a competitor. Low-coverage operators may not secure enough market share and volume to survive against well-funded national operators even if their investment costs are low. For weaker operators with neither a significant subscriber base nor well-funded promoters, their

financial performance has deteriorated under low subscriber revenues, high losses, and high debts. These operators face the possibility of being swamped by well-funded new entrants, who will reduce tariffs and, thus, negate the benefits of revenue sharing and increased subscriber penetration. For the weaker operators, merger with an existing wellfunded operator remains the only way to survive and recoup investments.

Consolidation is not just expected among low coverage operators, but also the big players are likely to witness it. The best example is that of the current talks going on between BSNL & MTNL about BSNL planning to acquire a majority 52% stake in MTNL. This would be one of the largest mergers in Indian telecom history and would hugely widen their network and subscriber base to achieve substantial economies of scale.

7.2 Declining Average Revenue per User For cellular operators, a critical indicator of profitability is the ARPU, which represents the amount billed per subscriber. ARPU is usually expressed on a monthly basis. Factors that determine the usage and ARPU patterns of an average mobile telecom subscriber include: The level of competition Other factors being equal, greater competition leads to lower prices and, for a given level of usage, lower ARPU. Price elasticity for mobile services is estimated to be closer to that for fixed line long distance services than for fixed line local services. Thus, lower prices stimulate usage and lead to higher ARPUs, but lower revenues per MoU.

 Penetration rate When mobile services were first launched in India during the mid-1990s, they were mainly used by business subscribers, who were less sensitive to prices. However, the business communications market represents a limited market segment. Thus, the mobile sector has had to expand its focus to include the mass-market mobile communications market. To encourage mass-market penetration, access charges must fall. Thus, more and more low usage subscribers enter the market. While the ARPU may remain stable for existing subscribers, the lower usage patterns of newer marginal (and largely pre-paid) subscribers leads to a lower overall ARPU.

Calling Party Pays (CPP) The CPP system, where a mobile subscriber does not pay for incoming calls, also has an effect on the ARPU. Implementation of CPP has partially resulted in lower ARPUs in India, since incoming minutes constitute around 62% of traffic, and with CPP, a cellular mobile subscriber does not pay for receiving calls.

Pre-paid subscriptions The increasing penetration of pre-paid service adversely affects the ARPU. Pre-paid subscriptions accounted for around 77% of cellular subscriptions at end-2003, and the ARPUs for pre-paid users are, typically, 25%-30% of the ARPUs for a contractual, postpaid subscription. Pre-paid card service is an increasing part of subscriptions of most cellular operators. Users pre-purchase blocks of time via rechargeable cards or so called `scratch cards' with numbers, which allow them to access entitlements. This

airtime must be generally used within a specific time. The entry costs are lower and pre-paid cards are generally targeted at attracting new subscribers. Thus, generally, prepaid cards have the most attraction for low usage subscribers (a high usage subscriber would switch to a post-paid connection with lower airtime charges).

Increased penetration into the mass market, increased pre-paid market share, price declines, cost reductions, and CPP implementation have resulted in increased (MoU) and declining ARPUs. However, the decline in ARPU does not necessarily have an adverse impact on an operators profitability. As the total number of subscribers increases, the marginal operating cost per subscriber for functions such as transmission, switching, and administration is likely to fall. Consumers also benefit to the extent that providers pass along these gains through price reductions. In effect, providers can provide the same service at a lower cost. Further, although pre-paid cards generally lead to lower ARPUs, they also result in the elimination of billing and bad debt expenses for a cellular operator.

7.3 High Accumulated Losses The tremendous subscriber and revenue growth rates seen in the telecom industry is expected to continue due to increased coverage, competition, substantial price reductions, increased pre-paid card penetration, and implementation of CPP. But the industry is still reporting net losses. The accumulated losses for the cellular services operators are estimated to have increased from Rs. 79 billion by March 2003 to over Rs.100 billion in 2004. The high built-in cost structure because of the high license fee outflows and the low subscriber usage has meant that only a few operators have now attained profitability.

To retain market share and presence, operators are investing significant amounts towards network expansion, and delivery of high-quality voice and data services in an increasingly competitive market. This trend may well continue, for the advent of 2.5G technologies most notably General Packet Radio Services (GPRS)offering improved voice capacity and quality, as well as high-bandwidth data services, is likely to result in even larger incremental capital expenditures.

As a result of all these developments, the growth in the number of people subscribing to cellular services is likely to continue to outpace the industrys overall growth in revenues. Slower growth in revenues (as compared with subscriptions) and increased network investments to support an increased subscriber base and provide high-quality voice and data services would imply that most of the operators would not be able to wipe out accumulated losses in the short-term.

7.4 Increased Competition from CDMA services It could be assumed that with the acquisition of USL by erstwhile BSOs, and their upgradation of CDMA-based limited mobility WLL (WLL-LM) services to fully mobile CDMA services since November 2003, there would be increased competition to cellular services based on the GSM standard. Unlike GSM, which offers seamless national and international roaming, WLL-LM services did not offer roaming. However, with the acquisition of USL, CDMA mobile services are, currently, competitive on product offerings and prices as compared with cellular GSM services. CDMA subscriptions accounted for 22.2% of the total wireless mobile connections in India at end-February 2004. Thus, the digital GSM mobile services offered by cellular operators in India faces the

possibility of increased mobile services competition from CDMA mobile services offered by USL operators.

CDMA services subscription have increased significantly since the launch of nationwide services by Reliance Infocomm in May 2003. Reliance had achieved a CDMA subscriber base of 6.07 million at end-February 2004, accounting for nearly 86% of total CDMA subscriptions in India.

7.5 Fixed To Mobile Substitution Higher mobile penetration rates and lower mobile prices have already caused a significant subset of consumers to consider their mobile telephones to be their main phones and a substitute for fixed lines.

Call/Service Substitution The use of mobile instead of fixed phone for calls or access is called fixed to mobile substitution (FMS). FMS is potentially a significant threat to fixed operators if subscribers surrendered their fixed network connections (`cutting the cord') and decided to use only mobiles. In India, many higher fixed network users are `cutting the cord', as evidenced by the surrender of telephone lines. With more mobile subscriptions and declining prices, users with both fixed and mobile phones make an increasing proportion over their mobile lines. This results in not only lesser call revenues for fixed operators, but also to subscribers cancelling their fixed line subscription, and a total loss of the subscriber and the associated monthly line rental revenues as well.

There are a number of reasons for the switch from fixed to mobile : Speed of obtaining a mobile subscription The paperwork and administrative delay is much more for a fixed connection as compared to mobile connection. Also if the present residential premises did not have a telephone line in the past, the infrastructure required for a fixed line is substantial compared with no infrastructure requirement at the residence of a mobile subscriber, speeding up the process. Mobility Higher decline in the mobile service prices than in fixed service prices The price premium for mobile services has lowered the threshold for making calls over a mobile network.

However, many consumers will still rely on, and access a fixed telephone to provide voice or Internet services as the quality and the extent of access to content on the Internet is far better in a fixed connection than in a mobile handset..

7.6 Pricing Convergence The increasing liberalisation of mobile communications, increased competition, implementation of CPP & the consequent decline in mobile service costs, and the falling tariff structures raise the question of when the prices of mobile services might converge with fixed network prices. The fall in the price of mobile services has been dramatic since 1999, and the price premium over fixed services has declined. Looking ahead, it is likely that the gap will narrow over time. The present scenario is as follows :

 At present, a high percentage of calling opportunities on a mobile network terminates on a fixed network. As the user base of mobile subscribers grows, a higher percentage of calls will remain on the mobile network. Increasing consolidation will result in a still higher percentage of calls remaining on the same network, obviating the need for interconnect payments. The entry of BSNL, MTNL and newly licensed operators is likely to result in further reduction in mobile service prices. Existing private operators will be forced to reduce prices to be competitive. With CPP implementation, mobile operators with CPP and revenue sharing have an additional revenue source and, thus, can be more flexible in pricing services. The ability to draw revenue from a wider user base enables operators with CPP to offer lower tariffs aimed at keeping traffic within their network. The proportion of revenue earned by mobile operators from traffic earned from terminating calls can be very significant considering that incoming traffic constitutes 62% of the Minutes of Use (MoUs). Over time, as the market expands, the incremental capital requirements for mobile operators should be reduced. This should serve to reduce their costs and prices.

However, while the price premium of a mobile call over a fixed call will decline over time, it is highly unlikely that mobile and fixed prices will converge:

 The supply of mobile capacity is limited by spectrum availability. Difficulties are already being experienced in the metros, where the demand is likely to outstrip the available spectrum in the foreseeable future. Solutions to spectrum congestion include cell splitting or additional spectrum allocation. Splitting leads to an increase in the number of channels available and the capacity of the cells. In practice, the efficiency of a system decreases when cell size reduces, and the ratio between the expenditure and traffic increases, eventually reaching a point where economic considerations call for a halt. Thus, increasing consumer demand and stagnation in the available spectrum combine to increase the cost of service, and price is one factor that is used to manage the demand for mobile services. Fixed services, on the other hand, face no such capacity constraint. Users value the defining feature of a cellular mobile servicethe ability to make and receive calls everywhere. In addition, cellular services also provide more value-added functions that are not available on the fixed network. As is evident from the increased penetration of cellular services, subscribers are prepared to pay a substantial premium for the mobility and other value-added services offered by a cellular network. The costs of acquiring and retaining cellular mobile customers are much higher because the market is more competitive and the switching costs for a subscriber are much lower, enabling subscribers to switch operators more easily.

For these reasons, it is likely that there will be a sustained (but declining) premium for using mobile communications over fixed communications.

7.7 Rural Telephony Expansion

With a view to promote and expand the telecom industry in remote and rural areas of the country where telecom facilities are minimal or even non-existent, the Indian Government has introduced a new charge called the Access Deficit Charge (ADC). The ADC is a charge levied on phone companies to fund the rural expansion programme (which is loss-making) of the state-run BSNL who is subsidizing local and international calls. TRAI has cut the ADC on local and international calls in a bid to reduce call rates further. The ADC on outgoing international calls has been cut by 41% to Rs.2.50/minute from Rs.4.25/minute and on incoming overseas calls ADC has been reduced by 23.5% to Rs.3.25/minute, which have come into effect from February 1, 2005. On national long distance (NLD) calls, charges have been reduced to a flat 30 paise/minute for all distances from the existing rates of 30, 50 and 80 paise for distances of 0-50 km, 50-200 km and more than 200 km respectively. However the reduction in ADC is expected to cost BSNL an annual loss of Rs12.5bn. The loss could affect its roll-out plans for rural areas. While TRAI has provided for ADC of Rs50bn per annum, BSNL expects to spend about Rs112bn annually on present lines in the rural areas. However, the reduced revenues from ADC may force BSNL to review some of the projects planned for achieving the ambitious rural tele-density targets. BSNL provides rural telephony at highly subsidised rate of Rs. 50 per month against the average monthly rental of Rs360. Major private cellular operators like Bharti, Hutch and BPL, have promised to pass on the entire benefit of the cut in ADC to customers.

The new ADC regime is likely to boost subscriber growth due to further decline in tariffs as most of the mobile operators have announced reduction in tariffs. A comparison of tariff plans for mobile service of SAARC countries revealed that the mobile tariffs in India are lowest as compared to other countries.

Mobile tariffs - SAARC countries Countries Per Minute Cellular Tariffs (in US Cents) India 34 Bangladesh 6.5 Nepal 6.5 Pakistan 8.4 Sri Lanka 11.0 Bhutan 11.4 Maldives 14.4

8.

SPECTRUM MANAGEMENT - A KEY EMERGING ISSUE

The Spectrum is a fundamental resource employed in a wireless communication service. The radio spectrum is usually taken to comprise that part of the electromagnetic spectrum falling between frequencies of 3 kHz and 3000 GHz. Different frequencies have different characteristics that make them suitable for specific applications. For instance, lower frequencies travel longer distances so they are used for applications where large areas such as broadcasting are to be covered.

Spectrum is scarce and is allotted by the government among users. Few years ago, when there were few wireless-based applications, it was liberally allocated to the Railways, Ministries of Defence and Home, but now with the proliferation of new technologies in the country, the demand for spectrum by users has increased manifold. In the telecom sector, the introduction of cellular and WLL (M) services has led the growth in demand for spectrum. In fact, spectrum constraints being faced by telecom service provider are affecting the quality of service to consumers. Further, the scope of interference of radio links has also increased, making coordination and management tasks related to the spectrum, more complex than before.

Methods of spectrum assignment Worldwide there are two methods of spectrum assignment : 1. Auctions Auctions are a method to allocate spectrum licenses among competitive buyers at the best price the market can offer. The objective of most spectrum auctions is two-fold. The

primary goal is efficiency - getting the spectrum into the hands of those who will put it to best use to get returns on their investments. Firms with a high value for spectrum are likely to bid higher than others, and are therefore likely to use it optimally. Another goal is revenue maximization.

An argument in favor of auctions is the existence of informational asymmetries. The seller has imperfect information about how much the buyer might be willing to pay. In most cases, the buyer knows more than the seller about the value of what is being sold. An auction is a transparent means of assignment. All parties can see who won the auction and why. Spectrum auctions have been adopted by many countries albeit with mixed results. Healthy auctioning may result into huge debts for the winning licensees. Huge bidding amounts have led to under-investments in infrastructure. The ability to recover the cost operators had sunk in the license purchase in the foreseeable future has also been questioned with an uncertain demand scenario for such services. It is to be noted here that although in theory auctions may be the best way to allocate a scarce resource, their effective application is constrained by many external factors such as the legal administrative framework, the political regime, the number of competitors, etc. Success of an auction depends upon its design, which should meet the twin objective of fostering competition and ensuring effective use of the spectrum. An equally important consideration is the management of the post-auction process. Even the most carefully designed auctions have had some problems in the post-auction phase.

2. Comparative hearings

The second most popular method is that of comparative hearings. In this, the price that the candidate is prepared to pay for spectrum is only one of several criteria taken into account. Other factors may include financial soundness, technological know-how and social considerations. Comparative hearings have some advantages. They allow innovative but unproven firms facing funding constraints a chance to win the license as the method is based on criteria other than price. To the extent that hearings eliminate ill-prepared bids and inexperienced firms, they can reduce transaction and litigation costs, and enhance consumer choice and innovation. Hearings are less transparent than auctions. They require assessment of competing firms on criteria other than willingness to pay, which can make the selection process subjective. This subjectivity and lack of transparency can encourage lobbying and bribery.

Spectrum pricing In India, the auction method has been used for allocation of basic and cellular licenses. It is the service provision and not the spectrum that is being auctioned. Therefore, the market value of spectrum has mainly been determined indirectly i.e. through the services that could be provided over it. The DoT issues the service license and Wireless Planning and Coordination (WPC) Wing the wireless license. Once the service license is allotted, the latter gets allotted automatically. However, spectrum required by the licensee is priced additionally to the license. This is in the form of spectrum charge, a fee based on spectrum management costs levied by the WPC. It consists of a license fee and a royalty charge. The license feel is based on the processing costs, which includes examination of the application form, preparation of documents, etc. The royalty covers the frequency management costs,

which includes monitoring, inspection, coordination, infrastructure development, etc. Overall, the price being charged is cost based.

The framework that was adopted to rapidly develop communication infrastructure. had a disadvantage of a disconnection between the level of charge and the value of spectrum used. For instance, one licensee may use a spectrum band in a relatively unpopulated area and pay the same fee as a second user who uses the identical band in a heavily populated area even though the latter band has far greater value. This anomaly gets minimized in the case of telecom, where bidding of service (that uses spectrum) licenses reflects the market potential circle-wise. This mechanism however, tends to result into an inefficient use of spectrum. For instance, fixed-line basic service can be provided by either wired or wireless means. Mobile telephony, on the other hand, can be provided only via the spectrum. A below market value price of spectrum would make fixed-line service providers prefer spectrum to its available alternatives, resulting in less being available for mobile telephony. As compared to this if all the resources (spectrum, fibre optic cable, copper wire) are priced at the market rates, then the costs incurred in using spectrum are likely to be compared with that of its alternatives, and the most cost effective selection would be made. It is therefore, viewed that spectrum should be auctioned than auctioning licenses for services that use spectrum as a resource.

An issue is the flexibility allowed in using spectrum. There are two alternative approaches in this regard. In the first case, for each block of spectrum, the government determines the application and the transmission standard. This has generally been the approach followed

throughout the world and also in India. An alternative is the flexible use doctrine, which allows licensees to decide what they will use their spectrum for. The main advantage of the flexible use approach is that the spectrum is used to provide the most valuable services, with the most cost-effective technology, which is difficult for regulators to predict. With this, innovation is encouraged, since firms need not wait for approval to offer a new service.

Spectrum available for GSM and CDMA players in India In a research conducted in GSM specific data for as many as 31 other countries from both Europe and Asia Pacific, it was found that the average GSM spectrum per operator in the Rest of the World (RoW) excluding India is as much as 2x17.1 MHz per operator. With 114 GSM operators being included in this study, the average is a very meaningful and reliable result. As against that, it should be noted that, even at 2x6.2 MHz, India is only 36% of the level of RoW level. This is extremely sub-optimal. Spectrum allocation in India must be brought in line at least with international norms.

The CDMA spectrum (used by basic operators in limited mobility services) has about five times higher capacity than GSM spectrum (used by the existing cellular operators). This effectively means that with the same spectrum, CDMA can cater to five times more subscribers than GSM. In a sense, it means that 5 MHz of spectrum (currently allotted to CDMA players) is equivalent to 25 MHz of GSM spectrum. The upper level of GSM spectrum is 10 MHz for any single cellular operator.

At present, some of the spectrum that is used in CDMA technology can also be used by GSM services in the extended GSM band. Given the technology-neutral policy, a transparent framework has to be set out for additional spectrum between CDMA and GSM, which may become overlapping technologies.

A common yardstick for the annual spectrum usage charge has to be evolved between the basic and cellular operators. At present, basic operators pay a revenue share of 2% of adjusted gross revenues from limited mobility subscribers for spectrum allocation up to 5plus-5 MHz. Cellular operators pay a revenue share of 2 per cent of adjusted gross revenue up to 4.4-plus-4.4 MHz, going up to 4 per cent for 10-plus-10 MHz. Given the differences in spectrum efficiency between CDMA and GSM, this will again become a fairly contentious issue.

Suggestions for Future Improvements : The surge in wireless-based applications in the telecom sector has increased the spectrum requirements of service providers while the supply remains constant. Spectrum

management is therefore an area of concern for the policymaker. Since spectrum is important in delivering a good quality of service and quantity of spectrum has implications on the capital expenditure, availability of spectrum is equally a concern for the service providers. Being a limited resource, its utilization should be optimal.

i.

Better allocation of the unpaid spectrum

Presently in India apart from the cellular service providers, the defence and the many government departments are major users of the spectrum. The government departments are not revenue- generating one and as far as national defence is involved, no usage charges are levied on them. The National Telecom Policy, 1999 held that efforts would be made towards relocating the defence spectrum so as to utilize the spectrum optimally. Compensation for relocation may be provided out of the spectrum fee and revenue share levied by the government. There are however, constraints cited by the defence forces in relocation. They hold that development and induction of their equipment is an expensive and long drawn process, and that such a relocation would be time-consuming and costly, as communication networks of defence agencies are very large. Although relocation from defence forces doesnt seem imminent, the other government departments that are hoarding chunks of spectrum without paying any charge could be asked to free the spectrum or pay the usage charge appropriately.

ii.

Improvement in functionality in WPC

WPC (Wireless Planning and Coordination), which is the national, radio regulatory authority responsible for spectrum management is a part of the Ministry. The decision

making process followed by the WPC is not transparent enough. An independent authority is the ideal proposition for spectrum management. This would help in ensuring a fair distribution of spectrum resource by keeping all the stakeholders, government departments as well as private users, at arms length. The consultative mechanism embedded in the regulatory process would help in better recognition and resolution of issues. To effect this, either the WPC could be made more independent or part of the functions, say the assignment of frequencies could be transferred into the domain of the telecom regulator and the decision-making process be made more transparent, involving private operators also.

9.

FUTURE OUTLOOK

Because of the current level of telecom penetration in the country (9 subscribers per 100 inhabitants in Feb-2005, and the growing demand for telephone connections, the Indian telecom network is expected to grow at a rapid rate in the future. The strong growth in cellular subscriptions is likely to be driven by : Lower equipment costs and increased competition which is likely to result in continuous decline in prices and greater cellular penetration, which in turn could result in economies of scale, thereby fuelling further decline in costs and prices. Increased penetration of pre-paid cards which is lowering entry barriers for consumers Consolidation which is resulting in achievement of economies of scale through broad geographic reach, lower prices, and enhancement of product offerings.

As in the past, the rate of growth in cellular service revenues is likely to lag the rate of growth of subscriptions, mainly because of price declines. The main forces that are likely to drive down tariffs and ARPUs are increased competition, increased penetration of prepaid cards, and the low marginal operating costs of cellular networks. However, in a competitive environment, slower revenue growth from voice services could be offset by increased revenues from data related services, and network access (interconnection) services.

The cellular mobile telecom sector is expanding rapidly in India as in other parts of the world and this has important implications. Cellular mobile telecommunications not only

add the feature of mobility, but they also complement and compete with the fixed line network for voice communications. Cellular services have created a new way for entrants to gain access to customers. Cellular mobile telecom can play an increasingly important role in providing universal service, at a lower cost, than fixed line service. For users, mobile telecom offers the obvious benefits of mobility and better service quality. By contrast, for the operators, the already high financial risk could increase. However, more intense competition could endanger the very survival of some of the weaker players. The weaker operators would then be forced to enter into strategic alliances or divest equity in favour of stronger players.

Positive news for the telecom sector is that the fundamentals for subscriber growth remain strong. Tele-density in India is rising and is expected to continue its upward march from the present 9 mark to around 12 in the next 2-3 years and a targeted 15% by 2010. The entire telecom market is expected to grow by a CAGR of around 22%.

Given the large benefits users are deriving from mobile telecom services and the competition that mobile telephony is likely to provide to the fixed line monopolies in the forseeable future, the growth of this industry is imminent which is in public interests. The outlook of accumulated losses for majority of the industry could probably inhibit the flow of huge long-term financial investments, but favourable and pro-competitive regulatory conditions can become important stabilizing elements. The present second generation (2G) cellular technology provides a voice substitute for fixed networks, not a data substitute. This is expected to come in the form of the next

generation technology i.e. Third-Generation (3G) which is an open, packet-based, system that would not only enable integration of voice, data, and multimedia for wireless mobile networks worldwide, but also support higher data rates than 2G systems. 3G would also advance other aspects of wireless communications by reducing equipment size, extending battery life, and improving ease of operation.

Overall the telecom sector is still in the initial growth phase. With maturity far away, the sector is bound to witness tremendous growth over the next decade.

10.

ANNEXURE

GPRS : The Concept The General Packet Radio Service (GPRS) is a new data value added service that allows information to be sent and received across a mobile telephone network. It supplements today's Circuit Switched Data (CSD) and Short Message Service. GPRS offers faster data transmission via a GSM network within a theoretical range of 9.6Kbps to 171.1 Kbps. This new technology makes it possible for users to make telephone calls and transmit data at the same time.

Traditionally, the radio capacity of CSD networks is used for calls and data transmission within the GSM network in a rather inefficient way. While voice transmission requires a dedicated channel due to the continuity required, for data transmission that is inherently bursty in nature too, the entire channel is occupied and is thus insufficiently used.

GPRS, on the other hand uses packet switching technology that gives it the efficiency of data transmission over CSD networks. With GPRS, the information is split into separate but related packets before being transmitted and reassembled at the receiving end. This lets the network transfer data sets of multiple users by mixing the packets on the same channel. Packet switching is similar to a jigsaw puzzle-the image that the puzzle represents is divided into pieces and then reassembled to form the original image. The Internet itself is another example of a packet data network, the most famous of many such network types.

11.

BIBLIOGRAPHY

Sources of data : TRAI web site : www.trai.gov.in Department of Telecommunications web site : www.dotindia.com Web sites of companies viz. Bharti TeleVentures, Reliance, etc. ICRA report on telecommunications Newspaper articles from Economic Times (dated 18 March 2005, etc.), Times of India.