On good days, India revels in being one of the world's fastest-growing telecom markets. Right now, though, mobile operators are reeling under the impact of a tariff war that is becoming increasingly brutal. The first salvo was fired in June by Tata DoCoMo, when it introduced per-second billing instead of the standard per-minute plans; by November, the other players had slashed rates as well, extending the offers to cover even national roaming calls. The result?
Margins are eroding at alarming rates, telecom share prices are falling and consolidation in the industry, sooner rather than later, seems an increasingly real prospect. Not surprisingly, then, many operators see the forthcoming auction of 3G licences as a distraction they just can't afford. That's a pity, for, managed well, 3G technology could well serve as the catalyst to ring in a new era of innovation — Telecom 2.0.
It's not just the advantages 3G can offer mobile subscribers . With 3G, a cellphone can be so much more than just a phone — it evolves from being a basic portable telephone to one that converges work, personal and entertainment communication needs into a small, handheld device.
High-speed Internet access, streaming video and music, movie downloads and multiplayer gaming – all at speeds five or six times faster than conventional EDGE technology – are tempting prospects for most mobilephone users but are especially attractive to young, techhungry urban Indians. More to the point, though, 3G is a potential game-changer because it can steer telecom operators into transforming the way they run their businesses —and that is critical for winning in Telecom 2.0.
Be there, or be square
Granted, 3G's entry into India could have been better timed – and not just because of the current turmoil in the telecom sector. The technology has been around for over eight years already and while it's not obsolete (yet), it is certainly mature. Still, the next big thing —Long Term Evolution (LTE) technologies — isn't likely to hit our shores for a while yet, so it may make sense to focus on the advantages of the delayed entry.
3G technology has evolved over the past eight years, offering operators greater scope for high-margin value-added services; handset prices have come down, in turn lowering subscribers' entry costs; and India can learn from the 3G experiences of 120 countries. We'll come to the dos and don'ts a little later , but one learning bears mentioning right away. In the early years of 3G, many operators tried building their businesses around the technology advantage and superior voice quality of service and failed when lay users couldn't make out the promised difference in call quality . The trick, then, lies in differentiating on the basis of wireless broadband and valueadded data services.
At A.T. Kearney, we believe 3G (and WiMAX) could drive as much as Rs 100 billion in value on an annual basis by 2015. Experience in other emerging markets has shown that 3G will have a gradual impact on the Indian telecom sector, with a likely penetration of about 10% in the first 24-30 months. In most countries, 3G has failed to arrest ARPU or EBITDA declines in the long-term ; however, it has provided a 'steadying influence' and may have prevented steeper declines. There is no reason to believe India will be different .
It is also likely that 3G growth in India will resemble the South African model (deep penetration in a narrow segment with basic messaging entertainment services), rather than the Malaysian model (broad-based 3G adoption with pervasive adoption of wireless broadband), resulting in only about 15% of total revenue from data (that is, non-voice ) services. Given this, why would telecom operators be inclined to sink in huge sums of money for the licences and follow it up with the additional monies needed to create a buzz around the technology?
Here's the good news
3G networks can provide about three times the capacity of 2G, which means more customers, increased revenue and, therefore, a greater return on investment. The improved voice efficiency of 3G networks frees up network availability; operators can then offer more value-added services, which mean more opportunities for increasing ARPU in the long term.
In the near term, the early adopters of 3G are likely to be the 'high value' subscribers (the top 10%) who account for a disproportionate slice of the profitability (60-80 % of the profit). Not offering them 3G could result in a migration to competitors. Moreover, even limited usage of value-added services (such as proprietary music libraries ) can create stickiness (a reluctance to switch operators ), which, in turn, reduces the acquisition costs. This is critical in a market like India, where for every two new subscribers, operators lose an existing one.