The Indian telecom sector is in the middle of making large investments into network expansion and spectrum acquisition in anticipation of growth in data market, while data tariffs are softening and expansion of the data subscriber base will materialize over medium to long term.
Addition of new cell sites is essential to improve the quality of services in order to expand data market. The industry will have to create 700 K sites (3G+4G) by FY18 to expand coverage (with about 400 K cell sites to be added in FY17). Bharti has '600 bn Capex plan over the next 3 years for infrastructure and network expansion. Also with the launch of Reliance Jio Infocomm Limited (RJio), the incumbent operators would need to maintain high level of services.
RJio's network strength is evident from the fact that it has erected 1.2 lakh towers till March 2016, as against 1.77 lakh towers of Idea Cellular and 1.79 lakh towers of Vodafone India. The serious players need to ramp up network capability to be able to compete with RJio and hence invest into spectrum.
The global average of spectrum per operator in India is just 18 MHz per operator compared with 39 MHz per operator in Americas, and 65 MHz per operator in Europe (TRAI 2015). The supply side issues are sort of addressed as the government has made sufficient spectrum available in the upcoming spectrum auctions; however, the pricing and undeveloped ecosystem issues across bands could play spoilsport.
Enormous spectrum supply across all bands will be put on the block. As spectrum trading and sharing broad base the availability of spectrum, it could lead to selective bidding in the auction.
Diverting capital expenditure to acquiring spectrum in 700 MHz would limit their capability to invest in rolling out networks where they already hold airwaves. The steep pricing for 700 MHz band makes the alternative 4G bands such as 1800 MHz band more attractive, which is available at half the price of 700 MHz.
The whole data story is not just about making huge investments into network, but also increasing the data subscriber base, rationalization of data tariffs, and increasing the data consumption amid rising competitive intensity.
Growth of data subscriber base could follow the trajectory of the voice subscription a few years back. With growth targets pinned on data volumes, telecom service providers (TSPs) are trying to woo rural smartphone users and expand their data revenue base and addressable market. Better content packaging could drive data volumes, data ARPUs, and data subscriber base. TRAI is already in consultation process for differential pricing of data services. If implemented, this could enable operators increase content offerings like movies, videos, songs, gaming apps, etc. Evolving digital payments and entertainment beyond social media and ecommerce have the potential to increase per capita consumption.
While the content demand and data usage are increasing, still the telecom companies are unable to increase the per GB realizations which continue to be amongst the lowest at USD 4.1 (CY2015), versus an APAC average of USD 9.7. Unlimited usage packs will keep the data realization low, but data consumption could grow manifold. This would mean additional investments into network to provide quality services at low pricing.
Meanwhile, with impending RJio launch just round the corner, defensive data tariff declines are already happening as Bharti Airtel and Idea have offered higher data limits for same prices. Thus margins of TSPs are likely to come under pressure in the near term whereas the industry stares at the long road to gestation on the investments.