Despite high growth in subscribers, challenges such as intensifying market competition, falling ARPU (average revenue per user) and uncertainty over government regulations are taking a toll on the margins of India's telecommunications industry.
The local telecom industry last year added between 11 million and 19.9 million wireless subscribers each month, but this healthy growth came with a host of challenges.
The industry has been facing stiff competition with 12 to 13 players in each segment.
Tariffs have also been falling and have touched new lows with various operators introducing per-second billing, leading to a further drop in the ARPU.
In addition, new subscribers are low-spenders, based mostly in semi-urban and rural areas. To make matters worse, taxes are comparatively high in India at over 30 percent.
All these factors are leading to a drop in operators' profitability.
For instance, Idea Cellular, a leading GSM mobile services operator in India, reported a 23 percent year-on-year profit dip, after tax, for the third quarter of its financial year, ended Dec. 31.
Similarly, the quarterly net income of India's largest telecom operator Bharti Airtel, has been decreasing with each quarter, from US$552 million in between April and June, to US$509 million between July and September, and US$484.6 million between October and December 2009.
"With 12 to 13 operators in each circle, India is witnessing hyper-competition," Kamlesh Bhatia, principal analyst at Gartner, told ZDNet Asia in a phone interview. "And the direct impact of this can be seen on the operating margins."
Concurred Nupur Singh Andley, senior research analyst of connectivity at Springboard Research: "Owing to sharp fall in tariffs and hence the ARPUs in the past two to three years, operators are finding it difficult to maintain good profitability amidst low margins and high competition."
She noted that in the long-run, this situation is likely to impact the operations of smaller players that do not have financial muscle. "It will ultimately lead to market consolidation," Singh Andley added.
Regulatory uncertainty hits players
The numerous delays in 3G auction have also adversely hit the telecom operators.
The country's spectrum shortage has been worsening with millions of subscribers being added each month. This has led to a fall in service quality, with dropped calls and disturbances becoming commonplace.
The government has currently set Apr. 9 as the date for the auction.
"Given the uncertainty over the 3G auctions, operators can't plan their investments," Kasturi Bhattacharjee, associate director of advisory in infocomm practice, PricewaterhouseCoopers, said in a phone interview. "Similarly, the equipment vendors can't sell equipment. It's having a domino effect on the industry."
Singh Andley agreed: "The delayed rollout of 3G spectrum has demoralized the market sentiments to quite an extent." She added that the delay has put the country behind other nations in the deployment of 3G services by years.
"The high spectrum fee proposed by the department of telecommunications, government of India, and the limited spectrum availability to private players in each circle is likely to accentuate this sentiment as operators may find it difficult to make a lucrative business case for the launch of 3G services in India," she noted.
The government must take steps to address each of these challenges, she urged. For instance, there needs to be more discipline around regulation in the industry.
"Commencement of the long-overdue 3G spectrum auction is one action point that must figure on the government's priority list," Singh Andley explained.
Bhattacharjee added that taxes and regulatory expenses have been partly responsible for the industry's woes. He called for the government to consider reducing the tax burden, which is currently as high as 33 percent.
Similarly, relaxation of voice-over-Internet Protocol (VoIP), introduction of mobile virtual network operators (MVNOs) and allowing mobile number portability are other steps that will help the industry.
India has reached penetration rates of nearly 50 percent, with mobile phones expanding to the remotest villages. "The reach of the mobile phone is the most attractive feature of the industry," Bhatia said, adding that the government must now take steps to encourage mobile-commerce and mobile banking in the country.
India leapfrog to 4G?
Even as 3G auction is repeatedly delayed, India's telecom regulator Telecom Regulatory Authority of India (TRAI), has initiated discussions on the introduction of a 4G mobile standard in the country.
At present, the authority is working on a consultation paper for wider deliberation. This will result in recommendations that will allow the government to take appropriate decision or for regulations to be implemented.
4G networks are touted to enable users to stream mobile multimedia, such as TV broadcasts and online games, with speeds of up to 10 times that of 3G networks. The TRAI has called for comments from "all the stakeholders" by Mar. 15.
Bhattacharjee believes India should leapfrog from 2G to 4G. "Globally, we are probably past the 3G stage. The technology was launched in 2001 and most countries adopted 3G around five to nine years back," she said.
"Now is the age of 4G, which is 10 times faster than 3G. Should operators be buying 3G spectrum? Or should India leapfrog to 4G," she questioned.
Moreover, there are several new players that have just paid for the 2G spectrum, she said, noting that these operators may not have deep pockets to pay for 3G spectrum as well.
"The technology is not only dated, the spectrum is also expensive," Bhattacharjee said.
Swati Prasad is a freelance IT writer based in India.