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3G: A Generation in Waiting

3G has been undervalued in India so far, but there are some sections of the market that might turn the tide

Published: Jan 28, 2010 08:45:11 AM IST
Updated: Feb 1, 2010 02:42:18 PM IST

When you sell geared scooters in two colours and make pots of money on that, it is hard to believe that anyone would ever want to buy a motorcycle. When you sell packaged software at a premium that the whole world has to buy, it is hard to imagine that one day a rival that sells ads on its free email service could be as profitable.

The Indian mobile operators who have sold nothing but voice find it hard to believe that they could ever make money on selling Internet services. You can’t blame them. For all its clever marketing, the number of Blackberry users — a proxy for absolute top-end customers — is not more than 350,000 in India. In itself that number justifies mobile firms’ pessimism about 3G. Now consider another number: 33 million. That’s the number of people who access the Internet frequently on their mobile phones. Consider another fact. The number of phones that can truly handle high-speed Internet is 25 million. A year ago the number was 10 million.

The Scope: Sean Maloney VP, Intel. If Wimax takes off, Intel stands to gain a lot by selling Wimax-enabled computers
Image: Amit Verma
The Scope: Sean Maloney VP, Intel. If Wimax takes off, Intel stands to gain a lot by selling Wimax-enabled computers
These 25 million people are thwarted by the double whammy of slow-speed connections and high prices. With 3G, the prices would be high to begin with but at least the connectivity will be high-speed.

Firms like Tata Indicom, BSNL, MTNL and Reliance Communications have shown that getting even one part of the equation right can translate into significant gains. These firms have managed to provide faster services, but the price is still very high. Collectively, they already have 2 million subscribers that enjoy 3G speeds, says Kanwalinder Singh, the head of Qualcomm’s Asia-Pacific business. These subscribers have all been built up in the last six months. Rajesh Patnaik, a consultant with consulting firm PRTM, says current EVDO (wireless) services are broadly accepted as 3G technologies. Ironically, India’s regulator, TRAI, does not see EVDO services as 3G. All this shows that the least the mobile operators can do is to prepare for a world beyond voice.

If there is one fear that unites telecom operators in rich countries and poor, it is the fear of becoming a “dumb pipe” to the Internet. In the US AT&T, the exclusive network for the Apple iPhone, saw its data traffic exploding nearly 50 times (that means 5,000 percent!) over the last three years, crowding out its regular users. Unfortunately, there was no proportionate increase in revenue. Besides, operators also lose the potential revenue of the services and applications they provide as the user only pays them for the bandwidth.

Instead, operators can focus on marketing to business users and government. Just 46 percent of businesses across the top 22 cities are connected to the Internet. Enterprise software companies like SAP and Oracle are already creating applications that work over wireless networks.

The government is now a major user of IT and Internet connectivity. Over 100,000 Common Service Centres (CSCs) are being put up across 600,000 villages to provide a range of everyday services to citizens. Some of these CSCs will become anchor clients for mobile operators to put up 3G base stations in remote villages which might otherwise not be economically feasible.

The other area that operators will have to focus is on learning how to build an ecosystem to deliver content and services. Arvind Rao, chief executive officer of OnMobile, India’s largest telecom value-added service (VAS) company, says, “An operator in the long run cannot make money to cover network and operating costs by being a pipe, period. Their fortunes are going to be in VAS.”

Apple has shown the value of this argument. While mobile operators around the world were concentrating on their networks, handset companies built advanced technology platforms atop their phones which allowed developers to write and market applications to end consumers directly. Apple, with its iPhone Appstore, deserves most credit for popularising this model. Its applications store contains close to 140,000 applications made by over 28,000 developers, collectively generating $500 million in new revenue. Its competitors, like Nokia, Google (with its Android operating system) and BlackBerry, have their own platforms too. Such platforms “let consumers figure out what they want,” say analysts Emeka Obiodu and Amit Gupta of telecom research firm Ovum, and trying to second guess that would be pointless for operators.

In India though none of these platforms have been commercially quite successful because of their reliance on credit cards for purchasing apps — there are very few credit card users in India. This offers a small window of opportunity for other platforms to emerge. Infosys and Aircel recently partnered to launch an exclusive developer platform targeting Indian developers. OnMobile launched its own developer platform over a year back.

But Ovum’s analysts are wary. “Operators have historically failed to get developers to work with them. Vodafone tried it with Vodafone Life and it didn’t work. Apple’s success lies in transparent revenue-sharing, everyone gets the same. Operators instead prefer to negotiate one to one and pay one less versus another,” they say.

Both Apple and Nokia share a flat 70 percent of any app sales through their iPhone and Ovi stores with the applications developers. That ratio is usually inverted in India, with operators keeping the bulk of what a customer pays.


A major reason for this is the fact that developers have to rely on piggybacking atop operator billing to charge money from subscribers. But with the RBI continuing to facilitate the expansion of mobile banking, the day where a developer could bill a consumer directly, and become independent of the operator’s billing, might not be far.

Making money from mobile users is also much easier than from Internet users, says Rajesh Reddy, CEO of Bangalore-based July Systems. He says this is because mobile consumers place much greater emphasis on instant and customised delivery of services on their phones as compared to their PCs. The trick, he says, lies in devising a “shampoo satchet” model of packaging a service into granular units at very low costs.

For 3G services to really attain mass adoption, there are still a few enablers that need to come into place. And the root of the problem is a three-way vicious cycle involving PC ownership, broadband penetration and content availability.

The introduction of 3G services can plug the broadband hole in this chain. Given that there are nearly 17 mobile Internet users in India for every broadband one, 3G phones might be the best way to connect the largest number of Indians. The sweet spot for 3G phones, says Singh, is Rs. 5,000 at the entry level and Rs. 10,000 at the mass market level.

That price point is already being touched. A few months back MTNL and Micromax together launched a 3G-enabled touchscreen handset at Rs. 5,500. Nokia India’s cheapest 3G phone costs about Rs. 7000.
With low-cost devices and high-speed connectivity, India could do exactly what East Asian countries like South Korea and Japan did. Perhaps Indian companies need to draw their inspiration from South Korea and Japan rather than Western Europe if it really wants to make it big in 3G.

WINNERS AND LOSERS

Winners

Airtel
• Total telecom provider ranging from consumer broadband to enterprise data to mobile 3G
• Mature pan-India
network
• Largest customer
network to cross-sell
services


Ericsson, Nokia, Siemens
Poised to win another round of 3G equipment deployments

Tata, Reliance
• Already offering 3G services on CDMA (EVDO), can also offer GSM 3G now
• Both are total telecom providers
• Large pan-India networks and customer base

Qualcomm
The “arms dealer” of communication, makes money no matter what version of 3G is deployed

Nokia
Likely to maintain its mobile marketshare as consumers move to 3G phones

OnMobile
As focus moves to data services, India’s largest VAS provider will become an important ally for mobile operators

Huawei, ZTE
Will look to move up equipment value chain during 3G rollouts


Losers

Uninor, Other Newer Players
• Still rolling out 2G networks, may not be able to afford 3G
• Not many options out of downward voice tariff spiral
• Not enough customers to upsell data services to

BSNL, MTNL
• Marketshare will continue to fall as competitors offer 3G services
• Last mile advantage on broadband will reduce once BWA winners start offering wireless broadband

Swing Players

Aircel, Idea
• Fewer customers and smaller networks compared to bigger players, hence 3G might be a more expensive rollout option
• May not have the same balance sheet strength to take on 3G as larger competitors
• Might also turn aggressive on 3G auctions as a way to attract high-end customers

Intel
• Wimax not compatible with GSM or CDMA networks, hence less attractive to most large telcos
• Wimax rollouts are likely to be expensive, hence restricted to lower volumes in cities
• If Wimax becomes de-facto wireless broadband standard, stands to gain a lot by selling Wimax-enabled computers

Vodafone
A pure consumer mobile operator, compared to Tata, Reliance and Bharti which have much wider offerings (hence able to cross-deploy 3G more effectively)

(This story appears in the 05 February, 2010 issue of Forbes India. To visit our Archives, click here.)

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