As the government prepares to release more telecom spectrum to new players in every circle, new opportunities open up in related sectors. This piece looks at opportunities in the infrastructure space
Indian wireless operators are expected to spend Rs 40,000 crore ($10 billion) this year, as they try to capture as big a share of the world’s fastest growing wireless market as possible.
| Why the scramble for spectrum? |
| Radio spectrum or Spectrum is the pipe that carries wireless communication of all types. It is measured in MegaHertz (millions of cycles per second) and for this business is like dough for a bakery. It is certainly not possible to start a wireless service without being allocated spectrum, just like it is not possible to make bread without having dough. To complicate matters further, unlike dough whose supply can be increased by increasing wheat cultivation, there is a finite amount of spectrum — currently around 35 MHz — that is available for commercial operations and is leased out by the government. |
| To start a wireless service in a given area, a new operator requires around 2.5-4.4 MHz, depending on the technology. After nearly a year of wrangling between the department of telecom and the defense ministry, we are about to see about 105 MHz (25 MHz for GSM services, 50 MHz for high-speed mobile and 60/2 MHz for wireless internet services) being released for commercial services, setting off a frenzy among aspiring wireless operators. |
| From around four applicants in the queue till about four months back, there are around 25-30 applicants for each circle now. Who gets to lay their hands on it will depend on whether the government decides to auction it or give it again on a first-come-first-served basis, among existing and new players. |
From around 40% of the geographical area at the end of last year and around 60-65% of the population, industry and analysts expect the wireless network coverage to hit 85-90% of the population by the end of 2008, thanks to the frenetic roll-out.
This year’s wireless expansion, involving the setting up of nearly 80,000 new towers (twice the last year’s figure) is already giving the biggest spin-off opportunities to downstream Indian companies in the telecom infrastructure sector. However, the government’s move to introduce 2-3 more operators in each circle by releasing more spectrum will change the rules of this game.From a market dominated by two or three large players, the entry of more aspirants with almost nothing on the ground and short time-to-market requirements will play a crucial role in further opening up the passive, radio and network sectors.
The Infrastructure
Operators need broadly three types of network infrastructure. First they need dead or passive structures such as towers, sheds, diesel generators and a piece of land or rooftop to host them. Secondly they need radio equipment such as antennae and the associated electronics such as base-station which are mounted on the passive infrastructure and finally a core network to connect all the base-stations or towers. Once the towers and the antennae are in place, they also need a core network to connect all these elements with each other. This is made up of fiber, the traffic-control and routing equipment and so on.
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Passive Network
The biggest opportunity from the massive roll-out (not counting content and applications) is and will continue to be in the passive infrastructure. The passive infrastructure market includes, besides equipment, a large service component estimated at around 30% of the total market comprising of network design and project execution.
Currently, nearly all of the passive infrastructure roll-out is handed out to contractors, and the sector is in a fragmented state. Only one player, GTL, has anywhere close to national reach (west + north), and is consulted in large scale roll-outs. For continuing incremental expansions, operators rely on small local contractors. Even where a roll-out is handed over to a big contractor like GTL, operators keep a tight control over expenses by using a services model where the equipment is billed directly to the operator.
| Emerging opportunities |
| Passive To provide a readymade backbone of towers, power, etc. for new players. Access To enter the equipment manufacturing business with the emergence of new technologies like Wimax. Core 1. To provide a nationwide fibre backbone for the new operators. 2. To provide managed IT services |
For businesses supplying towers, sheds, generator sets and most of the ´dead´ infrastructure involved in bringing a mobile network to reality, times have never been as good. 2007 has been a blockbuster year for the sector. It saw operators setting apart huge sums of money for capital expenditure. Bharti Airtel and Reliance Communications are together spending around $6 billion on expansions this financial year. The third biggest operator, Vodafone Essar, seen as a laggard in the capex race, last month revised its standing capex guidance for the year from $1-2 billion. In addition to these private players, state-owned Bharat Sanchar Nigam too in July gave a $2.2 billion (Rs 8,800 crore) contract to Ericsson and Nokia-Siemens Networks (NSN) to expand its wireless network over the next one year. It is expected to come out with one more jumbo tender in a year.
Around 75% of the $12-13 billion of capex by Indian operators will be spent on wireless network expansion. The remaining amount will be spent on corporate and broadband services.
The size of the passive infrastructure market is calculated using the number of new cellsites expected to be put up. According to industry inputs, the cost of designing and putting up the passive parts of each site comes to Rs 20-25 lakhs. With around 80,000 new sites likey to come up this year, the passive infrastructure equipment and installation market is alone worth around
Rs 18,000 crore (about 50% of the total wireless capex) during FY 2008.
The figure has doubled compared to last year as cut-throat competition has forced operators to go all-out this year to capture the ´early adopters´ in the new rural and semi rural areas being brought under wireless signals. This has in turn given the passive infrastructure contractors like GTL a shot in the arm. ¨The pricing pressure that was there during the last two years has also eased a little bit,¨ says Charu Datta Naik, COO of GTL.
But strangely, companies like GTL are being forced to think out of the box to maintain revenue streams even beyond 2008, by when the pace of network roll-out will start slackening. Population coverage of wireless networks, presently around 65% is expected to reach 85-90% by 2008-end. The remaining consumers may be too spread out to be profitably tapped by wireless operators. Another factor, which may bring down the pace of expansion later is the provision of more spectrum to existing operators by the government. Taking the cue from multinational wireless electronic equipment vendors such as Ericsson and Nokia Siemens, who have repositioned themselves as managers and not just manufacturers, GTL and others in this space started the so-called ´tower companies´ a year ago. These companies either set up new towers or buy existing ones from the operators and then offer a complete passive infrastructure solution. In return for a rent of a few thousand rupees per month, they offer their towers for operators to hoist their antennae and other electronics. They also assure them of uninterrupted power supply and security.
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While GTL spun off a services arm called GTL Infrastructure, others like Quipo Telecom Infrastructure and Essar Telecom Tower and Infrastructure entered the fray a year ago.
However, the initial enthusiasm soon vanished as they realized that their customers (the operators) are themselves entering the business of setting up and leasing networks. Not only were Bharti and Reliance going to compete with them in the same space, they also had a national coverage to offer to a new company. The hopes of passive infrastructure providers to be the vehicles of their expansion suffered a setback. At the same time, the expansion of the smaller players like Idea Cellular, Vodafone Essar and others who did not own infrastructure leasing companies, were caught up in red-tape as the government delayed the issue of extra spectrum to them.
It is under these circumstances that the current move to allocate new spectrum brings in infrastructure opportunities by the cartload. On the one hand, it will restart the expansion of the not-yet-national operators like Idea and Vodafone Essar while on the other fringe players like the Tamil Nadu operator Aircel Cellular and the Karnataka and Punjab operator Spice Communications will also get a chance to go national. The smaller players will need to rapidly roll-out their networks across the country, possibly with very little initial investment. They will look hard at the sharing model offered by infrastructure leasing companies. Independent tower leasing companies also have the advantage as operators are more likely to trust them than a tower lease company owned and controlled by their competitors. Existing operators too may not be very keen to let the new entrants promptly reach the market by rolling out on theri nationwide networks. Says Prakash Ranjalkar, the man in charge of GTL managed services unit, ¨We can offer them a completely impartial treatment¨.
There are, however, problems with this scenario as well. Skeptics point out that number of towers that the independent tower companies currently own are insufficient to support a nationwide roll-out. The half a dozen such companies currently in business, between them account for only around 6,000 out of the total 150,000 cell sites in the country now. Many of these are concentrated in urban areas, especially in the west and north. A decent nationwide roll-out will require at least around 16,000 towers.
However, as a ray of hope, big operators have begun saying that they may not be averse to selling controlling stakes in their tower companies, particularly to Private Equity players. A global leader American Tower Corp. is also on the lookout for acquiring tower assets of operators.
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