From one of the most celebrated among emerging market success stories to a case study in corruption and nepotism, the Indian communications industry has seen a dramatic swing in fortunes in recent years. After several decades of stagnancy under a government-owned monopoly, the industry became a classic example of how the right combination of new technology, innovation, and supportive government policies can transform a sector. Through the industry’s success, India’s large consumer market potential was boosted, attracting investments into several other sectors of the economy. For the smaller emerging countries, it was suggested as an exemplary model, one which illustrated the benefits of introducing pro-market industrial reforms and encouraging competition.

However, intense competition for market share eroded the industry’s profitability. Aggressive bidding for spectrum made it difficult to maintain prices at a sustainable level and the wave of corruption scandals involving senior government officials has dimmed the industry’s luster in recent years. With this, relatively young companies continue to lose money. Nevertheless, the Indian communications services market remains one of the fastest growing and the most competitive anywhere in the world.

Future growth opportunities

After several quarters of bloodletting, the industry has realized that the price wars cannot be sustained indefinitely, as they would hurt both the established players and the challengers. As a result, call rates have gradually started moving up higher. Some of the established carriers have seen an improvement in profitability, though the call volumes continue to trend lower. Though none of the new entrants are as yet profitable, their losses are unlikely to worsen any further. At the same time, it may be difficult for the smaller players to survive in the long-run and it is possible that some may be acquired by the larger carriers. This is unlikely in the short term as the current regulations and licensing conditions restrict mergers and acquisitions in the industry. For instance, current rules do not permit a carrier to have more than a 40 percent market share in any of the country’s 22 telecom regions. Further, no telecom carrier can hold more than 10 percent equity stake in another company in the same region. However, if the government accepts the recent proposals by the Telecom Regulatory Authority of India (TRAI), these rules will become less restrictive and encourage consolidation in the telecom sector.

For future growth, the industry is banking on high value 3G and data services that fetch higher revenues per user and are more profitable. Though 3G services were launched by the major carriers in 2011, customer conversions have been slower than anticipated because of higher costs. However, the rising popularity of smart-phones and intensive marketing has led to increased demand for these services. It is expected that emerging markets like India too will follow the more mature markets where the majority of the customers have moved to higher value services. Spectrum licenses for 4G services that are even faster are likely to be offered for bidding by the government shortly. While spectrum prices are likely to rise even higher, as it is a scarce commodity, the established carriers are expected to bid aggressively.

Another segment that offers significant growth potential is internet broadband services. Despite India’s global reputation as a technology services powerhouse, broadband internet services are not as popular. The services available to retail consumers have low connections speeds and are of poor quality. Several companies are betting that increased demand for online multimedia will lead to significant growth in this space, if higher quality services are provided at affordable price points. The bidding for 4G wireless broadband licenses in 2010 were no less aggressive than that for 3G cellular licenses, indicating the industry’s confidence in this segment’s growth potential.

Besides the new jobs generated directly, the telecommunications industry has also created a large number of small businesses which provide support services in sales and equipment servicing. The growth of the industry has also contributed significantly to overall economic growth in India, by facilitating activity and efficiency gains in other sectors. Reliable and cost-effective communication services have opened up new markets for farmers and small businesses in other parts of the country, while ensuring faster dissemination of prices and other information. Like in other parts of the world, the telecommunications revolution has touched the lives of millions of Indians and the industry is likely to remain a significant growth driver in the future as well.

Data Source: Telecom Regulatory Authority of India

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