India’s mobile market continues to grow at a staggering rate, connecting around 10 million new citizens every month. But even in a country with a population of over 1 billion and a mobile penetration rate of just 40 percent, 15 different mobile networks is a lot. Indeed, industry-watchers have long predicted that the current situation is unsustainable and that some form of consolidation is inevitable, possibly reducing the market to around eight or nine pan-Indian (or multi-regional) players.
But despite these predictions, the market continues to move in the other direction as new entrants flood the market. Last year, India sold off a raft of new GSM licenses, which were snapped up by firms backed by foreign operators such as Norway’s Telenor, Japan’s NTT Docomo and UAE’s Etisalat. And then there are next January’s long-awaited 3G auctions, which have been tweaked recently by regulators to encourage new entrants and further foreign investors.
That this situation is sustainable at all is down to India’s unique regulatory framework, which divides the country into 23 telecom service areas each with its own unique market dynamics and market players (in terms of size, it’s worth noting that at least half of these areas comprise a population base greater than the UK). These service areas are then grouped into a further four categories (or ‘circles’) based on their revenue potential, ranging from the most lucrative urban ‘Metro’ circle (comprising India’s largest cities of Chennai, Delhi, Kolkata and Mumbai) to the increasing rural A, B and C circles.
The fact that India’s subscriber growth is increasingly concentrated in the rural – and usually poorer – B and C circles highlights the challenge faced by local operators in a market where 75 percent of the population live on less than US$2 a day and ARPU is among the lowest in the world. Against this backdrop, the prospects for smaller players or new start-ups turning a profit look increasingly bleak. Telenor’s Unitech Wireless, for example, recently predicted that it would rack up losses of US$3.2 billion before breakeven.
The rollout of Indian 3G could bring this situation to a head and could therefore be the catalyst for consolidation in the market. The costs involved in acquiring licenses and building out 3G networks will be prohibitively high for many operators, and economies of scale will be required to get affordable 3G devices into the hands of consumers.
So what M&A activity could occur? One scenario could see the larger operators such as Bharti and Vodafone use their financial muscle to snap up smaller players; another could see mergers between mid-tier players looking to scale (as was the case recently with the merger between IDEA Cellular and Spice); there is also likelihood that India could sell-off parts of MTNL and BSNL (the state-owned operators) to a more capable 3G player, as hinted at by MTNL’s search for a franchise partner. And then there’s the prospect of a major international player moving into the market and buying-up assets.
The picture should be a lot clearer once the winners and losers in January’s 3G auctions are known.