India's Great Leap Forward?

The world's second fastest-growing mobile phone market offers challenges for telecoms and implications for Indian society

Long a telecom backwater, India is rapidly embracing mobile telephony and is one of the fastest-growing markets on the planet right now. For global handset makers such as Nokia (NOK), Motorola (MOT), Samsung (SSNGY), and LG, the explosive growth in India offers huge opportunities—but also a critical challenge. How do you deliver low-priced handsets in the $40 range that still boast compelling design and decent functionality?

India is a fascinating telecom lab in another sense, too. Can a developing society leapfrog from a spotty, copper-wire-based phone system into the sunny uplands of high-speed, wireless communications? Mobile phones are cool fashion items in the rich world and have certainly changed everyday work and family life. But imagine the impact these gadgets would have on the 70% of Indian society, largely poor and rural, that doesn't have access to fixed-line phone service. Widespread access to the Internet would have huge implications for the quality of Indian education, health care, and the economic development of the world's biggest democracy.

Already, farmers living in remote hamlets are finally getting pulled out of the telecom dark ages. India is now the world's fastest-growing wireless market after China. The number of fixed and wireless telephone connections has doubled in the past two years, to about 150 million, and Indians are signing up for mobile-phone service at the extraordinary rate of 5 million new wireless connections a month. The Ministry of Telecom has set a target for 2007 to have 250 million connections and mobile coverage for 85% of the country, from about 30% today (see, 07/24/06, "Going Mobile in Rural India").


  Opportunities abound for domestic telecoms and handset makers. Indian Prime Minister Manmohan Singh's government is behind the participation of foreign investors in the country's massive telecom build-out. Since the mid-1990s, New Delhi has wisely allowed telecom tariffs on domestic voice services to drop steadily. Today India enjoys the lowest call rates in the world at an average price of 2 cents per minute, compared to average prices of 33 cents in Japan, 11 cents in Brazil, and 24 cents in Australia.

India is also at something of a tipping point in terms of market size. India's mobile-phone user base has exploded, to 105 million today from 5 million in 2001. There is a deep consumer hunger for handsets and mobile subscription services if they are priced appropriately. With growth maturing in Japan, the U.S., and Europe, the biggest names in handsets are aggressively targeting India. Nokia has established a big and early lead in India with a dominant 63% share, followed by LG (13%), Motorola (8.5%), and Samsung (3.5%).

Yet make no mistake: A fancy brand name alone doesn't guarantee market success in India. "The Indian user is very unique—extremely value-conscious and a super bargain hunter with precious little brand loyalty," says Sridhar T. Pai, founder and CEO of the Bangalore-based telecom research firm Tonse Telecom.

To get an idea just how budget-conscious India consumers are, consider the "missed call" phenomenon, in which subscribers send messages to each other based on a number of rings (two rings might mean "I am at the meeting place" or three rings "I am running late") but without actually connecting the call and thus triggering service charges. "This is an amazing Indian mobile user practice that is unheard of anywhere else," says Pai.


  Indian wireless operators such as Bharti Airtel and others have responded by offering innovative prepaid packages. While that has forced average revenue per user on voice traffic to trend downward, these operators are still profitable because of the resulting increase in data revenues. Bollywood music downloads, which typically cost about 25 cents per tune, are all the rage in urban India and average about 1 million per day, according to Tonse Telecom.

On the handset side, manufacturers with the most interesting and affordable lineup are gaining ground. Nokia, for instance, sells about 45 models in India. Yet its biggest seller, accounting for 15% of sales in India, is the basic 1100 model that is turning heads at only $44.

A relative latecomer to India, Motorola will launch a sub-$30 handset in October and is clearly serious about closing the gap with Nokia in this critical market. On July 25, Motorola struck a deal with India's Wipro Technologies, the tech services arm of Wipro (WIT), to create a joint venture for building, managing, and supporting telecom networks (see, 7/26/06, "Motorola Shows Its Mojo").

Meanwhile, local telecom providers such as BSNL, Reliance Infocomm, and Tata Teleservices are spending serious money to expand coverage to the country's sprawling rural regions. Rolling out towers and base stations to support wireless networks certainly isn't cheap, but it is less expensive and faster than extending copper-wire fixed lines at this point in India's economic development.


  One thing that could hold things up is government ownership of key parts of the radio spectrum that could be used to support 3G handsets and high-speed wireless technologies such as WiMax (short for Worldwide Interoperability for Microwave Access). WiMax networks support data speeds of up to 5 megabits per second and can transmit signals over a much bigger coverage area than existing wireless technologies. WiMax also represents a far more affordable and realistic option for India over digital subscriber lines and cable, which would require an expensive physical wiring infrastructure to India homes and would also need to be maintained.

Right now, the most popular form of broadband in India is ADSL (asynchronous digital subscriber lines). Yet the subscriber base is small and mostly in urban centers. WiMax could be a game-changer if telecom operators can get access to enough of the radio spectrum to make it happen, analysts say. More "spectrum is required for the government to realize its ambitious telephone and broadband penetration objectives," says Adlane Fellah, a research analyst with Montreal-based research firm Maravedis. New Delhi telecom regulators are looking into possible ways to accomplish this.

Obviously, India needs a lot of other things beyond broadband and modern communications to secure a prosperous future. Its investment in brick-and-mortar types of infrastructure such as roads, bridges, and ports is also a problem, Indian labor laws are backward, and terrorism and sectarian violence between Hindu and Muslim citizenry are always big worries. Yet affordable and world-class wireless communications are within the country's grasp. The choice is India's. And India could be an instructive case study for all developing nations in how enlightened telecom policies can help secure long-term economic prosperity.

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