India Telecommunications Report Q2 2008

India remains an appealing market for investors. This is apparent from the number of entrants looking to win licences to operate in India's fast-growing telecoms market. International giants such as AT&T and Sistema are tempted by the growth that is clearly still on offer as penetration in India's mobile market reaches just 20%.

BMI forecasts an annual average growth rate of over 30% over the next five years so that, by the end of 2012, there should be 620mn mobile subscribers in India, representing 51.5% penetration. Drivers for this order of growth include the government's (and regulator's) determination to encourage inward investment, a seemingly insatiable consumer demand, continued low tariffs and the very low penetration rates across rural India.

And yet, India is a tough market for investors to crack. It is an ultra-competitive market and investors have to be prepared to invest heavily in network rollout projects to succeed. India has a number of very strong existing players, none more so than Bharti Airtel, but also Reliance Communications, BSNL, Tata Communications and IDEA Cellular. The only foreign investor to have succeeded so far (other than SingTel via its interest in Bharti) is Vodafone, but at great expense (acquisition of Hutchison's stake and investment costs), and only in partnership with Essar Group.

However, for a successful investor, India offers huge opportunity. While mobile voice services become more popular (in urban areas of India at least), text messaging and data services, including music downloads increase in popularity; this is starting to boost revenues and flagging operator ARPU rates.

Many analysts suggest that, largely on the back of India's hugely popular film industry, music services will grow quickly. Furthermore, unlike the world's largest market, China, the Indian government continues to actively encourage investment from some of the world's largest telecom companies.

While gaining some praise for its transparency, India's regulatory process can be slow and cumbersome - Sistema-owned Shyam Telelink may have paid US$630mn for wireless licences across India, but it still needs radio spectrum. The lack of spectrum is becoming a real issue in India (for existing operators also) with overloaded networks resulting in voice traffic congestion and poor reception, which if not rectified quickly, could result in a slowdown in growth.

Still dominant is Bharti Airtel, which controls 23.6% of the market and ended 2007 with 55mn subscribers. It puts its success down to keeping its costs down, while outsourcing network management and customer services. It has also entered into a network sharing partnership with Vodafone Essar and IDEA Cellular, which it hopes, will keep down network rollout costs in rural India.