Business Today

Distress Call

A host of factors is contributing to the death of 3G in India.
twitter-logo Manu Kaushik        Print Edition: July 5, 2015
Distress Call
(Graphic: Ajay Thakuri)

In 2010, the telecom sector began undergoing a major shift. Telecom operators, which until then depended mainly on voice services for revenue, started seeing data usage on mobile phones growing. That year, the government sold spectrum for third-generation, or 3G, services in an auction that saw telecom operators bidding in a frenzy. All the 71 spectrum blocks that were up for auction across the 22 telecom service areas in the country were sold for a whopping Rs 67,719 crore, as operators bet on high-speed 3G data services hoping that it would be the next big thing after mobile telephony. However, things have not panned out as planned and 3G has turned out to be a huge disappointment.

To begin with, the quality of 3G services, including both data speed and connectivity, has been awful since its launch. Sample this: Bharti Airtel offers 3G speed of up to 21 megabits per second (mbps) for mobile users. That means a 10-minute YouTube video should take less than a minute to download. It, however, remains a pipe dream. For people accessing the Internet over mobile phones or otherwise, 2G-based Internet services - GPRS and EDGE - are still used by default. If a user is lucky enough to be in the range of a tower beaming 3G airwaves, the speed goes up marginally.

So, what is leading to the death of 3G in India? First, telecom companies are not willing to make enough investments to build 3G networks. Then, the technologically-superior 4G technology and Wi-Fi services are gaining prominence. Also, the government has liberalised spectrum usage and allowed telecom operators to offer any type of service - 4G, 3G, 2G - on any band. Finally, the emergence of new, faster versions of other wireless technologies such as Bluetooth is beginning to make 3G less and less relevant.

WHERE'S THE MONEY?

Telecom operators have been wary about investing in 3G networks. This can be attributed to the high spectrum prices. For instance, the average auction price per MHz (for 800 MHz band) stood at $89.20 million in 2013. The comparable figures for Spain, France and Portugal stood at $28.80 million, $57.20 million and $5.87 million, respectively, in 2011.

Also, as experts point out, operators are worried that investment in 3G would not make sense because newer technologies - 4G and Wi-Fi - will be given preference by users.

Consequently, telcos have found it extremely difficult to push ahead with 3G services on a large scale. The launches are limited to a few cities, and even within cities only certain pockets are covered. "Investments in 3G haven't happened the way they should have because the industry is starved of resources. The problem is that telcos [in India] pay extremely high prices for spectrum. It is 70 per cent over average world prices for the same type of spectrum," says Rajan Mathews, Director General of the industry group Cellular Operators Association of India (COAI).

Indeed, in most parts of the world, it takes around three years to develop a full-fledged 3G network. Despite over four years of its existence in India, 3G is still limited in reach and service standards. "We are far too delayed," says an equipment provider. The lack of investment in 3G networks is evident. Consider this: out of a total 5.5 lakh cell towers in India, just 1.65 lakh are 3G-enabled. Globally, most countries have over 70 per cent 3G-compatible towers. "We have pockets of 3G coverage. So, when people move out of that pocket, they fall into a 2G network," explains Mathews, adding that the poor quality of 3G services is due to lack of wall-to-wall coverage in both urban and rural areas.

Clearly, besides the issue of non-availability, there are concerns related to 3G speed within the service areas. The operators talk about 3G speeds of 3.6 mbps to 21 mbps on their network, but the actual speed is much lower. Last year, telecom regulator TRAI proposed to set a minimum of one mbps download speed for 3G networks.

In fact, the difference between the speeds of 2G and 3G is hardly visible. In an April 2015 survey by telecom equipment provider Ericsson, The Changing Mobile Broadband Landscape, some 48 per cent respondents in a survey were unable to distinguish between 2G and 3G speeds. As a result, they saw no advantage in switching to a high speed [3G] service. The comprehensive survey was conducted in 33 cities across the country.


Telecom operators say that their inability to invest in 3G networks can also be attributed to high taxes. "For every rupee I earn, 30 paisa goes back to the government in some form of taxes and levies, excluding income tax," says Mathews. It includes eight per cent licence fee, five to six per cent spectrum usage charge, various taxes on equipment, and other charges imposed at both state and central government levels.

In comparison, taxes in China and Pakistan amount to about two per cent of revenues cumulatively. "The amount of money left in the pockets of telcos is diminished. At the same time, they [operators] pay the same price for equipment as global telecom operators because most of it is imported," says Mathews adding that operators cannot expand their coverage without putting up more cell towers. "Laying fibre, which is essential for carrying high-speed data, is not easy because the cost levied by the local municipalities is extremely high," he says.

Meanwhile, data consumption is growing rapidly in India, primarily led by 3G services, but its contribution to overall revenue of operators is still minuscule compared with voice. The average data usage per GSM subscriber has grown from 50.70 megabytes in December 2013 to 79.73 megabytes in December 2014, a jump of 57 per cent. But data usage contributed only 17.1 per cent to the average revenues of telcos in December 2014.

'TODAY, A CUSTOMER IS LOOKING AT SEAMLESS MOBILE INTERNET EXPERIENCE, ESPECIALLY FOR VIDEOS, AND IS NOT BOTHERED ABOUT THE TECHNOLOGY,' says P. BALAJI, Director (Regulatory and External Affairs), Vodafone India. (Photo: Shekhar Ghosh)

THE DEVICE CONUNDRUM

The telecom operators argue that it is a chicken-and-egg situation for them. As there are not enough 3G-enabled smartphone users in the country, there's no point in investing heavily in the technology. For 3G to become commercially viable, it requires a large number of consumers who can afford the devices supporting the technology. According to the Ericsson survey, the penetration of 3G smartphones in urban areas is just 20 per cent. Penetration in rural India is much lesser.

Today, 3G users stack up to just over seven per cent of the total subscriber base of telcos. While there were around 130 million 3G capable-devices in use in India in 2014, just about 70 million were active, according to a report published by Nokia Networks. "Price of devices is a sensitive issue. India is very price conscious market. In the case of 2G, the real growth came when prices of handsets went down to below Rs 2,000," says a senior Idea Cellular executive. Even though the lowest 3G smartphone is now available at Rs 2,300, a good-quality device costs above Rs 3,000.

Experts believe that growth of the 2G market is difficult to replicate even if the prices of 3G devices fall further. This is largely because the prices of 4G-enabled devices are also dropping simultaneously and today are priced as low as Rs 5,399 (Nokia Lumia 638). "In three years from now, we believe there will be no difference between 3G and 4G devices," says Gurdeep Singh, CEO (Consumer Business) at Reliance Communications, which scooped up 5 MHz contiguous spectrum nationwide in the 800/850 MHz band in the recently-concluded telecom auctions.

However, smartphones alone will not change the game for 3G services. The whole device ecosystem around Wi-Fi - and wireless broadband - is developing fast. Routers, dongles, femtocells and Mi-Fis - all supporting 4G and Wi-Fi technologies - will provide superior voice and data services. In fact, both Airtel and Aircel have introduced 4G Wi-Fi routers, a portable device that gives wireless access for broadband-like speed.

'IN THREE YEARS FROM NOW, WE BELIEVE THERE WILL BE NO DIFFERENCE BETWEEN 3G AND 4G DEVICES,' says GURDEEP SINGH, CEO (Consumer Business), Reliance Communications

SKIPPING 3G

"A natural linear technology progression (subscribers graduating from 2G to 3G and then to 4G) might not take place in India," observes an October 2014 report by financial services firm JP Morgan. India will be ready for mainstream adoption of 4G in two to three years time, and that there could be a generation of 2G subscribers leapfrogging directly to 4G, according to the report. "Indian subscribers' latent desire for high-quality, high-speed data will likely force incumbent operators to roll out their 4G services earlier than planned - and without adequately monetising their 3G investments," says the report.

The international experience shows that 4G can have a far-reaching impact on 3G. In South Korea, for instance, the net 3G subscriber addition turned negative right after the launch of 4G. Similar trends were witnessed in China and Japan.

WHAT'S CAUSING THE DEMISE OF 3G

  • The quality of 3G services has been unsatisfactory in most parts of the country
  • Burdened with debt and high spectrum prices, telecom operators are not willing to make sufficient investments in building the 3G network
  • Technologically superior 4G is seeing a lot of traction with telcos scooping up spectrum to roll out services in a big way
  • Public Wi-Fi services gaining prominence. Wi-Fi network providers are expanding reach
  • Prices of 4G-enabled devices are plunging. New devices supporting 4G are making inroads
  • The government has liberalised spectrum usage. This allows telcos to offer any type of service - 4G, 3G, 2G - on various bands
  • Just about 30 per cent of cell towers in India are 3G-enabled compared to 70 per cent in other countries
Already, the amount of money being pumped into building 4G networks in India is immense. Take Reliance Industries, for instance. It has invested close to $12 billion (over Rs 77,000 crore), more than the amount spent by all telecom providers put together to acquire 3G spectrum in 2010, in Reliance Jio, which plans to roll out 4G network through its pan-India spectrum holding.

In addition, the emergence of Wi-Fi hotspots is also expected to deal a body blow to 3G. It's expected that users will increasingly access internet through public Wi-Fi zones. Indeed, there's a lot of action in the public Wi-Fi space. The Delhi-based Wi-Fi service provider Ozone Networks has over 1,500 public Wi-Fi hotspots across 26 cities, including Tier-II and Tier-III markets. Its aim is to deploy one million hotspots by 2020.

Ozone has tie-ups with GVK (for Mumbai airport), Oberoi Hotels and Resorts, several fast food chains, including McDonald's, and various commercial market associations to provide public Wi-Fi systems. Congestion in networks and low penetration of 3G will force telcos to use networks of Wi-Fi operators, asserts Sanjeev Sarin, founder of Ozone Networks. "Instead of depending on their own network entirely, we believe that telecom companies will use our [Wi-Fi] networks to give their customers seamless connectivity to high-speed data," he says.

According to some estimates, 80 per cent of the data usage takes place at fixed locations. The aim of Wi-Fi service providers is to target these spots, which includes offices, homes, hotels and restaurants, markets and transit zones such as airports and railway stations. "The public Wi-Fi hotspot market is set to expand considerably. The Wi-Fi hotspots will be what the PCO [public call office] market used to be before the mobile revolution," says Sarin. Bharti Airtel and Vodafone India, for instance, formed a joint venture last year, Firefly Networks, that plans to build Wi-Fi networks across the country. Several other operators have also taken the plunge and will roll out public hot spots. "Today, a customer is looking at seamless mobile internet experience, especially for videos, and is not bothered about the technology - 2G, 3G, 4G or Wi-Fi," says P. Balaji, Director (Regulatory and External Affairs) at Vodafone India.

Meanwhile, a move by the government in 2012 to liberalise spectrum usage is now seen as another blow for 3G. The two major broadband access technologies - 3G and 4G - can be deployed on any of the seven possible bands. At the moment, different bands are used for different technologies. For instance, 900 MHz and 2,100 MHz are used for 3G while 800 MHz, 1800 MHz and 2,300 MHz are used for 4G. It is because the Indian telecom market is modelled on China, the world's largest handset market. Since China has deployed 3G on 2100 MHz and 4G on 1800 MHz, India does the same.

So, going forward, 4G is expected to become band-agnostic. It is expected that all telecom equipment will support 4G. In such a situation, telcos will give preference to 4G over 3G because consumers tend to gravitate towards operators that offer the latest technology, according to Dunigan O'Keeffe, senior partner at consultancy firm Bain & Co. "Consumers prefer superior technology even if they do not have supporting devices. As more consumers shift operators, other telcos will be forced to tune their networks in favour of 4G," he says.

While Airtel and Reliance Jio have been acquiring 4G spectrum over the past four years, players like Vodafone, Reliance Communications and Idea Cellular have strengthened their 4G arsenal of late. Take Vodafone, for instance. In the last two rounds of auctions, it has acquired spectrum in 1,800 MHz across 11 circles. Its total spectrum in the 1,800 MHz band is significantly higher than the spectrum it holds in other bands - 900 MHz and 2,100 MHz. Globally, 1,800 MHz is a prime band for deploying 4G.


THE COUNTDOWN

The large-scale shift from 3G to 4G is yet to happen but the telcos are already preparing for the future. For example, Airtel has kept its 4G tariffs almost identical to the rates for 3G. For the one gigabyte prepaid offer, it is charging Rs 249 for the 3G plan for 30 days and Rs 255 for the 4G plan for 28 days. A recent report by global financial services firm Credit Suisse says that the move by Bharti Airtel, the market leader in the Indian telecom market, to offer 4G services at 3G tariffs (or below) is a significant event. "We believe this is a good reason to be worried about the fate of 3G investments and profitability in India," says the report.

But access to faster internet is just one reason for consumers to switch from 3G to 4G. A combination of factors, including 3G-comparable data tariffs and quality of services, are equally important for a large scale migration to 4G. "It's more important to get the price-value equation right," says Jaideep Ghosh, Partner (Management Consulting) at audit and advisory firm KPMG India.

Some experts think that phasing out of 3G is unlikely for the time being. O'Keeffe of Bain & Co says that shortage of spectrum will result in carriers taking a hybrid approach - it would intrinsically mean offering 4G in some pockets and 3G in others. The average spectrum available per operator in India is just 18 MHz, according to the Global Mobile Operators' Association. It is much lower than the global average of 50 MHz and the average in Asia (49 MHz), Europe (65 MHz) and Americas (39 MHz). "For instance, in Maharashtra, an operator will give 4G service in Pune where the data usage is high among commercial users, students and individuals but for other parts of Maharashtra, the operator may still fall back on 3G," adds O'Keeffe.

All said and done then, 3G may not have an extended shelf life. Indeed, its death appears certain, but how long it will survive is anyone's guess.

THE EMERGENCE OF BLUETOOTH

The next 10 years will see the emergence of various wireless technologies. For instance, Bluetooth is narrowing its gap with Wi-Fi. The latest version of the technology - Bluetooth 4.0 - enables data transfers at the speed of 24 Mbps. Even though the latest Wi-Fi technology, Wi-Fi Direct, promises data transfers at 250 Mbps, its earlier versions could support speeds of only 11 Mbps and 54 Mbps.

The reach of Bluetooth-based wireless connections is increasing as well. Bluetooth 4.0 can send and receive data in a range of about 60 metres, which is sufficient in an office or residential set-up because it can connect multiple devices to one master device. In addition, Bluetooth 4.0 is also powerefficient - it consumes a fraction of the power consumed by older Bluetooth technologies. But the low-energy feature sometimes also makes it incompatible with the existing Bluetooth devices.

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