Indian Telecommunication Sector August 2007

Presentation Plan 1 Telecom Industry Overview 2 Telecom – Investment Attracting Sector 3 Regulatory Framework and Its Impact 4 Emerging Trends in Telecom Market 5 Major Players in Telecom Sector 6 Growth Avenues

Presentation Plan 1 Telecom Industry Overview 2 Telecom – Investment Attracting Sector 3 Regulatory Framework and Its Impact 4 Emerging Trends in Telecom Market 5 Major Players in Telecom Sector 6 Growth Avenues

Indian Telecom Industry – A Lucrative Option In recent years, the Indian telecom industry has witnessed phenomenal growth. A conducive business environment, favourable demographic outlook and the political stability enjoyed by the country have contributed to the growth of the industry. India achieved the distinction of having the world's lowest call rates (2–3 US cents), the fastest sale of million mobile phones (1 week), the world's cheapest mobile handset (USD 19) and the world's most affordable colour phone (USD 31). One of the fastest growing cellular markets in the world in terms of number of subscriber additions – 19.35 million in 3 months (April to June 2007) Expected to reach total subscriber base of about 500 million by 2010 (i.e., more than one phone for every household) Annual growth rate of the telecom subscribers – 47 percent (2006–07) More GSM subscribers than fixed-line subscribers Indian Telecom Industry – Facts Total telecom subscribers – 225.21 million (June 2007) Tele density – 19.86 percent (June 2007) Number of new mobile subscribers added every month – 7.34 million (June 2007) ARPU for GSM – USD 6.6 per month Telecom equipment market – USD 17,100 million (2006–07) Handset market – USD 4,750 million (2006–07)

Telecom Services – India Telephony services (mobile and basic) and Internet services dominate the Indian telecom services The Indian telecom market generated revenues of approximately USD 20 billion in 2006–07. It registered a CAGR of approximately 22 percent from 2002–03 to 2006–07. The CAGR from 2006–07 to 2009–10 is expected to stabilise at 21 percent. Apart from mobile telephony services, other value-added services are also gaining importance. Revenues of Indian Telecom Industry: 2002–07 (USD billion) Telecom Services – India Internet Mobile Services Basic Services PMRTS VSATs GMPCS Paging Radio Registered an annual growth of 33 percent in 2006–07 The Indian telecom services can be divided predominantly into basic, mobile and Internet services. It also comprises smaller segments, such as radio paging services, Very Small Aperture Terminals (VSATs), Public Mobile Radio Trunked Services (PMRTS) and Global Mobile Personal Communications by Satellite (GMPCS). The growth witnessed in the mobile services and Internet services segments was higher as compared to other services, such as basic services and radio paging services.

Private players account for highest subscriber base growth in the basic telephony services segment Market Share* of Basic Services Segments in India (2006–07) Basic Services Basic services include fixed wireline and wireless in local loop (WLL-fixed). In 2006–07, basic services subscribers exceeded 50 million. Fixed wireline services hold a major market share of 83 percent in basic services. BSNL and MTNL are market leaders in this segment. Although the government-owned BSNL dominates the segment in terms of subscriber base and market share, private players have registered a notable growth. Market Share* of Basic Service Operators in India (2005–06) * In terms of Subscriber Base

Mobile telecom services provide an unprecedented growth opportunity for companies Mobile services have led to a spectacular growth in the Indian telecom industry. Currently, 12 players are active in this segment. The total number of wireless subscribers escalated to 185.13 million at the end of June 2007, with a monthly addition of more than 6 million wireless subscribers. Despite the decreasing ARPU*, the minutes of usage is on a rise, which provides impetus to the mobile services growth in India. Minutes of Usage per Month – Mobile Services Despite a low teledensity of approximately 19 percent, India has the second highest minutes of usage per month. This offers huge growth opportunity to telecom companies. ARPU* in India – Mobile Services The declining ARPU implies that India Inc. is tapping a large market at the bottom of the pyramid by reducing tariffs; thereby, enhancing affordability. * Average Revenues per User

Number of mobile subscriber will propel the total subscriber base to 500 million by 2010 Telecom Subscriber Base and Teledensity in India The telecom subscriber base has witnessed an explosive growth; the additions in the current year registered a growth of approximately 47 percent over the previous year. The subscriber base registered a CAGR of 40.4 percent for 2002–03 to 2006–07. Market Share* of Wireless** Operators (As of June 2007) The state-owned BSNL was the second largest service provider after Bharti Airtel (23 percent) in the Indian wireless telecom market with a market share of approximately 19 percent for the year ending March 2007. * In terms of Subscriber Base ** Includes GSM, CDMA and WLL-F services

GSM surpasses CDMA in number of additions to subscriber base Market Share* of Wireless Operators (as of quarter ending March 2007) GSM surpasses CDMA segment by a large margin in terms of subscriber numbers. Bharti Airtel dominates the GSM segment with a market share of approximately 31 percent for the year ending March 2007, followed by BSNL with a share of approximately 23 percent subscribers. Reliance Communications and TTSL dominates the Indian CDMA mobile services segment. * In terms of Subscriber Base Market Share GSM* Service Providers (as of quarter ending March 2007) Market Share* CDMA Service Providers (as of quarter ending March 2007)

Various other services emerged by leveraging the telecom services industry Radio Paging In 1995, radio paging services emerged as a promising segment in India. However, this segment could not compete with cellular services in general and SMS technology in particular, and is currently shrinking. At present, only four radio paging service providers are present in the Indian market. GMPCS* Public Mobile Radio Trunked Services PMRTS have not grown to their expected potential in India. The high licence fee leaves a very thin margin for services providers; thereby, inhibiting its growth. About 31,000 subscribers are currently availing this service in India from 12 different operators. GMPCS services were launched in India in 1999. These services allow a subscriber to communicate from any point on earth through a handheld terminal. Moreover, the telephone number remains unchanged, irrespective of the subscriber’s location. Other Telecom Services Very Small Aperture Terminals (VSAT) The market for VSAT services increased by 5.73 percent during the quarter ending in December 2006, and the segment had a total subscriber base of 55,070. HCL Comnet is the largest of the eight players functioning in the market. * Global Mobile Personal Communication by Satellite

Broadband services to drive Internet penetration in India Internet Subscribers: 1998–2007 The emergence of private players and new technologies have provided a strong impetus to the growth of Internet and broadband services. The quality and penetration of these services have undergone changes, with significant improvement in the telecom infrastructure. The Internet subscriber base registered a CAGR of 60 percent for the period 1997–98 to 2006–07. Market Share of Top Five Internet Service Providers (as of quarter ending March 2007) BSNL and MTNL caters to more than two-thirds of Internet subscribers in India. India had 2.52 million broadband connections at the end of June 2007. Private players are catching up fast due to increased penetration of Internet and broadband services in India. The telecom market will experience high penetration of Internet services with the support from government policies and introduction of novel technologies in India.

Presentation Plan 1 Telecom Industry Overview Telecom Handset Market 2 Telecom – Investment Attracting Sector 3 Regulatory Framework and Its Impact 4 Emerging Trends in Telecom Market 5 Major Players in Telecom Sector 6 Growth Avenues

Indian telecom handset market booming along with mobile services industry The Indian handset market grew at a phenomenal rate in 2006 with the sale of approximately 30–35 million handsets. It is estimated that by 2011, sales of mobile handsets will reach 150 million units. Competitive pricing has triggered the growth of coloured handsets, which accounted for 65 percent of the market in 2006; whereas, the share of monochrome handsets has declined to 35 percent. Mobile phones are available at prices as low as USD 28–35. Camera phones currently occupy 15 percent of the sales volume. Mobile Handsets Market in India: 2004–07 The CDMA category is growing faster than the GSM category. It captured 25 percent of the market volume in 2005–06 as against a 20.5 percent share in the previous year. Market Share of GSM and CDMA Handset Manufacturers: 2006–07 Overall, Nokia has a market share of 53 percent; it dominates the GSM mobile handsets with a market share of approximately 73 percent. LG dominates in the CDMA handsets market with a market share of 60 percent.

Presentation Plan 1 Telecom Industry Overview 2 Telecom – Investment Attracting Sector 3 Regulatory Framework and Its Impact 4 Emerging Trends in Telecom Market 5 Major Players in Telecom Sector 6 Growth Avenues

India: An Ideal Destination for Investments in Telecom Sector World’s largest democracy Independent judiciary Skilled and competitive labour force Fifth largest telecom network in the world; second largest among the emerging economies after China On an average, about 6–7 million new users added per month, making India the world’s fastest growing wireless services market Liberal Foreign Investment Regime–FDI limit increased from 49 percent to 74 percent; the rural telecom equipment market is also open to large investments Among the countries offering the highest rates of return on investment The large untapped potential in India’s rural markets–1.9 percent teledensity in rural markets as compared to the national level of 18 percent Expected to become the second largest telecom market by 2010 The government promoting telecom manufacturing by providing tax sops and establishing telecom specific Special Economic Zones Fully repatriable dividend income and capital invested in telecom equipment manufacturing

Increasing mobile subscriber numbers and low level of teledensity offers large opportunities to Indian companies Large number of additions in telecom subscribers Low teledensity (depicting large untapped potential) Telecom Advantage The telecom subscriber base has witnessed an explosive growth; the additions in year 2006-07 registered a growth of approximately 47 percent over the previous year. The subscriber base witnessed a CAGR of 40.4 percent during 2002–03 to 2006–07. The impressive growth in the subscriber base has resulted in a significant increase in teledensity. In 2006–07, India had a teledensity of 18.3 percent, as compared to year 2005-06 figure of 12.80 percent, signifying a growth of 43 percent. Even though the Indian telecom industry has exceeded a subscriber base of 200 million, its teledensity is only 18 percent. Thus, the Indian market provides telecom service providers with a large untapped potential due to the country’s increasing population and its low teledensity. The government has plans to raise teledensity to 40–45 percent by 2010; thereby, offering greater growth opportunities for service providers.

Presentation Plan 1 Telecom Industry Overview 2 Telecom – Investment Attracting Sector 3 Regulatory Framework and its Impact 4 Emerging Trends in Telecom Market 5 Major Players in Telecom Sector 6 Growth Avenues

Indian Telecom Industry Framework Regulatory Framework provides level playing field for all operators The Department of telecommunications (Government of India) is the main governing body for the industry. Telephone Regulatory Authority of India (TRAI) assists the Government of India (GoI) to take timely decisions and introduce new technologies in the country. Indian Telecom Industry Framework Indian Government Bodies Independent Bodies They formulate various policies and pass laws to regulate the telecom industry in India. They undertake various research activities and monitor the quality of service provided in the Indian telecom industry. They also provide various recommendations to improve the status of telecom operations in India. Handles spectrum allocation and management Wireless Planning and Coordination (WPC) Telecom Regulatory Authority of India (TRAI) Independent regulatory body DoT – Licensee and frequency management for telecom Department of Telecommunications Telecom Disputes Settlement and Appellate Tribunal (TDSAT) Telecom disputes settlement body Exclusive policy making body of DoT Telecom Commission Group on Telecom and IT (GoT-IT) Handles ad hoc issues of the telecom industry

Various important regulations and laws have been passed in the Indian telecom industry post-liberalisation era Department of Telecommunication (DoT) is the main body formulating laws and various regulations for the Indian telecom industry. ILD services was opened to competition BSNL was established by DoT Intra-circle merger guidelines were established Number portability was proposed (pending) Independent regulator, TRAI, was established Private players were allowed in Value Added Services Calling Party Pays (CPP) was implemented Attempted to boost Rural telephony Go-ahead to the CDMA technology 1994 1999 2002 2003 2004 2005 2007 1992 1997 2000 Internet telephony initiated Unified Access Licensing (UASL) regime was introduced 2006 INDIA Broadband policy 2004 was formulated—targeting 20 million subscribers by 2010 National Telecom Policy (NTP) was formulated Decision on 3G services (awaited) NTP-99 led to migration from high-cost fixed license fee to low-cost revenue sharing regime Reduction of licence fees FDI limit was increased from 49 to 74 percent Reference Interconnect order was issued ILD – International Long Distance

Important regulations and their impact on the Indian telecom industry Unified Access Service License Regime (UASL) Unified licensing marked the end of the license regime in the Indian telecom industry. It helped in aligning convergent technologies and services. The establishment of the Unified Access Licensing Regime (2003) eliminated the need for different licenses for different services. Players are now allowed to offer both mobile and fixed-line services under a single license after paying an additional entry fee. This does not take into account national and international long-distance services and Internet access services. NTP 99 Telecom Tariff Order WLL UASL, CPP Lowering of ADC Access Deficit Charges (ADC) ADC makes it mandatory for a service provider at the caller’s end to share a percent of the revenue earned with the service provider at the receiver’s end in long-distance telephony. This subsidises the infrastructure costs of the service provider enabling access at receiver’s end, especially because rental for fixed-line services is low. Revision in the ADC regime is expected to be followed by further tariff reduction in telecom services. Universal Service Obligation (USO) The USO policy was laid along with NTP ’99 to widen the reach of telephony services in rural India. All telecom operators are bound to contribute 5 percent of their revenues to this fund. This system was put in place to bridge the wide gap between urban and rural teledensity, bringing it down from the current 31 percent. Initially, only basic service providers were under the purview of USO. Later, its scope was expanded to include mobile services also. Although it increases the cost burden for the telecom companies, USO helps in building the telecommunication infrastructure in the rural areas.

Presentation Plan 1 Telecom Industry Overview 2 Telecom – Investment Attracting Sector 3 Regulatory Framework and Its Impact 4 Emerging Trends in Telecom Market 5 Major Players in Telecom Sector 6 Growth Avenues

FDI and other M&A activities increasing in number Major trends in the telecom sector is increasing M&A activity, de-regulation of telecom policies and growing interest of international investors. Recent Deals in Telecom Sector The Indian telecom industry has a 74 percent FDI limit in the telecom services segment. The GoI has permitted 100 percent FDI in manufacturing of telecom equipment in India. Vodafone purchased stake in Hutch from Hong Kong's Hutchison Telecom International for USD 11.08 billion. FDI in Telecom Sector Reliance Communications Limited has sold a five percent equity share capital of its subsidiary Reliance Telecom Infrastructure Limited to international investors across the US, Europe and Asia. The deal was worth USD 337.5 million. Telekom Malaysia acquired a 49 percent stake in Spice Communications for USD 179 million. The Indian telecom industry has always attracted foreign investors. In fact, the cumulative FDI inflow, during the August 1991 to March 2007 period, in the telecommunication sector amounted to USD 3,892 million. It is the third largest sector to attract FDI in India in the post-liberalisation era. FDI calculation takes into account radio paging, cellular mobile and basic telephone services in the telecommunication sector. Maxis Communications acquired a 74 percent stake in Aircel for USD 1.08 billion. Ericsson to design, plan, deploy and manage Bharti Airtel network and facilitate their expansion in the rural areas, under a USD 2 billion contract.

Presentation Plan 1 Telecom Industry Overview 2 Telecom – Investment Attracting Sector 3 Regulatory Framework and Its Impact 4 Emerging Trends in Telecom Market 5 Major Players in Telecom Sector 6 Growth Avenues

Major Players in different segments of Indian telecom industry Basic Services Operators MOBILE SERVICES GSM Services Operators BSNL Airtel MTNL Vodafone Reliance Idea TTSL Reliance BSNL Internet Services Operators BSNL CDMA Services Operators MTNL Reliance Reliance TTSL TTSL BSNL Airtel MTNL – Mahanagar Telecom Nigam Ltd. TTSL – Tata Teleservices Ltd. BSNL – Bharat Sanchar Nigam Ltd.

Presentation Plan 1 Telecom Industry Overview 2 Telecom – Investment Attracting Sector 3 Regulatory Framework and its Impact 4 Emerging Trends in Telecom Market 5 Major Players in Telecom Sector 6 Growth Avenues

India presents a host of opportunities for telecom companies Infrastructure Sharing Rural Telephony Managed Services 1 8 2 Value-Added Services Growth Avenues Virtual Private Network 7 3 6 4 WiMax 5 Enterprise Telecom Services 3G To reduce their network deployment costs, many service providers are considering infrastructure sharing offers the following advantages: Improved service quality Increased affordability for customers Faster roll out of services in rural and remote areas Significant reduction in initial set up costs Increased environmental aesthetics Lower operating costs for service providers 1 Virtual Private Network is a private data network that provides connectivity within closed user groups via public telecommunication infrastructure. Competition is likely to heat up in the VPN segment as DoT has relaxed the norms for private players. 3 Enterprise Telecom Services includes key services, such as voice over Internet protocol (VoIP), dedicated telecom communication systems, IT infrastructure enabled unified communication services, etc. Telecom service providers are increasingly targeting enterprises by providing dedicated services and is expected to witness major developments in near future. 2 Managed services is another segment that is attracting telecom companies. On account of the rapidly growing subscriber base, service providers find it difficult to manage their infrastructure and network management operations. In such cases, they completely or partially outsource their infrastructure or network management operations. 4

Emerging technologies – 3G and WiMax to assist in penetration of telecom services in India 5 The Indian government plans to auction the spectrum for 3G services by inviting bids from domestic as well as foreign players, and creating a competitive environment that offers better services to consumers. Therefore, the 3G spectrum is among the major investment opportunities and growth drivers of the telecom industry. The immense potential for 3G is reflected by the 30–40 percent annual growth in Value-Added Services. Cell phone manufacturers are striving to develop USD 100 priced 3G handsets for the Indian market. India expects to replicate its 2G growth in 3G services. 6 WiMAX has been one of the most significant developments in wireless communication in the recent past. Since this mode of communication provides network access in inaccessible locations at a speed of more than 4 Mbps, it is expected to be a major factor in driving telecom services in India, especially wireless services. Thus, it will lead to the increased use of telecom services, Internet, value-added services and enterprise services. WiMAX is expected to accelerate economic growth and assist in providing better education, healthcare and entertainment services. It is estimated that India will have 13 million WiMAX subscribers by 2012. Aircel is the pioneer in WiMAX technology in India. The state-owned player, BSNL, aims to connect 74,000 villages through WiMAX. Bharti, Reliance and VSNL have acquired licenses in the 3.3GHz range to utilise the opportunities offered by this domain.

Value-Added Services and Rural Telephony holds large market potential in India 7 Value-Added Services in India (2006–07) The VAS industry was worth USD 632 million in 2006–07. The industry is estimated to grow by 60 percent in 2007–08 and become an USD 1,011 million opportunity. The VAS industry is currently focussing on the entertainment sector, such as the Indian film industry and cricket; however, there is scope for growth in other avenues as utility-based services, such as location information and mobile transactions. Rural Telephony Urban Rural Teledensity in India 8 As the government targets to increase rural teledensity from the current 2 percent to 25 percent by 2012, rural telephony will require major investments. This segment will boost the demand for telecom services, equipment, Internet services and other value-added services; thereby, offering great market opportunities for telecom players.

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