BackTelecom tumult: The contours of the Net neutrality debate
India's telecom sector, caught in a raging debate over Net neutrality, faces more disruption as the cost of expensive wireless radiowaves comes home to roost and Mukesh Ambani's Reliance Jio Infocomm gets set to make its entry
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Twenty-four year old Shareen Kambli, who works as an assistant manager in a Bengaluru-based 5-star hotel, is addicted to her smartphone. Like thousands of digital natives, or those born in the Internet era, she uses services such as WhatsApp and Skype that also allow her to text, send pictures, upload videos and even make domestic and international calls—all at no cost other than the fee she pays her telecom services provider.
Kambli can also use her smartphone to surf the Internet, listen to music, play games, buy goods and services from e-commerce companies, check for online educational courses or even download apps for banking or to check her health.
It’s these features, which telecom services providers (telcos) club as data, that are undeniably going to be the key driver of the Indian mobile market in the years to come, analysts say.
“We don’t have a landline at home. I use my mobile to surf the Internet and I speak to my friends and relatives mostly on (communications apps) like WhatsApp, Skype and Viber. Since I’m also doing an online MBA from Sikkim University, I communicate with my co-students on Shareit to exchange notes, download files and other quick links," said Kambli. Shareit is a free application from Lenovo Group Ltd that lets users share files and folders among smartphones, tablets and personal computers (PCs).
Users such as Kambli have contributed to a surge in data traffic on India’s mobile phone networks.
Data revenue accounts for less than 20% of the total mobile revenue of Indian telcos, against close to 30% in China. But with falling handset prices, data subscribers in India are likely to grow at an average 25% every year to reach 519 million by fiscal 2018, a July 2014 report by Morgan Stanley said.
So why aren’t telcos leaping with joy?
For one, the Indian telecom sector, which has negotiated a thicket of regulatory red tape, fought for licences and spectrum and had been rocked by scams since the introduction of the New Telecom Policy in 1994, is now facing accusations of breaching Net neutrality with preferential zero rating plans. What is net neutrality and why is it so fiercely contested?
To be sure, not many are aware of the nuances of the Net neutrality debate.
Kambli, for instance, says: “I have heard about the term, but have not understood the implications fully. All I know is that there’s some talk of charging for tools like WhatsApp. But I already pay for my Internet plan. So I would want them (the apps) to be free."
Second, the battle for spectrum that ended on 25 March has the potential to make or break some telcos as they splurge money on rolling out third- and fourth–generation (3G and 4G) technologies. (See: Battle for spectrum)
According to an industry executive, who did not want to be named since he’s not authorized to speak to the media, the biggest challenge that telcos face is that “having spent around ₹ 2.5 trillion over the last five years, we (telcos) will now have to spend about ₹ 2 trillion over the next five years towards building the infrastructure".
Infrastructure spending would include the purchase of spectrum (for which the government received bids worth ₹ 1.10 trillion in the auctions), setting up telecom towers and fibre optic cables, and paying municipal councils for the right of way.
Third, the telcos argue that they are losing business to so-called over-the-top (OTT) communication services such as WhatsApp, WeChat, Line, Hike, Gtalk, Facebook Messenger and Skype.
They argue that it’s not a “level-playing field" since these services use a technology called Internet telephony, or voice over Internet protocol (VoIP), to ride over the telco network—which explains OTT—but have neither paid for spectrum nor invested in infrastructure such as towers and fibre, and have not paid to obtain government licences.
The OTT services providers contend that such services, including voice calls, chats and messaging, are offered to users through Internet services providers (ISPs) that levy applicable online usage charges—and, hence, they are offering communication services over the Internet for which the telco is already paid by an end-user. All companies, including telecom services providers, that provide Internet services have to apply for a unified licence from the department of relecommunications. As on 31 December 2014, 325 companies were authorized to provide Internet services in the country.
The telecom sector has always been facing disruption—be it through spectrum auctions or tariff wars, according to Hemant Joshi, telecom lead at consultancy firm Deloitte India.
“This year will be yet another inflection point, marked by three main forces of consolidation and competition, aggressive growth of data and further roll-out of 3G and 4G," he said.
The spectrum auctions, said Joshi, will put a “huge strain on the already stretched balance sheets of telecom operators and impact profitability, bringing a challenge of cash-flow management".
Simultaneously, the aggressive launch of 4G LTE (Long-Term Evolution, a standard for wireless communication) could lead to another round of aggressive pricing, along with more bundling of devices and services, which has not been seen a great deal in India earlier. “This again could cause a price war," said Joshi.
JP Morgan analysts suggested in an October 2014 report that as the prices of 4G-enabled handsets start falling, India could leapfrog “from 2G to 4G, bypassing 3G—a real possibility in India with the right start and as the ecosystem builds out".
While leading telcos such as Bharti Airtel Ltd, Vodafone India Ltd and Idea Cellular Ltd battled with each other to win back spectrum in the auctions that began on 4 March and ended on 25 March, the joker in the pack was Reliance Jio Infocomm Ltd—the telecom unit of Mukesh Ambani’s Reliance Industries Ltd (RIL)—and its long-delayed rollout of 4G telecom services.
Reliance Jio, which could be the biggest disruptionist force in the telecom sector, is expected to introduce its voice-plus-data mobile services in five cities by June. In April, Reliance Jio launched its first offering Jio Chat—a messaging application that it hopes will rival WhatsApp.
It indicates Reliance Jio’s “...intention to eventually become a single platform for users—voice, messaging, and e-commerce," analysts at Citi Research wrote.
The company has ready apps such as Jio Mag for news, Jio Beats for music and Jio Play for television, said a company executive who did not want to be named.
Reliance Jio plans to launch its high-speed data services across the country using a blend of technologies, including two rival 4G high-speed wireless technologies, as well as other network options such as FTTx (fibre to the location) and Wi-Fi hot spots.
Reliance Jio’s cloud-based services are expected to span healthcare, education and entertainment, and build synergies with the home shopping and content businesses of Network18 Media and Investments Ltd, in which RIL has acquired a majority stake.
It will also tap Reliance Retail Ltd’s proposed e-commerce venture and projects of Reliance Foundation, RIL’s philanthropic arm. The company’s data centres will help it offer its planned services such as direct-to-home (DTH) television, video-on-demand, mailing and messaging services, and VoIP.
Reliance Jio is also in the process of installing hundreds of monopoles, unlike the regular rooftop-mounted telecom towers typically used by telcos, the executive pointed out. Monopoles, or ground-based masts (GBMs), are expected to double up as street lights and surveillance systems, and provide real time monitoring of traffic and advertising opportunities.
Reliance Jio does face its share of challenges in terms of return on investment and capturing market share. The company, according to industry analysts, is expected to spend $8-9 billion in total.
For one, the commercial launch of the project, unveiled in 2010, has been inordinately delayed. It was in 2010 that RIL acquired a 95% stake in Infotel Broadband Services Ltd, the only company to win Broadband Wireless Access (BWA) across the country in an auction the same year.
The challenges for Reliance Jio, according to analysts, include the reach and penetration shortcomings of the 2,300MHz band since a higher frequency requires more towers and is less efficient than lower frequency bands.
“Adding more towers in a city like Mumbai, for instance, is very difficult currently due to radiation fears and getting permission from multiple utilities to dig roads when laying down fibre," the executive cited above said.
According to a 3 February report by JP Morgan India Pvt. Ltd, “delays in obtaining municipal/local permits for laying the fibre are likely causing the delay" in the launch of Reliance Jio’s services.
The problem is with the 2,300 MHz band that requires telcos to add more towers to make it more effective.
“The current 2,300 MHz band allocated for 4G LTE services in India has the issue of in-room penetration, and the number of BTSs (base stations) to be deployed for coverage is also high, compared with same area coverage in a lower band. Also, the robust backhaul network to transmit 4G LTE traffic—in the form of optical fibre networks—is also inadequate in India...," noted a January report by research and consultancy firm Convergence Catalyst.
Cajoling customers to move from existing operators and upgrade to 4G by making the devices affordable is another challenge. JP Morgan analysts also point out that RJio has already set up some outlets in Reliance Digital stores, which are called Reliance Digital Express Mini—small format digital stores.
Reliance Jio declined to comment for this story.
While Reliance Jio may take a few years to build its network and address the challenges, other telcos can ill afford to ignore the 4G revolution, say analysts.
To be sure, Airtel was the first to launch 4G in the country in Kolkata in April 2012.
Airtel 4G services are currently available in 17 cities, including Bengaluru, Kolkata, Pune, Nashik and the Vasai-Virar-Nalasopara belt in suburban Mumbai. It was also the first telco to launch 4G for mobiles in the country in Bengaluru in February 2014.
Bharti Airtel, noted a January report by Convergence Catalyst, “launched 4G LTE services in Bangalore in May 2012 and, in the last 20 months, the number of LTE subscriber additions on Airtel’s network in Bangalore have been less than 1/8th the number of 3G subscriber additions (in the same period)".
So what’s the way ahead for telcos?
Any talk about telcos currently is being overshadowed by the Net neutrality debate—an issue that is undoubtedly critical but unlikely to be resolved in a hurry—and loss of revenue to OTT communication services such as Whatsapp.
Telcos have to face the fact that newer technologies will continue to disrupt business models. Hence, while they continue arguing for a “level-playing" field, they also need to find innovative answers.
Reliance Jio’s messaging service Jio Chat is a case in point. The company’s plan to offer voice over LTE (VoLTE) is another such move. VoLTE is a data-based voice service where voice packets can be prioritized over the network, similar to VoIP.
Besides, telcos should have little to complain, given that they themselves, over the last few years, have evolved their business models, and are now challenging traditional banks with micro-payments, having themselves applied for payment banking licences in the country.
Telcos can learn from banks that instead of lobbying to derail an inevitable technology disruption in the name of a level-playing field, it’s better to innovate to stay ahead of the pack.
Telcos are also involved in the evolution of smart grids, smart cities and the Internet of Things itself, wherein machines and devices talk to each other. This explains why many telcos have even ventured into machine-to-machine (M2M) services as part of their enterprise mobility offerings.
In this context, analytics will help provide telcos get additional revenue by monetizing the huge data pools that they collect, said experts from Knowledge@Wharton in an August 2014 white paper sponsored by Wipro Ltd.
Telcos, similar to banks, can take advantage of analytics because they “don’t have to guess who their customer is", experts suggest.
They point out that smartphone proliferation is generating huge amounts of data and analytics can help telcos mine this rich data for a faster, better understanding of customer behaviour.
Armed with this, telcos can come up with personalized products and services, and also enhance customer experience at various touch points, which, in turn, can help arrest customer churn, and also aid in cross-selling activities, according to the white paper.
The white paper also suggests that telecom companies can anonymize their data and repackage it for third-party companies “who want to understand the behaviour of people who are making phone calls, Web browsing, Web purchasing or TV viewing".
Here, too, just as telcos need to take care not to violate Net neutrality principles, they will have to take adequate care not to invade or compromise the privacy of individuals.
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