The document provides an overview of the global telecom industry and key trends. It discusses how the industry has transformed significantly in recent years due to factors like deregulation, privatization, and technology advancements. Major markets like the US, Western Europe, and Japan have matured, leading operators to look for growth opportunities in emerging markets like India and China that offer strong growth potential due to lower penetration levels and favorable demographics. The rural Indian market is seen as an important source of future growth for the Indian telecom sector.

1. ConneCting RuRal india
The Untapped Growth Opportunity

2. Contents
Foreword 3
Executive Summary 5
Macro Economic View of India 7
Global Telecom Markets 15
Indian Telecom Sector 25
Telecommunications for Rural India 35
Broadband for All 49
Operator Initiatives in Delivering Low-Cost Mobile Services in India 57
Value Added Services 63
Telecom Manufacturing 71
Regulatory and Policy Environment 75
Conclusion 81
About Us 83
Contact Us 84

3. Foreword
India today offers the most exciting growth opportunities in the telecom sector.
The proactive policies of the Government with active support and involvement of
stakeholders have changed the face of this sector which has now emerged as the
world’s fastest growing telecom sector. With a base of more than 325 million
mobile subscribers, India has become the second largest wireless network in the
world. From a teledensity of a mere 5% in March 2003, the Indian Telecom sector
has grown manifold and the teledensity is now over 32%. The gigantic size of the
telecom market in India can be easily judged from the fact that we still have to
provide connectivity to 70% of our population mainly in small cities, towns and
rural areas and broadband connectivity to a majority of population. Connecting
Rural India is thus a key focus for future growth, a challenge as well as a great
opportunity.
On the occasion of India Telecom 2008, the 3rd International Conference and
Exhibition, the Department of Telecommunications is bringing out this report on
“Connecting Rural India – The Untapped Growth Opportunity”.
Capgemini & FICCI have put in a lot of effort into compiling this report which
covers the key areas of Indian telecom sector and would form a useful reference
manual for telecom operators, regulators, vendors, policy makers and all those
involved in this rapidly growing sector.
Siddhartha Behura
Secretary
Department of Telecommunications
Ministry of Communications and IT
Government of India
New Delhi
11th December 2008
Connecting Rural India: The Untapped Growth Opportunity 3

4. Message
The Federation of Indian Chambers of Dr. Amit Mitra
Commerce and Industry (FICCI) and Secretary General
Capgemini are pleased to present this FICCI, India
report on “Connecting Rural India.”
We are grateful to the Department of
Telecommunications (DoT) for this
opportunity to work with them as
Knowledge Partner for the India
Telecom 2008 conference.
The Indian telecom industry has seen Didier Bonnet
strong growth on the back of a Managing Director & Global Head
significant rise in mobile subscribers. Capgemini Telecom, Media and Entertainment Consulting
The next phase of this growth is likely
to see mobile operators spread out into
the hinterlands of the country, and tap
the large rural market. Emphasis in
connecting the unconnected India
presents the next big challenge and
opportunity for operators and the
Government alike.
In this report, we look at how the Greg Jacobsen
telecom story has panned out over the Global Sector Leader
last few years in India, and how rural Capgemini Telecom, Media & Entertainment
India is likely to leave its own imprint
on the telecom sector in the coming
years. The real challenge for all of us,
though, lies in translating the telecom
successes into a harbinger of sustainable
growth across India.
4

5. Executive Summary
Today, India is at the cusp of its next phase of growth, driven by an economy that
has been growing at over 9% for the last three years. India’s changing demographics,
along with strong domestic markets, are attracting the attention of major global
organizations, resulting in strong foreign investments in the country. Globally,
telecom sector players are coming to terms with saturation in developed countries
and looking at newer streams of growth from emerging countries.
In India, the telecom sector has seen exceptional growth in the last few years. This
growth has largely come through a rapid rise in mobile subscriptions and makes
this a key market for many global operators. One attractive proposition is the
falling entry barrier, which has ensured swift uptake of mobile connections and
increase in teledensity. With increasing penetration in urban circles, operators are
looking to continue growth by tapping the large rural Indian markets. In doing so,
all the stakeholders in the ecosystem—including operators, device vendors and the
Government—are playing an active role.
With the recent issuance of guidelines for 3G and Broadband Wireless Access
(BWA), broadband in India is likely to receive an impetus. In addition, the high
cost of wireline infrastructure is bringing wireless broadband services into focus.
The advent of 3G services is likely to result in a rise in data usage, along with
innovative service launches from operators. Over the years, delivering mobile
services in India has been a tricky business for operators to date. The high Minutes
of Usage (MoU) clubbed with low Average Revenue Per User (ARPU) has meant
that operators have had to innovate in their service delivery. In doing so, operators
have initiated activities such as network outsourcing, network sharing, and micro-
prepaid schemes that have enabled them to work around the limitations of the
Indian market in an innovative manner.
India’s mobile markets have thus far been largely focused only on voice services.
However, with the advent of advanced devices and a strong marketing push from
operators, uptake of value-added content services has been steadily increasing over
the recent months. In driving this growth of content, operators would do well to
take the examples of Japan and South Korea, where content ARPUs are some of the
best in the world.
Growth of telecom services in any country is, to a large extent, determined by
the regulations that drive it. Telecom regulatory bodies in India, along with the
Government, have ensured that through a series of initiatives, past and
present, the interests of the Indian consumer are upheld whilst ensuring a
competitive marketplace.
Connecting Rural India: The Untapped Growth Opportunity 5

6. 6

7. Macro Economic View of India
The emergence of a global contender
India’s GDP Growth 8
Growth of Foreign Direct Investment in India 10
India’s Changing Demographics 12
Connecting Rural India: The Untapped Growth Opportunity 7

8. India’s GDP Growth
Figure 1: India’s GDP in US $ Bn and YoY Growth in %, 2004-2008
India’s economy has been experiencing
a strong period of growth in the last
few years. Today, the Indian market 9.6 9.0
9.4
represents one of the fastest growing 8.5 G
economies in both the emerging and
7.5 G
the developed world. India’s GDP
grew by 9% in FY 2008, the third
consecutive year in which growth has 1,171
been above 9% (see Figure 1). Despite
a global slowdown, growth is expected 916
809
to remain strong at around 7-8% 701
599
In recent years, India’s GDP growth
has been led by the services sector
2003-04 2004-05 2005-06 2006-07 2007-08
which contributes a significant
portion. In 2007-08, it is estimated  GDP
that over 56% of India’s GDP growth  GDP Growth
was contributed by the services sector.
The services sector includes sub- Source: Capgemini Analysis; Exim Bank, “India’s Macroeconomic Indicators”, Sept 2008
sectors such as hospitality, financial
services, and transport among others.
The industry and agriculture & allied
sectors contributed around 27% and Figure 2: Sector Contribution Towards GDP, 2003-2008, (%)
18% respectively (see Figure 2).
A comparison with similar emerging
markets around the world reveals that
India is currently one of the fastest 53% 53% 54% 54% 55% 56%
growing markets. Apart from China,
which is currently experiencing
similar growth, India represents one
of the largest opportunities for growth 27% 26% 28% 26% 27% 27%
(see Figure 3).
21% 21% 19% 20% 19% 18%
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
 Agriculture & Allied
 Industry
 Services
Source: Capgemini Analysis; Exim Bank, “India’s Macroeconomic Indicators”, Sept 2008
8

9. Figure 3: Real GDP Growth Rate in Select Countries, 2000-2008, (%)
12%
10%
8%
6%
4%
2%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008
 China
 India
 Russia
 Brazil
Source: Capgemini Analysis; IMF, “World Economic Outlook”, April 2008
Connecting Rural India: The Untapped Growth Opportunity 9

10. Growth of Foreign Direct Investment in India
India’s high levels of growth in the recent Figure 4: FDI in India, 2004-2008, US$ Billion
past have meant that the country has
needed a constant inflow of resources
29.9
from global companies and institutions.
Aided by the increasing globalization of
the Indian economy, and the positive
steps taken by successive Governments, 22.1
foreign institutions have made a beeline
for investments in the country. With the
Government liberalizing most sectors,
and allowing up to 100% ownership by
foreign investors, many FIIs (Foreign 9.0
Institutional Investors) and large global 6.1
companies have invested significantly 4.3
in India in the recent past. While initial
Foreign Direct Investment (FDI) had
focused on low value-added and labor- 2003-04 2004-05 2005-06 2006-07 2007-08
intensive industries such as textiles
and food processing, over the years Source: Capgemini Analysis; Department of Industrial Policy & Promotion, FDI Fact Sheet, June 2008
industries with higher value-add such as
electronic components and automotives
have started to see significant benefits
of FDI. Most of these investors came to rising over the past few years. For for promoting telecom equipment
India looking for the cost arbitrage that instance, the consumption growth rate manufacturing in India. Taking
the country’s labor markets offered, but was pegged at 5.1% during FY 2004 to advantage of this, multiple global
have since expanded their presence, FY 2008 and estimates for 2008-09 Original Equipment Manufacturers
buoyed by the high quality of the skills are at 5.3%. (OEMs) and Electronics Manufacturing
and products. Services (EMS) providers have set
FDI growth in India’s economy has up shop in India with a view to
The large growth in FDI in recent been led by the services sector, a export, as well as serve the booming
years (see Figure 4) has helped India’s reflection of the larger contribution domestic market. For instance, global
economy in multiple ways. FDI inflows of services to the country’s overall majors such as LG, Motorola, Nokia,
into India have helped generate GDP. However, other sectors have also Ericsson, Flextronics and Hon Hai
employment, increase the FOREX started to see significant investments have set up telecom manufacturing
(foreign exchange) reserves through in the recent years (see Figure 5). operations in India.
exports, and have expanded the overall
supply and availability of goods. Many In the telecom sector, the Government
global corporations, which had used allows up to 74% FDI for fixed and
India initially as a base for exporting, cellular services. Taking advantage of
are increasingly looking to target the this policy, multiple global companies
domestic market whose consumption have entered India over the years. The
is fast scaling up. India’s per capita Government has also allowed 100%
consumption has been constantly FDI through the automatic route
10

11. Figure 5: FDI Investment by Sector, 2000-June 2008, (US$ Bn, %)
21.9%
 % of Total
11.9%  Amount of FDI In ows
14.3
6.6% 6.4%
5.6%
7.5 4.1% 4.1%
3.6%
3.0%
2.4%
4.3 4.1 3.7
2.6 2.6
2.4 2.0 1.5
s
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Source: Capgemini Analysis; Department of Industrial Policy & Promotion, FDI Fact Sheet, June 2008
Connecting Rural India: The Untapped Growth Opportunity 11

12. India’s Changing Demographics
The demographic nature of India is changing rapidly. Post 1970, India’s demography
has shifted to a more favorable ratio of working to non-working population. This
translates to India having one of the most work-friendly populace in the world (see
Figure 6). Demographic changes are an important parameter for future growth as
consumer consumption and savings are closely linked to it. Other countries around
the world such as Ireland and Japan have exhibited a strong positive correlation
between favorable demographics and rise in GDP.
12

13. Figure 6: Changing demographics of India, 2008 & 2015
Population Age Structure, Millions 2008 Population Age Structure, Millions 2015
29 60-64 41
41 55-59 51
51 50-54 60
59 45-49 68
67 40-44 78
76 35-39 89
86 30-34 99
97 25-29 109
107 20-24 118
117 15-19 120
121 10-14 121
121 5-9 122
124 0-4 122
Age
Source: Capgemini Analysis; Euromonitor International from National Statistics, August 2008
Connecting Rural India: The Untapped Growth Opportunity 13

14. 14

15. Global Telecoms Markets
The changing landscape of opportunity
Introduction 16
Trends in Global Markets 18
Connecting Rural India: The Untapped Growth Opportunity 15

16. Introduction
The global telecom industry has been for over 50% of all mobile subscribers
growing steadily, both in terms of in the world, while Africa and the
subscribers and revenues. By the end Americas together contribute close to
of 2007, global mobile subscribers had 40%. Going forward, Asia Pacific is
already crossed 3 billion. The current likely to be the driver of growth.
growth in subscribers is being led by
mobile operators from Asia, and in The strong growth of subscribers has
particular, India and China. These two resulted in operators witnessing a
countries have been accounting for the significant increase in their revenues
bulk of net additions of subscribers (see Figure 8). In 2008, it is estimated
following the saturation of developed that industry revenues are likely to top
markets in Western Europe, the US €1 trillion.
and Japan. Asia Pacific now accounts
Figure 7: Mobile Subscriber Base in Different Geographies, 2007, Millions
1,323
860
270 361 363
161
Russia North Latin Middle East Europe Asia Paci c
America America & Africa
Source: Capgemini Analysis; Digiworld 2008 Yearbook
16

17. Figure 8: Revenues of Major Telecom Operators in the World, FY 2008, US$ Bn
119
94 94
86
77
71 73
42 43
40
32
24
22
17
10
m
N
KT
k
DI
tel
BT
lia
ne
m
ica
m
T
s
T
on
an
NT
&
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co
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ko
KD
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co
Tel
rin
SK
mu
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ch
nc
Sp
Tel
om
uts
Fra
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De
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ri
Ve
Source: Capgemini Analysis; Cellular News, “SK Telecom, KT Freetel and LG Telecom Q2 2008 Results”, Aug 2008; Mobile Burn, “Japan’s NTT DoCoMo
begins phasing out its 2G network”, Aug 2008; Communications Direct, “Subscribers Run from Sprint while T-Mobile Meets Trend as Net Additions Fall in
Q2”, Aug 2008; Fortune, “Global 500 :2008 Rankings”, Jul 2008; Company websites
Connecting Rural India: The Untapped Growth Opportunity 17

18. Trends in Global Markets
Convergence services that were hitherto impossible major device vendors such as Nokia,
to deliver on the mobile handset. For and Sony Ericsson, have combined
One of the key areas where operators, instance, over the last few years–feature music services with their mobile
equipment vendors and value added phones with the capability to play handsets, and in doing so are directly
service providers in the industry music, take pictures and tell a user’s reaching out to consumers, thereby
are focused is the rising importance location–have become available in the bypassing the mobile operators.
of convergence and its impact on market. In ensuring that consumer Companies in the telecom, media and
consumer spending patterns. The uptake of these services is high, entertainment space are increasingly
pace at which device development players in the mobile ecosystem have coming to terms with the new found
has progressed in the last few years built multiple business models that reality that they need to extend their
has enabled the rise of a new class are creating challenges for traditional presence across the content, delivery,
of devices, and enabled a new set of service providers. For instance, today, and device value chain.
Figure 9: What is Convergence?
Convergence is both a threat and an opportunity for players
Content Delivery Device
Traditional Media Portable
 Video Mobile Media Player
 Music
 News
Handsets
Vertical Convergence
Fixed
Web Content
 Pictures Home
 Blogs Gateways
 Podcasts
Broadcast
PC/Laptop
Advertising
Pay TV TV
Horizontal Convergence
Source: Capgemini Analysis
18

19. Shift in Technologies fixed line operators around the world Mobile Operators: While fixed operators
are re-evaluating the capabilities of are gearing up to deploy fiber in order
Over the past few years, there has been their copper line network. In doing so, to deliver the next generation of content
a slow but steady shift in technologies most operators have embarked on an rich services, most mobile operators
that have been typically used for expensive, but future-proof rollout of across the developed world have
delivering fixed and mobile services. fiber networks. Operators have adopted already deployed 3G services that have
These technologies promise to bring multiple strategies in delivering these been capable of delivering most of these
a significant change in the service fiber networks, with options varying services. However, that hasn’t held back
delivery experience for consumers, and between fiber to the node, fiber to the mobile operators in deploying advanced
bring in additional service capabilities curb, fiber to the building, and the most 3.5G networks. These networks include
for operators. expensive option being Fiber To The those that operate on HSPA (High
Home (FTTH). These options differ in Speed Packet Access) such as HSDPA
Fixed Line Operators: Fixed line the extent of rollout of fiber network, (High Speed Downlink Packet Access),
operators across the world are and its distance from the consumer’s and HSUPA (High Speed Uplink Packet
increasingly realizing that their home. Operators across the world Access). Operators are utilizing HSPA
last mile copper connectivity is not have adopted differing approaches in networks in ensuring the uptake of
going to be useful to them in the deploying these networks (see Figure mobile broadband services. As per
coming years. With a rapid increase 10). For instance, while Verizon in the the GSM Association, over 200 HSPA
in multimedia rich applications, and USA is adopting a FTTH approach, networks are currently operational in
increasing usage of the Internet to rival AT&T is deploying Fiber To The over 93 countries.
deliver content-rich services such as Node (FTTN) networks.
high definition IPTV/Internet TV,
Figure 10: Status of Fiber Rollouts by Select Operators, 2002-2008
2002 2004 2006 2008
AT&T 2007: Allocates
$6.5B for GPON
and selects vendors
USA
Verizon 2004: Starts 2005: Launches
deploying ber ber-based TV
services
Orange 2006: Testing 2007: plans to
FTTH in six invest 3-4.5 billion
districts in Paris Euro on FTTH
Europe
T-Mobile 2005: Rollout of 2007: Covers 5.5
VDSL in 50 cities million households
in Germany
Hanaro 2004: Fiber to 2007: Selects
Telecom the premise Alcatel-Lucent’s
using Ethernet GPON FTTH for
IPTV and HDTV
Asia
NTT 2002: Rolls 2004: 1.2M 2007: Reaches
out FTTH subscribers 4.5M subscribers
Source: Capgemini Analysis
Connecting Rural India: The Untapped Growth Opportunity 19

20. Focus on Content: IPTV Entry of Online Players
Fixed operators around the world are Of late, multiple Internet players have
increasingly looking to offer triple- actively entered the domain of services
play packages, combining data and traditionally dominated by telcos.
voice with video services. In doing so, Spurred by the growth in online
operators are tying up with content advertising, and with an intention to
providers in delivering Internet grow their online audience, online
Protocol Television (IPTV) services. players are increasingly making an
Across the world, most of the major entry into delivering communication
operators, specifically in Europe, have services. In doing so, they aim to gain
already launched IPTV services. While an increased share of online spend.
many others across Asia and other Services delivered by online players
geographies are actively considering today include instant messaging,
following suit. Success in IPTV has mobile VoIP (Voice over Internet
largely been determined by the Protocol), and location-based services
strength of the content offering and among others. Aided by the strength
the pricing of the triple play packages. of their brands, several online players
France Telecom and Telefonica have have also launched mobile versions
successfully demonstrated the growth of their services that not only directly
possibilities of IPTV (see Figure 11). impinge on operator-provided services,
but also go a step further in interacting
directly with devices and creating new
Figure 11: IPTV Subscriber Base for business models around them. In doing
Select Operators as % of so, most online players are banking
Total Broadband Subscribers, on emerging open mobile ecosystems
(’000s, %), Q2 2008
where device players, operators and
online players have a level playing
17% ground for reaching the consumer.
Internet players have built their
business models around ad-supported
11.5% 1,389 free services. Their forays into telecom
with VoIP on IM and Wi-Fi access
576 are also guided by the same model
(see Figure 12). Recent growth in
Telefónica Orange France the online advertising market has
(IPTV launch in 2005) (IPTV launch in 2003) resurrected the online industry which
had been lying low after the burst of
the dot.com bubble in the early years
Source: Capgemini Analysis. Enders-Analysis,
“Triple-Play in France”; CSMG Triple Play whitepaper; of the decade.
Company websites
20

21. Figure 12: Online Players Initiatives in the Communication Services Space
Complexity MSN: Partnerships with
various mobile operators
High Google: Launch of Mobile Google: Bidding for FCC’s 700MHz
Email client spectrum auction
Yahoo/Nokia: Partnership Fring: Launched Mobile VoIP
to embed IM on handsets Google: Released Android platform
Yahoo: Acquisition of Dial Pad
eBay: Acquisition of Skype Mobile
MSN: Acquisition of Teleo Messaging Mobile Voice
PC-to-Phone
Advanced
WiFi/ Mobile Apps
Internet Access
Yahoo/MSN: Nimbuzz: Launched
Google
■ PC-PC Video Calls Multi-Platform mobile
■ City-wide WiFi in
PC-to-PC on IM IM
■ PC-PC Voice Calls
San Francisco
■ Investments in Fon,
Skype: Launch of
on IM Skype Mobile
a WiFi Community
Low
Time
2001-03 2004-05 2006-08
Source: Capgemini Analysis
Connecting Rural India: The Untapped Growth Opportunity 21

22. The Shift to Emerging Markets Fixed Mobile Substitution
Emerging markets today represent In recent years, voice usage has
the next growth frontier for telecom significantly moved to mobile phones,
operators around the world. With which are increasingly substituting
growth saturating in developed landline phones as the primary means
economies, most major operators are of communication. Moreover, with
today looking at developing economies the growth in mobile broadband
such as India, Africa, Latin America speeds, the utility of the fixed line
and China for driving future growth. for delivering both voice and data is
increasingly getting blurred. In most
The importance of emerging markets developed markets, mobile operators
has been underscored by the fact that are increasingly bundling fixed services
many major mobile operators have into their mobile offerings in an effort
already stepped up their presence in to boost stagnating voice revenues and
emerging markets. Interest in India reduce customer churn.
as a key market for global players was
vindicated when Vodafone acquired Across Western Europe subscribers
Hutchison India’s mobile operations are increasingly replacing their
for $9.6 Bn in 2007. Most of the other landlines for mobile phones. In Nokia’s
major operators have evinced keen homeland, Finland, this change has
interest in entering markets such as been most evident. By the end of
India and China, attracted by the 2006, 74.6% of call minutes originated
significant opportunities that they from mobile phones. In Germany as
offer (see Figure 13). well, where fixed lines have been
traditionally dominant, at the end of
2006 24.3% voice traffic originated
from mobile handsets.
Wireless substitution continues to
increase in the US as well by 3-4
percentage points per year. At the end of
2007, 16.4 percent of USA households
had abandoned their landline phone
in favor of mobile phones, but by the
end of June 2008, just 6 months later,
that number had increased to 17.1
percent (see Figure 14).
In line with this global trend, India
witnessed a fall of 3.9% in the total
number of wireline subscribers between
September 2007 and September 2008.
This figure declined from 39.58 million
to 38.35 million as of September 2008.
22

23. Figure 13: Estimated % of Revenues from Emerging Markets for Select Telecom
Operators, 2007
10% 9% 8%
8%
18% 38%
8%
4%
92%
75%
72%  APAC
 Latin America
58%
 Middle East/Africa
 Eastern Europe
 Developed Markets
FT Telefónica Vodafone T-Mobile
Source: Capgemini Analysis; Company websites; Company annual reports
Figure 14: Percentage of Mobile-Only Households in Select Countries, 2005-2007
61
47 47
38 37
32
27
25 25
23 24
20
16 15
13 13 13
7 9 8
4 3 4
0
Sweden Netherlands USA UK Poland Spain Italy Finland
 2005
 2006
 2007
Source: Capgemini Analysis; European Commission, E-Communications Household Survey, 2005-2007, AC
Nielsen, “Wireless Substitution in the United States”, Sept 2008
Connecting Rural India: The Untapped Growth Opportunity 23

24. 24

25. Indian Telecom Sector
A growth story of seismic proportions
Introduction 26
India’s Fixed Line Market 28
India’s Mobile Market 30
Future Growth Forecast 32
3G Arriving in India 32
Connecting Rural India: The Untapped Growth Opportunity 25

26. Introduction
The telecom market in India has The rapid growth in mobile services the developing countries, India’s
undergone a seismic change in the can be clearly seen in the complete attractiveness as a country for offering
last few years. With rapidly increasing change in split between wireless versus mobile services is extremely high (see
teledensity, India is set to join the league wireline connections in India between Figure 16).
of nations that have been transformed 1997 and now. Mobile operators have
by the availability of cheap, and yet managed to significantly drive home India’s rapid growth in telephony
quality, telecommunications networks. the advantages of a mobile phone as a services can be traced back to the
India’s telecom growth story has communication instrument of choice significant rise of private mobile
essentially been one of two distinct for the consumer. operators who have steadily increased
halves. The first half, which panned the addressable market through a range
out over 50 years, is the growth of the Faced with a saturating market in of innovative tariffs and extended
wireline industry; and the other half the developed countries of the world, network coverage. In doing so, the
witnessed the rapid rise of the wireless the Indian market represents one of industry on the whole has enabled
industry over the past ten years (see the last remaining pockets of growth access to communications services to
Figure 15). for global operators. Even amongst a completely new set of subscribers
who were hitherto untouched by the
telephony revolution. Consequently,
Figure 15: Number of Telephone Connections in India, FY1997-FY2008, Millions private operators have steadily increased
their control over the market and their
market share (see Figure 17).
400
350
300
250
200
150
100
50
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sep-08
 Total
 Wireless
 Wireline
Source: TRAI
Note: CAGR from March 1997 to September 2008
26

27. Figure 16: Attractiveness of the Indian Telecom Market Measured With Respect to Growth and Mobile
Penetration, June 2008
High
India
Egypt
% Growth
Brazil China
Germany
USA
Belgium
Italy
Spain
Netherlands
France
UK
Low
High % Mobile Penetration Low
Bubble thickness represents the total
number of mobile subscribers (in millions)
Source: Capgemini Analysis; TRAI. Credit Suisse European Factsheet 2008. CTIA. Various Regulator Websites
Figure 17: Market Share of Private Operators (%), 2003-September 2008
77.0%
65.3%
57.0%
47.1%
39.3%
20.9%
2003 2004 2005 2006 2007 Sep-08
Source: TRAI
Connecting Rural India: The Untapped Growth Opportunity 27

28. India’s Fixed Line Market
Figure 18: Market Share of Fixed
India’s fixed line market has historically fixed mobile substitution setting in,
Line Operators,
been dominated by the incumbent there has been negative growth in September 2008, (%)
operator Bharat Sanchar Nigam fixed line connections since 2004.
Limited (BSNL) in the entire country, However, if we were to take a look at
except for Mumbai and New Delhi the overall growth of the market in the Others
where Mahanagar Telecom Nigam past decade, fixed lines have grown 12%
Limited is the Government operator. from around 14 million to over 38.3 MTNL
9%
However, fixed line growth in India million by the end of September 2008.
has been slow due to the expensive From two fixed line operators in the
nature of last mile rollouts. Growth past, the Indian market has grown to BSNL
79%
of fixed lines has been steady over the accommodate five new entrants in the
years until around 2004. Thereafter, recent years. BSNL continues to have
the strong growth of mobile telephony the lion’s share of the market in fixed
has meant most new consumers to lines (see Figure 18).
the telecom market preferred to opt
for a mobile connection rather than Source: TRAI
a fixed line connection. In fact, with
28

29. Connecting Rural India: The Untapped Growth Opportunity 29

30. India’s Mobile Market
The mobile telephony market in India and consequently, a prepaid connection Call rates for voice calls in India are
has paved the path for the strong appeared more attractive. Operators have among the lowest when compared to
rise in teledensity that India is also strived to innovate by introducing other emerging telecom markets. As
currently experiencing. From a mere offers such as prepaid with lifetime a result of a series of regulatory and
0.3 million subscribers in 1997, the validity at low costs. Such initiatives competitive developments, call rates,
market has grown to over 315 million have ensured that prepaid has become when compared to cost of living, are
subscribers at the end of September the preferred mode of connection for quite low in India (see Figure 21).
2008. India today has the world’s most Indian subscribers.
second largest wireless subscriber base
after China. The rapid rise in India’s
mobile market can be attributed to a
host of factors, but most importantly Figure 19: Minutes of Usage (MoU) and Average Revenue Per User (ARPU) per
to the regulatory action of opening month, June 2007, minutes, US$
up the market to private operators.
Operators and equipment vendors High
have also contributed to the rapid rise
through innovative tariff structures
and attractively priced handsets. The
interesting part about India’s rapid US
growth in mobile telephony is the (812, 52.5)
fact that this growth has come in a
Minutes of Usage
market where Average Revenue Per India (448, 8.6)
User (ARPU) is the absolute lowest
China (420, 10.8)
in the world, and Minutes of Usage
(MoU) among the highest in the world Developed
Europe
(see Figure 19). Russia Brazil (89, 17.2)
(116, 10) Japan
(161, 38) (138, 52.4)
Growth of India’s mobile market has been
led by the prepaid segment. Operators
have constantly focused on reducing
the entry barriers towards owning a
mobile connection, and in the process,
Low
this has skewed the ratio of the prepaid
to postpaid subscriber mix (see Figure Low ARPU High
20). Additionally, Indian middle class
consumers have traditionally preferred Source: Capgemini Analysis; Fitch Global Wireless Review 2008. Various Broker Reports
to have control over their monthly
expenditure on mobile communications,
30

31. Figure 20: Subscriber Split by Payment Mode, FY 04- H1 08, Millions
Proportion
of Prepaid 78% 74% 80% 87% 92%
Subscribers
271
22
165
21  Prepaid
249 Subscribers
99  Postpaid
Subscribers
20
57 144
36 15
79
9
42
27
FY2004 FY2005 FY2006 FY2007 1H2008
Source: TRAI
Figure 21: Revenue Per Minute, December 2007, US$
0.23
0.22
Mobile Tariffs in India
are Globally the Lowest
0.19
0.17
0.16
0.11 0.11 0.11
0.09
0.05 0.05
0.04
0.03
0.01
nd
n
m
ly
UK
e
s
an
a
a
g
ina
ia
zil
ta
ine
nc
tin
asi
on
Ita
Ind
lgiu
Bra
aila
w
kis
Ch
Fra
en
gK
lay
p
Tai
ilip
Be
Pa
Th
Arg
Ma
n
Ph
Ho
Source: Department of Telecommunications
Connecting Rural India: The Untapped Growth Opportunity 31

32. Future Growth Forecast
The Indian mobile market has been multiple forecasts of the Indian
growing at an extremely strong market, in terms of future mobile
pace over the past few months. In subscriber growth. The Government
March 2008, net additions topped of India has kept a target of reaching
10.37 million subscribers, which is 650 million subscribers for mobile and
considered to be the highest ever fixed telephony by 2012.
additions by any country in 30 days.
As recently as September 2008, India The fixed line subscriber base in India
added over 10.07 million mobile is likely to remain stagnant, with
subscribers indicating that the pace falling net additions. Fixed operators
of growth has not slowed. However, are looking to make attractive bundled
it has to be noted that growth in offers by offering triple-play services.
urban India is fast reaching saturation. With the Government of India recently
In most metros, mobile penetration issuing the guidelines for IPTV
today stands at over 80%. Future services, fixed operators are looking to
growth will have to come from the expand their share of the household
significantly under-penetrated rural spend on voice, data and video.
markets of India. There have been
3G Arriving in India
The 3G spectrum auction process successful in the 3G spectrum auction,
opens the door for a whole new set are likely to use the spectrum to
of entrants into the Indian mobile reduce their network congestion while
space. Operators who have missed simultaneously launching rich data
out on the voice-led growth in the services with which they can migrate
past few years are keen to capitalize their high ARPU users.
on this opportunity and launch
services targeted at capturing the Similarly, the regulator has recently
strong potential of data services that made public the recommendations
3G services offer. The Government, for allowing Mobile Virtual Network
through a set of initiatives, has enabled Operators (MVNOs) in India. Once
foreign telcos to participate in the MVNOs are allowed to operate in
auction process. The entry of players India, targeted mobile service launches
through the 3G route injects a new by niche players in banking, retail and
competitive dimension into the Indian other sectors are likely to receive a
telecom market. In the search for new boost. Moreover, the MVNO route is
subscribers, this move is likely to also likely to be adopted by some of
galvanize competition and expand the international telecom operators
network coverage into the hinterlands that have thus far stayed away from
of the country. Existing operators, if the Indian market.
32

33. Connecting Rural India: The Untapped Growth Opportunity 33

34. 34

35. Telecommunications
for Rural India
Rural reach: The next phase
Fixed Line Telephony in Rural India 36
Growth of Mobile Telephony in Rural India 36
Key Barriers Towards Development of Telecom
Services in Rural India 38
Stakeholder Initiatives to increase Growth of
Telecom in Rural India 39
Success Stories in Rural Telecom 44
Potential for Telecom Services in Bridging
Economic Divide 46
Connecting Rural India: The Untapped Growth Opportunity 35

36. Fixed Line Telephony in Rural India
India’s rapid growth in mobile subscribers has been quite lop-sided. While urban
subscribers have been growing significantly year-on-year, similar growth has not
been seen on the rural front. The divide between urban and rural teledensity has
been rapidly widening, and it is in recent years that all the stakeholders involved
in the telecom industry have realised the significant growth opportunity that the
rural markets offer. While urban teledensity has touched nearly 75%, rural
teledensity is around 13%. In fact, in most of the major cities in India, teledensity
has crossed over 90% (see Figure 22).
Growth in the rural telecom market has historically been driven by fixed line
deployments that were undertaken by the incumbent operator, BSNL. However,
with the rapid network deployments undertaken by some of the private mobile
operators, there appears to be a clear fixed mobile substitution scenario happening
in the rural markets (see Figure 23).
Growth of Mobile Telephony in Rural India
Growth in teledensity in rural India has been led by a strong uptake of mobile
telephony services. Falling entry barriers, led by lower handset and per-minute
calling costs, have ensured a rapid uptake of mobile telephony in rural India.
Today, the mobile phone has become the first communication device for many
rural subscribers who are skipping the traditional step of a fixed connection.
The Indian rural markets offer significant opportunities for telecom operators.
Considering that over 70% of India’s population is resident in rural and semi-
urban India, these markets offer an extremely strong potential for growth. While
average income levels might be significantly low in comparison to urban markets,
these rural markets offer significant potential for profitable growth, as has been
demonstrated by operators such as Grameen Phone and others across the world.
Today, operators who have made early moves into the rural markets of India are
reaping the fruits of their investments, and are looking eagerly forward to the next
phase of growth when these markets take the lead that has hitherto been with
urban India.
36

37. Figure 22: in India, 2004-Sep 2008, Phones per 100 people
80
O
70
60
U
50 R
40
30
20
10
0
2004 2005 2006 2007 Mar-08 Jun-08 Sep-08
 Urban
 Overall
 Rural
Source: Department of Telecommunications
Figure 23: Rural Wireline Market in India, June 2007 - March 2008, Million
12.27 12.04 11.94 11.63 11.36
Jun-07 Sep-07 Oct-07 Mar-08 Jun-08
Source: Department of Telecommunications
Connecting Rural India: The Untapped Growth Opportunity 37

38. Key Barriers Towards Development of Telecom Services
in Rural India
Telecom growth in rural India has been Network Coverage percolate down to the local retailer. In
constrained by multiple factors, some doing so, operators end up in a strong
financial and some technological: One of the most significant barriers for battle for acquiring influential local
mobile network operators’ expansion entrepreneurs.
plans in India has been the large
investments that rollouts in rural areas Low Population Density
entail. With the average cost of setting
up a base transceiver station crossing Population in rural India is spread
Rs.5 million, most operators have not unevenly (see Figure 24). There are
been willing to expand their network pockets where population density is
coverage beyond urban and semi- below 100 people per square km,
urban areas. and there are areas where the density
exceeds 650. Given these wide
Distribution variations, it becomes imperative for
operators to pick and choose the most
Lack of organized retail beyond major optimal location for their operations
cities and towns in India is acting as a in a given region. In doing so, they
significant constraint in the expansion also have to contend with the socio-
plans of major mobile operators. Most economic realities of the regions,
operators have to build their own which tend to be quite different even
exclusive distribution systems that amongst contiguous areas.
Figure 24: Distribution of Population in Rural Indian Villages, 2001, ‘000s
155 159
126
114
69
12
3
Less than 200-499 500-999 1000-1999 2000-4999 5000-9999 10,000 &
200 People People People People People People Above People
 Number of villages
Source: Capgemini Analysis; Census 2001
38

39. Stakeholder Initiatives to Increase Growth of Telecom
in Rural India
Stakeholders in the Indian telecom Initiatives by the Government to rural rollouts. Keeping this in mind,
industry have recognized the existence of India the DoT has also announced rollout of
of these barriers, and are now taking phase II of its mobile expansion plans
active steps to eliminate them. Abolition of Access Deficit Charge in rural areas. In Phase I, around 7,871
In March 2008, TRAI abolished towers are being set up in 500 districts
the access deficit charge which was spread over 27 states. Rollout of phase
being paid by private operators to II of this program will ensure spread
the incumbent for providing service of mobile telephony to all villages with
to rural areas. Operators have over 500 people. Future phases are
committed to pass on the savings likely to provide over 10,000 towers in
accrued from the ADC to the rural the unconnected areas of rural India.
areas in expanding coverage.
In encouraging operators to invest more
Rural infrastructure funding in the rural areas, the Government
from USOF has also waived license fee for rural
The Universal Service Obligation Fund telephony (wireline) and similarly, have
(USOF) was started by the Government decided to reduce the USO fee from
of India in April 2002. As per the 5% to 3% for existing operators that
guidelines issued, all telecom service have over 95% coverage compliance in
providers had to contribute 5% of their license areas.
their Aggregate Gross Revenues (AGR)
towards the USOF. This fund is to be Setting up of Telecom Export
used in delivering telecom services Promotion Council
in the rural areas of India where In order to give a boost to the fast
teledensity was quite low. However, growing telecom equipment sector in
disbursements from the USOF have India, the Government, in April 2008,
been low, leading to a large amount announced the setting up of a telecom
of unutilized funds. By end of FY 08, export promotion council. Along with
the unutilized fund pool has grown to the launch, the Government has also
over Rs.14,000 crore. set a target of achieving US$10 billion
in telecom equipment exports by
The Department of Telecommunications 2012. The export promotion council
(DoT) has been taking multiple steps and renewed focus on manufacturing
in ensuring the appropriate and timely exports is likely to give a boost to
utilization of these funds. In order to domestic telecom manufacturers.
achieve this goal, the DoT announced
in June 2008, that operators were
free to draw funds from the USOF
for setting up infrastructure in rural
areas. Similarly, earlier in April 2008,
the DoT allowed telcos to jointly bid
for support from the USOF. These
initiatives are likely to give an impetus
Connecting Rural India: The Untapped Growth Opportunity 39