Number One Mobile Cellular Market of the world

With 6.8 million new subscribers a month in November alone, India recently surpassed China as the fastest-growing cell phone market in the world. India still lags behind China in total subscribers, with a mere 143 million compared with China's 449 million. But that's almost double the 75 million amassed a year ago -- and India is closing the gap with rival China fast. India has set an ambitious goal of reaching 500 million subscribers by 2010.
For many who celebrate the emergence of India as a global economic power, the rapid spread of cell phones is a much more important development than "high tech" India. While the high tech off-shoring industry is the province of the elites, the spread of cell phones has been remarkably democratic and is allowing taxi drivers, farmers and fishermen to participate directly in India's economic boom.
The explosion of the cellular industry in India also shows what happens when government gets out of the way. At the turn of the millennium, it took months, sometimes years, to get a phone in India. Shaky infrastructure and stifling bureaucracy meant that telephone penetration had barely hit 2% -- one of the lowest phone penetration rates in the world. Then, in 1999, government reforms rationalized phone tariffs and allowed competition from private-sector telecom companies.
The results have been nothing short of astounding. Fierce competition among mobile phone operators have driven down rates to 7-8% of their former levels. Indian firms today offer the cheapest mobile services in the world, with outgoing calls for as little as a penny a minute. The cost of mobile phone handsets also has fallen to as little as $35, as manufacturers such as LG, Ericsson and Nokia opened factories in India. Today you can buy a second hand phone in New Delhi for $15 or less. A small businessman in Mumbai (Bombay) or Kolkatta (Calcutta) now can have a mobile phone in his hand in a matter of a couple of days. Mobile networks now cover 38% of the population and coverage is expected to increase to 50% by the end of 2007. Overall, phone penetration has jumped to 16.6% for India as a whole, and up to 50% in larger cities.
The Indian Cellular Market: The Challenges
Not surprisingly, Indian cell phone operators are thriving. Industry leaders like Reliance Communications and Bharti's Airtel are earning a pre-tax profit margin of around 40%. Those margins have a lot to do with clever business models. Bharti has outsourced most of its operations to global giants IBM, Ericsson and Nokia. It spends nothing on research and development -- focusing instead on marketing and customer management.
Yet, India represents a unique set of challenges. Overall wireless revenue may continue to grow as the market grows by leaps and bounds, but average revenue per user is falling -- 11% alone in the quarter that ended in September. As a result, cell phone players are being forced to focus on expanding to broadband Internet, commercial phone networks and telecom infrastructure. Bharti Airtel, Reliance Communications and BSNL are already diversified telecom businesses set to take advantage of these opportunities.
The biggest challenge is financing the industry's breathtaking rate of expansion. Cell phone penetration is 40-50% in cities but hovers at a pitiful 2-3% in villages. Clearly, the future lies in India's rural areas, where about 70% of India's 1.1 billion population lives. Consider the case of Uttar Pradesh (UP) -- an area in India with a population 170 million -- about 60% the size of the U.S. As an independent nation, it would be the sixth-biggest in the world -- and include a whopping 8% of the world's poor. Here cell phone operators face the hurdle of setting up infrastructure to reach villages that barely have electricity -- let alone selling to villagers who have little purchasing power to own and to operate a cell phone.
Indian Cellular Phone Market: You've Gotta Pay to Play
With India now the fastest-growing market in the world, it is little wonder that the auction for Hutchison Telecom's 67% stake in India's fourth-biggest operator, Hutchison Essar, is making headlines. Interest from India's number two operator Reliance, the U.K.'s Vodafone, the minority shareholder Essar, as well as private equity bidders, are turning the auction into a feeding frenzy.
Vodafone appears to have gained the upper hand by offering a bid that values the company at about $19 billion. That's a rich valuation. The book value of the Indian unit's assets in Hutchison telecom's 2005 accounts -- including goodwill -- is less than $3 billion. As recently as June, Hutchison Telecom bought out a 5% shareholder at a valuation of $10 billion.
India's low penetration and exceptional size demands a premium. But to justify its bid of $19 billion, the number crunchers at Vodafone will have to assume huge market share gains, massive rises in average revenue per user, and earnings before interest, tax, depreciation growth of more than 40% in the long term.
And not all emerging market cell phone deals are a slam dunk. Spain's Telefónica struggled in Mexico. Others faced collapsing margins in Brazil. The Indian market is highly competitive. Monthly revenues are almost one-third of Chinese rates and operators' pricing power will fall as they move into rural areas.
The best news is that, after decades of stifling progress, the Indian government is doing the right thing. Recently, the Indian government agreed to free up radio spectrum now used for military and satellite communications for advanced 3G cell phone services sooner than originally expected. The government's motivation? A desire to launch 3G before China does. There's nothing quite like competition to spur progress.
by Investment advisor
Nicholas A. Vardy