Despite growth takeoff, 3G penetration is merely 7-10% of the existing mobile subscriber base in India. One key deterrent to a broad based data adoption has been expensive 3G handsets. With the launch of Android One the USD 100 handset segment has seen more depth. With the availability of low-cost 3G smartphones, existing subscribers are unlikely to continue using 2G feature phones, opting instead to make the switch to 3G smartphones; in this respect, the trends over the last six months have been very encouraging. We believe the trend will now change in favour of low cost smartphones versus feature phones.
Furthermore 3G coverage is expected to improve; more so as incumbent telcos gear up to contest 4G launch by Reliance Jio. Given this first positive outcome will be improvement in data penetration. We estimate data penetration to improve; some early signs of this should become visible in the next 3-6 months. In the medium term, there will be a need for pure 3G towers, more spectrum and fibre backhaul. This, in our view, will imply that the data opportunity will be skewed toward market leaders.
We expect data rates to decline going forward particularly on the 3G side. On the other hand for 2G data rates we see there is room for some more upside, possibly another 10-15%. We note that the rate of decline in 3G data tariffs will be determined by timing of 4G launch by 4G new entrants.
3G Vs 4G in India – Tug of War
Based purely on technological factors, operators would prefer 4G over 3G, given that 4G is superior from the perspective of spectral efficiency and equipment cost (as the routers required to be installed are more standardized in nature given the IP-based technology). However having already invested in 3G (5MHz spectrum plus network), migrating to 4G is not such an easy decision to make. If telcos can add more spectrum in a single technology, they benefit from trunking efficiencies (spectral efficiency gains /throughput gains increase disproportionately with increase in every MHZ of spectrum). Having already made network and spectrum investments in 3G, telcos are likely to stock with 3G if they acquire additional data spectrum for this reason. Other considerations are the spectrum and handset ecosystem. Furthermore, 4G LTE comes with share of its hurdles like the 4G handset ecosystem remains highly priced and thus not suitable for India’s low income, price sensitive mass market. In both these respects, 3G scores better than 4G at present as well.
All told, we expect India to continue to be a 3G centric market for another 2-3 years at least. That said we do expect that the top 25-50 cities have potential for an early 4G-LTE launch combined with FTTH services.