Telecom firms’ dependence on alternative energies will increase when it expands to low-income rural areas
The dynamics of how industries work and their interactions with other industries can be fascinating and sometimes, surprising insights arise. For example, mobile telecom services is a high growth industry that’s likely to maintain momentum over the next several years.
As of now, there are roughly 650 million active mobile subscriptions across India (many users have multiple SIMs) and each month sees another 15-18 million new subscribers. By 2014, there will be over 1 billion subscribers. In addition, 3G services are being launched over the next 6-12 months, which means a potential jump in the share of high-end data and entertainment services to supplement voice. Number portability will add to the churn.
Telecom is characterised by massive capital expenditures. It makes sense to build maximum capacity at one go. First, there are licensing fees and then, there are equipment costs, tower costs, marketing and so on associated with network rollouts. Even where capex is lowered by sharing passive infrastructure such as towers, rollouts are always expensive.
A running network tends to see flattening variable expenses and more or less stable overheads. Regardless of subscriber base, engineers and technicians have to perform operational and maintenance tasks.
Revenue obviously depends on the number of subscribers and the average revenues per user (ARPU). Most operators have extremely low blended ARPU (“blended” = a weighted average of pre-paid and post-paid ARPUs).
Blended ARPU has been dropping steadily, quarter on quarter, even as the subscription base rises. This is partly due to inevitable price wars in a very competitive market with a dozen operators fighting for market share. It is also the result of network expansions into low-income rural areas.
The vast majority of subscriptions are pre-paid and in many cases, pre-paid ARPU is double-digits. The need to raise ARPU by creating more revenue streams is obvious and it was one key driver behind the frantic 3G bidding. Every operator would like to offer high-speed mobile internet access and services like TV on mobile.
Due to security reasons, a telecom operator has about as stringent know-your-customer (KYC) norms as banks. So mobile operators have been looking at ways to tie up with the financial industry to offer means of rapid cash transfers and other mobile banking services as well as other bundled services.
One operational expense has been rising and that head now accounts for a third or even more of operating expenses for telecom operators. This is the energy cost incurred in ensuring uninterrupted power supply. In many rural areas, grid power is unreliable or non-existent, and operators have to make alternate arrangements to keep their networks functional through long power cuts.
Ad hoc arrangements involving diesel gensets are convenient, but expensive as well as polluting. There are around 330,000 cell-phone towers in operation across India and it's estimated that (in addition to normal grid power), they consumed around 2.5 billion litres of diesel in the past fiscal.
The next set of rollouts will increase both the number of towers and the consequent diesel consumption. The environmental cost is considerable - each litre of diesel contributes around 2.6 Kg of CO2 emissions. Telecom is therefore under the gun, in terms of fossil fuel dependencies, and sooner or later, it will face pressure on environmental grounds.
The industry obviously has a very strong business case for going green and finding alternative energy sources that can help reduce its dependence on diesel. Various operators and tower operators have been launching pilot solar and wind powered projects and also experimenting with bio fuels. They have also been investing in smart energy management solutions and more energy efficient equipment. While all these technologies and solutions are relatively more expensive in terms of initial investments, expenses tend to reduce as economies of scale come into play. Certainly the telecom industry offers the kind of opportunity where scaling up shouldn’t be an issue. In a hyper-competitive environment, any cut in energy costs could become a key variable, especially if crude costs spike up as they will, at some stage.
The interplay between the alternative energy industry and the telecom industry is worth keeping an eye on. There may be worthwhile investment options there sometime, even though there are no major listed players at the moment.
In the next 12-18 months, the less successful players will be pushed to the edge of bankruptcy and therefore, we could see a lot of action on the mergers and acquisition front. Balance sheets are likely to be confused and messy with future profitability extremely difficult to judge.
