2G to 4G: Will Indian telecom revolution give 3G a miss?

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Moneycontrol BureauAfter creating a telecom revolution over the past decade, India may leapfrog from existing 2G technologies by directly hopping on to the 4G bandwagon, giving 3G adoption a miss, a report by JPMorgan has said.Analysts at the firm base this projection from similar experiences in other countries where launch of 4G services have witnessed drying up of subscriber additions to 3G, falling prices of 4G-enabled handsets, demographics/profile of data-hungry Indians as well as less-than satisfactory data experience on existing 3G technologies.Adoption of 3G services has been slow in India yet, with only 5 percent of total mobile subscribers progressing on to the technology. This compares to double-digit penetration in other emerging economies such as Brazil (20 percent) and even higher for developed countries such as US and Japan.This has prompted concerns whether Indian subscribers will adopt 4G in any meaningful way. But analysts at JPMorgan wrote in a report that the markets may be overlooking the “evolution of the Indian telecom industry towards 4G” and the associated financial implications for stocks.The four-point explanation is this.The international perspectiveSouth Korean operators launched 4G in the fourth quarter of 2011 and its 3G net subs additions turned negative starting from second quarter 2012. “At the end of first quarter 2013, after five-six quarters of launch, total 4G subs were much ahead of total 3G subs (about 35 percent more than 3G subs). Also, the 4G net additions are consistently higher than decline in 3G subs -- subscribers shifted directly from 2G to 4G skipping 3G,” analysts wrote.A similar experience was seen in Japan and China.The behavioural perspectiveIf companies are able to launch 4G serves which deliver superior data experience (say five times faster than 3G) while being priced slightly higher, will it not achieve an attractive price-value equation? Analysts asked, while admitting that ultimately the data experience will also depend on the operator in question.How will 4G succeed when 3G has failed? JPMorgan wrote that the failure of mass adoption in 3G was partially a result on users perceiving that the 3G experience was not a significant improvement in experience over 2G as a result of lack of operator investments in technology and also because early on, 3G handset affordability was a concern (which is now no longer becoming an issue).“Channel checks in China suggest that price points for 4G-enabled handsets have come down steeply. Tri-mode handsets are already available at about USD65 (RMB400 or INR4,000), while quad mode and penta-mode (five-mode) devices are available at about USD 160 (RMB1,000 or INR10,000),” JPMorgan wrote.Is the market for data big?Finally, analysts suggest that the concern about low data use (on average, the Indian subscriber uses 85 MB data per month on 2G and 350 MB on 3G) may be confusing cause and effect.That is, “once better quality data is available at much higher speeds, there is no reason why for example, YouTube user count and usage (interestingly Facebook, for which India has second largest subscriber base, also drives traffic to Youtube through video sharing) cannot increase significantly,” they asked.The report does not focus per se on the strategy of to-be-launched Reliance Jio, owned by Reliance Industries, but says the company, which has a pan-India licence to offer 4G services, may “provide the trigger/impetus for the non-linear migration” from 2G to 4G. Airtel is also another player with large 4G plans.The other viewOthers have their concerns about whether 4G could disrupt the traditional telco business model.“India is a voice-centric market, with 85 percent of sector revenue being voice. As a result, a new entrant with no viable low-cost voice strategy may struggle to get subscriber traction as a pure data approach has struggled globally,” analysts at HSBC wrote.They pointed to the fact that long-term evolution (LTE) technology can only be used to offer data services, and even in developed markets such as US, the voice-over-LTE technology that 4G operators have rolled out (which involves making voice calls using data, similar to applications such as Skype) is too recent to be judged a success.“RJio has the alternative to sign 2G roaming agreements with any of the incumbent operators (such as RCom) for voice services. Though there are no indications of any such agreement currently, we expect RJio’s strategy to evolve over time,” JPMorgan analysts wrote. "How RJio will provide voice services in the absence of legacy 2G/3G services remains the most critical and ‘make-or-break’ question."“We think if RJio gets its initial service right at the appropriate price-value equation, it could provide the ‘nudge’ towards 4G investments in the sector. Thus, we do not see any reason why 4G cannot surpass 3G in terms of subscriber count/revenues within 3 years of its launch,” they added.

(Disclosure: Reliance Industries has acquired management control of Network18, which publishes Moneycontrol.com)