rural market in india- a case study

8/7/2019 Rural Market in India- A Case study

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Case study- Rural Telecom focus of BMS

Background

High growth sector

In the global recession that is encompassing the world since 2008, there are two economiesthat seem to have been the least affected, India and China. In both, we have witnessedphenomenal increase in the telecom and healthcare sectors. In India, recession has not evenbothered the telecom operators and more global operators like Etisalat, Telenor, Docomo,Vodaphone are entering India and are vying for a revenue pie in India.

In Dec,2010 there are 60 telephones for every 100 people, as against 7 telephones for every100 in 2003. Yet the concern is a vast disparity between the penetration levels in urban andrural India. In cities there are more telephone than the population but the rural tele-density isnear 25 per cent.

The next billion mobile phone users would come from villages of India

The problem: High OPEX

Going into rural areas is indeed an expensive affair compared to offering services in metros,accessible cities and towns, which is why almost one half of the country still does not have acellular signal.

Figure 1 Typical expenses for a mobile site

The figures are only national average figures for a Tier-1 Operator. The Power & Fuel chargesfor a rural deployment are bound to be higher.

High OPEX is killing the balance sheets of telecom operators (See Annexure 2). The factor thatcontributes high OPEX are;

7%

14%

28%32%

0.4%

18%

Interconnect,PSTN Rentals &

Leased Line

Rent

Repairs and Maintainence

Power and Fuel

Insurance

Others



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Unreliable or No Grid Power, some sites entirely run on DG sets

High Lease line cost for backhaul

High Fuel Cost & Fuel transportation Cost, pilferage

High Repair & Maintenance Cost

Poor Accessibility of Rural /Remote Areas. This increases the time to address the faults

ARPU or Average Revenue Per User has become a major performance benchmark for telecom companies world over, and is dropping year-on-year. It is obviously less in therural areas.

³The overall opex for RCOM in 2008-09 is approximately Rs 3,000 crore. Out of this theexpenses for power (commercial supply) is Rs 616 crore and for diesel it is Rs 741 crore,´ saysHarish Jere, GM, Infrastructure Planning & Operations, Reliance Communications. He further adds ³Northern and northeastern parts of India have been the regions where RelianceCommunications had to spend more for power management. This is primarily because of

inaccessible terrain, rough weather conditions and less market. The maximum amount is spentin states of Bihar, Uttar Pradesh, Madhya Pradesh and Maharashtra where the availability of power is low. We spend nearly 70% more than a normal state. The current figure of stateelectricity board power availability on pan India is 16-17 hours per day and the diesel generator (DG) running is nearly 4-5 hours per day. In states mentioned above the DG running is nearly14-15 hours´.

Each of the existing 3.4 Lacs sites and 1.2 lacs upcoming sites are typically backed by a 15-25KVA or 40 KVA diesel generators. If a typical 15 KVA diesel generators consumes over 2.5 ltr of diesel every hour. Going by this basic statistics, Indian telecom towers consume diesel worth Rs17.5 mn, assuming the average price of diesel is Rs 35. This means a minimum of 5.2 mn kg of CO2 is emitted into the environment per day. Transporting diesel to the BTS site and theft of diesel, common in rural areas, add to the woes of telecom operators.

Strategies of Operators and IP

Uninor, which is a joint venture between Norway¶s Telenor and India¶s Unitech, came out withan innovative tariff plan to attract subscribers. Uninor has introduced the dynamic pricing wherecustomers would be offered 5-60% discount based on traffic on the network which is a functionof Time and Location. This plan is called ¶24X7 Badalta Plan¶. The traffic would be function of location and time at which they call. The capacity utilization is low in rural areas. The dynamicpricing of Uninor would offer higher discount in rural areas and lower discount in urban areas.This would not only help fill up the rural network but also help Uninor differentiate itself fromother operators in the lucrative rural market.

Idea Cellular, Ericsson and the GSMA's Development Fund teamed up to develop bio-fuels as apower source. In a pilot project, bio-fuels were used to power mobile base stations located inLatur, Maharashtra, where main electricity is highly unreliable. Idea also started poweringapproximately 350 base stations in Andhra Pradesh with waste cooking oil. These base stationswere made to run on 80:20 blend of diesel fuel and non-edible oil.

Talking about the Green initiatives adopted by GTL Infrastructure, Prakash Ranjalkar, COO,GTL says, ³We are investing our resources in innovative practices and solutions to minimize theconsumption of energy. Various technical solutions that are being tested for energy



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management on the demand side include: identification of energy efficient air conditioningsystem with high EER (Energy Efficiency Ratio); free cooling/emergency free cooling concept of air conditioning systems to utilize cool ambient temperatures for reducing compressor running;wide input voltage range SMPS better efficiency even at lower input voltages; fuel optimizer method of operating DG, interleaved with battery back up; and usage of energy star ratedproducts. GTL Infrastructure has also created a dedicated National Network Operations for

online monitoring of site parameters, which will bring in operational efficiencies.´

The ultimate need: BOP

Of the 6 billion people world over, 5 billion are in the Bottom or the middle of the Pyramid. If youtry to reach out this BOP, the margins and revenue per sell is low but volume would be veryhigh. Five Rupee Glucose biscuits and one Rupee shampoo pouches are examples on howcompanies try to reach the BOP.

Rural India is a different market segment that needs a tailor made solution.

The segment is different as the needs are different,

y Rural India gives a preference to a torch light feature in a mobile as compared to Internetsurfing

y They are more concerned about cost of mobile than the quality of coveragey Getting help during medical emergencies is their main concern (Refer Annexure 2)

Regulatory and government environment

USOF

Usof.gov.in states ³Apart from the higher capital cost of providing telecom services in rural andremote areas, these areas also generate lower revenue due to lower population density, lowincome and lack of commercial activity. Thus normal market forces alone would not direct thetelecom sector to adequately serve backward and rural areas.

The New Telecom Policy - 1999 (NTP¶99) provided that the resources for meeting the UniversalService Obligation (USO) would be raised through a µUniversal Access Levy (UAL)¶, whichwould be a percentage of the revenue earned by the operators under various licenses.´ USOFadministration;

y Monitors the implementation of USOF projects and to disburses subsidyy Designs the bidding process to disburse the USOF and carry out tendering focused on

rural projectsy Enters into implementation agreements with Telecom Service Providers (TSPs) for

rendering services to rural areas

The scope of USOF includes;

y Providing Village Public Telephones (VPT) to all villages with population of 2000 andabove

y Creation of Infrastructure for provision of Mobile Services in Rural and Remote Areas.



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y Provision of Broadband Connectivity to rural & remote areas in a phased manner (RuralPublic Service Terminals)

y Induction of new technological developments in the telecom sector in Rural and Remote Areas, like Solar powered BTS and Solar based mobile chargers

Having said that USOF exists does not mean villages would start having phones, the apathy

and the government machinery like administration did not yield the results. 60% of the moneythat telecom consumers pay for creation of rural telephony infrastructure is lying unused inGovernment coffers. Of the Rs 10,753 crore collected by the Government since its inception in2002-03, Rs 7,000 crore is yet to be disbursed. The Government charges 5 per cent of thetelecom operator's annual revenues from telephone usage towards the USO fund.

In past, money from the USO fund was given to a consortium of three operators and oneInfrastructure provider (IP1) or ³tower and power´ companies based on a bidding process.Nearly 8,000 towers were erected in the first phase. The towers and power (Diesel Gen setsand grid supply wherever applicable) were to be shared by four operators. TTL rolled out 1500+sites and RCOM rolled out 2000+ sites. After a while RCOM did not even get revenueequivalent to the monthly rentals and the fuel charges and pulled out from most the sites stating

the reason of high OPEX.

As in July,2010 India had only around 9 million broadband connections, compared with 611million mobile connections. Indian Government owned telecom operator BSNL is launchingbroadband services targeting rural areas, with considerably cheaper monthly rental planscompared to urban areas. What is a bigger entry barrier for villagers is ± Rs. 20,000 for a PC,and BSNL and USOF has not yet made any tie up with PC manufacturers for reducing this entrybarrier.

Carbon credits

³Nothing moves the world like money does´ and could Telecom Operators be an exception tothis?

Carbon Credits allows the entities to reduce the GHG (Green House Gases) emissions they areresponsible for, by offsetting, reducing or displacing the GHG in another place, typically where itis more economical to do so. India¶s carbon market is growing faster than even informationtechnology, bio technology and BPO sectors as 850 projects with a huge investment of Rs650,000 million are in pipeline. Clean Development Mechanism (CDM) provides a soundbusiness case for Telcos to generate and sell Certified Emission Reduction (CER) credit, whichis a trading unit for carbon credits. CDM is an arrangement under the Kyoto Protocol that allowsdeveloped countries to invest in emission-reducing projects in developing countries, as the costof cutting one unit of carbon emission is much more in developed countries. Reduction of onetonne of carbon dioxide (CO2, CO, NO, SO2) is equivalent to one CER unit, and CER tradingprice ranges from ¼8 to 10 (INR 650) for early stage projects to ¼17 (INR 1115) for issued units.

Following is reported from the Indian subcontinent:

y Gujarat Fluorochemicals (GFL) makes upwards of $21 million (Rs 88.2 crore) a year in2008. In 2009, 64 per cent of CERs issued in India were for hydro-fluoro-carbon (HFC)reduction projects, mainly in refrigerant-producing factories.

y Grasim Industries registered gains of Rs 17 crore



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y Jindal Group made Rs 112 crore through its CDM

y GMR sold CER of Rs 3 crore from its BioGas plant to a global investment bank in 2007

y 18 million CERs have been issued to India by the CDM executive board under theUNFCCC (United Nations Framework Convention on Climate Change). At an average

market price of $13 per CER (Total Rs 959.4 crore)

y India has 282 CDM projects registered with UNFCCC, there are 75 companies that areon the list of µCarbon Credit Seller- India¶, including DLF, Reliance Energy, Gujrat StateElectricity, Mawana and Dwarikesh Sugars, Tata Steel, Tamilnadu News papers. Thesector are renewable energy, energy efficiency and biomass\Solar and Wind energyprojects

Crisil survey reported that, Indian projects are estimated to receive 246 million CERs byDecember 2012, a three-fold rise from 72 million in November 2009. This will cement India'ssecond position in the global CER market, after the leader China.

In May, 2010 UN under the CDM has given clearance to Bureau of Energy Efficiency for the

world¶s grandest carbon credit project that would replace 400 million incandescent bulbs withCFLs. The project which will help prevent 40 million tonnes of carbon from entering theatmosphere. The subsidy, will allow the government, investors and CFL manufacturers to sellCFLs at Rs 15 each, instead of the Rs 100 they currently cost on average. Several states andcities have been ready to take advantage of the scheme the moment it becomes operational.Kerala is one such state. It has already found investors and tied up with manufacturers todistribute roughly 1.5 crore bulbs in the state. In anticipation of the project clearance, it hasbegun distribution of the energy saving bulbs to consumers.

So here is how and why CER trade finds its way into the business plan of corporate.

y Polluting industries are fined ¼40 ($54) in the first phase and ¼100 ($136) in the second-

per excess metric ton emitted

y Polluting industries that create CO2 emissions must either reduce emissions or buyCER. Telco that generate CER in India can trade them with polluting companies thatexists anywhere in the world

y Telco or any other Company that wants to trade CER have to first register their CDMprojects with UNFCCC and earn CER and this might be through projects that areotherwise financially unviable

y Polluting industry can buy CER directly or through exchanges like PowerNext (Paristrades CER like commodity and common stocks)

y Telcos themselves can hedge the risk from rising costs due to oil±shock by developingsystems that run on alternative sources of power

The ecosystem of CER trade has already evolved: Company can now call an accredited anddesignated agency in Germany or France to get project validated, and sell CER to US or Europe, all this by possibly getting the funding from a Japanese bank. 100 million CER wereissued till Dec-07 under the Kyoto Protocol. Telcos can use power consumption reducingmechanisms as a double edged sword, reduce the OpEx and also enroll for the CER trade.



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Here is a case study done by telecom OEM having wide presence in India and ROW;

y Ericsson proposes to use Solar+DG; with 45-50% of diesel savings per site due to solar augmentation

y This translates to diesel savings ~10 000 liters per site

y One liter of diesel generate 2.68 kg CO2 emission

y Also means less re-fueling visits, once a month instead of 3 times a month to BTS site

The company

BMS (Bhartiya Mobile Systems) makes telecom equipment that helps mobile operators reachrural markets profitably. BMS makes the GSM system, the solar powered turnkey GSM systemspecifically made for rural areas with ARPUs of less than $2. GSM is the f irst commercially

viable GSM system that is independent of the power grid. It runs exclusively on solar power andrequires no diesel generator backup. It is also designed for simple delivery and deployment bylocal, untrained workers ± all resulting in zero OPEX, dramatically lower CAPEX, and near zeromaintenance.

For the first time, operators can build profitable businesses serving low-ARPU users in difficultto reach communities.

The bottom line is that mobile operators now have a way to provide mobile services to ruralcommunities in the developing world ± and still turn a profit. GSM also opens up a newMicrotelecom business model ± involving microfinance ± where operators can partner with localentrepreneurs to accelerate deployment and reduce costs.

BMS is 100% focused on this massive opportunity. Our management team has deepexperience at the highest level of the telecom industry and has long-established relationshipswith major operators, equipment vendors, suppliers and NGOs.

Microtelecom refers to business models designed from the ground up for low income ruralusers. It is characterized by four principles:

y Low Cost: Dramatic reductions in capital expense and running costs compared tomainstream technology.

y Low Power: Ideally, completely independent of an unreliable power grid.y Ease of Deployment: Removing the dependence on a skilled workforce.y Modeled for Purpose: Using business models that take into account local resources and

limitations.

The business model proposed by BMS involves many stack holders and role of eachstake holder is mentioned as below;

Mobile Operators



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The operators run the business of developing and managing large telecom networks. They are bestsuited to undertake the following roles:

y Provide and manage the macro-network backbone, roaming, interconnect and billingservices.

y Build the brand and standardize the services offerings over an area based on the profile.y Select the rural entrepreneur after screening and shortlisting.y Provide a start up box containing the SIM cards and sales collateral that allows the rural

entrepreneur to set up their business.y Assist/train the rural entrepreneur on how to acquire and retain customers, collect the

billed amounts and troubleshoot as needed.y Arrange for sufficient spectrum and interface with the regulator and other government

bodies for related issues and clearances.

Banks AND Microfinance AgenciesBanks manage funds and are in the business of disbursing these funds for enterprise activities. They arebest suited to provide the following value adds:

y Vet the local business plan and their financial needs.y Validate the rural entrepreneur shortlisted by the operator.y Finance the local rural entrepreneur to implement the local business plan - at the

appropriate terms and conditions and through the operator.

Regulator/GOVT/ USOFThese entities ensure a level playing field and the regulation of the entities in the ecosystem bydeveloping an appropriate mechanism. They are best suited to provide the following value adds:

y Approve the Micro-telecom Business Model thus paving the way for funding through theUSOF

y Protect the interests of all the players and ensure quality service delivery to the customer by legislating uniform and fair play rules.

Rural Entrepreneur The rural entrepreneur brings in the local knowledge and the capability of service delivery in the localarea and risk capital to run the business. They are best suited to undertake the following roles:

y Apply for the scheme floated by the operator and become a local business partner of theoperator.

y Bring in the risk capital, ensuring that they have ³skin in the game´.y If needed, access capital from funding sources to invest in the local business.y Market the service in the local area and acquire the customers. Troubleshoot if

necessary.y Provide local feedback to the operator, bill collection services and pass on revenue to

the operator.y Become an evangelist for the development of local businesses in the area.

End Consumer The customer is the key stakeholder ± the service needs to reach him. He will use the service andpay for it.

Role of BMSThe technology provided by BMS enables this whole local model. BMS provides:



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y Business planning.y RF planning and dimensioning.y Sales and installation of the GSM systems.y Technical support and troubleshooting as needed.

Steps in funds flowy Operator decides on geographic areay Operator approaches USOF for financing on per-site basisy USOF gives funds for high CAPEX items like towers, land acquisitiony Operator contacts rural entrepreneur y Bank or Microfinance institute does due-diligence of this local guyy Rural entrepreneur and operator buys GSM equipment (part CAPEX, Part later from

revenue)y Revenue from users is collected by Local entrepreneur and flows to Bank, Operator,

Equipment provider.

Applications

We have recently seen flurry of operators lunching 3G in India, followed by poor adoption of 3Gservices. The reason behind the low penetration could be that consumers do not see acompelling need or there is no µKiller application¶ for 3G. The penetration of mobile can certainlyhelp.

y Education

Idea cellular ran a highly successful add campaign µWhat an Idea sirji´, in which it highlightsbenefits as remote education µTeacher addressing student on phone.

y Medical benefits

TB is still rampant in rural India killing 3 lacs Indian every year. There is a program run by

Microsoft under its CSR initiative using mobiles supporting Windows Mobile 7 platform.Training about, Connecting all DOTS centers to monitor their logistics needs, patientmigration, connect patient with DOTS center reminding the patients through SMS and voicecalls

y Commodity trading

There are now many commodity exchanges including NCDEX now offer mobile basedcommodity tracking and online transactions to farmers. Using phone one can;

y Interact with Research Analysts with risk factorsy Available either on Yahoo Messenger or alerts on SMSy Cell broadcast of messages regarding weather, rainy Do transactions using phone

Keeping in mind the key applications required to penetrate the rural market BMS has decided tooffer GSM and GPRS solution (With SMS) only without such nice-to-have features like 3G,EDGE etc.



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Annexure 1:



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RCOM Q2FY11 Results Update, published Nov 19, 2010

Ratio of Opex to total revenue 67/5 %, Network operations to toal revenue is 26.9%



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Annexure 3 Results of marketing survey, how rural market needs are different then urban

What features do you want in the mobile

Feature %responses

Camera 23Dust proof 19Torch light 11Long battery life 11FM radio 8Internet access 6Speaker phone 2

Most important barrier for adopting mobile

Feature %responses

Cost of mobile handset 39Monthly charges 11Difficult to use 9Poor coverage 7Difficult to get connection 2Health risk 2

Most important usage

Feature %responses

Call during emergency 49Keep in touch with family 19Use while travelling 5Contact customers 4Finding information quickly 2It¶s a lifestyle product 1

Above data is when a limited but same set of villagers dwelling in city were asked the questionsand were asked to tick mark only one option of the multiple choices.



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Groups Discussion

Marketing:

What is the target market for BMS

What marketing window gets opened up by focusing on rural telecom market

Strategy:

Wear your entrepreneurial hat and please mention where do you see an opportunity for a startup venture?

Where to focus to succeed in Rural market mass rollout; technology or business model?

Management accounting:

Does Carbon Credit help in reducing costs, it helps whom?

Would the business model work, if not what steps to take to make it work«

rural market in india- a case study

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