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The 5G Conundrum

The ecosystem is still at a nascent stage and debt-laden Indian telcos must find new revenue channels to make fresh investments viable.

The 5G Conundrum

As the decibels around fifth-generation (5G) spectrum auction rise, one must remember that ecosystem development is crucial to the success of next-generation technology. India is yet to complete the transition from 2G and 3G to 4G. But the march towards 5G is inexorable and necessitates gigabuck spending. Telcos have already invested more than Rs 3 lakh crore over the past three years, and a large portion of that money has been used to roll out 4G networks across the country, and we are still counting.

The implementation of any paradigm-shifting technology spawns manifold ecosystem changes such as spectrum usage, network infrastructure and devices. While newer bands will be made available for 5G services in India, the reserve price for the spectrum bands, recommended by the Telecom Regulatory Authority of India (TRAI) at around $0.23/MHz/pop (for metros), is almost twice compared to $0.12/MHz/pop auctioned in the UK in June 2018.

At TRAI's pricing, owning a block of 20 MHz spectrum across circles in the 3.3-3.6 GHz band will cost a staggering Rs 98,000 crore or so. Also, high-frequency bands such as these will require more investments in cell sites because of their low-propagation characteristics.

Even though a combination of sub-1 GHz and 3.3-3.6 GHz is ideal for the 5G rollout, prices in the 700 MHz band remain very high while the rest of the sub-1 GHz bands will be mostly utilised for 2G (voice) and 4G services.

The government seems ready to conduct the 5G auction towards the end of 2019, but it is imperative for telcos to check the readiness of their ecosystems before plonking down truckloads of money to buy spectrum. On the other hand, if the US and China successfully adopt 5G by 2020 as expected, subsequent adopters will have the benefit of lower network equipment and device costs, thus making the ecosystem transition smoother.

An important 5G ecosystem prerequisite, essential to building use cases, is optic fibre networks. But India lags far behind with lower than 30 per cent use of fibre as on date compared to more than 70 per cent in the US and China. CRISIL Research estimates that India needs to lay another 10 lakh fibre km to be 5G-ready. That will require an investment of over Rs 1 lakh crore.

Nearly three-fourths of this cost will occur to get right-of-way (RoW) approvals, which can be as high as Rs 1 crore per km in metros. We believe it will take three-four years for telcos to reach the required fibre levels, given delays in RoW and other permissions.

For telcos, getting RoW approvals has been as much an issue as making investments and RoW issues may delay fibre deployment. However, leasing of fibre can significantly reduce the investments required, depending on sharing modalities, and it will also make India 5G-ready sooner.

Furthermore, the Indian telecom industry is struggling under a massive debt load of Rs 4 lakh crore (as of March 31, 2018). In the recent past, a combination of asset and stake sales and sponsor support have helped telcos maintain their debt levels. But bundling of voice with data amid a price war, coupled with high investments, has resulted in low returns. We now see low single-digit returns on the capital employed in the industry compared to more than 15 per cent three-four years ago. So, telcos need to explore areas of revenue generation to make such investments viable.

While 5G-enabled devices are expected to enter India in late 2019 or early 2020, it may take another three-four years before mass adoption of affordable versions takes place. With the number of interconnected devices rising, the Internet of things will unfold newer revenue streams across domains such as healthcare, education and transportation. A lot is in store for Indian telcos, but things will not take a clear shape before fiscal 2023.

The writer is Director, CRISIL Research

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