Indian Mobile Industry

INTRODUCTION TO THE WORLD’S FASTEST GOWING TELECOM MARKET

2

THE WORLD’S SECOND LARGEST MARKET

Area – 3,287,263 Square kilometers Population (July 2005) – 1.08 Billion 22 National Recognized Languages Literacy Rate (2005) – 65% Average Annual Growth Rate – Population – 1.4% – Labour Force – 2.5% – GDP Growth- 6.7% Trade (2004) – Total Exports (FOB) – USD 76 Billion – Total Imports (CIF) – USD 97 Billion Forex Reserves (including gold) =USD 155 Billion

Source : The World Bank Group

3

….& ONE OF THE FASTEST GROWING ONES

One of the fastest growing economies in Asia. Annual GDP growth rate of ~8% over next 5-10 years Set to emerge as 3rd largest economy in the world by 2020 Major global hub for IT & IT enabled services Mobile telephony transforming people’s lives

4

Background of Mobile Revolution in Indian Telecom

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Policy announced for additional licenses in Basic and Mobile Services (Jan 2001). Entry fee: – Basic Services: US$ 0.2mn – US$ 25.5mn (+ Bank Guarantees = 4 times entry fee for rollout obligations) – GSM Mobile Services (4th Operator bid): US$ 0.2mn – US$ 45mn License fee (revenue share) reduced from provisional 15% to 12%, 10% & 8%. Limited Mobility allowed to Basic Services (CDMA spectrum allotted to BSOs). Rollout Obligations to cover Urban / Semi-Urban / Rural areas in equal proportion. New licenses awarded in Jul - Sep 2001 : Basic (25), GSM Mobile (17).

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MOBILE – MAJOR CONTRIBUTOR TO TELE DENSITY 14

Total – 12.3% 12 10

Mobile – 7.5 %

8 6

Fixed – 4.8 %

4 2 0 1997

1998

1999

2000

2001

2002

2003

2004

Feb' 06

Cellular constitutes ~61% of current national tele density – has played an important role in taking overall tele density from 0.8 in 1994 to 12.3 in Feb’06. 10

GSM DRIVING MOBILE GROWTH 70

GSM

Subscribers in Million

60

CDMA

65

50

41

40 26

30 20

19

13

10

8

6

11

2 1

2

4

1999

2000

2001

0

1 2002

2003

2004

2005

Feb' 06

Year Ended March

GSM driving growth of Indian market with nearly 80% market share & about 75% of new additions

11

IN SYNC WITH WORLDWIDE TRENDS Worldwide GSM constitutes 75% of the subscriber base and 80% of the monthly additions. 1800

GSM

Subscribers in Million

1600

CDMA

1400 1200 1000 800 600 400 200 0 1992

1993

1994

1995

1996

1997

1998

1999

Year Ended December

2000

2001

2002

2003

2004

Jan' 06

12

INDIAN GROWTH FUELLED BY INCREASED COVERAGE 6000

Number of Cities & Towns

5048 5000 4000 3076 3000 2000

1575 918

1000 0

249

421

Dec' 98

Jun' 99

Nov' 00

1743

1116

Apr' 01

Sep' 02

Sep' 03

Dec' 04

Dec' 05

• Estimated that service providers will cover 5,000 towns by mid 2006 • Ubiquitous coverage holds the key to future growth of mobile industry

13

AND CONTINUOUSLY IMPROVING AFFORDABILITY 0.07

Effective Tariffs – 400 Minute Basket

0.06

USD per minute

0.05 0.04 0.03 0.02 0.01

D ec -0 4

Ju n04

M ar -0 4

D ec -0 3

S ep -0 3

Ju n03

M ar -0 3

D ec -0 2

S ep -0 2

Ju n02

M ar -0 2

D ec -0 1

S ep -0 1

Ju n01

M ar -0 1

D ec -0 0

0

In last 3 years alone, effective local call cellular tariffs have plummeted by 80% from USD 0.06 / minute in December 2000 to USD 0.01 / minute in December 2004. During 2005, tariffs have declined further by ~ 37% Source:TRAI Quarterly Performance Indicators, March 2005

14

INDIAN MOBILE INDUSTRY – CURRENT STATUS 2006 133 state-of-the art Networks (GSM + CDMA) on Air: 91 on GSM Total Investments ~ USD 15 billion Nearly 85 million mobile subscribers (GSM + CDMA) – end February 2006 – with GSM accounting for ~80% of the subscribers base. 4-5 million new mobile phone subscribers added every month, Total adds in 2005 ~28 million, showing growth of almost 60% in last 12 months Services in ~ 5000 cities & towns & ~1 lakh villages Fixed Mobile Crossover in October 2004, GSM Fixed Crossover in April 2005 Mobile the primary driver of growth, accounts for 7% tele density

15

GROWING SUBSCRIBER BASE 50

Prepaid

45

Postpaid

40

Million

35 30 25 20 15 10 5 0

1999

2000

2001

2002

2003

2004

2005*

• Subscriber growth predominantly on the prepaid plank • Allows even credit challenged subscribers to take advantage of benefits of connectivity • Mobile connectivity a common feature amongst blue collar segment

COAI-PWC Benchmarking Reports * COAI Estimates

16

…IMPROVED AFFORDABILITY Blended Airtime Rate 0.1 0.08

USD / minute

0.1 0.06 0.1 0.04 0.0

0.036 0.02

0.0

0.0 1USD=Rs. 44.3

0.0125

2000

COAI-PWC Benchmarking Reports *TRAI Report Dec-05

2001

2002

2003

2004

2005*

17

GROWING MINUTES OF USE 393

400

Minutes/Subscriber/Month

350 287

300 245 250 200

204

220 192

175

150 100 50 0

1999

COAI-PWC Benchmarking Reports *TRAI Report on GSM

2000

2001

2002

2003

2004

2005*

18

DECLINING ARPUS 32

29.3

USD/Subscriber/Month

26.1 24 18.4 16.5 16 11.4 8.7

8.2

8

0 1USD=Rs. 44.3

1999

2000

2001

2002

2003

2004

2005*

• Increased subscriber base accompanied by constantly declining ARPUs – demonstrating the increased acceptance of mobile services amongst low end consumers.

COAI-PWC Benchmarking Reports *TRAI Report

19

REDUCED OPEX PER SUBSCRIBER 22.4 19.1

USD/Subscriber

20

10.2 10

7.4

6.5 4.7

0 1USD=Rs. 44.3

1999

2000

2001

2002

2003

2004

3.6

2005*

• Opex per subscriber brought down by 80% in last 5 years • Result of better improved efficiency by operators as well as the benefits of economies of scale

COAI-PWC Benchmarking Reports * COAI Estimates

20

COMPOSITION OF NET SERVICE REVENUES Gross IUC Revenue, 15% Other Revenues, 3%

Airtime, 28%

Other VAS, 5% SMS Revenues, 4% Roaming Revenues, 12%

Rentals, 13%

Activation & Processing fees, 20%

Airtime

Rentals

Activation & Processing fees

Roaming Revenues

SMS Revenues

Other VAS

Other Revenues

Gross IUC Revenue

Roaming Revenues 12%; SMS Revenues 4%; Other VAS 5% Source: Price Waterhouse Benchmarking Study, December 2004

21

REVENUES FROM VALUE ADDED SERVICES

10% 8%

As a %age of Service Revenues

VAS Composition

Others 34%

10%

Postpaid

12%

SMS 54%

8% CLIP 12%

6%

CLIP 0%

2%

Prepaid

4%

Others 17%

SMS 83%

0% • Prepaid subscribers are increasingly taking to value added services, Percentage of Revenues from VAS for prepaid subscribers has gone up from 3% in 2003 to 8% in 2004. • Overwhelming proportion of this comes from SMS, which is the VAS of choice for prepaid subs. Source: COAI-Price Waterhouse Benchmarking Study, December 2004

22

GROWTH IN VALUE ADDED SERVICES

23

REVENUES FROM VAS

“Revenue from the VAS segment is growing at the rate of 30 to 40 percent annually. At present, this segment accounts for 10 to 13 percent of the total revenue of a service provider,” - Tim DeLuca Smith, Communications Manager, SmartTrust. “Market for mobile VAS is currently about USD 85 million and it is expected to grow around 800 million by 2010.” - Arun Gupta, CEO Mauj Telecom Daily downloads of around 1 million ringtones and ringback tones. – average cost: Rs 9 per ringtone. During festive season the figures skyrocket….. – This Diwali, there was a six fold increase in value added service downloads, over a normal day. – Delhi circle alone saw 8.5 million SMSs being exchanged on Diwali day as against 5.5 million last year. 24

REVENUE GENERATED FOR OPERATORS FROM VARIOUS APPLICATIONS

Charges

Application

(in USD)

Estimated monthly downloads

Operator Revenue Share

(in million)

2G – SMS

0.02– 0.11

1,100

90%

2G – P2A/ A2P

0.05 – 0.23

50

70-75%

2.5G Messaging

0.07/MMS; 2.23 unlimited for 1 month

5

80-90%

CRBT

0.14-0.34

7

50-60%

Wallpapers

0.23

14

50-60%

Games

1.13-3.39

14

25-50%

IVRS

0.07-0.14/minute, voice + transaction charges

1USD=Rs. 44.3 Source: Global Equity Research

25

REVENUES FROM SMS

200

180

180

SMS Volumes in billion

160

140.2

140 120 100

89.4

80 50.7

60 40 20

12.3

20.6

33.1

0 2004

2005

2006

2007

2008

2009

2010

Expected to grow in the next five years due to – falling prices, increasing mobile penetration, widening user demographic and increasing number of SMS based services. Source: Portio Research

26

CONSUMER AWARENESS FOR DATA SERVICES IN INDIA

Roaming

90

Voice Mail

76

Call Waiting

62

Email

27

Instant Access

10

Data Services

7

M-banking

5

MMS

4 0

20

40

60

80

100

27 Source: Portio Research

INDIA’S PLACE IN ASIA PACIFIC

28

ARPU 35 ARPU

Average

30 25

USD

20 15 10 5 0 Malaysia

Philippines Indonesia

Thailand

China

Singapore

Australia

India

INDIA • ARPUs well below Asia Pac average • Market driven by volumes not margins COAI PWC Benchmarking Study, December 2004

29

MINUTES OF USE 350 ARPU

Average

Minutes/Subscriber/Month

300 250 200 150 100 50 0 Malaysia

China

Singapore

Australia

India

INDIA • One of the most talkative markets in the region • Increased use a direct result of affordability of service COAI PWC Benchmarking Study, December 2004

30

COST OF CUSTOMER ACQUISITION 120 100

Cost of Customer Acquisition Average

USD

80 60 40 20 0 Malaysia

Philippines Indonesia*

Thailand*

Singapore

Australia

India

INDIA • One of the lowest costs of customer acquisition in the region * For the year 2002 COAI PWC Benchmarking Study, December 2004

31

MONTHLY CHURN 9% 8.0%

8% 6.7%

7% 6% 5% 4% 3% 2%

2.0%

1.9% 1.0%

1%

1.2%

1.5%

1.4%

Singapore

Australia

0% Malaysia

Philippines

Indonesia

Thailand

China

India

INDIA • The highest Churn in the Asia Pac Region – demonstrating existence of an intensely competitive & vibrant mobile market COAI PWC Benchmarking Study, December 2004

32

BAD DEBTS AS A % OF NET SERVICE REVENUES 4% 3.1% 3%

3.0% 2.8%

3% 2% 1.6% 2%

1.3% 1.1%

0.9%

1% 1% 0% Malaysia

Philippines

Thailand

China

Singapore

Australia*

India

INDIA • Bad Debts above Asia Pac averages; need to be brought under control COAI PWC Benchmarking Study, December 2004

33

EBITDA 70%

60

EBITDA

Average

60%

50

50%

40

40% 30

30% 20

20%

10

10% 0%

0

Malaysia

Philippines

Indonesia

Thailand

China

Singapore

Australia

India

INDIA • Lowest EBITDA in Asia Pac Region; Combined effect of lowest tariffs & highest costs COAI PWC Benchmarking Study, December 2004

34

PAST PERFORMANCE AND FUTURE AHEAD

35

Convergence of Tariffs and Growth of mobile services

Full Mobile (Rs./min) Mobile Subscriber base (Millions) Lowering of ADC from 30% to 10% of sector revenue

Effective charge (in Rs. per min.)

18.00 16.00

100 89.54 90

NTP ' 99

14.00

CPP introduced

Telecom Tariff Order

12.00

80 70

10.00

3rd & 4th cellular operator

8.00

52.17

CDMA introduced

50 40

6.00

33.60

30

4.00 2.00

60

20 0.88

0.00 Mar-98

1.20

1.88

Mar-99

Mar-00

3.58

Mar-01

13.00

10

0.90 1.18 0

6.50

Mar-02

Mobile subscriber base (in Million)

Fixed (Rs./min.) Limited Mobile (Rs./Min)

Mobile growth and effective charge per minute Steps taken for increasing growth

Mar-03

Mar-04

Mar-05

Mar-06

36

Falling ARPU vs. Rising Subscriber Base

100 90

89.54

80 70 60 51.57

50 40 30

29.77

20 10

33.6 25.12 3.58

19.95 6.5

14.31 13

10.59

9.19

7.90

0 1.88 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 ARPU(in $) * ARPU of March-06 are Estimated

Subs. in (Mn) 37

Urban/Rural income-wise distribution of households

Income Group

Rural Households

Urban Households

Lower

60 (43.48%)

10 (18.52%)

Lower Middle

56 (40.58%)

20 (37.04%)

Middle to High

22 (15.94%)

24 (44.44%)

Total

138 (100%)

54(100%) 38

Effect of CPP Regime

Thousands

Additions in Mobile CPP Introduced

2500 2000 1500 1000 500 0 Feb03

Mar03

Apr-03 May- Jun-03 Jul-03 03

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DECLINING ARPUS 32

29.3 26.1

USD/Subscriber/Month

24 18.4 16.5 16 11.4 8.7

8.5

8

7.0

6.5

6.0

5.0

0 1999

1USD=Rs. 44.3

2000

2001

2002

2003

2004

2005*

2006*

2007*

2008*

2009*

• Increased subscriber base accompanied by constantly declining ARPUs – demonstrating the increased acceptance of mobile services amongst low end consumers. To achieve the required growth, the focus will shift to villages with low teledensity, and ARPU will be going sub $5 mark I next few years.

COAI-PWC Benchmarking Reports * Estimates

40

Past Growth and future Expectations 20%

16 14 12 10

10%

8 6 4 2

0%

Growth

Mar-06

2

(" )$& ' " % ,$" . */ /

Dec-05

1

,(& * +' +

Sep-05

! -*

Jun-05

Mar-05

Millions

0

% Growth

*+" .0 41

Growth (Estimates)

1 % " 4

M illio n s

350

%& 1

300

3

" # ,% -4 3 '

#,

250

200 5#&

150 100 50 0 2003 2004 2005 2006 2007 2008 2009 2010 42

!" #

35

Teledensity (%)

30 25 20 15 10 5 0 1997

1998

1999

2000 Urban

2001

2002 Rural

2003

2004

2005

2006

2007

Total 43

Enhancement of Rural Density 35

31.1

30

26.2

25

21.3

20 15 10 5 0

6.9 2.3 0.5

1999

8.2

10.4 3.6

2.9

0.9

0.7

2000

2001 Rural

•

14.3

12.2

5.1

4.3

1.5

1.2

2002

2003

Total

7.04 1.7

2004

9.08

9.86

1.74 Source: TRAI 1.94

2005

Jul-05

Urban

To bridge the Urban-Rural divide, Cost to Serve the Rural area should be reduced

Impact of CDMA on India’s Wireless Industry Tariffs

Subscribers (Millions)

Rs.0.40/min. Voice Tariffs

90

Rs.1.00/min. Voice Tariffs

80 70 60 50 40 30 Rs.4.00/min. Voice Tariffs

20

CDMA Limited Mobility Introduced with competitive Service Offerings

10

Sources: TRAI study

83 million net wireless sub adds since competition from CDMA Limited Mobility was introduced

05

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20

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20

05 Q

Q

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20

20

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20

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20

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4

20

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20

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20

01

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45

FUTURE GROWTH POTENTIAL

46

Urban population -Indian Census 2001: Agewise distribution 80+ 70-74

Age Groups

60-64 50-54 40-44 30-34 20-24 10-14 0-4 0

50

100

150

200

250

300

350

Population in lac

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The next generation People born in 1980’s & 90’s – Majority of these young people will be in their early twenties and thirties in the next ten to fifteen years General profile of next generation – Just started working or would start in near future – Single or just married with high disposable incomes – High Lifestyle Aspirations

48

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' ( ) & ' ( ) ' ( ) ' ( ) ' ( ) *" +, + + , ."Growth has been accelerating in each decade Industry + services (78% of GDP) growing at +8% Impact of agriculture on overall growth is steadily reducing Per capita income has grown by 7% CAGR over the past decade and is projected to cross $1,000 by the end of the decade

49

Break up betw een Basic and Non Basic Household Expenditure

2002-03 2001-02 2000-01 1999-00 1998-99 1997-98 1996-97 1995-96 1994-95 1993-94 1992-93 0%

10%

20%

30%

40%

50%

Basic

60%

70%

80%

90%

100%

Non-Basic

Moving away from basic necessities Aspirations given wings by higher Disposable Income’s have changed consumption patterns Decrease in outlay on basic: 16% Increase in non-basic items: 39% 50

SUBSCRIBER BASE & MOBILE PENETRATION 350

100% 316

Subscriber Base

92%

Mobile Penetration

300

90%

88%

80%

Million

250

70% 60%

58%

200

50% 150

40%

40%

36%

100

30%

25%

50

32 14

20%

48 29 12%

27 4

0 Malaysia Philippines Indonesia Thailand

China

18

Singapore Australia

10% 4.50%

0%

India

INDIA • 2nd largest market in Asia Pac, in absolute terms • With a mobile tele density of only 4.5% (now 6%) – the one with the highest untapped potential COAI PWC Benchmarking Study, December 2004

51

FUTURE SUBSCRIBER GROWTH

500

China

COAI Projections

Actual

Million

400 300 200 100 0

9

10

11

12 13 Year Ended December

14

15

16

Year

9

10

11

12

13

41

15

16

India

2003

2004

2005

2006

2007

2008

2009

2010

Sub (MLN) Actual

31

48

76

Sub (MLN) Projected

28

48

81

130

207

290

377

471

1996

1997

1998

1999

2000

2001

2002

2003

6.8

13.2

24

43

85

145

207

279

China Subs (MLN)

52

The tariff drivers

53

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Shift in tariff paradigms of cellular services

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