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Updated Monday, November 9, 2009 10:49 am TWN, By Penny MacRae, AFP

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Fast-growing telecom sector is dialing up trouble

Total telephone penetration, including landline and mobile phones, in the country of nearly 1.2 billion stands at 43 percent — up from 2.8 percent in 2000 and testimony to the telecom sector's blistering growth. India added 14.98 million new phone customers in September, pushing the number of users to over 500 million — 15 months ahead of a government target for reaching the milestone. The boom in phone connections has been overwhelmingly driven by cellular services, with mobile customers comprising 40.31 percent of the 500 million telephone users.

India is the second-biggest cellular market, lagging behind only China, which has over 600 million users. Urban mobile markets are already saturated but there are still hundreds of millions of customers to be signed up in rural areas — a tantalizing prospect for new entrants that see India as one of the few global growth areas.

Another four players, including Norway's Telenor and United Arab Emirates' Etisalat, are set to roll out services in the next few months, joining the 11 companies already pitching for customers. As competition has mounted, the companies' share prices have taken a hit, with market leaders Bharti sliding 30 percent in a month and Reliance Communications tumbling 45 percent. Investment house MacQuarie recently downgraded the sector to under-perform.

India plans to hold an auction in January for third-generation or 3G spectrum, which will allow high-speed Internet and video downloads on mobile phones. But analysts say it will take time for companies to earn back the money spent on the licenses and the auction will add to their balance sheet burdens. Experts say the sector can only reasonably support four to five players and that consolidation looms.

“These developments will accelerate industry consolidation over the next 18 to 24 months,” Satish Seth, group managing director of Reliance Communications, said, adding that Reliance would be a survivor. A shakeout will ultimately be beneficial for the industry as it will allow those who emerge on top to restore pricing, analysts say.

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