3G, rural penetration to catalyse PE investments in telecom

CHENNAI, INDIA: Almost 70 percent of the Private Equity (PE) and Venture Capital (VC) investors surveyed by Venture Intelligence, a leading research firm focused on Private Equity and M&A deal activity, felt that Indian telecom operators would be able to find and profitably serve the next 100 million mobile consumers from rural areas.

A majority of investors are also willing to bet that the introduction of 3G services can be a game changer for various players in Indian telecom, the survey of fund managers from over 50 PE and VC firms reveals.

While the appetite for investments into mobile operators is still high, PE & VC investors who have invested over $5 billion in telecom services and related companies over the past five years, are also actively scanning for "downstream" opportunities including Mobile VAS, Telecom Software and other service providers to telcos.

Investors are also bullish on the expansion of Indian telecom operators into other developing markets. Their experience in the highly competitive Indian market, combined with their low costs and ability to continuously innovate, will stand Indian operators in good stead while expanding into markets like Africa, the investors feel.

The survey results are published in the in the newly released report from Venture Intelligence titled "Private Equity Pulse on Telecom". "In recent months, intense and rising competition levels, declining ARPUs, high costs of 3G licenses and the impending introduction of Number Portability, have placed significant challenges before the industry," said Arun Natarajan, CEO of Venture Intelligence.

"At the same time, as the report reveals, investors feel the introduction of 3G and the increased emphasis by mobile operators on locally-relevant applications to enhance their ARPUs, will present investors with several interesting opportunities," he added.

In a special article for the report, an expert from KPMG points out the various opportunities and challenges ahead for PE investments across various segments within Telecom. While the industry will continue to provide attractive returns that PE investors seek, the landscape is likely to remain dynamic and somewhat uncertain over the foreseeable future from market, regulatory and industry perspective, KPMG feels.

Experts from Deloitte insist in their article that 3G has great potential to alter the dynamics of the Indian telecom market. Besides the expected adoption in the metros, the poor infrastructure on the fixed line side means that an increasing number of consumers are going to rely on their mobile phones for data driven services, leading to a massive uptake as and when the infrastructure becomes available.

Mobile Value Added Services (VAS) companies, which have thus far been struggling in the shadows of the largely voice-focused mobile operators, are looking forward keenly to the advent of 3G which promises an opportunity to enhance their revenues including via new types of services.

In this context, the article by TC Meenakshisundaram of IDG Ventures India analyses the emerging scenario in which, he predicts, VAS will get its rightful priority in the operators' focus to maintain or increase their ARPU and profitability.

The Venture Intelligence investor poll reveals that a majority of investors, given the unorganized nature of cable TV distribution in the country, believe that several opportunities still exist in this space.

In his article, Nithin Kaimal of Private Equity firm New Silk Route Advisors (NSR), highlights how the battle over the "last mile" in cable TV networks is hotting up with the entry of Direct to Home (DTH) services. He feels the success of the cable model over DTH in other markets as well as the performance of organized cable players like Asianet and Ortel provides ample evidence of the economic attractiveness of this model.

Telecom-focused consulting firm BDA weighs in with a meaty analysis of the various technology options and investment scenarios for the cable TV sector.

In an article on the legal and regulatory challenges facing the telecom industry, leading corporate law firm ARA Law outlines the regulatory framework, rules relating to foreign investments, M&A-related issues as well as recent developments like spectrum allocation and 3G licensing.