1Serving India’s Digital Consumer

Serving India’s Digital ConsumerIndia stands on the threshold of a digital boom that promises widespread benefits. Realizing this opportunity will require government and industry to take immediate action.

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Foreword In less than a decade, India will boast the world’s second-biggest population of smartphone-connected mobile Internet users—more than half a billion of them. This boom has the potential to transform the nation’s economy, society, and governance.

All players in India’s telecom industry—from operators and handset manufacturers to equipment and infrastructure providers and policy makers and regulators—need to prepare themselves to facilitate this transformation. Only by looking beyond the uncertainty of the last few years and acting now to build a strong foundation that satisfies the data demand and ensures availability of the right services—at the right price—will they meet consumers’ aspirations.

The digital consumer of 2020 will have high expectations, and companies that want to deliver a superior customer experience and fulfill those expectations will have to broaden product portfolios, digitize core operations, and invest in leading-edge technologies to meet band- width demands.

Meanwhile, the government must resolve the current impasse and define clear, forward-looking policies. In particular, it needs to be cognizant of spectrum economics for data use, offer additional spectrum that’s more in line with global standards, and provide a definitive road map for implementing the National Telecom Policy (NTP 2012). These are among several important steps required of the industry today if it is to serve India’s digital consumers tomorrow.

In this context, the paper “Serving India’s Digital Consumer,” jointly produced by the Confederation of Indian Industry (CII) and A.T. Kearney, highlights key imperatives for industry and government in preparing to serve the digital consumer of tomorrow.

Kiran Karnik, Chairman, National Committee on Telecom and Broadband Confederation of Indian Industry

Mohit Rana, Partner, Communications, Media & Technology Practice, A.T. Kearney

Serving India’s Digital Consumer

3Serving India’s Digital Consumer

Mobile Boom’s Widespread ImpactSizable population accessing Internet on mobile in 2020

It is estimated that more than 600 million people will be using mobile Internet and that broadband will connect 150 million computing devices by 2020 (see figure 1). This growth will be spurred by a sharp rise in smartphone adoption, expected to reach 50 percent penetration by 2020, and is likely to have a seminal impact on Indian society, corporations, and governance in a multitude of ways (see figure 2).

Mobile Internet users (millions)1

600

400

200

800

0

130 30 <10%

150

40%-50%

600

2013 2020

Connected computingdevices (millions)2

150

100

50

200

02013 2020

Smartphone penetration(%)

40

30

20

10

50

02013 2020

1 Includes all technologies 2 Includes personal computers and tablets, 87 percent connected via broadband

Sources: International Telecommunication Union, Business Market Intelligence, International Data Corporation; A.T. Kearney analysis

Figure 1 Mobile Internet and smartphone penetration in India

4x-5x 5x

5x

Sources: Cisco Visual Networking Index, Reserve Bank of India, eMarketer, YouTube, China Internet Network Information Center; A.T. Kearney analysis

Figure 2 Potential m-services adoption in India by 2020

140million

900million

300million

75million

11million

80million

Unbanked withaccess to mobilefinancial services

Children with onlineaccess to education

Monthly appdownloads

Hours daily videostreaming on mobile

Annual m-commercepurchases

Users of instantmessagingservices

Expected data tra�ic(exabytes)

20.02020

10x

1.82012

4Serving India’s Digital Consumer

Society. Evolution of strong local and global communities, increased awareness, new approach to learning, banking, and buying; changes in media and entertainment-consumption habits

Corporate. Emergence of new businesses; need for new operating models to engage the consumer; emergence of crowdsourcing and digital media; greater consumer activism

Governance. E-governance across most government-to-citizen interface points, identity and privacy management, subsidy payment, health care, greater public empowerment

Understanding the behavior and expectations of the digital consumer

Many mobile-data users will embrace the online medium as part of their lifestyle and will use it for acquiring information, for entertainment, for socializing with friends and family, for augmenting health care, and for countless other purposes. In short, they’ll become digital consumers, and while their behavior may evolve in nonlinear and unpredictable ways, it is likely to exhibit the following traits:

• Community orientation. Share heavily, and rely on peer recommendations.

• Instant gratification. Try new services anytime, anywhere.

• Extreme personalization. Base content access on personal interest, current location, and time.

These consumers will have much higher expectations than today’s consumers, and fast, easy access to information will make them highly demanding and proactive in fulfilling their needs (see figure 3). Moreover, the shift in consumer expectations will occur against a backdrop

• Wide m-service portfolio (under-standing customer needs is adierentiator)

• Aordable data plans

• Personalized taris

Productportfolio

• VAS and m-services not a priority;driven by pricing of voice, SMS

• Marginal dierentiationin oering

• Uninterrupted voice quality and coverage

• Consistent high-speed mobile Internet

Expectations in 2020

• Instant activation; sales online and on apps

• Digital and interactivecommunication channels

• Dierentiated service

• Evolved and self-sustained digital help

• Quality technical help for basic data users

Notes: VAS is value-added services. SMS is short message service.

Source: A.T. Kearney analysis

Figure 3 Changes in customer expectations

Expectationsin 2013

Connectivity • Moderate voice and datacoverage and quality

Sales andmarketing

• Technology andspectrum investment

Key imperativesfor industry

• Digitization of coreoperations

• Enable digitalservice ecosystem

Customerservice

• Moderate service levels and quality of interaction

• Human interface (call centers, stores), digital secondary and basic

• Complexity and poor service levels in activation

• Largely physical channels

• Direct marketing, butnon-interactive

• Spectrum availability and management

Key imperatives for policy makers

• Clarity on policies and push for implementation

5Serving India’s Digital Consumer

of significant slowdown in new subscriber additions. As a result, operators will have to make a shift of their own, from focusing on driving sales to serving the rapidly changing needs of their existing customers.

Consider this: About 80 percent of today’s customers are serviced through traditional channels, such as stores and call centers offering moderate service levels. These will need to be diver-sified into multiple channels, with digital channels assuming significance for both sales and service. A large proportion of tomorrow’s users will be comfortable with self-service through peer recommendations or online channels, as is the case for electronics and web portals today. Operators will need to make such channels readily available.

Three Imperatives for the Telecom IndustryOperators expecting to meet the digital consumer’s evolving expectations will need to address three crucial areas:

1. Technology and spectrum investments. The exponential growth in data traffic in India will require significantly higher spectrum than is available now. Based on observation of other markets, we estimate that each operator will need 30 to 50 megahertz (MHz) of spectrum to meet data traffic needs (see figure 4). Data traffic will occupy more than 90 percent of the spectrum to meet future demand at the optimum price level. As we have seen in other markets, the revenue contribution from data is still expected to be less than 30 percent, with margin

Sources: Various regulator websites; A.T. Kearney analysis

Figure 4 Spectrum allocation across emerging and developed markets

Spectrum allotted per operator (MHz)

2,600 2,100 1,800 900 850High bands: Low bands:

Telstra–Metro

15

8

20

15

58

Vodafone–Metro

Australia United Kingdom Malaysia Indonesia India

10

8

30

20

68

Telefonica

18

6

10

34

EverythingEverywhere

45

20

65

Digi

25

20

10

57

MAXIS

10

16

25

20

71

Celcom

10

17

25

20

72

Telkomsel

22.5

7.5

15

45

Indosat

10

10

15

10

45

Top 3operator–

Metro

8

15

25

2

6Serving India’s Digital Consumer

contribution as low as 20 percent. Clearly, tomorrow’s spectrum economics—including pricing—will be very different from the economics of today’s 6 to 10 MHz spectrum, primarily used for voice.

In addition to spectrum, operators will need to invest significantly in radio networks, backhaul, and next-generation network (NGN) migration. Over the past three years, regulatory uncertainty and high debt burdens have combined to slow operators’ capex spending to under 15 percent of sales. Ideally, operators will need to invest 20 to 25 percent capex over the next few years to prepare for data traffic needs, but the economics have to improve first. At a 30 percent EBITDA margin and substantive interest costs, high regulatory payouts can crowd out capex and slow down network rollout, a scenario we have seen in other markets and, indeed, in India in the past.

It is important to note that inadequate spectrum availability and capex investments will lead to supply-side constraints in meeting market needs—which in turn will lead to higher tariffs for India’s consumers. For the rural consumer, the planned National Optical Fiber Network (NOFN) is a step in the right direction, but its success is contingent on the rapid implementation of viable business models through public and private partnerships to provide last-mile access to the consumer from the NOFN landing point. This will ensure the infrastructure is adequately leveraged to serve the rural consumer while providing the government with a return on its investment.

Digital consumers will have much higher expectations than today’s consumers, and fast, easy access to information will make them highly proactive in fulfilling their needs.2. Digitization of core operations. Telecom operators need to drive digitization using a three-pronged approach as demonstrated by other global and Indian players: embracing digital media, digitization of physical touch points, and making internal processes customer-centric (see figure 5 on page 7). We advise India’s operators to meet customer expectations at each point in the relationship, from building awareness and activation to usage, payment, and termination. Further, operators will need to have two equally important and parallel processes to serve both the digitally evolved and the basic consumer. This requires a customer-centric view to design effective core processes, organization, skills, and systems. While leadership support for these initiatives is important, employees who understand the digital consumer’s needs are perhaps even more important.

Following are our suggestions for making the three most important telecom business functions more conducive to attracting the digital consumer:

Sales. Evolved consumers will expect more engagement through digital channels such as email, apps, mobile websites, and social networks. At the same time, basic and new customers will prefer traditional channels and seek more information about complex new services. Operators

7Serving India’s Digital Consumer

need to invest in transforming current physical touch points and promoting services using touch screens and smart devices to stimulate instant trial and purchase. In addition, they should work with other stakeholders and upgrade their IT systems to enable online identification and completion of forms to reduce service-activation time.

Marketing and analytics. Operators need to actively adopt digital media and digitize traditional marketing channels by using interactive outdoor displays, smart devices at stores, quick-response (QR) codes, and other emerging technology. They can also leverage consumer information that will become available as consumers spend an increasing amount of time on networks and using digital services. This will need investment to develop deeper, more advanced analytics capabil-ities to identify customer trends. This information can be used to segment customers, design more targeted products, and drive advertising and database revenues.

Customer service. Customer service will have to undergo a major transformation to improve the customer experience. The first task is to create segmented service channels for the following categories:

• Advanced users. Access to digital touch points to discover new services and resolve complaints

• High-value customers. Superior service at digital and physical touch points

• Basic users. Education and assistance in using digital services at virtual or physical touch points

Online touch points will need to be expanded and should include self-sustaining digital platforms using crowdsourcing, instant messaging, and social media. Additionally, operators can provide greater transparency by allowing customers to track the progress of a complaint or service request.

Note: QR code is quick-response code.

Sources: Internet Retailer, news articles, company websites; A.T. Kearney analysis

Figure 5 Digitization of core operations: case studies from across industries

Embracing digitalmedia

Sales Free Mobile (France) attractedmore than two million users in two months using zero budget, web-only distribution

Tesco runs a virtual store inKorea—shop by scanning QRcode on a digital billboard;goods delivered to home

SingTel ensures instantactivation and delivery ofdigital services

Digitizing physicaltouch points

Making internal processes customer centric

Marketing andanalytics

Amazon yielded 35 percentrevenue from cross-selling,thanks to a recommendationengine that suggests new items

Samsung promoted Wavephone through an outdoorcampaign using interactivescreens

Google uses advancedanalytics to send targeted adsbased on user browsingbehavior

Customerservice

Best Buy responds within15 minutes to customerqueries on Twitter andFacebook

Singapore airport uses touchscreens to record customerfeedback at points of servicein the airport

Flipkart ensures transparencyby allowing users to trackconsignments online

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3. Enabling a digital service ecosystem. Tomorrow’s leading mobile digital services will require an integrated ecosystem across various industries. Though operators have tried various models globally, very few have been able to create a successful, replicable business model.

We recommend India’s telecom operators become smart enablers, collaborating with other players in the following ways:

• Design enabling platforms: — Develop platforms that allow participation in the ecosystem. — Create open interfaces allowing others to leverage operator assets and customer information.

• Facilitate ecosystem integration: — Collaborate with partners to create industry standards. — Foster alliances that generate customer awareness and take advantage of brand affiliations and marketing clout.

• Leverage customer data through analytics: — Provide real-life insights into digital-consumer behavior. — Offer customers tailored solutions and instant recommendations.

Government needs to allocate consid-erably more spectrum for telecom services, taking into account the impact of data traffic on spectrum economics and pricing.This strategy requires operators to be proactive in several areas. First, drive consensus on standards and operating models, especially for new and complex services and to ensure interoperability. For example, mobile banking requires a common platform, software, and revenue-sharing modalities with the banking industry.

Second, partner with content and service providers to offer customers more choice. Investing in advanced analytics tools to capture consumer behavior is crucial for designing and promoting new services.

Third, experiment continually with new services, monitor adoption, and promote popular services while scaling back others. Always keep in mind that because consumer behavior is ever evolving and hard to predict, digital services require a lot of trial and error to achieve success.

Remember, too, the importance of undertaking initiatives such as developing local-content, low-cost smartphones, and other devices to provide digital services. Mobile health services, for example, can only flourish if low-cost health-monitoring devices are available for rural customers and adopted by health practitioners.

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Key Policy ActionsServing India’s 600 million future digital consumers will require major investment in infra-structure by an industry already under immense financial stress. The time is ripe for the Indian government to resolve impending issues, lay the foundation for digitization through spectrum management and NTP 2012 implementation, facilitate infrastructure expansion through rural infrastructure rollout and conducive infrastructure policies, and enable development of an ecosystem for digital services through clear licensing norms.

Spectrum policy and management. India’s telecom companies are managing the industry’s exploding growth on inadequate spectrum. Moreover, high payout expectations from spectrum allocation over the next couple of years will lead to severe financial challenges for these compan- ies and could result in price increases that make data services unaffordable for the majority.

The government needs to allocate considerably more spectrum for telecom services, taking into account the impact of data traffic on spectrum economics and pricing. Prioritizing the auctioning of 700 MHz spectrum, which is highly cost-effective, will be a step in the right direction.

Smart enablers experiment with new services while scaling back others. Always keep in mind that digital services are a trial and error business.NTP 2012 implementation. NTP 2012 offers guidelines on spectrum allocation and efficient use through re-farming, sharing, and trading. The government needs to clarify modalities and time lines for the implementation of this policy. In addition, policy makers should benchmark global best practices in optimizing spectrum use. The Indian government’s proposed re-farming of spectrum is in contrast to markets elsewhere, which allow continued use on payment of renewal fees and re-farming and sharing at the operator end or compensate operators with part of their spectrum in other suitable bands.

Rural infrastructure rollout. The proposed NOFN rollout has been set into motion with Bharat Broadband Network Ltd. (BBNL) laying the required fiber. In addition to increasing delivery speed to ensure a timely rollout, government needs to engage private players at an early stage to prepare viable business models to drive scalable community services while ensuring return on investment in rural markets.

Smart enablers experiment with new services while scaling back others. Always keep in mind that digital services are a trial and error business.

Promoting infrastructure expansion. Government must take action on benefits that accrue to telecom tower providers post-inclusion in the infrastructure sector, including accelerated depreciation, higher external commercial borrowing limits, and lower lending rates, among others. A uniform national policy is needed for right-of-way permission that can be imple-mented by state governments, thus enabling faster infrastructure rollout.

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Meeting green telecom requirements. The adoption of green technology to power telecom infrastructure has been below mandated levels due to issues surrounding implementation and financial feasibility. Revolutionizing green telecom will require strong governmental support—both fiscal and non-fiscal—especially from the Ministry of New and Renewable Energy, as part of its carbon footprint-reduction initiatives.

Unified licenses. After a series of delays, Indian operators anticipate prompt implementation of a unified license policy. We believe the government should provide appropriate incentives to encourage all operators to shift to a unified license. We also advocate a clear policy on exit norms and interconnection charges to avoid adverse situations in the future.

Digital services. Clear, transparent regulation—or a lack of regulation—is required to provide m-services through the unified license, as these services will transgress the domains of several other government departments, such as the Ministry of Finance, for m-banking services.

Joining Forces India is on the cusp of a quantum leap in mobile-data and digital services. The digital consumer is ready to embrace the connected future, one that can lead to significant benefits for the country. Industry leaders and policy makers need to be ready, too—to work together and pave the way for India’s digitization.

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About A.T. Kearney

A.T. Kearney is a global team of forward-thinking partners that delivers immediate impact and growing advantage for its clients. We are passionate problem solvers who excel in collaborating across borders to co-create and realize elegantly simple, practical, and sustainable results. Since 1926, we have been trusted advisors on the most mission-critical issues to the world’s leading organizations across all major industries and service sectors. A.T. Kearney has 57 offices located in major business centers across 39 countries.

With more than 500 consultants focused on the sector, A.T. Kearney has an industry-leading communications, media, and hi-tech practice globally and in India. We work extensively with major industry players, including operators, equipment and handset manufacturers, industry associations, and governments, on a range of strategic and operational topics.

For more information, please visit www.atkearney.in or www.atkearney.com.

About CII

The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the develop-ment of India, partnering industry, government, and civil society through advisory and consultative processes.

CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive role in India's development process. Founded more than 118 years ago, India’s premier business association has more than 7,100 member organizations from the private and public sectors, including subject matter experts and multi- nationals, and an indirect membership of more than 90,000 companies from around 257 national and regional sectoral associations.

CII charts change by working closely with government on policy issues, interfacing with thought leaders, and enhancing efficiency, competitiveness, and business opportunities for industry through a range of specialized services and global linkages. It also provides a platform for consensus building and networking on diverse issues.

Extending its agenda beyond business, CII helps industry identify and execute corporate citizenship programs. Partnerships with more than 120 non-governmental organizations across the country carry forward our initiatives for integrated and inclusive development in affirmative action, healthcare, education, livelihood, diversity management, skill development, empowerment of women, and water, to name a few.

The CII theme for 2013-14 is Accelerating Economic Growth through Innovation, Transformation, Inclusion, and Governance. To this end, CII advocacy will accord top priority to stepping up the growth trajectory of the nation, while retaining a strong focus on accountability, transparency, and measurement in both the corporate and social ecosystem, building a knowledge economy, and broad-basing development, to help deliver the fruits of progress to many.

With 63 offices including 10 Centres of Excellence in India and seven overseas offices in Australia, China, France, Singapore, South Africa, the United Kingdom, and the United States, and institutional partnerships with 224 counterpart organizations in 90 countries, CII serves as a reference point for Indian industry and the international business community.