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Rural telephony market – still small but growing fast So, should recent bullish projections about the potential for rural telephony projects be taken seriously? It is still too early to say one way or another. Certainly, the liberalization of telecoms markets and a sharp fall in manufacturing costs are giving rural telephony projects a major boost. On the other hand, there is evidence that WLL ventures may lose out to cellular communications because of an even-steeper fall in cellular network and handset costs. Furthermore, cellular operators have far greater support from the investment community than fixed-network ventures.
Rural telephony-via-satellite to a large extent involves deploying VSATs. The rapid price reduction of VSAT terminals is crucial to adopting this solution; customers are predominantly telcos or governments of developing countries. Terminals that sold for US$10,000-20,000 only a few years ago, are now down to US$3,000-4,000. Greg Caressi, director of satellite research at Frost & Sullivan, expects a great boom in the next one or two years, as critical mass is reached. The magic threshold is for the terminal price to dip below US$1,000. Nigel Simmons, Hughes Network Systems’ (HNS) senior director of satellite networks says that this price level will be reached within the next two years, but that it is “a chicken-and-egg situation. Come in with a large order and we can achieve that [price] today.” Today, however, the market largely consists of installing village pay phones, as individual subscriber lines are not financially viable. “The real bogey is when you can touch individual subscribers,” Simmons says, “I believe that when we can bring the technology below the US$1,000 mark, then we will be in the million of subscriber-type market.” There have been rumours from Gilat about a unit with this price tag emerging earlier than that. However, the recognition of the rural telephony market and the subsequent tailoring of equipment has also played a role. “In the past, the market has been addressed by taking VSATs built for corporate networks and applying them to rural telephony. But now [manufacturers] are building equipment for this market,” Caressi says. Voice terminals deployed in the past few years include Gilat’s DialAway and Faraway VSATs, STM Wireless’ Subscriber Earth Station (SES) and HNS’ TES Quantum Direct. Regulatory and social issues Vancouver, Canada-based telecoms consulting company and research firm Intelecon specialises in rural telephony. It argues that policy reform is at least as important as equipment-cost reduction. Liberalizing telecoms markets, universal service or universal access obligations, and regulating technologies impact the possibility of deployment. In addition, regulation affecting interconnection costs can impact a project’s profitability. Direct government subsidies, meanwhile, are decreasing. While this may seem a deterrent, a more commercial environment could provide a push in the right direction. “For the market to boom, it is going to have to become a lot less dependent on governments,” Caressi says. As governments are often acutely aware of the need for telecommunications to promote economic growth, liberalization of the sector often brings with it obligations to serve remote communities. Either the incumbent is required to provide telecoms services nationally and new operators have to contribute to the cost of serving rural areas, or new entrants have coverage obligations included in their license requirements. If a coverage obligation is not part of a liberalization program, it is less likely that rural telephony rollouts will take place, as the incumbent would usually concentrate on retaining its high-usage corporate client base. Brazil, for example, sold off telco Telebras’ subsidiaries last year. It also imposed obligations on carriers to extend rural coverage. Governments are trying to find ways to keep the financing of rural telecommunications outside their budget. “In our experience, rural telecom funds are adopted in more and more countries,” says Intelecon’s Sonja Oestmann. Several Latin American countries have taken this route. Governments set up the funds to provide subsidies for rural telephony installations, often through fees levied on telecoms providers (see chart).
Appointing regulatory bodies independent of the incumbent telco is also important to ensure a fair interconnection regime. VSAT wholesale per-minute rates of rural calls are down to US$0.10-0.17/minute. However, interconnection costs with the public network can add substantially to the retail price of a phone call. Another related factor is the social agenda, which underlies a government’s desire to supply rural telephony. Caressi points out that this often clashes head-on with the commercial aspirations of a foreign company coming in to provide the service. Negotiations to find a middle ground lead to the definition of many service details, including plans for which villages to roll out service to, in what order and where to locate sites. Financial viability Gilat and STM Wireless are the two players recognised for targeting the VSAT market for rural telephony most aggressively. They have done so by establishing service companies. Gilat retains only a minority share in GVT, while Direct-to-Phone International is an STM subsidiary. Both companies are prepared to pay for the equipment if given a stake in the service provision. Normally, joint ventures are established with local partners. These ventures are not solely set up to sell VSAT equipment; they expect to make a profit on services as well, and early revenue indications are encouraging.
Oestmann says that people in the target areas for rural telephony systems are, in general, prepared to spend at least 1% of their income on telecommunications, rising to as much as 3% in some countries. “Most of the time one is surprised by how much people are willing to spend in order to get a decent phone service,” she says, pointing out that telecommunications can save money for rural communities as this service can substitute for travel. According to GVT, about 50 call minutes/day is a good ballpark figure for usage for its units. To reach breakeven, a GVT phone needs to bring in US$100-200/month.
Earlier this month, STM Wireless announced a pilot project with Intelsat for its Spaceloop system. The Spaceloop system is a combination of VSAT and DECT WLL technology. “[It] really gets at this market very well,” Caressi says. HNS can offer integrated WLL/VSAT solutions, but HNS’ Simmons is uncertain if there is a market for it. “There may not be many instances in the world where that is a fantastic model,” he says. The question is how many individual subscribers it will take to sustain a WLL model. Isolated communities that are large enough would really only be in the Amazon, he argues. However, STM’s Spaceloop targets areas with only 20-100 subs within a 5km radius, a far lower number than what is usually economically viable for a WLL solution. The manufacturer says that the integrated version makes it cost effective to implement even when serving only 20 subs. However, the model assumes that each subscriber will need an individual line. Frost & Sullivan research suggests that integrated VSAT/WLL systems will make up one-quarter of the 149 million-line rural telephony market in 2004. WLL will still dominate the remainder. Satellite communications will also contribute to the rural telephony market courtesy of mobile satellite services (MSS) players, which all to some extent say that they will provide rural telephony. ICO Global Communications and Globalstar have signed deals with suppliers of fixed pay phones for rural applications. However, Globalstar’s vice president of market development, Bill Thatcher, admits that Globalstar’s wholesale price of US$0.55/minute will be too high for rural applications. However, if rural operators receive subsidies to meet universal service obligations (USO), they could use them to reduce the price of MSS. “[If you are] looking to get away from up-front cost, it could make sense [to deploy MSS for rural telephony]”, Frost & Sullivan’s Caressi says. For VSAT deployments, network costs have to be added to the terminal price. Using MSS, the per-minute rate will be much higher than VSAT (US$0.10 - 0.17 wholesale), but the operator would not have any costs other than the actual terminals, as the MSS operators assume network costs. Caressi says that this could be viable for very isolated villages if enough call minutes can be generated to pay off the terminal in three years. However, he does not expect the global MSS players to take a large share of the rural telephony pie. Regional GEO MSS systems are likely to have a greater chance to fall back on fixed telephony should their mobile ambitions not materialize. MSS would clearly be the technology of choice for cellular operators seeking to guarantee national coverage though. Norway’s Telenor, for example, is mulling subsidizing MSS service for rural communities when its analogue NMT-450 network is switched off, as GSM does not have as extensive geographic coverage. Another feature of pay phones in rural communities is that they can become much more than their equivalent in urban areas, which can further add to profitability. HNS’ Simmons says that pay phones are now being developed incorporating voicemail functions that can be accessed with a PIN code. There is also a possibility to add screens for advertising and upgrade units to provide Internet access. Voice over IP may also be developed in this segment. Regional developments A dedicated regional rural telephony project in Indonesia also fell foul of the economic crisis. Pasifik Satellit Nusantara’s (PSN) M2A satellite venture envisaged deploying 4 million terminals. PSN’s earlier rural telephony VSAT installation, Xpress Connection, was a success, racking up 30 – 35 call minutes/day mid-1998. However, owing to the fall of the Rupiah and the country’s financial crisis, each phone generated weak dollar revenues. In 1998, Xpress generated revenues of US$195,412. All is not down and gloom in Asia, however, India, one of the region’s two giants, has conducted a small-scale trial with Inmarsat for remote villages in the northern state of Uttar Pradesh, using the fixed version of Mini-M. According to Inmarsat, there is now a tender out for a larger contract for this region. The Indian government is aiming to spread telephony to rural areas. According to local reports, only 50% of villages have some form of telecommunication. It is more likely that financial support will come from the state governments. While Asia is expected to pick up its quest for more widespread availability of telecommunications as soon as the economic climate allows, Asian markets still remain largely out of bounds. Latin America, where several systems have been installed, has emerged as the most rapidly growing rural telephony market. “Latin America has been the most active region in the last year, year-and-a-half,” Caressi says. Several key Latin American markets have steamed ahead with liberalizing telecoms, and included financing arrangements for national coverage as part of the bargain. Networks are also being installed in Africa where demand is enormous but resources are highly limited. Gilat’s installation in South Africa (via its Telkom South Africa deal) is notable, but South Africa’s economy differs significantly from the rest of the continent. Smaller networks are being rolled out in a number of countries including Benin, Egypt and Ethiopia. The biggest plan for Africa is RASCOM, the 54-nation initiative which plans to install 500,000 VSATs across the continent to provide telephony, but also TV and other services. RASCOM continues negotiations with Alcatel Space, the preferred partner for its build-operate-transfer agreement. Industry observers, however, remain cautious about RASCOM’s chances of getting to service launch. Central and Eastern Europe, as well as the C.I.S.’ widespread territories, also represent markets for these services. Last year Gilat signed a significant deal for VSAT telephony deployment in Kazakhstan. Intelecon’s Oestmann points out that, if accepted to join the EU, Central and Eastern European countries will have to subscribe to the EU’s USO. While in Western Europe, the problem is who should foot the bill for existing unprofitable lines, Central and Eastern Europe will need to make sure that they provide the service in the first place. It is uncertain how this policy will be implemented. Demographics make it likely that terrestrial solutions will take a larger share of new telephone lines in this region.
Lower-density VSAT/WLL may be an attractive solution for smaller communities in Russia, where the focus would be on individual subscriber lines. Russia has its own regulatory hurdles, as the local telephone carriers have their rates set, most often below cost, by local authorities. There are ways around this, however, as Leap is showing by establishing separate, private joint ventures for its systems. Most developed countries also have stringent USOs, which can mean opportunity for satellite solutions. In Australia, telco and satellite operator Optus is challenging incumbent Telstra’s provision of universal service. Optus argues that it can serve the sparsely-populated outback cheaper by satellite and WLL than Telstra does with the technologies it currently uses. This article is reprinted with the permission of Phillips Business Information Ltd., publisher of Interspace. |
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