With the imminent large-scale launch of 4G services by Reliance Jio set for later this year, the market for 3G in India faces an uncertain future just four years after its commercial introduction and only five years after the country's leading operators parted with nearly $15 billion for their 3G licenses.

Having secured licenses in an auction in early 2010, a number of operators launched commercial 3G services in early 2011, providing Indians with their first real experience of mobile broadband. (See India's 3G Auction Ends, Raises $14.6B.)

And while there is little doubt that the introduction of 3G services has had an impact on India's communications sector, it hasn't been the broadband revolution many had been hoping for.

According to the Mbit Index report on mobile data usage in India published by Nokia Networks , mobile data volumes grew by 87% during 2013 to reach about 50 Petabytes per month. "3G continues to be the prime contributor in the data growth, growing its share from 33% in 2012 to 43% of total mobile data in 2013," states the report.

However, the initial response to 3G can at best be described as lukewarm. High tariffs and patchy coverage coupled with the high price of 3G-ready smartphones has ensured a limited demand. It was only when the telcos decided to reduce their tariffs in mid-2013 that 3G started to record strong uptake. A further drop in prices of 3G-enabled handsets led to the further migration of high-end 2G customers to 3G.

Even so, uptake is limited in a country that is fast approaching 1 billion mobile connections, with recent statistics from the Telecom Regulatory Authority of India (TRAI) showing there were only 70 million mobile broadband connections in use across the whole country at the end of 2014 (though the number of 3G connections will be about 12 million or so higher due to the way broadband connections are reported to the TRAI by Idea Cellular and Reliance Communications).

Idea Cellular Ltd. provides a clear example of how 3G has attracted only a small section of India's mobile base: The operator had more than 150 million mobile connections at the end of 2014, but only 16.1 million 3G customers. (See India's Mobile Subs Base Nears 1 Billion.)

It's not all bad news for the 3G sector, though. The introduction of 3G services has resulted in the significant growth of mobile data revenues for the operators, resulting in an increase in the ARPU (average revenue per user) levels of all the main telcos. Vodafone India 's blended ARPU increased from 171 Indian Rupees (US$2.75) in March 2011 to Rs 192 ($3.08) in December 2014, while Idea Cellular's ARPU increased from Rs 161 ($2.59) in March 2011 to Rs 179 ($2.86) in December 2014.

This increase in ARPU is the result of increased data usage. For Bharti Airtel Ltd. (Mumbai: BHARTIARTL), data usage per customer has increased from 187 megabytes per month at the end of March 2013 to 622MB per month by December 2014. For Idea Cellular, data usage for a 3G subscriber touched 705MB per month by December 2014, while Reliance Communications Ltd. recorded monthly data usage of 752MB per customer at the end of September 2014.

The telcos have also recorded a significant increase in the contribution of non-voice component to the overall revenue of the telcos. While in March 2011 (the early days of 3G) the contribution of non-voice revenue was in the range of 10-15%, now this has increased to more than 20% for most of the telcos.

Next page: The impact of 3G roaming

The impact of 3G roaming
Significant 3G expansion gained momentum only in the current financial year (to the end of March 2015). For instance, Bharti Airtel, India's largest private service provider, added 6,728 cell sites during the fiscal year that ended March 2014, but during the first three quarters of the current fiscal year (up to the end of December 2014) the operator added more than 10,000 3G cell sites. Idea Cellular also increased its rate of 3G cell site rollout during the same timeframe: While the operator added just 4,241 3G sites during 2013-14, it added 6,363 3G sites from April 2014 to December 2014.

A key reason for this momentum during 2014 was the 3G national roaming verdict delivered in April 2014 that came out in favor of the incumbent telcos. 3G service roaming between India's operators was one of the biggest disputes to hit the Indian telecom industry during the past five years.

Roaming deals are agreements between service providers to offer coverage to their subscribers in areas where they do not have license. However, the 3G roaming agreements were markedly different from earlier 2G roaming deals, as Bharti Airtel, Vodafone and Idea Cellular went a step further and struck bilateral deals that resulted in them selling 3G connections to subscribers in the "circles" (service areas, of which there are 22 in India) where they did not own spectrum.

After many rounds of litigation, the telcos were finally allowed to go ahead with roaming deals in April 2014. This provided much needed impetus to the growth of 3G and data consumption in the country. Following this verdict, Reliance Communications also signed a tripartite agreement with Aircel and Tata DoCoMo. However, the matter is still under litigation as the government filed a fresh appeal in October 2014 to overturn the April verdict of the Telecom Disputes Settlement and Appellate Tribunal (TDSAT).

The road ahead
Quite how India's 3G market will develop from here is unclear, as while the current crop of service providers would ideally like to get the most from their 3G investments, they now face a 4G dilemma.

Shortly after the 3G spectrum auction in 2010, the Indian government auctioned what it calls Broadband Wireless Access (BWA) spectrum for 4G services, raising more than $8 billion in the process. The main outcome of that auction was the arrival of a new major player, Infotel, which was then swiftly acquired by Reliance Industries, and is now known as Reliance Jio. (See India's BWA Auction Ends in $8.2B Drama, India's Billion-Dollar LTE Question and Reliance Jio Selects 4G Vendors.)

Now 4G is set to stir up India's communications sector in a significant way. Recently, Bharti Airtel announced that it intends to offer 4G service at the same price as (or even at a discount to) its 3G offering. Clearly, this doesn't bode well for 3G return on investment strategies.

The impact on the 3G market will largely depend on the scale, prices and coverage of Reliance Jio, which is the only operator that holds BWA/4G licenses for all of India's 22 circles. It is expected to launch 4G services later this year: While Bharti Airtel has already launched its 4G offering in some cities, Reliance Jio is planning to launch 4G on a broad scale.

The number of tower-sharing agreements signed by Reliance Jio suggest that 4G coverage might be even better than 3G: Reliance Jio has signed tower-sharing agreements with Reliance Communications, Bharti Airtel, Viom, BSNL, American Tower Company and others.

Reliance Jio is planning to launch 4G services in 5,000 towns and cities and 215,000 villages in the first phase (according to the annual report of Reliance Industries). Around 90% of urban India would be covered, which means that premium users are very likely to shift to 4G deals soon after the launch.

That doesn't render 3G irrelevant, but it puts it in the shade, so soon after its light started to flicker. Quite how the operators view their 3G offerings might be indicated during the upcoming spectrum auction, which includes some 2100MHz licenses for 3G: Additional capacity may provide some new impetus for WCDMA services.

There is also the voice factor: While 3G offers reliable voice as well as data connectivity, that is not yet the case for 4G, with options such as VoLTE and CSFB (circuit-switched fallback) less proven for mass deployment.

The next few years will be critical for India's 3G services sector in determining just how relevant 3G will be in India's developing mobile broadband economy.

— Gagandeep Kaur, contributing editor, special to Light Reading