New research has confirmed that India's mobile phone market is set for a period of fast growth, with revenue from cellular services expected to jump by more than 18 percent each year for the next five years.

Most of the growth will come from rural areas, where only 2 percent of the population have access to mobile phones today, said Madhusudan Gupta, senior research analyst at Gartner Inc., which conducted the research. Service providers have already started to focus on rural markets, with aggressive rates and handsets priced at under $25, he said.

Cellular service revenue in India will increase at a compound annual rate of 18.4 percent between this year and 2011, to reach US$25.6 billion, Gartner estimated. Cellular revenue last year was $8.9 billion.

As call rates fall from their current level of 2.6 cents per minute to rates comparable to fixed lines, which are about 0.9 cents per minute, a broad swathe of additional users will start using mobile phones, Gupta said. "The fixed-line infrastructure in India is not that good, which is giving enough of space for mobile wireless to move in," he said.

Revenue from data will outpace that of voice services and contribute to about one fifth of revenue in 2011, more than double its share last year, although most of that growth will come from urban markets, Gartner said.

As they expand into rural areas, operators will see their average revenue per user (ARPU) fall to $59.50 per year by 2011, from $82.1 last year. Successful operators will be those that make up for the falling ARPU through economies of scale, Gupta said. Operators are likely to collaborate by sharing infrastructure and outsourcing their network management to equipment vendors, and possibly system integrators, he added.

For example, Bharti Airtel Ltd., a large Indian service provider, said Wednesday it had awarded a contract worth $2 billion over two-years to Telefonaktiebolaget LM Ericsson, to expand its network in rural areas and provide capacity management.

The service providers should not be short of funds for expansion. Vodafone Group PLC's acquisition in May of a controlling interest in the Indian operator Hutchison Essar Ltd., for $10.9 billion, has increased the valuation of all Indian service providers, and is helping them to attract private equity and other investments, Gupta said.

The rural demand will come from businesses expanding into these areas, as well as from local businesses. Some individuals will own mobile phones, although the predominant model is likely to be a communally-owned handset, a concept already tried in some areas, Gupta said.

India added 15.5 million mobile subscribers in the first quarter of this year, taking the total to 165.1 million, according to the Telecom Regulatory Authority of India.

Gartner expects 58 percent of the rural population and 95 percent of the urban population to be covered by mobile networks by 2011. That year, the total number of mobile connections in India will have increased to more than 462 million, according to Gartner. India's total population at that time will be close to 1.2 billion, according to some estimates.

IDG News Service

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