Disconnected calls

Indian telecom companies may want to go global but, so far, they have had mixed success. While Bharti Airtel, Tata Communications and Reliance Communications have had a fair share of success in the long-distance segment through acquisition of cable networks, including Tyco Global and FLAG, they have failed to acquire telecom licences in countries such as Qatar, Kenya and Saudi Arabia. Bharti’s attempt to acquire South African major MTN only adds to that list.
The reason for the partial success has primarily been the pricing of the acquisitions.
Most of the successes for Indian telecom players have come in cases where the deal came cheap.
For instance, both Tata Group and RCOM acquired Tyco Global and FLAG respectively when the global undersea cable market was facing a bandwidth glut. In 2004, Tata paid just $130 million to acquire Tyco Global Network, which had 60,000 km of cable spread across three continents.
The following year, the Tatas acquired another long-distance player, Teleglobe, for $239 million which catapulted the company to the number-three international bandwidth provider in the world.
Similarly, Bharti bagged licences for Seychelles in 1998 when mobile services were just beginning to reach consumers. Bidding against biggies
However, Indian telcos have lost out whenever competitive bidding has taken place. For example, Bharti and Reliance lost out in the race to acquire a licence in Saudi Arabia after Kuwait Mobile Telecom Company bid a whopping $6 billion.
Indian telcos also lost out to France Telecom when 51 per cent of Telkom Kenya was up for grabs. France Telecom coughed up nearly $400 million for 2.8 lakh fixed-line telephone subscribers.
The talks between Bharti and MTN may also have failed due to price considerations, as the South African company wanted $50 billion while Mittals were prepared to give about $3 billion.
Analysts said that Indian operators are already working on thin margins, given the low tariffs in the country, and therefore they cannot afford an expensive buy to maintain profitability. The other reason is that home-grown operators are still small in scale compared to global giants such as Vodafone, giving them lesser chance of winning a competitive bid. In the case of the Bharti-MTN deal too, the Indian company refused to get into a pricing war by putting in a bid even as others like Etisalat expressed interest in quoting a price.

How integrated telcos are making their moolah

The Government may want more revenues from telecom operators, but large integrated players including Bharti Airtel have found a smart way to save at least Rs 1,000 crore a year in the form of licence fee revenue share.
In the current licence fee regime, telecom companies providing the whole gamut of services, including long distance telephony, are required to pay only 6 per cent of the annual revenues from long distance services compared to a total levy of 12 per cent for mobile services. These companies are saving on the net outgo to the Government by loading higher revenue component to their long distance licence.
For example, Bharti recently increased its long distance carriage charge from 25 paise a minute to around 60 paise. This means that if STD rates are at Rs 1.50 a minute, Bharti is passing on almost 45 per cent of the revenues on to its long distance arm compared to just 10 per cent earlier. Through this arrangement, Bharti can easily save about Rs 200 crore by paying a lower revenue share to the Government. Operators also save as they do not have to pay spectrum charges on the long distance revenue compared to about 2 per cent of the revenues from cellular services. The savings, however, have enabled the operators to lower the STD rates considerably from Rs 2.60 a minute to Rs 1.50 a minute.
That’s not all. The integrated companies are also carrying their intra circle mobile-to-mobile calls on their own long distance network. Latest quarterly report shows that Bharti carried nearly 89 billion minutes on its cellular network. According to industry estimates, almost 70 per cent of all mobile calls are within the same circle. This means that a part of the revenue from nearly 60 billion minutes of intra circle calls is being routed through the national long distance network. That’s another Rs 800 crore saving out of the amount that the company pays to the Government as revenue share. This has enabled operators to offer intra circle calls within their own network at low tariffs. Reliance Communciations, for instance, is offering Reliance-to-Reliance calls at 40 paise a minute.
However, despite the new practice, the Government may not end up getting any lesser amount from telecom operators. Increasing subscriber base, booming minutes of usage coupled with the entry of new players will keep the Government’s coffers rolling. In 2007-08, the Government earned Rs 10,000 crore from licence fee and spectrum charges. This is estimated to go up to Rs 20,000 crore in 2008-09 as operators’ overall revenue base increases.
Officials in the Department of Telecom said that the operators were within the rules in following the new routing scheme. Bharti executives said that while they did not comment on commercial aspects of the business, they were fully compliant with all regulatory norms. “There are a number of operators with a long distance licence and they can also leverage their network. Operators are under pressure to reduce tariffs all the time due to the competition and, therefore, it is up to them to find the best way keep their business profitable,” said an industry analyst.

Indian telcos look for global acquisitions

Saturated urban markets, declining average revenue per user, tighter acquisition laws and the desire to achieve global scales is driving Indian telecom operators to foray into other emerging countries.
Bharti Airtel, Reliance Communications, Tata Communications and State-owned Mahanagar Telephone Nigam Ltd have already launched services in some of these new markets and are hungry for more.
“This is not a surprise development because as the Indian urban market gets saturated, these companies are looking at other emerging markets to sustain the growth. Africa, for instance, is one of the growing markets outside India. The other reason would be to get global scales, just like foreign multinational companies that are entering India. Indian telcos are also eyeing the advantages related to global scales,” said Ms Arpita Pal Agrawal, Associate Director, InfoComm Advisory Services, PricewaterhouseCoopers. High Revenue
While ARPU in India is just around the $5 level, this is much higher at around $11 in other emerging markets. By foraying into such territories, Indian companies are hoping to cash in on higher margins.
Analysts also point out that Indian mobile market has already reached the 300 million mark and another 200 million subscribers are expected, mostly from rural areas. This is enough to sustain the current growth rate for only about 3-4 years more after which operators may come under pressure. M&A norms
The recent mergers and acquisition norms have also made it impossible for existing telecom companies like Bharti and Reliance Communication to grow organically. A deal with South Africa’s MTN will give Bharti access to nearly 60 million subscribers across 21 countries.
For a company like MTNL, foreign markets offer an opportunity to go beyond Delhi and Mumbai. “MTNL has the licence to offer services in Delhi and Mumbai, which is already becoming a saturated market with more than 25 million subscribers and seven different operators. We need to look elsewhere to increase our revenues,” says an MTNL executive. MTNL’s profits have been dipping over the past few years and the company is, therefore, betting big on the foreign telecom forays.
For Tata Communications (formerly VSNL) too, expanding its presence to global markets has been part of a well thought-out strategy to reduce its dependence on domestic market where its share has been dwindling over the past few years due to competition. The company plans to invest $2 billion for global expansion over the next few years. Operation costs
But Indian companies also have to deal with challenges related to higher cost of operations, different regulatory environments and competition from large global European and American majors who are also eyeing these emerging markets.
However, analysts don’t see too much resistance. “Indian operators are aware of these issues better and they will make a bid or acquire a licence only if it makes any business case. In the past too, some of the Indian operators have bid for licences but they have not quoted huge sums even if that meant losing out,” says Ms Agrawal.
One advantage that Indian operators have is that they have learnt the trick to make profits even as they offer the lowest tariffs in the world. Bharti’s talks with South African major MTN, if successful, will take this strategy to a new level. Other companies are eyeing countries such as Kenya, Egypt, CIS and the Gulf region to expand their footprint. (Business Line)