Bad year for telecom

As I reflect on the past year 2009 it was a damp squib as far as the telecom sector is concerned with most of the big ticket Government initiatives getting delayed.

The much-awaited introduction of Mobile Number Portability, launch of third generation (3G) mobile services, entry of Mobile Virtual Network Operator and permitting unrestricted Internet Telephony – have all got delayed as the Government went back and forth on policy related issues. In fact in the entire year, there was no major policy announcement from the Government that could have taken this sector to the next level of growth.

Even the second phase of the rural mobile initiative, directed at the aam admi in villages, through the Universal Services Obligation fund is yet to be rolled out as the Communication Ministry kept sitting on the project through the year.

“This year has been fiasco. Promises that were made got delayed as the Government dilly dallied on policy making. The blame for this is not just on the Communications Ministry, but on the entire Government. On the regulatory front, lot of contentious issues are still unaddressed including delinking telecom licence from spectrum, anomalies with the existing 2G spectrum allocation and 3G auction rules,” said Mr B.K. Syngal, former Chairman of Videsh Sanchar Nigam Ltd and currently Senior Principal with Dua Consulting.

There was, however, some cheer for consumers with a number of new mobile operators, including Tata DoCoMo, Unitech Wireless, MTS and STel, entering the market.

The immediate impact of the intensifying competition was that the operators moved from minute-based billing to offer tariffs on per second. There was reduction in roaming and STD tariffs as well. As a result, the mobile subscriber base grew from 346 million in December 2008 to 506 million by November 2009 with 15 million new subscribers being added every month on an average.

The other good news was that while the world was being battered by the global economic slowdown Indian telecom was among the least affected sectors.

Going forward analysts predict that 2010 is likely to be a great year for the Indian telecom subscribers, but operators will face a reasonably tough year.

“Already with tariffs at one paisa a minute, subscribers are having a great time. The intense competition at lower tariffs could mean that margins could be hit for smaller operators in the immediate future. But, that should not be a major problem in the mid to long-term future,” says Mr Prashant Singhal, Partner & Telecom Industry Leader, Ernst & Young.

The big event slated for 2010 is the auction of 3G and broadband spectrum that would provide subscribers with quicker access to information on the mobile phone.

The migration to 3G will result in spectrum being released on the 2G network. In turn, these subscribers too will get better voice connectivity. Call drops that had become a feature of mobile calling in India would get reduced substantially.

This could set the stage for the introduction of other consumer-oriented initiatives such as number portability and Net telephony.

“India needs a regulatory roadmap that clearly defines the path ahead for the next few years. That one thing could make things a lot easier for the telecom industry. The Government needs to clear the confusion surrounding the future provision of 2G spectrum and a clear understanding of the merger and acquisition norms in the sector. Despite a couple of thorny issues, 2010 should be a reasonably good year for the Indian telecom industry,” says Mr Singhal.

Hopefully, the chances missed in 2009 will be taken in the New Year.

EXIT PC, ENTER MOBILE

Zero Mass Foundation, an NGO, has found an innovative way to use mobile phones for payment towards social services provided by the Central government.

The Foundation, in partnership with six banks and a technology company called A Little World, has started a service that enables the Government to implement its flagship social programmes — the National Old Age Pension (NOAP) Scheme and the National Rural Employment Guarantee Scheme across 10 districts in Andhra Pradesh.

In each district covered in the programme in AP, several Customer Service Points (CSPs) have been created by selecting women from the local Self-Help Groups (SHG) who are given a kit consisting of a special mobile phone and accessories.

These kits can process banking transactions such as deposits and withdrawals electronically, through real-time exchange of information with the bank's database at the backend. A biometric scanner to read finger prints and a printer is also connected to the mobile phone to make the transaction secure.

The system has become so successful that ZMF has now appointed nearly 6,000 CSPs serving a total of 1.5 million NREGS payees, 0.7 million pensioners and nearly 0.7 million rural citizens who have opened accounts under the financial inclusion (FI) programme.

In Himachal Pradesh, the State government has started an initiative to give information pertaining to driving licence, arms licence, and vehicle registrations on the applicant's mobile phone.

Under the scheme, applicants would be required to put their mobile numbers on applications submitted to various Departments.

The Departments then inform the applicants about the status of their application through an SMS and also send an SMS once the work is completed.

The State IT mission has further identified around 20 services from eight government departments that would be covered by this project; irrigation and public health, agriculture, horticulture, State electricity board, State transport corporations, forest and educationnitiatives such as these were initially planned to be implemented through the Government's $10-billion National e-governance plan but the economic advantages of using the mobile network and the uptake of cellular services in the hinterlands is now prompting State agencies and NGOs to shift focus from e-governance to m-governance.

“Delivery of e-government services in the existing paradigm requires access to the Internet. With 5 per cent penetration of the Internet, personal access to the Net is a distant dream for those at the bottom of the pyramid.

Access to the Internet will remain inconvenient with restricted time window even after 1,00,000 citizen service centres (CSCs) are made functional in rural areas under the e-governance plan.

Only 40,000 CSCs have been opened so far and a very limited number actually deliver any government service. In comparison, there are already more than 100 million mobile users in the rural areas,” says Professor Subhash Bhatnagar of IIM, Ahmedabad, who has done a study on how mobile phones can serve as a more efficient and cost-effective mode of e-service delivery than the comparatively traditional Internet kiosk.

According to the study, it is twice as expensive to operate an Internet Kiosk in rural areas in comparison with urban areas because of the need for a power back-up, problems of maintenance of computer hardware, lack of broadband connectivity, and lack of trained manpower to operate computers.

On the other hand, demand for services in rural areas is scattered, making it difficult for CSCs to achieve economic viability.

According to a study by Vodafone, small farmers in India prioritised weather, plant protection (disease/pest remediation), seed information and market prices as being the most important. Traditionally, the farmers used a variety of sources for getting agricultural information, including TV, radio, newspapers, other farmers, etc. However, the perceived quality and relevance of the information provided by these sources is highly varied.

Employment exchanges can deliver timely and accurate alerts about appropriate job openings, and loans available for setting up small entrepreneurial projects through SMS in local languages to the unemployed rural poor. Sri Lanka-based think-tank on Information and Communication technology (ICT) regulation, LIRNEasia, says that mobile ownership in India has grown by 131 per cent between 2006 and 2008.

This growth has been driven by rural India, with 27 per cent of the rural Bottom of the Pyramid (BOP) getting connected in 2008, compared with only 19 per cent in urban India.

Combined fixed and mobile phone ownership now surpasses that of radios. In contrast, computer ownership and Internet use is very poor. Less than 1 per cent of the Indian BOP own a computer or have ever used the Internet.

“These findings show that the potential use of mobile phones over other mediums in accessing government services is large. In addition, mobile devices are less expensive to buy and maintain than traditional computers, and require less electricity or power to run, a feature particularly beneficial to rural areas without a guaranteed source of power,” says Chanuka Wattegama, Senior Research Manager, LIRNEasia

But there are financial issues that are coming in the way of large-scale deployment of mobile governance.

Unlike the e-governance platform, the m-governance solutions are not recognised as a part of the National e-Governance Plan. So while an agency that has an e-governance-related scheme can get funding from the Government, there is no such provision for m-governance projects.

For example, the Zero Mass Foundation's mobile banking project is struggling to make it a viable proposition, given that it requires close to Rs 3,000 a month to run each customer service point, compared with a revenue of Rs 2,129.

“M-governance should be made part of the NeGP, which will not only improve the funding for these projects but will also create an overall ecosystem for mobile-related applications directed at the rural users. Government needs to create conditions for economic viability of projects through a subsidy regime that is equitable across different technologies,” says Bhatnagar.

There are other issues too at the policy level. Enabling legislation would need to be created so that the law recognises mobile documents and transactions.

The money lying in the Universal Services Obligation fund could also be utilised to incentivise mobile operators who expand their network into the rural areas.

Will market take the wimax call?

Chhota Udaipur, a tribal area 100 km off Vadodara in Gujarat, is probably where the story of India’s WiMax-based wireless broadband services will begin. This remote area is among the many places in India where there is no copper available to provide connectivity to the online world. But things may soon change here after broadband connectivity and Net devices are given to tribal schools and hostels by Bharat Sanchar Nigam Ltd through its franchisee partner Soma Netwo rks. This State Government initiative will also attempt to set up low-end BPO centres using WiMax.

In a country with low wireline penetration and a cost-sensitive market, WiMax is touted as the perfect medium for broadband services, which so far has only about 6 million subscribers. Companies including Tata Communications, BSNL, Reliance Communications, Soma Networks and Intel are betting big on WiMax to take this number to 100 million over the next 10 years.

Prateek Pashine, chief operating officer, Tata Communications Internet Services says, “WiMax can play a major role in addressing the large latent demand for quality broadband in homes and small businesses. In India this technology will play the role of kick-starting growth in broadband penetration and we hope to participate in driving that growth.” Tata Communications has been dabbling with a lower version of WiMax (802.16d standard) for over two years. It already has over 1,000 base stations spread across 150 cities and a customer base exceeding 50,000. Now with the Government planning to auction 20 Mhz of spectrum for broadband wireless access, Tata Communications is eyeing the new version of WiMax (802.16e standard). “The ‘e-version’ provides better spectral efficiency, more standardised and compatible product availability, and other features in addition to mobility,” says Pashine.

Time-to-market advantage

Globally, several operators are deploying WiMax e-version for mobile broadband services. In the US, Clearwire, which was among the first to select WiMax as its wireless mobile broadband technology in 2006, believes it will give existing telecom operators more than a run for their money. “There was (and still is) no other technology available to meet our time-to-market timelines. Currently, WiMax has minimum 2-3 years’ time-to-market advantage over any competing technologies. None of the existing 3G technologies could properly support the capacity required for heavy data utilisations — 5GB to 15GB per month,” says Ali Tabassi, Senior Vice-President, Global Ecosystem and Standards, Clearwire.

UQ Communications in Japan is also rolling out WiMax-based broadband services.

Tatsuo Sato, Senior Manager, UQ says, “UQ selected WiMax because it has fast-mover advantage over other technologies.” He says although WiMax and LTE (Long Term Evolution) both use the same technologies, WiMax is way ahead with many products in the market. “UQ started its pilot service from February this year and moved to commercial service from July. We have received many positive comments from our pilot users,” he says.

Does it mean business?

Though telecom industry largely agrees that WiMax is a good broadband technology, not all are convinced on the business front, which will, at the end of the day, decide the success or failure of any technology. Compared with other next-generation technologies, WiMax is relatively a new entrant. Third-generation technologies such as EVDO and HSPA, which are also competing for the lucrative wireless broadband data market, have been tried and tested for more than five years. In contrast, WiMax deployments are only just beginning. Operators including Yota in Russia, Packet-1 in Malaysia, VMax in Taiwan and Clearwire in the US began rolling out network over the past six months. On the other hand, 3G is available in the whole of Europe, the US, Australia and many other countries in South-East Asia.

Comstar, a WiMax-based operator in Russia, admits it is early to say whether they have bet on the right technology. Says Dmitriy Ronin, director, WiMax project, Comstar – Russia, “Comstar has chosen WiMax because we suppose it’s the most innovative wireless broadband access technology and can build powerful wireless networks. But it’s too early to judge (on whether they have made the right choice of technology). The first facts-based comments are possible in 2-3 years.”

Elsewhere too, WiMax faces different challenges. According to research analyst firm Maravedis, subscriptions in South Korea to WiBro, the local version of WiMax, fell last year before the government allowed VoIP (Voice over Internet Protocol) on the network. “An auction of radio spectrum for WiMax in India was delayed and Clearwire doesn’t have enough money to do what it has to do. Clearwire is about $3 billion to $4 billion short of the $6 billion to $7 billion it will need to reach 100 million subscribers by 2010, and is unlikely to make its deadline. All this matters, in part, because chip and device manufacturers need some assurance that people want to use WiMax before they put it in their products,” a Maravedis executive was quoted in an international report.

Most of the international WiMax operators eWorld spoke with were unwilling to share targets for achieving break even. However, a study by business consulting and internal audit firm Protivity states that the four WiMax operators in India, as envisaged in the auction guidelines, will start making 25 per cent profits on revenues of about Rs 5,200 crore at the end of five years of operation. The report, made for the WiMax Forum in India, pegs 36 million WiMax subscribers by 2014 which gives each of the four operators about 7-9 million subscribers. It says the operators will get ARPU of Rs 700-1,100 a month, assuming 512 kbps speed initially. It estimates 10,700 WiMax base stations in five years for which sites will primarily be leased from existing tower companies. “Capital expenditure (excluding spectrum licence cost) per subscriber is estimated to be Rs 1,900-2,100 and break even in 3-5 years,” the report states.

3G players unimpressed

But proponents of 3G technologies dismiss these numbers and insist there is no space for WiMax in India when existing mobile players are well positioned to offer wireless broadband through EVDO or HSPA. Kanwalinder Singh, President, Qualcomm India and South Asia, says, “The cost of rolling out a greenfield mobile WiMax network is huge, given the geography of this country. WiMax requires at least 4-5 times the number of base stations needed for, say, EVDO.” Renting a tower would cost Rs 30,000 a month, making it unviable both in rural and urban areas, he says, adding that existing players are committed to the next levels of their respective technologies, namely HSPA for GSM and EVDO for CDMA. According to Qualcomm, WiMax may be restricted to niche areas in cities, offering fixed connectivity to the enterprise segment. “In India this technology may, at best, be relevant for homes and offices in a fixed environment,” says Singh. Agrees Tata Comm’s Pashine, who says the WiMax 802.16e is seen relevant in the short term to serve the needs of fixed and nomadic broadband, owing to poor availability of wireline infrastructure.

Who will benefit?

Soma Networks, currently the only operator in India to roll out WiMax using BSNL’s spectrum on a franchisee model, is also restricting itself to fixed broadband. “In an emerging market like India, with vast areas underserved due to lack of wired infrastructure or sub-optimal DSL connections (slow speeds), the best use of WiMax today is to deliver broadband to homes and businesses that have poor or no connectivity. The population we cover in the three circles of Gujarat, Maharashtra and Andhra Pradesh is 240 million. And even if broadband penetration increases from the 0.5 per cent today to 3 per cent over the next three years, we are still talking of very small volumes to justify that kind of investment, given the lower ARPU numbers in India. Using WiMax as a mobile broadband application is better suited for developed markets, which have high data consumption. Classic examples are Tokyo and Korea,” says Yatish Pathak, founder and CEO, Soma Networks.

Established global WiMax players, of course, disagree. Clearwire, for example, says it is offering 4-6 Mbps downlink and 1-2 Mbps uplink at full mobility at 60 miles per hour. Japanese players such as UQ and Malaysia’s Packet-1 are also exploring options to bring their WiMax-based mobile broadband to India not just for data services on handsets but also applications such as IPTV and VoIP. “The flexibility of WiMax enables a great variety of services, types of users and progressive deployment in any geographical location… allows for greater economies of scale as wide areas are covered by WiMax base stations,” says Packet-1.

But international players sound a word of caution on the quantum of spectrum available in India. While in other countries operators have more than 30 MHz of spectrum for WiMax services, in India there is only 20 MHz for each operator. “More than 30 MHz bandwidth should be assigned to install 10 MHz channel with Reuse 3. Operators are able to expand their service coverage with 20 MHz by using a technology called Fractional Frequency Reuse (FFR: Reuse1). The wider the spectrum, the better for coverage expansion and future technology expansion toward the new standard 802.16m that realises 100Mbps+ download speed,” says UQ’s Sato.

Big players in the ring

Market watchers point out that apart from cost factors, the Indian market has traditionally been unkind to new technologies in the mobility segment. “We have seen many mobile technologies such as PAS, Cordect and CDMA trying to break into the cellular market dominated by GSM players. So far, only CDMA has had some limited success, that too because it is backed by large corporate groups like Reliance and Tatas. WiMax may have a tough time breaking into the mobile space unless a major player decides to invest in it,” said a GSM player.

That big player could be chipmaker Intel, which is heavily banking on the success of WiMax in India to penetrate into the booming mobile devices segment. Intel Capital, the Silicon Valley-based chipmaker’s venture capital firm, is in talks with Indian operators to jointly invest and offer mobile WiMax. The chipmaker is also trying to get other international WiMax players, funded by Intel Capital, to either bid for spectrum when it is auctioned or partner an Indian licence-holder. Russian operator Yota is one such player which may strike an alliance with an Indian player, including Mahanagar Telephone Nigam Ltd and Bharat Sanchar Nigam Ltd, to offer WiMax-based broadband services in India. Yota, backed by Intel capital, currently offers WiMax-based services in three regions of Russia including Moscow and St Petersburg. Yegor Ivanov, Director, Business Development, Yota, says, “India is a key market for us since we are looking at expanding to international markets. We are looking at various options, including a partnership with MTNL, for offering WiMax broadband in Delhi and Mumbai, and with BSNL in the rest of the country.” Yota has roped in Phi Televentures, a new company floated by former executives in Motorola and Alcatel Lucent, to work out a deal in India. By partnering MTNL and BSNL, Yota will have the first-mover advantage apart from not having to buy spectrum through the competitive bidding slated for later this year. One factor favouring WiMax players is that compared to 3G they offer international and new players a lower upfront cost to enter the fastest-growing mobile market in the world.

While the Government plans to peg the reserve price for 3G spectrum at Rs 4,040, there are efforts to fix the base price for WiMax spectrum at only 25 per cent of that. But 3G players say that would hardly make a difference in a business requiring investment of billions of dollars. “While the disparity in reserve price is unfair to 3G, the lower base price does not give WiMax players a 100-metre headstart in a 10-km marathon race. The winner, at the end of the day, will be decided in the marketplace and we are going to go hard at them,” says a company executive backing 3G technologies.

Will the WiMax story also end at Chotta Udaipur or will the technology be able to disrupt the mobile broadband market by taking on the 3G juggernaut in India? With the auctions for spectrum slated later this year, the answer will not be long in coming.

In for a rough ride

If one were to go by the first few months of A Raja's new stint as Communications and IT Minister, the telecom sector should brace for a rough ride. As soon as he took over the minister announced that he expects local tariffs to come down to 10 paise without explaining how operators, who pay a minimum of 25 paise to each other as termincation charge, will be able to bring down tariffs to such an extent. Then a week later after he took charge of the Ministry, Raja made a number of faux pas. Though he introduced the Minister of State Mr Gurdas Kamat as someone who needs to introduction, he managed to get the second name wrong. Then he adressed Sonia Gandhi as the ChairMAN of UPA. After hearing all the errors in his inaugural speech to the media, an industry executive (who had managed to sneek into the Minister's office) said "One just hopes that this time he limits the mistakes to his sundry speeches and not let it over flow to policy making." But that hope is probably just a hope. For Raja seems to be in no mood to relent when it comes to messing up telecom sector. He has alreay trashed the sweeping reforms proposed by the spectrum commitee headed by Subodh Kumar. Raja wants to stick to giving 2G spectrum away for free based on the subscriber based criteria - a system which is unique to India. Although the opinion of the TRAI has been sought in this regard, DoT sources say that it is a hog wash. Raja has already made up his mind to not auction 2G spectrum becuase it benefits him. Auction would take away his ministry's control over spectrum, which of course could mean not having enough funds to fight the next elections. On 3G and Wimax, Raja has repeatedly shifted the goal post. Initially he said that the auctions for 3G mobile services would take place in September. Now he says it wont happen before the end of the year. It is not as if other telecom ministers before him were all clean. But the difference is that the predecessors at least delivered some good to the country.

Bharti-MTN deal: Pointer to the future

The merger talks between Bharti Airtel and South African telecom company, MTN, is a pointer to an emerging trend in the Indian telecom growth story. Saturated urban markets, declining average revenue per user, tighter domestic acquisition laws and the desire to achieve global scale are driving Indian telecom operators to other emerging markets.
That the largest and most profitable mobile operator in the country is looking for markets elsewhere in the world is a clear indication that there is not much juice left in the Indian telecom market. This is similar to what Vodafone went through in the earlier part of this decade, when it decided to move out of its traditional, but saturated, European market to other emerging markets. Growth rate
A recent report from the Department of Telecommunications leaves no ambiguity on what the policy-makers think about the future growth prospects of the Indian cellular market. The report states that though the mobile subscriber base is increasing at a scorching pace, the growth rate will taper off by the end of next year.
Using the S curve model of growth, the DoT has projected that the telecom sector will reach an inflexion point (the point at which maximum growth rate will occur) when the mobile density reaches 44 per cent. Considering that the current tele-density is close to 35 per cent, it is expected that the inflexion point will be reached by the end of 2010, after which growth rate of mobile subscription is expected to decline.
In addition, Indian operators have been struggling with falling monthly billings because the new additions are coming from semi-urban and rural areas where subscribers are not willing to spend more than Rs 100-Rs 200 a month on mobile usage. Therefore, even though the mobile user base is expected to increase from 400 million at present to 900 million by 2013, operators are not betting on a proportionate increase in revenue generation.Mouth-watering proposition
In comparison, other emerging markets such as Africa, Latin America and West Asia offer a mouth-watering proposition. These markets are at the point where India was in 2003. The telephone penetration levels there are low which means huge potential in terms of higher subscriber addition. The African telecommunication market, for example, is estimated to grow at roughly 40 per cent and is expected to continue to show higher growth for much longer period after the Indian market stagnates.
Also, the average revenue per user is much higher at Rs 600 in these emerging markets compared to Rs 250 in India. By foraying into such territories, Indian companies can hope to cash in on higher margins.
The domestic merger and acquisition norms have also made it impossible for existing telecom companies such as Bharti and Reliance Communication to acquire other large operators within India. On the other hand, a deal with South Africa’s MTN will give Bharti access to nearly 100 million subscribers across 21 countries.
However, Indian companies also have to deal with challenges related to higher cost of acquisitions, different regulatory environments and competition from European and Chinese telecom majors which are also eyeing these emerging markets. Mixed success
So far, Indian players have had mixed success in their attempts to go global. 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.
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.
Similarly, Bharti bagged licences for Seychelles in 1998 when mobile services were just beginning to reach consumers. Competitive bidding
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 operators 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.
Since Indian operators are already working on thin margins, given the low tariffs in the country, 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 a lesser chance of winning a competitive bid.
One advantage that Indian operators have is that they have mastered the game of working on high volumes, building economies of scale, and cost management through innovative outsourcing deals and infrastructure-sharing agreements.
Bharti’s talks with South African major MTN, if successful, will take the low-cost business strategy to a new level. Markets such as Africa are also similar to that of India — predominantly agriculture-based with a large rural population — which again works to the advantage of Indian operators. The Bharti-MTN deal, therefore, could show the way to other Indian players. Companies such as Reliance Communications, MTNL and BSNL have been eyeing countries such as Tunisia, Egypt, CIS and the Gulf region to expand their footprint.
For a company such as MTNL, foreign markets offer an opportunity to go beyond Delhi and Mumbai. The PSUs profits have been dipping over the past few years and the company is, therefore, betting big on the foreign telecom forays.Showing the way
But the window of opportunity is closing fast. Most of the emerging markets in the African continent, for instance, are already controlled by European players such as Vodafone and France Telecom. The Bharti-MTN deal would create a most formidable rival there. Other Indian operators looking for a similar deal still have options such as Kuwaiti-based Zain, which is in 24 markets across Africa and West Asia and may be a bid target. The Egypt-based Orascom, which has operations in 11 countries, could be another possible partner. Then there are regional players such as Telekom SA, which may be open to a possible alliance. Partnering with an Indian company will also give these foreign operators a foothold into the fastest growing market in the world.
Bharti Airtel’s $23-billion deal with MTN, if successful, may spark the consolidation of mobile phone markets across Africa and West Asia. But Indian operators may have to move fast if they want to continue the telecom growth story.

New players going nowhere

On February 26, 2008, the Communication and IT Minister, Andimuthu Raja, gave his permission to issue licences to new telecom operators amidst a lot of opposition from existing players. Though the minister was criticised for giving away spectrum to the new players without conducting an auction, Raja pushed through with the decision and hoped that the new operators would launch their services to bring cheaper mobile services to consumers.
The companies that received fresh licences were Swan Telecom, Unitech, STel, Datacom, Shyam-Sistema, Bycell, Spice Telecom and Loop Telecom.
Soon after receiving the government nod, these companies declared war on the incumbents, to grab a larger share of the booming cellular market in the country. (See The call of competition in eWorld dated February 18, 2008). They sounded the bugle with a combined investment of over $10 billion and some innovative tariff schemes in the offing that promised to give the incumbents a run for their money. Some of them announced that they would get 10 million subscribers by the end of 2009.
However, even after a year since the licences were awarded, none of these companies is anywhere near fulfilling promises. Reeling under the combined effects of the liquidity crunch in a slowing economy, a highly competitive market dominated by the likes of Airtel and Vodafone and problems among various equity holders, the dreams of the new players seem to be going sour.
Take, for example, the case of Datacom. A feud between the two owners of the company — Mahendra Nahata of Himachal Futuristic Communications Ltd and Videocon promoters Dhoot family — is threatening to cripple Datacom’s future.
Datacom was initially owned by Nahata-promoted Jumbo Techno Services. But when Videocon failed to get a licence from the Government, it picked up 64 per cent stake in Datacom. The dispute began after Nahata alleged that the Dhoots were not fulfilling their commitments made during the initial agreement. Sources in Nahata’s camp said that Dhoot had promised to pump in money into the company as equity but later offered a loan to finance the mobile services project.
This dispute between the two promoters has not only delayed the launch of Datacom’s cellular services by at least six months but also driven away prospective international investors from picking up a stake in the company. Etisalat, which recently picked up 45 per cent stake in another new telecom company — Swan — had earlier shown interest in Datacom. Similarly, Telenor, which struck a deal with Unitech to acquire a stake in its new telecom venture, was also close to partnering Datacom. However, the spat between the Indian promoters is keeping away the international investors.
The company has also lost its Chief Executive Officer, Ravi Sharma, who quit the company on the grounds that the dispute was delaying Datacom’s business decisions. While Nahata and Dhoots have put the discussions on a fast track, the delay is hurting the interest of Datacom. The company had earlier said that it was planning to launch services by the end of 2008. It has not even placed orders for buying network equipment until now.
Another company whose entry into the telecom segment had attracted a lot of excitement was real-estate major Unitech. The company, which has no experience in the telecom sector, made all the right moves initially after it got the licences. First, it appointed Rohit Chandra, the then Northern region head for Aircel, as the CEO for the new venture. In October, Unitech also struck a strategic deal with Norway-based mobile company Telenor wherein the European company agreed to take 60 per cent stake for Rs 6,120 crore.
The deal was a great one for Unitech as the company had not set up a single tower or owned a subscriber and still managed to get that valuation. Trouble started after Telenor’s shares crashed to a five-year low on the news of its investment in Unitech’s telecom project. Also, Telenor said its Q3 profits fell 33 per cent to 3 billion kroner.
The Nordic company had plans to finance the acquisition by selling approximately Norwegian kroner $12 billion or $1.8 billion worth of its shares in a rights issues in the first quarter of 2009. But investors signalled they would rather see a cut in dividend than a dilutive share issue or asset sales. It then decided to evaluate alternative ways of funding the investment, including the previously announced rights issue.
Due to a melting market Unitech itself has seen over 90 per cent erosion in market capitalisation from its peak in January. Even though the company said that the deal with Telenor will be completed this month analysts pointed out that the absence of a viable funding plan makes the future uncertain for Unitech’s telecom project.
Other new players are also nowhere near launching their services. Loop Telecom, partly promoted by the Ruias, is still looking for a partner. When contacted by eWorld over its future plans, Loop’s spokesperson sent a one-line response indicating that the company did not have much to say on its rollout as of now.
One of the new players has run into trouble with government authorities. Swan Telecom had got a foreign partner through a deal with Dubai-based Emirates Telecommunications Corp (Etisalat) which agreed to buy 45 per cent stake for $900 million. But the money has not flowed into the Indian company as it is yet to be cleared by the Foreign Investment Promotion Board.
Swan has also been dragged into another controversy with the Prime Minister’s Office asking the Department of Telecom to look into allegations of undue favour shown to Swan Telecom. The company had got into a roaming agreement with BSNL, which will allow it to use the state-owned firm’s national network to offer mobile services. While Swan has agreed to pay a fee to BSNL for using the network, concerns have been raised since BSNL has so far refused to open up its network to any private telecom companies for roaming agreements.
The PMO’s order followed complaints by at least two Members of Parliament that Swan may have been given undue favours. Swan was owned by Reliance Communications when it applied for licence. However, RCom has since maintained that it has sold off majority of its equity shares in the company to Dynamix Balwas Group, which is a real-estate firm based in Mumbai. Analysts say that the new players, even if they were to launch services, face a bumpy ride ahead, given the falling average revenue per user and aggressive incumbent operators. The delay is, of course, benefiting the incumbent players. The existing operators are adding close to 8 million new subscribers a month.
They have already added close to 80 million new subscribers since the licences were awarded to the new players. The more the new operators delay launching their services, the smaller will be the market size left for them.
The only company that seems to be on track with its plans is Shyam-Sistema. It has already launched services in Rajasthan and is planning to begin mobile operations in Tamil Nadu by March under the MTS brand, which is owned by the Russian conglomerate Sistema.
Others including STel and ByCell have not announced any plans yet. Communications Minister Raja would be hoping that his decision to bring in new players will offer the consumers more choice before going into the general elections later this year.