The process of natural selection is over. Now begins the great telecom struggle for domination.

By Suveen K. Sinha

You can agree with Sunil Mittal, or disagree with him. But ignore him you cannot. Early last decade, they were talking about his and his father's role in the erstwhile Big Bull Harshad Mehta's alleged suitcase pay-off to P.V. Narasimha Rao, the Prime Minister at that time. At the beginning of this decade, they are still talking about Mittal, albeit in a very different context.

A decade ago, all that the Bharti Group had in the name of telecom business was equipment manufacturing. It is now emerging as the country's largest integrated all-India operator-what Jardine Fleming Research innovatively refers to as the omnivore, and what a transnational executive calls a portfolio player. And Mittal's intention of being all things to all people has become the focal point of a raging debate on the winning strategies, as the first phase in the life of India's telecom sector (1994-2000) draws to a close.

IT'S A DIFFERENT JUNGLE NOW

A lot has changed in these six years. Or rather, in the last one year. It seems inconceivable that as recently as the middle of 1999, a list of potential winners would have featured just seven names: Bharti, Hutchison, BPL, the Hindujas-controlled Fascel, and Vinai Rai's Koshika (See Current And Future Operations of Major Telecom Players). Of course, the Department of Telecommunications and the Mahanagar Telephone Nigam figured on the list too.

The potential losers included Birla-AT&T (AT&T was said to be in two minds about India); Reliance, Tata Cellular, and ModiCorp. High licence fees and low subscription in circles-along with high cost of roll-out and subscriber acquisition, and low average revenue per user-were pulling them down. Himachal Futuristic Communications was in its famous mess. The third category was of the non-descripts, whose intentions and strategies-if any such existed at that time-were closely guarded secrets. These were Enron and PowerGrid. Then, there were the also-rans: Escotel, Usha Martin Telekom, Skycell, RPG, and Shyam Telecom.

OF OMNIVORES, HERBIVORES, AND OTHER ANIMALS

A migration from licence fee to revenue sharing regime, a host of deregulatory measures and a spate of M&As later, an interesting pattern is emerging. Mittal, with his firm belief that a combination of all the services as well as the infrastructure is the best strategy, is emerging as the only true omnivore, or portfolio player.

The Bharti group is already one of the biggest cellular operators, one of only three active basic service operators, and has a high-profile internet service provider in Mantra Online. It has drawn up plans to get into domestic and international long distance services-the first just got deregulated and the second is due for privatisation on April 1, 2002. Completing the picture are broadband networks within the country and a $650 million undersea fibre optic link connecting India to Singapore.

Big gun Reliance is perhaps the only one that comes close to being classified with Bharti as a true omnivore. A clever selection of circles in primary bidding ensured it had to shell out only Rs 116.47 crore for seven contiguous circles. It is now rolling out basic telephony in Gujarat. Consistent with its established strategy of being vertically integrated within an industry, Reliance plans to build a telecom backbone around its existing ISP licence. This will get a fresh impetus once it obtains a DLD licence and enters international long distance after April 1, 2002. The difference, however, is that most of Reliance's cellular circles are unattractive and cover a limited area. In contrast, Bharti's emerging telecom footprint is nationwide. Also, unlike Bharti, Reliance doesn't have a consumer ISP yet.

At the other end of the spectrum are herbivores, or believers in pure play. The biggest of them is Hutchison, with an aggressive cellular-only strategy that is in keeping with what it is doing globally. It is accepted as the largest cellular service operator in the country, directly or indirectly controlling Delhi's Sterling Cellular, Calcutta's Usha Martin Telekom, and Fascel in Gujarat, in addition to Hutchison Max in Mumbai.

Revived by the three-way merger in March this year, Birla-at&t-Tata is back in the cellular game. It has acquired RPG's Madhya Pradesh licence and is a front runner for RPG's other cellular licence in Chennai, though its bid has just been exceeded by another company (believed to be Hutchison). Other notable cellular-only players are ModiCorp, which has bought erstwhile partner Telstra's 49 per cent in Calcutta cellular operator Modi Telstra; and Escotel, which seems to be getting its act together, despite being a circle-only operator. Then there are some notable pure-play practitioners in telecom infrastructure: Enron, which is setting up a country-wide broad-band network; Spectranet, which is wiring up Delhi and Gurgaon to provide broadband services; and PowerGrid, which plans to lay down an optic fibre network using its existing right of way.

In between is BPL, which is a portfolio player, albeit a choosy one. In addition to cellular operations, it's upbeat about its new ISP business. It has reportedly invested $6 million in setting up 11 vertical portals. It's keeping off basic services and as of now is no more than "looking at" long distance. "BPL's strategy is a combination of cellular, ISP and broadband," says Rajeev Chandrasekhar, CEO of BPL Innovision Business Group. BPL is pumping Rs 750 crore in laying more than 6,000 km of optic fibre cables in Maharashtra, Kerala, Tamil Nadu, Goa and Pondicherry.

CLAWS VS HOOFS

Before we look at who will win, let's look at who won't: those who are too focused. This is not to say that they won't survive or be profitable. But rule the roost, they will not. Analysts point out that pure play makes it difficult to offer multiple services to the same customer.

Among pure play artists, Hutchison, headed by Asim Ghosh, is the best placed, as it controls operations in three of the four key metros that have not only a large subscriber base, but also high average revenue per user and high inter-city DLD traffic. Birla-AT&T-Tata, having added Madhya Pradesh-which is contiguous to its other circles and key to DLD operations, as it shares boundaries with seven states-should be almost up there with Hutchison. "It's simple. If my competitor in a circle has only that one operation, whereas I also operate the licence in the adjacent circle, I can heavily subsidise the interconnect and termination charges on calls originating in the adjacent circle," says an executive in a transnational TELCO.

Says a report by Sheriar Irani of Jardine Fleming: ''Among the remaining herbivores, there are those that will sell out or close down due to a lack of funds or viability. A few will continue to do reasonably well because either the circles are lucrative on a stand-alone basis or have synergies with other businesses within the group.'' Even if the sharply-focused TELCOs don't fold up or sell out, they may have to forge a number of alliances with other pure or portfolio players. Predicts Sanjay Jain of Andersen Consulting: "It'll be a game of alliances as bundling of services will be crucial."

Among the omnivores, both DTS and MTNL will have to undergo significant changes if they have to survive. They are planning to start cellular services, but given their tendering process for equipment purchase, any such launch maybe a year away. "We see the competitive edge of both to be significantly blunted by their incumbent legacy systems," says Irani.

PORTFOLIO PLAY

The Jardine Fleming Research report is categorical that omnivores like Bharti will have obvious advantages, as they will be "capable of leveraging cellular access and infrastructure to deliver competitive services across the whole spectrum." Agrees Vimal Bhandari of IL&Fs: "Customer acquisition being so difficult and costly, you must own him in totality (a la Bharti)."

Apart from providing a wide range of service options, a large portfolio hedges against technological shifts. Points out former Reliance Telecom vice-chairman Ashwani Windlass: "It's important to be in everything, simply because given the rapid technological changes, one doesn't know which will go up the value chain. Also, since distance is dead, those who own the customer at both ends become more valuable."

But if it were that easy, wouldn't everyone be doing it? Says Deepak Kapoor of Pricewaterhouse Coopers: "Bharti's is the ideal model, provided you have the resources-financial and managerial." Adds an executive at a telecom MNC: "It will be impossible to conceive that anyone, except a few global corporations, will be able to make nation-wide investments. Capital will not be available."

The 49 per cent cap on foreign equity puts further squeeze on capital. Mittal, at the moment, is breathing easy as he has just got $400 million from Singapore Telecom in exchange for 35 per cent equity in two of his holding companies. But he surely needs much more. "Global markets are rewarding pure plays and the Indian experience should be no different," points out Virat Bhatia, AT&T India's Managing Director.

Portfolio play also means formidable opposition. Bharti's rivals include all the big telecos: Hutchison, Birla-AT&T-Tata, BPL, Spice, and MTNL in cellular; Reliance and dot in long distance; Enron and Reliance in infrastructure; dot in basic; and Satyam, MTNL, VSNL and Dishnet in internet services. The tricky thing? Even as it competes against them, Bharti will have to woo them as buyers for the immense bandwidth infrastructure it is setting up.

Which is why an integrated business strategy is of paramount importance in portfolio play. "Having a tentative position in multiple telecom businesses rather than a dominant position over time in a few focused areas is not the most prudent strategy," says Bhatia.

WILL THE GORILLA (BHARTI) WIN?

It cannot escape notice that Bharti is not the biggest in any one service. Hutchison is the biggest cellular operator. Hughes is widely believed to be bigger than Bharti in basic. And, according to JM Morgan Stanley, Mantra's share of the ISP market has grown from 8 per cent in May this year to 8.9 per cent in September. Dishnet's, on the other hand, has leaped from 8 per cent to 14.3 per cent, while Sify leads among private ISPs with a 16.4 per cent share.

Mittal concedes that Bharti did not focus enough on Mantra initially, but says that the focus is back now. Elsewhere, he doesn't think there is much problem. "It's not important to be number one in each business," he claims. "It's important to be among the first three."

As for an integrated strategy, he is counting on the recent restructuring of the group, designed to achieve a linear vision for each business under the broad heads of fixed service, mobile services, and networks, with independent CEOs for each company. And to the question of finding customers among competitors, Mittal says that there will always be takers for a service or product as long as it is efficient and cleverly priced.

WILL THE BEAR (RELIANCE) WIN?

The debate does not mention Reliance much by name, simply because the company has never been vocal about its plans. Some even believe that its emerging strategy is more by default than intent. Given the company's size and the promoters' ambition, it's a surprise Reliance has kept away from acquisitions. Further, the roll-out of its fixed and cellular services has not been aggressive yet. Says a rival: "Reliance is an enduring enigma when it comes to telecom."

Reliance insiders are quick to point out that telecom is very much on top of the Ambanis' priority list. Interestingly, the somewhat limited portfolio play that mars Reliance's claim to the title of a true omnivore may give it some kind of an edge. Its seven none-too-sought-after circles mean the big cellular guys don't see it as competition. That it has never entered the acquisition game cements that impression. Which means that, compared to Bharti, it may have an easy time finding bandwidth buyers.

WILL THE WOLF (BPL) WIN?

It's perhaps here that the question mark is most pronounced. Simply because in spite of being an early mover (it was the biggest cellular operator from the outset), BPL hasn't expanded the business. Its lacklustre approach to DLD is surprising, given its position to carry traffic between Mumbai and the rest of Maharashtra. "There is a clear slow-down. BPL is not making any headway," says a Delhi-based management consultant.

But all that could change. "We will grow in cellular through new licences and acquisition of existing ones and make investments where there is value," says Chandrasekhar. But he admits that acquisition is a function not merely of BPL's vision but also of what the rivals are doing. But BPL certainly has a high brand equity. "It will leverage its existing brand name established through successful consumer goods range of businesses," says Jardine Fleming Research.

THE OTHER ANIMALS

There are enough of these to prompt Chandrasekhar to refrain from talking about winners and losers. "It is not fair to try to declare a winner when we don't know when and what the match is going to be," he says. There are grey zones in regulation as well as business risks in areas where new investments are being announced. The course of DLD and ILD cannot be foreseen. Two-and-a-half months after DLD was deregulated, not a single application has yet been submitted. Capital will become more of an issue for the cellular operators once fourth licences are awarded. These, Mittal believes, will be much cheaper. The valuation of existing licences will consequently plummet. As Windlass points out: ''Once the value of licences goes down, it will become difficult to raise funds and growth will be affected.''

Clearly, there is enough competitive space open for the emergence of an as-yet-unheard-of player who may go on to dominate the picture. Says Windlass, who is starting out on his own: ''India still does not have a player offering customised and tailor-made services to customers while optimising the cost.'' Clearly, it's not just might but smart strategies that companies will need to survive in the telecom jungle.

Issue Contents  Write to us   Subscriptions   Syndication 

INDIA TODAY |  INDIA TODAY PLUS | COMPUTERS TODAY
TEENS TODAY | NEWS TODAY | MUSIC TODAY | ART TODAY | CARE TODAY

© Living Media India Ltd