They're late, but they're here. Now Reliance's Anil and Mukesh Ambani plan to launch a full service offensive that could make them the only real threat to India's public sector telecom monopolies.

By Sanjoy Narayan

In his typical rapid-fire style, occasionally interspersed with colloquial Hindi, Anil Ambani, the managing director of Reliance Industries, is explaining the Reliance Group's plans for the New Economy. He's been just 15 minutes into his discourse and I'm wondering why all of it seems so uncannily like one day back in 1997, when in this very meeting room in Reliance's Mumbai headquarters, Ambani was describing how work was progressing apace at Jamnagar, where Reliance Petrochemicals was building Asia's largest grassroots oil refinery. Back then, he was animatedly talking about how the Jamnagar site was crawling with 60,000 construction workers working round-the-clock to build a refinery plus a port, a cracker and an oil pipeline. Four years later, Ambani is talking about Reliance's New Economy plans in the same Old Economy lingo.

Phrases like 'return on equity', 'internal rates of return', 'quick payback' constantly pop up in his description of the Reliance strategy and the raison d'etre of the Rs 50,000-crore group's latest foray in the convergence sector. Ambani talks about how 35,000 workers are tunnelling through 60,000 kms-roughly the distance the health freak who's lost 35 kilogrammes in the past six months will run in 11 years-nationwide, wiring up for a one terabit bandwidth broadband network that will connect 115 Indian cities, which together represent over 50 per cent of India's GDP. A corpus of 500 people, which will grow by year-end to 1,500, has been recruited to manage the project and 10,000 km of optic-fibre cabling has been completed.

Reliance is looking at its convergence business-where Reliance Telecom's front-end basic and cellular telephony dove-tails into Reliance Infocom's back-end broadband network-as a gigantic infrastructure project, quite like the mega projects it has built in its oil and petrochemicals businesses. The similarity doesn't end there. Like petroleum and petrochem businesses, where Reliance is present at all links of the value chain (oil, refining, fibre intermediates, fibre and textiles), it wants to be a full service communications player. From back-end bandwidth to last-mile access, from fixed-line telephony to high-speed voice- and data-networks for corporates, and from submarine cables to cellular telephony, the Reliance gameplan for what the Ambanis term infocom is all-encompassing. Says Ambani: ''Our strategy of being on the complete value chain is now being extended in the infocom sector.''

Here's a quick run-through of just how Reliance is positioning itself in every segment of the telecom value chain: fixed-line services, domestic long-distance, international long-distance, mobile cellular, internet service provider and value-added services like IDCs (Internet Data Centres) and call centres. Back in 1995, in what most observers saw as a decidedly conservative strategy, Reliance obtained licences to operate mobile services in 13 states (Madhya Pradesh, Bihar, Orissa, West Bengal, Himachal Pradesh, Assam and seven North-Eastern states). Plus, it acquired a fixed-line (basic) licence for Gujarat. Now, with the opening up of the circles for basic services, Reliance is free to enter any circle by paying an entry fee and agreeing to a revenue-sharing formula. Plus, later this year, it can bid for additional cellular licences as the fourth operator in the circles where it isn't present. It will also offer domestic long-distance (DLD) services where there is unrestricted entry, and, post March 2002, it will go for international long-distance (ILD) services.

Let's not ignore the fact that Reliance missed out on the lucrative circles when cellular telephony was being opened. True, it got its circles cheap, but these were not much sought after. And the group missed out on a second opportunity to expand its cellular operations when the M&A binge broke out. Reliance's infocom strategy is, thus, more of a come-from-behind effort. And the comeback vehicle could well be the 18 FSP (Fixed Service Provider) licences the Ambanis have bid for, against which they have already received letters of intent from the Department of Telecommunications.

One positive outcome of its initial intertia in telecom was that Reliance paid only Rs 116.47 crore for its seven contiguous circles, by far the lowest any operator did. Secondly, by delaying its entry, it got into a position from where it could negotiate better. Its investment in switches, for instance, have been the lowest. And by waiting till FSPs were allowed to use the Wireless in Local Loop (will) platform, Reliance has secured the option to offer mobile services in circles where it gets a FSP licence.

Then, of course, there is its national backbone, approvals to build international gateways and its plans to build or lease bandwidth for global connectivity. Says Mukesh Ambani, Vice-Chairman and Managing Director of Reliance Industries, who is the main force driving the backbone project: ''So, when you look at the footprint of our offering, we are talking about a national backbone, basic services provider in every geography, with wireless local loop offering limited mobility in the geography of the basic services that we will offer, 13 GSM (cellular) licences that we already have and the new GSM licences that we will examine whether to bid or not.'' In fact, apart from its 18 basic services applications, Reliance is one of the only two companies (the other is Bharti Telecom) that have applied for domestic (or national) long-distance.

The Money-Engine

The size and ambitiousness of Reliance's plans, whether it talks about building a massive refinery or a national backbone for infocom, don't shock people any more. Nevertheless, all of its New Economy plans will cost a bomb. Take the 18 licences for basic services. In terms of licence fee, they would cost Rs 450 crore, and in terms of guarantee, another Rs 1,800 crore. Even though that's a total of Rs 2,250 crore, for a group whose total cash flows (RIL and RPL together) are expected to be Rs 6,000 crore in 2000-01, that's hardly going to be a problem. In addition, later this year, Reliance will be unlocking value from RIL's 64 per cent stake in Reliance Petrochemicals by selling 10 per cent of it to strategic and financial investors. The expected cash inflow from that sale is Rs 4,000 crore and profit on sale Rs 2,500 crore. And although Reliance isn't touting the figures officially, the total investments in telecom and infocom over the next three years could add up to a cool Rs 25,000 crore, that's more than what was spent on building the Jamnagar complex from grassroots up.

It's Reliance's deep pockets and ability to generate cash from its mother businesses that can allow the Ambanis to think up projects that are audaciously big. Says Rajeev Chandrasekhar, CEO, BPL Innovision: ''One thing about Reliance that scares the living daylights out of me, is their ability to raise capital. The might of their balance sheet is bound to scare people.'' Reliance Infocom is being structured as a separate company with a debt-equity ratio of 2:1, with 45 per cent of the equity held by Reliance Industries and the balance by other group companies. As a logical step, Reliance Telecom, now a subsidiary of Reliance Industries could be merged with the new infocom entity. And a couple of years down, Reliance Infocom would be publicly listed, probably overseas.

Ambani says all of the debt will be raised locally, given the fact that all of the infocom venture's revenue streams will be from domestic customers. And, unlike in the RIL petrochem complex in Hazira or RPL's refinery in Jamnagar, Reliance Infocom will not have to wait till the entire project is complete to start rolling out its services. ''If we complete wiring up Maharashtra or Gujarat first, we can start offering services right away,'' says Ambani, who estimates the entire backbone to be in place by March 2003 with phased roll-outs beginning in q3 of 2001-02.

Reliance's Real Competence

But the questions aren't about Reliance's ability to set up large-scale projects. In the petrochem, oil and power sectors, the group has amply demonstrated its financial and execution skills at doing so. What sceptics wonder, however, is how it will manage a business that is very different from its existing oil and petrochem ventures. Says the CEO of a well-entrenched private sector telecom company operating cellular services in a number of circles: ''Ability to build infrastructure is fine. But you will need competencies in other spheres, like brand, customer service and technological innovation. Infrastructure cannot be the only determining factor for success. In the past, at least abroad, companies have made mistakes of investing in infrastructure, believing the rest will follow. But that hasn't happened.''

Reliance, however, does not see its new businesses as being out of sync with its core competencies. Says Mukesh Ambani: ''Unfortunately, the evaluation of Reliance is based on products. Instead you should base the evaluation of Reliance on its skills and capabilities. There is nothing common between polyester and mobile phones. But you should ask us whether we understand project management or can set up a grassroots project or deal with rules and regulations or manage to raise large amounts of capital. These are the skills and capabilities set of Reliance. And this is what we want to leverage in our new businesses.''

But the other critique of the full-service infocom model that Reliance has adopted for its new ventures is that it hasn't seemed to work elsewhere, especially in the developed markets. Globally, full service telecom companies have not been able to create the kind of values that other focused players like wireless service providers or internet infrastructure service providers have. In fact, this has forced some of the international full-service players to unbundle or disaggregate their operations. Says Sandeep Biswas, Senior Manager, Accenture: ''If you go for an end-to-end project, chances are it will be difficult to raise funds in the international markets; both AT&T and BT are breaking up their companies into two-to-three units (broadband, international long-distance, and domestic) as investors are nervous of different businesses bundled in one company.'' Anil Ambani, however, points out that the ''unbundling phenomenon'' is more relevant in mature western markets where teledensity has reached saturation levels. ''In India, we are still at least a couple of decades away from that.''

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