From the Front: Ratan Tata, who became Chairman of Tata Teleservices in October 2005, is doing everything he can to get his and his company's point of view on spectrum across

Ratan Tata is angry. The chairman of Tata group has been busy interacting with people such as the Chief Minister of West Bengal (about the location of a plant for the group's Rs-1,00,000 car), chairing board meetings and doing other things that someone who heads a Rs 80,000-crore group would be expected to do (so much so that he couldn't meet with Business Today for this article). He is also, presumably, upset that the government is veering around to the point of view that incremental spectrum allocation-spectrum is essentially a frequency wavelength that mobile telephony operators need; it is what is termed a public goods and needs to be allocated by the government in return for a consideration; more on this in The Ins And Outs Of Spectrum-should be done on the basis of the subscriber base of the companies and the technology it uses. That would mean that a telco's chances of getting spectrum are directly related to the number of subscribers it has on its rolls. Tata has never been in favour of this argument. In May 2005, he suggested, for the first time, that companies pay for spectrum, say Rs 1,500 crore for providing services across the country. Over the past few months, he is believed to have written about three letters to the government putting across his point of view.

There is merit to Tata's arguments, although adopting it could mean revisiting, at least in part, the New Telecom Policy of 1999 (NTP 99), which replaced a licence-fee regime with a revenue sharing one and kick-started India's mobile telephony revolution. It could also mean reviewing the unified licensing regime that came into effect in 2004, and effectively allowed companies that originally had licences to provide fixed telephony services to offer mobile telephony ones under pretty much the same terms as cellular companies did.

The services of the fixed telephony companies were built on the CDMA (Code Division Multiple Access) technology, a spectrally-efficient wireless technology that is popular in some parts of the world while those of the cellular companies were based on GSM (the popular standard for wireless telephony as evident from the fact that the name has outgrown its acronym and become a noun), but the issue was never about technology, although the competing lobbies initially made it out to be that way.

The real issue was access to India's booming mobile telephony market. It was about companies that had initially missed out on bagging licences to offer mobile telephony services going out and doing just that (offering mobile telephony services).

When the government started giving out spectrum to the CDMA companies, it offered them less, citing the technology's spectral efficiency. That should put the CDMA lobby soundly behind Tata. If it doesn't, it is because the country's largest CDMA telco, Reliance Infocomm, has a little over 19 million subscribers (at the end of April 2006, making it the country's second largest mobile telephony player after Bharti Tele-Ventures), and isn't averse to a subscriber-based allocation of spectrum.

Tata's Tata Teleservices Limited (TTSL), which jumped into the mobile bandwagon only after the unified licensing regime came into play, in 2004, well after Reliance did (in late 2002), boasts around 9.5 million subscribers, and a subscriber-based spectrum policy could hamper the company's growth.

That could, at one level, put paid to Tata's ambitions of making his group a heavy-hitter in the booming telecom space: Both TTSL and VSNL (Videsh Sanchar Nigam Ltd), a long distance telephony player the group acquired from the government in 2002, are on the comeback trail (numbers would suggest that they have come back), and the last thing they'd like is a policy regime that isn't conducive to them.

Late-starter To Aggressive Player

In the four months between January 1 and April 30 this year, TTSL added 1.26 million subscribers. Industry leader Bharti did 4.35 million, and Reliance, 2.47 million. Despite boasting a subscriber base of over 102 million (April 30), India's mobile telephony story is far from over. "The game in other markets is over as far as new entrants are concerned," says Darryl Green, CEO, TTSL, adding that there is nothing that matches the excitement of being in this market in India. "The number of players means fierce competition."

DARRYL GREEN CEO/ Tata Teleservices Ltd "If you want to be among the top three players in the market (and TTSL does) you must have a market share of at least 20 per cent"

In many ways Green's presence in TTSL is itself indication of the company's seriousness. The American was hired from Vodafone KK, Japan, where he was President & CEO and has overseen the company's efforts to break into the big league in the Indian telephony space. However, despite its best efforts-the recent non-stop-mobile offer from the company, for instance, where it offered free incoming for two years without a need to recharge-legacy factors ensure that it trails the other large companies, although Green is convinced that this isn't such a big issue as it is being made out to be.

Nor is making money in a context where tariffs are on a down slope. "An incremental minute (of usage) can add as much as 80 per cent to your gross margins," explains Green. Indeed, in 2005-06, TTSL's revenues in the last quarter (January to March 2006) are rumoured to be twice its revenues in the first (April to June 2005). Much of that has come from aggressive growth-oriented strategies, including lower tariffs, promotions and alliances with Chinese handset manufacturers such as ZTE and Huawei to reduce the cost of going mobile. By 2011 (five years from now), claims Green, TTSL will have 100 million subscribers on its rolls. India's telecom ministry expects the country to have 500 million mobile connections by 2010 (by 2011, going by these numbers, it should have around 570). TTSL's share works out to around 17 per cent. "If you want to be among the top three players in the market (and TTSL does) you must have a market share of at least 20 per cent," says Green.

India's low average revenue per user (ARPU) of Rs 400 per month (TTSL claims its own is Rs 500 per month) could be a cause for concern (volumes could come at the cost of profit margins), but that doesn't worry Ravi Menon, Managing Director and Co-Head (Investment Banking), HSBC Securities and Capital Markets. "Yes, India does have a low ARPU, but since capex costs have fallen, EBIDTA (earnings before interest, depreciation, taxes and amortisation) margins will be healthy." Menon's opinion on India and Green's on his company is shared by private equity firm Temasek (it is the investment arm of the Singapore government) that recently acquired a 9.9 per cent stake in TTSL for an estimated $350 million (Rs 1,575 crore).

N. SRINATH Executive Director/ Videsh Sanchar Nigam Ltd "After the TGN buy, we could compete on a global basis. In five years, we will look more like an IT company rather than a telecom one"

An All-new Global Player

The Tata Group has also managed to turn around VSNL, an international long-distance (ILD) company it acquired from the government in 2002. Soon after, the company's monopoly on the business ended (as it was expected to), the Tata Group delayed entering the national long distance (NLD) telephony business (licences for which had been given to VSNL free in return for the premature termination of the monopoly on ILD telephony), and with TTSL being a slow starter, the company saw its numbers falling. Bharti and Reliance, for instance, had vibrant local operations (as well as NLD and ILD licences) and they leveraged this to good effect pushing their own traffic onto the international network. The economics of interconnect also meant that a telco that had a presence in all three made more money from every international call than one that was merely present in the international telephony space.

All along, however, says N. Srinath, Executive Director, VSNL, the company was working to move from being a "wholesale monopoly" to a "multi-business competitive company". "Getting into national long distance telephony was an immediate and logical extension," he adds, but with voice tariffs across local, national and international telephony on the decline, the company wanted to look at the real sweet spots in the market. These were enterprise business, and a global-scale operation in international telephony. The company managed to do the second by adopting the acquisition route (see VSNL's Key Acquisitions). The 2004 acquisition of TGN (Tyco Global Network) helped VSNL complement its own international network (TGN connected Tokyo to the us West Coast, and then to Europe, and Tokyo to Singapore). "Our services before the TGN acquisition were India-centric," says Srinath. "Now, we could compete on a global basis."

And the $239-million (Rs 1,076-crore) acquisition of Teleglobe helped VSNL address the other problem it faced. "We were not getting enough (international) traffic from the others and were dependant on players such as TTSL and others, who did not have a licence," says Srinath. Teleglobe, however, was a big player in the traffic-to-and-from-India market.

KISHOR CHAUKAR Managing Director/Tata Industries "The future will see us increasing our footprint, ramping up the subscriber base and offering more value-added services globally"

Thanks to the acquisition, of the 12 billion minutes that the Indian international telephony market will be worth in 2006-07, VSNL (with Teleglobe under its belt) will account for 4.8 billion (40 per cent). VSNL's acquisitions, a Mumbai-based equity analyst points out, have also helped it control costs and increase profit margins. And they have also come cheap. "An acquisition like TGN at a cost of $130 million (Rs 585 crore) is small considering the potential in the business," he adds.

VSNL has also made an entry into Africa, considered the next big market for telcos after Asia by almost anyone in the business, by acquiring a 26 per cent stake in South Africa's Second Network Operator (SNO), a provider of services that include fixed telephony services, data, internet and broadband. In five years (though the first service will be launched in July this year), says Srinath, "SNO will be up and running and that will contribute a big chunk of our revenues". However, he expects the company's US and European operations to be bigger. "In five years, I think we will look more like an it company rather than a telecom company." Enam Financial Consultants' Vice President Salil Pitale believes that some of India's larger telcos are well placed to harness the power of the broadband infrastructure to offer high-end value-added services (virtual private networks or VPNS, data centre hosting, business continuity planning and the like) to their consumers.

That move towards data is crucial; voice is rapidly becoming a commodity even in the international telephony business, one reason why, despite its acquisitions, VSNL's numbers do not come close to its 2001-02 high. And as this magazine goes to press, international bandwidth major flag Telecom, now owned by Reliance Communication Ventures, has gained access to one-time partner VSNL's landing station in Mumbai. This comes after the International Court of Arbitration allowed flag to sell bandwidth directly to end users in India. More significantly, flag could also be compensated for VSNL's earlier decisions to prevent it access to landing stations. In short, this will free a huge quantity of bandwidth and will also lead to a fall in bandwidth prices.

THE INS AND OUTS OF SPECTRUM An explanation of what the fuss is all about.

A reason to smile: Bharti's Sunil Mittal (left) and Reliance's Anil Ambani are happy with the proposed spectrum policy Where do things stand now? An empowered Group of Ministers, headed by Defence Minister Pranab Mukherjee, is looking at the DoT (Department of Telecom) policy on spectrum allocation. Who's fighting the battle? Ratan Tata, for one, who has shot off letters to DoT, the Communications Minister and the Prime Minister on the need for a more comprehensive approach to the allocation of spectrum. And the Cellular Operators Association of India, whose constituents, all GSM telcos, stand to benefit from the policy, has come out in favour of it. What does DoT's policy say? That GSM operators will get a maximum allocation of 15 Mhz per circle and CDMA ones, 7.5 Mhz. Today, GSM operators do a maximum of 8 Mhz (although more has been given to some companies on a case-by-case basis; Bharti has close to 10 Mhz in Delhi), and CDMA, 5 Mhz. Why has subscriber base become a contentious issue? Simple, because DoT has retained its existing policy prescribing a specific number of subscribers that the operators have to achieve before they can be eligible for fresh frequency (spectrum). According to this, Bharti is now eligible for 15 Mhz in Delhi where it has over 2 million users. Reliance, however, will get 7.5 Mhz only when it reaches the 2 million mark in the city. DoT has specified the numbers at which operators will be eligible for extra spectrum for each circle and for GSM and CDMA players. Who gains, who loses? Large mobile telephony firms that use GSM (such as Bharti and Hutch) win. So does Reliance, a CDMA firm that has a huge number of subscribers. Tata Teleservices, with less than 10 million subscribers, is a clear loser.

Getting It All Together

Tata has always wanted to see all the group's it companies under one umbrella (which has now happened with TCS), and all the telecom companies under another. The second would involve the Tata Group buying out the government's residual 26 per cent stake in VSNL and then merging TTSL with it.

That fits in very well with the vision Kishor Chaukar, MD, Tata Industries (one of the men behind the group's telecom foray), has for the future of telecom services of the kind TTSL offers and it services of the kind VSNL does. "Convergence is what it will be about," he says. "Companies, for instance, would like a single window relationship that will cover it and telecom-related services."

That (the merger), though, is in the realm of speculation according to Chaukar. VSNL has risen from the ashes to become a strong international bandwidth and value-added services player, and TTSL is today the country's fifth largest mobile telephony company (in terms of subscribers). "The future will see us increasing our footprint, ramping up the subscriber base and offering more value-added services," says Chaukar.

For the first time since it entered the business, the Tata Group looks like a serious contender in the telecommunications space. It would be a pity should that change and TTSL suffer a setback because of the spectrum issue. Which could explain why Tata himself is keen that this doesn't happen: the stakes are so much higher now.