A revolution in telephony. A revolution in convergence. And, after 13 full months, a new CEO. You decide.

By Radhika Dhawan

In this tri-convergent age of voice, data, and visuals, Amitabh Kumar's gleaming table is hardly remarkable. With the paper-free office virtually in the making, the desk of the 46-year-old Officiating CEO of the Videsh Sanchar Nigam Ltd (VSNL) on the 10th floor of the Videsh Sanchar Bhavan on M.G. Road in Mumbai is, obviously, a good place to start.

The absence of the usual clutter can imply only one of two things. Either Kumar is actually a super-efficient CEO, quickly clearing his files before the word, convergence, can even roll off your tongue. Or he really hasn't got anything to do at the Rs 7,000-crore telecom and Net services public sector company.

Kumar's track-card would, tragically, suggest the latter. In the last 13 months, not a single project that would have strengthened the VSNL's capabilities as a convergence-router-as opposed to voice alone-has been mooted. ''There is a mid-term approval process, so our applications are just going out now. That is the natural course of things,'' shrugs Kumar.

The real reason, perhaps, is that he has only been playing CEO as over a 100 aspirants-all men, incidentally-have huffed and puffed their way through a topsy-turvy selection process. Two months after the VSNL's strongman CEO, B.K. Syngal, retired on June 30, 1998, Union Communications Minister Sushma Swaraj, by insisting on applications from the private sector too for the top job, effectively restarted the entire selection process. Which has now taken 13 months.

Ironically, even as the CEO's appointment now awaits the final nod from the Cabinet's Appointment Committee, 2 bureaucrats appear to be the front-runners. And S.K. Gupta, the Chief General Manager of the Department of Telecommunication's Gujarat Circle, may pip Narendra Sharma, Secretary, Telecom Regulatory Authority Of India, to the post. Whoever is selected will have to cope with the terrible static on the VSNL's satellite dish.

Particularly as the giant is already under siege, just 60 months before its monopoly over international telephony from India will end. Well before that, the VSNL will see its margins slip-sliding away since dramatic changes in technology and business structure will transform its cross-national telephony and Net services businesses into commodity operations. By 2004, if it doesn't watch out, the VSNL will simply not have a competitive raison d'être.

Sure, the VSNL is trying to reinvent itself by moving into value-added services. Apart from consolidating its position as a carrier's carrier, the VSNL is marching into areas like Net services, satellite telephony, and, eventually, broadcasting and Direct-To-Home (DTH) services. While the VSNL's search for margins is a step in the right direction, it is often forced into uncompetitiveness. Take, for instance, its indecision about subscribing to the global satphone-provider ICO's $500 million 1:1 rights issue, whose closure has been postponed to July 27, 1999.

Actually, the VSNL is the second-largest shareholder in ICO's Indian venture, ICO-P, having pumped in $202 million (Rs 848.40 crore) into its next-generation mobile satellite systems. Argues Kumar: ''ICO's entire funding process is under strain because of Iridium's performance.'' Equally, it can be held that, by not subscribing, the VSNL is missing an opportunity to control one of the world's global satphone companies tomorrow.

The silver lining: this navratna is well in the black (1998-99 net profits: Rs 1,341.30 crore) and its scrip-price was ruling at Rs 1,045 on July 16, 1999, a new high for the last 12 months. Since the VSNL has reserves of Rs 2,500 crore, boosted by the long-delayed $185 million Euroissue in February, 1999, ''it is in a good position to capture a large portion of the domestic long-distance telephony market,'' adds Vimal Jain, 30, Assistant Vice-President, Prime Securities. That's a Department Of Telecom (DOT) monopoly, scheduled to open up to competition in April, 2004.

The danger is that, by 2002, the VSNL's revenue-sharing agreement with the DOT will have little relevance. While it is guaranteed a revenue of Rs 10 per minute until then, the VSNL's carrying-costs are actually just Rs 3 per call. Says Abhijit Attavar, 27, Assistant Vice-President, I-SEC: ''While volumes growth is good, realisations will have to be cut if the VSNL is to stay competitive.'' That's why Kumar had to slash international telephony tariffs by 20-30 per cent in May, 1999, and will reduce them by another 30 per cent over the next 12 months.

Not only is technology cutting telephony costs short, it has also made protecting the VSNL impossible. Cost-effective methods of voice communications, like Net telephony, have the potential to render its monopoly meaningless. Moreover, the VSNL is being forced to reduce its settlement-rates with American carriers, with the US Federal Communications Commission (FCC) urging it to slash them by 80 per cent by 2002 from the current $0.70 per call. Predicts Prime Securities' Jain: ''The DOT and VSNL won't be able to resist those pressures for very much longer.'' Agrees Kumar: ''We expect a 15 per cent drop in settlement-rates every year from now on.''

This will put a strain on the VSNL's revenues-and profitability. Using the discounted cash-flow valuation model, BT estimates that its Return On Capital Employed and Return On Equity, which hover around 77 and 27 per cent, respectively, will drop to 20 per cent by 2002-characteristic of commodity telecom businesses. Worse, the VSNL entered the Net business only in 1996, belatedly realising that it could sell the customer value-added services only after the former took off. Adds Jain: ''The VSNL is a carrier's carrier, and does not have the advantage of the last mile.''

Not only are the margins in retail telephony higher, the customer can be hooked by the services provided by the telephone operator-like DTH TV. This is the pot of gold at the end of the rainbow for international telephony companies, which are all busy annexing entertainment and communications companies, like AT&T's recent acquisition of cable giant MediaOne. Why not the VSNL? Since telephone traffic accounts for 85 per cent of its revenues, agrees Kumar, ''we are trying to move away from being a mere international telephone services-provider.''

Apart from the stake in ICO, the VSNL has incubated a host of plans, none of which has hatched-yet. For instance, the VSNL wants to pump Rs 400 crore into Asynchronous Transfer Mode (ATM) super-highway nodes; build a global bandwidth cable system; co-invest in ventures like the $15-billion Project Oxygen, a submarine optical fibre telecom cable network; invest in broadcasting and DTH services; and be a partner with MCI and British Telecom in the Rs 2,100-crore regional voice and data traffic hub project that will link a trans-Eurasian cable to South Asia. Then, there is also the VSNL's stake in the Essel-promoted Agrani, which is a geo-stationary system covering Asia and the Middle East, and its plans to operate gateway services for the Motorola-promoted Iridium and the Qualcomm-promoted Globalstar.

Value-added services are, obviously, vital for the VSNL. Last year, revenues from its non-telecom business grew by 71 per cent to Rs 491.90 crore. Of this, its Net service revenues boomed by over 151 per cent to Rs 172 crore. Adds Vikram Mehmi, 45, Chief General Manager (Finance), VSNL: ''By 2002, the Net should contribute 45 per cent to our revenues.'' Although there is competition, with 250,000 subscribers, the VSNL is the leader in the ISP sweepstakes since Satyam Online has 55,000 subscribers, and the Mahanagar Telephone Nigam, just 10,000.

That is because the VSNL had the first-mover's edge. But, with incremental growth, issues like the ease of connectivity, customer service, and prices will play an important role. Therefore, the company needs to streamline its infrastructure by setting up remote access servers. And overhaul its network to increase the throughput, currently at 40 per cent. As much as Rs 1,030 crore will be spent in the next 3 years on expanding and upgrading the infrastructure, like international gateways. This will enable the company to provide uplinking services for ISPs, and will prove to be crucial if the VSNL is to provide other infotech-enabled services too.

That's why the VSNL plans to hive off all its value-added and specialised services-like Net services, video-conferencing, and electronic data interchange-into a subsidiary, VSNL Seamless Services. But the proposal is still on the drawing-boards. Agrees Kumar: ''Value-added services would be better-managed as a separate venture.''

Clearly, planning Rs 7,000 crore of investments, the VSNL will have to spread its risks. A public issue is on the cards before December, 1999, which will reduce the GOI's stake in the VSNL to 53.50 per cent. Explains Kumar: ''It's part of the natural disinvestment process.'' But, even more than that, there is a need for a CEO of a more permanent nature. In a nano-second world, even natural delays will, naturally, cost the VSNL dear.

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