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"A much freer market": John Harley, Ernst & Young

March 15, 2005



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As partner, industry leader, technology, communications and entertainment (TCE) at Ernst & Young, John Harley has led the global TCE Transaction Advisory Services team since 2000 and the UK TCE practice since 2003. Previously, Harley was global leader of information, communications and entertainment at PricewaterhouseCoopers' corporate finance practice. In his present job, he specialises in merger and acquisition advisory services. On a short visit to India recently, he spoke to tele.net about the Indian telecom sector and how it is perceived abroad...

How are the business opportunities in the Indian telecom sector perceived abroad?

At first, people were mystified because they saw a restrictive and highly regulated environment which did not allow foreign competition or even a build-out of infrastructure. I think now the industry is opening up, there is more competition coming in and more development in the industry. They also see much more of this because they are outsourcing much of their business to India. Now people are visiting India and understanding the market better. Earlier India was a mysterious market, so people used to wonder what is going on there. But as things move on and outsourcing activity increases, people are thinking much more about India as a place one can invest in.

If you look at the Indian telecom market, there isn't any European player offering services here. What is the reason for this?

Well, there was Orange. And British Telecom was looking at it. From the US, AT&T had a stake. I think one of the reasons was that they thought the locals knew more than they did. They thought they would get carved up by the locals.

Has that perspective changed? Are they willing to come in now?

Not yet. But I think the growth in wireless will encourage some of the larger wireless players to come in. Strategically, some of the wireless players also now have a lot of cash flow. T-Mobile, Vodaphone, Telephonica, Orange, etc. have a lot of cash, but their parents are distributing them in different ways. Telephonica is sort of focused on South America and Spain. For it to stretch over to India is quite a big stretch. T-Mobile had its problems with US telecoms and it is now getting that sorted out. It also had a lot of problems in Germany with Deutsche Telecom, and it has just got out of that. So it might come here. It has been in Southeast Asia before. Vodaphone will have to because this is the only major market in the world where it doesn't provide services. It is imperative for it and it is logical. France Telecom is still restructuring its financial position and has to sort out some issues. So, to actually put in money in India during its growth phase while it is putting its finances in order is a stretch.

How do you rate the regulatory initiatives that have taken place in India in the last few years?

People see it as a much freer market now. It was earlier seen as a very local Indian market where no foreign entity could get more than 49 per cent. There was no growth in the market either, growth was very difficult. The market was split up into a number of wireless licences. So, you couldn't get more than 49 per cent and then when you did get in, you had to get licence by licence by licence –­ which means you are in for a long haul. It also happened at a time when many companies "The problem with India at the moment is that, except in outsourcing, it is not top of the mind."were trying to restructure their businesses, so that shut off any investment interest.

Now everyone is looking at European consolidation or US consolidation, which is stopping them from coming into India. We think there will be three or four main European players and the US market will also consolidate rapidly. So, you are talking about a market with eight to 10 major players covering cable, satellite, wireless and fixed line. The problem with India at the moment is that, except in outsourcing, it is not top of the mind.

Getting back to the issue of regulatory initiatives, do you think there has been a huge jump in this area?

The fact that foreign owners are now allowed to own 74 per cent (75 per cent would have been nice) is useful. I think there is greater competition; there is a real mood to drive up subscriber numbers. It makes it worth doing. It makes it possible to put some money into India and grow the business. There was no encouragement to do that before.

How has the 3G experience been in Europe?

Very slow, very expensive and no consumer acceptance yet. The handsets are very clunky, they are like bricks. They are almost like the cellphones we saw in the 1980s and 1990s. The battery life is an hour. They weren't very interesting. Over Christmas, there was no substantive move to move to 3G. No one is looking at moving to 3G from a 2.5G or a 2.75G. You will see that happening at the end of 2005, as handset prices go down and battery life increases.

Do you think India is in any position to move to 3G?

If I were in the Indian market where you have a huge potential to increase just the number of subscribers, and if I was running a business, I don't think I would put my money into 3G because I could get a very good return by doing 2G or 2.5G. Also, in 2.5G, as the compression techniques improve, data can be transferred quite quickly. Not as quickly as 3G but quite quickly. People can cope with it. I would not go for 3G in India now. I would go for market share, profitable growth, and a solid subscriber base. And when I find a solid subscriber base that does not churn, I would introduce 3G.

What, according to you, are the areas of concern for the Indian telecom industry?

The main concern from the European operator perspective, from a regulatory point of view, is to get the Indian market to think not infrastructure but competition. The UK regulator talks about regulation junkies, people who love making money by tweaking regulations so that they can make more money. So, there is a move in Europe to get into competition and to deregulate, because there is enough competition to allow deregulation in certain services. We have universal services. Now that this has happened, people want financially secure competitors, so that the industry is sustained and there are better services. Not just infrastructure.

The major thrust of the government in India is broadband. Do you think the targets set by it are a bit aggressive?

No, absolutely not. It is really interesting. The UK has had a huge broadband drive on, and the recently released BT third quarter results show that from 300,000400,000 subscribers two and a half years ago, there will be 5 million this summer.

But isn't there a huge difference between the consumer in Europe and the consumer in India?

Well, as we have seen in the UK, as more and more people are getting this service, they are demanding faster and faster speeds. So it is just that the satisfaction level is increasing so rapidly.

How does the Indian telecom market compare with China in your opinion?

The Chinese market has seen very rapid growth but is having some problems rolling out in the rural areas. This is similar to India and also Russia. But I think there is huge potential for Indian telecom and with the outsourcing activity the country is seeing, the demand for telecom services will increase even more. The problem is how to build it out so rapidly and how to get people outside the big cities to use it. There is a threshold beyond which getting the numbers is much more rapid. In the case of Italy for example, once it reached the 25 per cent point, it went to almost 80 per cent very, very rapidly. When that happens, you get tremendous economic benefits such as economic efficiency.



 
 

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