In the bare-knuckle battle for subscribers in the country’s rapidly growing mobile space, it is always the pan-Indian operators ?? Bharti Airtel, Reliance Communications Limited (RCL), Bharat Sanchar Nigam Limited (BSNL), Hutchison Essar and Tata Teleservices Limited (TTSL) ?? that come to mind as the big players with deep pockets and enviable staying power.Nonetheless, it would be remiss to overlook some of the other players, who may have a more restricted regional footprint but still add value in the big picture. Some of the so-called niche, or regional, players who have made a mark in the sector and added their own flavour to it are Aircel Cellular, Spice Communication Ltd., HFCL and Shyam Telelink.
These operators have a strong presence in one or two regions, expect for Aircel, which now has a pan-Indian licence and is operational in nine circles. However, till as late as 2005, it too was an incumbent in the Chennai and Tamil Nadu circles, where it continues to be the leading player despite stiff competition from heavyweights like Bharti, BSNL and Reliance.
Spice Telecom, operational in Punjab and Karnataka, is the second largest service provider in Punjab. It has determinedly beaten down competition with innovative value-added services and competitive tariffs.HFCL too is a popular service provider in Punjab and Chandigarh with ambitions to extend its reach to more regions. The company also has manufacturing interests, which received a further fillip when the company recently tied up with Qualcomm to manufacture chips. Shyam Telelink on the other hand, having sold off its lucrative GSM-based business ?? Hexacom ?? to Bharti, has lost ground to its rivals in Rajasthan circle where it operates. Still, its manufacturing and CDMA mobile ventures help it to stay afloat.
In 2003, the introduction of unified access service licences gave CDMA operators entry into the mobile arena and set the stage for consolidation through mergers and acquisitions. Smaller players, not able to survive the onslaught from the bigger players, were expected to be marginalised and hence forced to sell out. This did happen to some extent. Escotel was taken over by Idea Cellular, Aircel sold off its majority stake to Maxis of Malaysia, and Spice’s 49 per cent stake was picked up by Telekom Malaysia.
Undoubtedly, there are many disadvantages of being a regional player with a limited area of operation. Even today, the subscriber base of the four operators individually is way behind that of their rivals.These operators have limited networks and therefore cannot innovate with pricing. Roaming too is an issue. And, once the markets saturate, the competition will get only tougher.
“In such a situation it makes sense for, say, a Hutchison Essar to bid for Spice in Punjab where it is one of the leading players,” says Mahesh Uppal, director Com First.
Otherwise, to survive, these companies need to diversify, look at new revenuegenerating streams or extend their reach across the country. Says Amit Aggarwal, senior research consultant, Zinnov: “Shyam and HFCL have lost their area of focus. HFCL should focus on telecomrelated products and move out of telephony. Shyam, too, should focus on an area it is strong in, telecom equipment.
That said, it must be pointed out that regional players have their strong points as well. As their operations are more specific, they can be nimble-footed and deliver quickly, unlike national players who are not oriented to any specific market. Moreover, their understanding of their market is far better, which is a key strength as they can customise their offerings to meet local needs.We take a look at each of these companies individually, their key strengths and limitations, and how they plan to overcome the challenges they face…
Aircel: National ambitions
For long an incumbent service provider in Chennai and Tamil Nadu, Aircel Cellular is now determined to shed its regional player tag and make a mark on the all-India stage.Over the last one year, the company has been steadily acquiring licences to operate in all 23 circles of the country, including Delhi and Mumbai, where it hopes to be operational by mid-2007.
As a first step, in 2006, the company launched services in Himachal Pradesh and Bihar and then subsequently, in the Northeast and Jammu & Kashmir. Today it is operational in nine circles.Aircel has also recently been granted national and international long distance (NLD and ILD) licences.
Aircel’s decision to expand was not just prudent, it was necessary for survival.Telecom majors like Bharti Airtel, Reliance Communications Limited (RCL), Hutch, TTSL and BSNL were investing furiously in networks, competing on tariffs and flooding the markets with value-added services. To hold on to its market share, Aircel needed a winning strategy.
Its ambitions took shape only after Malaysian telecom carrier Maxis acquired a 76 per cent controlling stake in the company for $1.1 billion in partnership with the Reddy family in end-2005. The financial backing of the Maxis Group gave a fillip to the company. It drew up an aggressive growth map that included a national footprint and all-out efforts to attract users.
Maxis brought on board telecom veteran Sandip Das (who was earlier with Hutchison Essar) as its chief executive officer. He was later made responsible for the Indian operations as director in charge. With him came a team of professionals who were handed a stiff target: to pull in 8 million subscribers a year from approximately 2.4 million in January 2006.
“Along with Aircel’s existing senior management team, we will build a strong India-based top management team that will work towards making the company a formidable telecom service provider,” Das had noted then. The company also planned an investment of Rs 27 billion in 2006-07, to be scaled up by a further Rs 20 billion in 2007-08 to facilitate the process.
Strengths and weaknesses
The efforts paid off. In one year, Aircel was able to increase its market share in the two circles from 1.4 per cent to 9.3 per cent. Today, it has 5.51 million subscribers against about 2.22 million at the end of 2005. The Telecom Regulatory Authority of India (TRAI) statistics also show that, given the overall GSM growth rate during 2006-07, Aircel witnessed the maximum growth at 8.24 per cent followed by BSNL at 7.8 per cent, MTNL at 6.51 per cent, Spice at 5.83 per cent and Reliance at 5.76 per cent. Even in a new circle like Jammu & Kashmir, despite stiff competition from bigger players, Aircel was able to capture 100,000 users in less than six months.
Having managed to augment its subscriber base, Aircel now expects to be fully operational in all circles by early 2009. By then it would be servicing its NLD and ILD licences as well. To finance these plans, Maxis Group Chief Executive Officer Datuk Jamaludin Ibrahim has not ruled out a potential listing of the company in the near future apart from a planned investment of $3 billion spread over five years.
His enthusiasm is understandable.Aircel’s contribution to Maxis’s revenue and net profit this fiscal year has been 10 per cent and 8 per cent respectively, and is only likely to grow further. Since taking over, Maxis has seen the company’s subscriber base double. And, the scope for growth is considerable. “Over the next five years, we would be adding 20,000 to 25,000 telecom towers in India. In comparison, for 10 years in Malaysia, we have added only 5,000 sites.That is the magnitude of work we are talking about in India,” says Ibrahim.
Telecom analysts are, however, more cautious. While they concede that Aircel has gone the right way in getting a panIndian presence, its overall subscriber base is still quite small compared to the larger operators. For instance, Bharti has 37.14 million subscribers followed by RCL with 29 million, BSNL with 27.43 million and Hutch with 26.44 million. Over time, the fight for subscribers will only get tougher, more so with international carriers like Vodafone making an entry into the telecom space. The big players will be armed with aggressive strategies and deep pockets. Therefore to stand out, companies like Aircel will need to focus on service differentiation. “Better quality of service, quicker time-to-market, and an understanding of the local flavours can be used to differentiate products,” notes Aggarwal.
Uppal further points out that the key to survive for Aircel will be to tap B and C circles as that is where the next level of growth will be. To a large extent, the company is already doing that. Its focus is on taking its services to secondand third-tier cities.
What the company may also need to look at, according to telecom analysts, is becoming an integrated player. Larger players (barring Hutchison Essar and Idea Cellular) are all integrated players today, offering more than one service. “It might get tougher for pure-play mobile operators to survive in future, especially with the mobile markets getting increasingly saturated,” observes Saurabh Kaushal, industry manager, ICT Practice, Frost & Sullivan.
Future prospects
For the moment, however, company officials are focusing primarily on mobile services. With networks that are EDGE/ GPRS and 3G enabled, Aircel is exploring the idea of commercially offering 3G services in the future. It has already asked for permission to conduct 3G-readiness tests in Chennai, Coimbatore, Bhubaneshwar, Shillong and Guwahati.
Also, its Aircel Business Solutions (ABS) unit is planning to launch wireless internet services using Wi-Max in Bangalore. Subsequently, ABS intends to extend Wi-Max to 26 more cities. “With all-India backhaul capacities connecting more than 125 cities and towns, ABS is targeting the top 1,000 corporates for connectivity solutions,” says Ram Shinde, head, ABS.
In all, Aircel’s prospects are bright.From a two-circle operation, it is expected to grow into a national presence.
Spice: Ready to IPO
Claiming to have the second largest subscriber base in Punjab, Spice Communication is not a force to be taken lightly.Though operational in only two circles ?? Punjab and Karnataka ?? Spice has managed to stir up enough interest to clinch a 49 per cent foreign investment from leading Malaysian operator Telekom Malaysia. Armed with strong financial and technical backing from the latter, it has been taking on its larger pan-Indian opponents.
Spice recently applied to the Department of Telecommunications for NLD and ILD licences. The move makes good business sense. Not only will it enable the company to generate another revenue stream but will allow it to ride on Telekom Malaysia’s readymade ILD infrastructure to tap the segment. Spice will also set up three ILD points of presence (PoPs) in the US, UK and Singapore, and will use these in conjunction with its two NLD PoPs in India to distribute its long distance traffic.
Spice is also eyeing acquisitions abroad with Telekom Malaysia. For its first venture, it is seeking to acquire a GSM-based service provider in Bangladesh. It has appointed an adviser to shortlist a possible target.
Apart from voice services, Spice offers a wide range of value-added services, which are expected to be the major growth drivers in the future. In fact, “Spice was the first operator in India to launch incoming call block service. This enables subscribers to screen incoming calls,” says Mukul Khanna, assistant vice-president, marketing, Spice Punjab.
In order to further enhance brand visibility, the company is launching its mobile retail venture. It reportedly plans to invest Rs 5 billion to set up Spice mobile outlets across the country.
Strengths and weaknesses
While there is no doubting that the company holds its own despite being a two-circle operator, it has been facing some serious challenges in the last few years. It has not, for instance, been able to replicate its Punjab success in Karnataka, where it stands on the bottom rung, making losses.
As of March 2007, Spice had 0.82 million subscribers in Karnataka compared to Bharti Airtel’s approximately 4 million subscribers, Hutchison Essar’s 1.70 million subscribers and RCL’s 1.65 million subscribers. This has eroded the company’s overall share in the GSM market to a mere 2.25 per cent.
For players like Spice, the main hurdle is stiff competition from national players like Bharti Airtel, Reliance and Hutchison Essar. According to Romal Shetty, director, Telecom Risk Advisory Services, KPMG, India: “All the pan-Indian players have their infrastructure in place. They can use this across the country to benefit from substantial economies of scale.Moreover, regional operators have to undertake several tie-ups, for example, to offer roaming services. A Spice customer has to pay high roaming charges to roam on outside networks. National players don’t need such tie-ups.
This puts the company at a disadvantage. It has few options before it: to expand, generate new revenue streams, sell out or shut down. Spice is, however, not ready to throw in the towel yet.
It is planning to leverage all its advantages to the fullest. For one, being smaller, the company has more agility than the bigger carriers. It also knows the pulse of the market it operates in and can cater to local needs much faster than other operators. According to Shetty, “Spice chooses its strategies carefully. It brings a local flavour to its products.” This is relatively simpler for smaller, regional players as they can address demand changes much faster and far more flexibly.
Moreover, the company benefits from Telekom Malaysia’s strong financial backing and technical expertise. Says Aggarwal: “The company’s strength is its financial muscle.
According to Telekom Malaysia’s CEO, Yusof Yaacob, “With two-thirds of India’s population living in the rural areas, this is a key growth area for Spice.”
Today, with telecom being one of the most rapidly growing sectors in the country, Spice is aiming to be a key player in it ?? and to do so it is not averse to adopting a much more aggressive stance. It has chalked out a $2.5 million expansion plan for the next three years with the aim to build a pan-Indian presence. It has already applied for 21 unified licences.
To garner funds for this expansion, Spice will offload 10 per cent of its postpaid-up equity share capital through an IPO. It has already submitted its draft red herring prospectus for the same. The IPO is expected to not only increase Spice’s visibility but generate funds to partially pay off its long-term debt, NLD/ILD licence fees, network equipment charges and related capital expenditure.
The company has healthy growth prospects. In the long run, if its plans go through, Spice Telecom can be expected to give reasonable competition to the big boys in the field.
HFCL: Survival strategies
Another prominent regional player is HFCL Infotel. A 100 per cent listed subsidiary of the Himachal Futuristic Communications Limited Group, the company provides basic and mobile services in Punjab and Chandigarh. Having delivered basic telephony services since October 2000, the service provider is well known to its users by the brand name Connect.
On a somewhat slow track for years, the company has of late been gearing up to take on competition. The international success of triple-play services has whetted the company’s appetite. It is already carrying out trial runs in Punjab and intends to launch triple-play applications in Jammu & Kashmir, Himachal Pradesh, Haryana, Uttar Pradesh and Delhi, in two phases.
To this end, it has installed an analog head end at Jalandhar and is making its feed available to local cable operators. By appointing these operators as franchisees, it can effectively bundle its telephony and broadband services.
The service provider also offers fixed line and mobile telephony services along with internet and broadband access. For its corporate customers, the company provides leased lines, integrated service digital network (ISDN), virtual private networks (VPNs) and other customised solutions.
The challenges
However, being a regional player has its own limitations. HFCL has to face aggressive competition from larger pa Indian players with deep pockets, who can benefit from economies of scale.Over the years, the number of operators in HFCL’s domain has grown substantially. While RCL, TTSL, BSNL and Bharti Airtel are fighting for a share in its fixed line business, TTSL, BSNL, Reliance, Bharti, Spice and Hutchison Essar are trying to capture its mobile market share.
This has taken a toll on its subscriber base. Over the past four months, the company’s subscriber base (wireline, fixed wireless and digital mobile) has been continuously declining to reach 320,000 in March 2007. Meanwhile, Bharti registered 2.65 million subscribers, Spice Communication 1.91 million, Reliance 660,000 and BSNL 1.13 million in the same circle. Significantly, even a late entrant like RCL has been able to achieve a subscriber base that is 50 per cent larger than HFCL’s in the circle. “Companies with a pan-Indian presence are able to provide services at cheaper rates while incurring lower costs,” explains Shetty.
However, Mahendra Nahata, chairman of the HFCL Group, does not agree with this view. “Competing with national players that have a pan-Indian presence is not such a big issue, as all companies operating in Punjab are subject to the same market conditions. Being a regional player, we can concentrate exclusively on the region and react quickly to its demand changes.” Nevertheless, he admits that being a regional player prevents the company from launching extensive marketing and advertising campaigns. It is forced to resort to door-to-door sales.
Uppal points to a bigger problem.”The company may find it difficult to survive as a standalone player,” he notes.
It has two options. First, it could concentrate on offering services in niche segments. “It is currently offering services like video conferencing and multimedia services. If it concentrates on these niche areas, it may generate hefty returns and win shareholder support,” says Uppal.”Also, the group has been relatively successful in manufacturing and has bagged several major contracts. It could concentrate on this segment alone in the future.
Another alternative is to sell out.Earlier in 2005, the company had attempted to sell 61.98 per cent voting rights. (The Securities and Exchange Board of India had, however, withheld clearance of the share sale document.
The company, meanwhile, is ramping up its operations. In order to raise muchneeded funds for expansion, it is reportedly in talks with various players such as New Enterprise Associates and Goldman Sachs to offload stake for a substantial sum. According to sources, the company will invest the proceeds to offer tripleplay services.
All in all, it will be an uphill journey, but the company intends to make every effort to get there.
Shyam Telelink: Reinventing itself
With the lowest overall subscriber base among the four regional players, Shyam Telelink has perhaps the lowest profile of the lot. Despite being the first operator to offer GSM services in Rajasthan circle, the company has fallen way behind its larger pan-Indian rivals.
This is not to say that the company does not have good growth prospects.The service provider is gearing up to renew and reinvent itself in order to get a fresh lease of life.
For starters, Shyam, which offers CDMA-based wireless and wireline services under the brand name Rainbow, is all set to list itself on the bourses. It has acquired all the necessary clearances and it is only a matter of time before it visits the market. The move is slated to unlock shareholder value and provide the company with much-needed funds for expansion.
The only single-circle company with a positive net worth, Shyam Telelink’s listing is expected to generate significant interest among investors. Earlier, in 2006, a group of international telecom companies including Korea Telecom, US-based Sprint, Deutsche Telekom and Sweden-based Telia had lined up to acquire stake in Shyam.Though the deal was eventually called off due to valuation-related issues, the company nevertheless displayed its potential to attract foreign investment.
Background
Shyam Telelink is the services arm of telecom equipment manufacturing company, Shyam Telecom. Although it started out by providing GSM-based services, in April 2004, it sold off its stake in Hexacom, its profitable cellular service arm, to the Bharti Group for Rs 4.3 billion. At the time, the company had intended to focus solely on its CDMA business.
However, despite efforts, its user base has been lagging behind somewhat. As of March 31, 2007, it had an overall subscriber base of 250,000, small in comparison with other pan-Indian players. In the wireless segment therefore, the company has been under pressure ?? facing stiff competition from pan-Indian players including Bharti Airtel (1.73 million subscribers), BSNL (2.05 million subscribers) and RCL (1.1 million subscribers). Shyam, in comparison, has only 95,000 subscribers (digital mobile and fixed wireless).
To counter this trend, the company has taken a leaf out of RCL’s and HFCL’s book and applied for GSM spectrum again.Given that GSM infrastructure is cheaper, the move makes business sense.
Meanwhile, Shyam’s wireline story is quite the reverse. With over 150,000 subscribers, it is one of the leading wireline service providers in the circle. Reliance and Bharti are virtually no match for it with 4,800 and 11,800 subscribers respectively.
Consequently, one option before the company is to focus exclusively on this segment. According to Aggarwal, “Companies such as Shyam and HFCL have lost focus. They are `everywhere’ and should try to narrow down their focus areas.”
Uppal agrees: “Shyam Telelink, not unlike HFCL, must concentrate on a niche segment, whether it is enterprise networking services or other services that it can club together with its fixed line operations such as wireless broadband. This will be essential for its future survival.”
