RCOM: Aiming for the next 100 million – Aiming for the next 100 million

Reliance Communications (RCOM) launched its GSM ervices in early 2009. The nationwide network rollout was the largest and possibly the quickest effort undertaken by any company till then. It was completed six months ahead of schedule and was true to RCOM’s low price point strategy, backed by strong marketing initiatives.

Its trademark charm worked.Between January and April 2009, the company added 13.5 million users ?? the highest ever amassed by any Indian operator. The latter half of the year, however, saw the country’s second largest telecom operator remain unusually quiet.

As the competition got thicker and rock-bottom tariff packages flooded the market, service offerings like those from TATA DOCOMO began to find increasing favour in the market. For seven months straight, Tata Teleservices led the pack in monthly user additions. In March 2010, even pure-play GSM operator Vodafone Essar raced ahead, adding 3.62 million subscribers, beating leading operators like Bharti Airtel and RCOM.

During all this, RCOM remained a quiet bystander, its customary spark and drive somehow missing. In fact, it has been a while since the company made an impact in the market. But then, as Dr Mahesh Uppal, director, ComFirst, points out, “It may simply be waiting for now. The company is very savvy, ambitious and aggressive and has left no stone unturned to be competitive, right from the time it entered the market.”

On all other counts, RCOM remains a leading, integrated telecom operator in the country, offering services on both the GSM and CDMA platforms. In March 2010, it joined the 100 million mobile subscriber club (after Bharti Airtel), to become the world’s fourth largest, single-country mobile services operator.

With 102.42 million mobile subscribers as of March 2010, it trails behind only Bharti Airtel (127.62 million subscribers) in subscriber numbers.

Passing phase
Most analysts believe that RCOM’s restraint may be temporary. In the past 10 months, the company has been preoccupied with consolidating and redefining its core businesses to increase efficiencies.

Moreover, according to telecom experts, the crux of the problem could be that RCOM has had a heavy capex phase up till now. The company had a capex build-up of Rs 250 billion for 2008-09, leading to the pan-Indian GSM launch. For fiscal year 2009-10, the capex was pegged at Rs 150 billion. Much of the debt on RCOM’s balance sheet has been serviced through foreign currency borrowing, resulting in considerable pressure on margins. Added to that, RCOM has been hit like any other incumbent player by the recent onslaught of tariff cuts, which have lowered the company’s ARPUs and further squeezed margins. Thus, after years of strong profit growth, incumbents like Bharti Airtel and RCOM have been facing a decline in their quarter-on-quarter growth.

With 3G auctions under way and a pan-Indian licence likely to be in excess of $2.82 billion, analysts expect that each winner will be shelling out about $4 billion for acquiring 3G and wireless broadband spectrum. This is going to further add to the burden.

However, the good news for RCOM is that this is probably the last significant capex phase for the company. Having completed most of its expansion project, the amount of investment that will be required hereafter will be significantly less. “The company can now take a breather and actually enjoy the fruits of the investment it has made in the past two years. The downside is very limited from here on,” says Deven Choksey, managing director, KR Choksey Securities.

Targets
RCOM recently announced its target of crossing the 200 million subscriber milestone within 1,000 days beginning April 2010. The company is also aiming to push its revenue market share from the current 12 per cent to 20 per cent in the next three years. According to RCOM officials, the company is on a complete transformation journey, a 360 degree initiative to renew the organisation. The initiative is called R2.0, where R stands for resurgence, reformation, revival and Reliance itself, while 2.0 connotes the new version of the company.

Syed Safawi, president, wireless business, RCOM, in an interview given to a leading business daily, said that he is confident that the growth target set by the company is easily reachable even at the current growth rate. “RCOM is comfortable with the current growth rates and will sustain them. It will focus on the quality of customers and ways to increase their usage pattern. To increase the quality of customers on the CDMA platform, the company is upgrading handsets and giving better choices to customers. On the GSM front, the company will be increasing the quality of customers by focusing on revenue-earning customers,” he noted.

According to the senior management of RCOM, the other factor that will aid the growth process is the tapering away of the tariff war plaguing the sector. They believe that the handful of spoilers denting the market dynamics are now getting more rational on the tariff front.

“Telecom costs other than spectrum charges, etc. are more or less negligible and sometimes nil, once the network is in place. Thus, the incremental cost of serving the customer is next to nothing. So from now on, I see the company being a part of the price war but not really losing money as such,” says Uppal.

Meanwhile, the interest for most operators has shifted from tariffs to 3G spectrum auctions. Although Mahesh Prasad, president, RCOM, had earlier raised doubts on the business case of 3G, declaring that whilst it gives an opportunity to launch wireless broadband, this service in metros alone will not justify the business case, there is no way that RCOM will be left out of the 3G spectrum race. “It is imperative to secure spectrum for the future in an environment where spectrum is in short supply and RCOM will surely contest heavily for it,” says a senior analyst from Anand Rathi Securities.

Advantage RCOM
The flagship company of the Reliance Anil Dhirubhai Ambani Group (R-ADAG), RCOM has a market capitalisation of Rs 316 billion. “Reliance’s biggest strength is that it is a long-term strategist. It will remain a key player in the industry. Not only does it have deep pockets but it also has the great advantage of understanding the role of markets and the government in the sector. Moreover, the company has invested hugely and wisely in infrastructure, which it will leverage in the future for higher gains,” says Uppal.

Today, RCOM delivers a full range of telecom services, including mobile and fixed line telephony, broadband, national long distance (NLD) and international long distance services, data services and a basket of value-added services (VAS) and applications. It has been valued as one of the world’s top 10 telecom companies. It has a corporate clientele of 2,100 Indian and multinational companies, apart from 800 global carriers that use its network.

In terms of infrastructure, RCOM owns and operates one of the world’s largest nextgeneration IP-enabled connectivity infrastructures, with 185,000 km of optic fibre cable systems covering India, the US, Europe, the Middle East and the Asia-Pacific.

In March, the company launched the largest and most aggressive broadband internet service under the brand name Reliance Netconnect Broadband Plus. According to industry observers, the seamless connectivity between 2G and 3G CDMA networks for an uninterrupted data experience is a significant advantage for RCOM. It will give the company an edge when 3G and mobile number portability are introduced later in the year.

Market position and strategies
Company officials are optimistic about achieving their target and future growth. RCOM will rely on both GSM and CDMA technologies. GSM is likely to be used more for voice services while CDMA, which allows a rich telecom experience especially on the data side, will be used more effectively once 3G services are introduced. RCOM has already upgraded its CDMA network to 3G.

RCOM is betting heavily on its enterprise data business from where it derives nearly 33 per cent of its revenues. According to a recent study by Frost & Sullivan, it is the second largest player in the domestic enterprise segment. It has an 18.7 per cent share of this 74 billion market, which is expected to go up to over Rs 130 billion by 2013.

NLD has also emerged as a lucrative business stream. The company provides NLD connectivity to operators such as Vodafone Essar, Idea Cellular, Tata Teleservices and Aircel, deriving 40 per cent of its NLD revenues from them. This is likely to grow as new operators have started tying up with RCOM for these services. No doubt, there is competition from BSNL and Bharti Airtel, but since the market is largely dominated by these three  players, RCOM still stands to gain a substantial share of the pie.

The company’s global business is also seeing a lot of action. In 2009, RCOM had clubbed its global operations into a new subsidiary, Reliance Globalcom. This holding company has under its wing the submarine cable subsidiary Flag Telecom, Yipes Enterprise Services and the Vanco Group in Europe. This division has 1,400 customers for data connectivity and deals with nearly 750 carriers worldwide.

In the past year, RCOM has landed large multi-year deals through Vanco with several retail majors in Europe, such as the Oxylane Group and illycaffe. However, given the nature of the transactions, the revenue visibility will be reflected only over the long term. What’s more, the Yipes division is also witnessing traction and has added 25 customers in the last quarter, including Facebook and Troutman Sanders.

Analyst view
As a company, RCOM has always had strong project execution skills. It has achieved the fastest rollout of GSM and CDMA services in the country and its speed to market is indeed creditable.

Sridhar Pai, CEO of research firm Tonse Telecom, agrees. “Reliance is extremely agile and adapts rapidly to market changes,” he observes. “It is a heavy investor and has a sense of the marketability of its abilities. It is cautious and watchful but also has the ability to dream big.”

Uppal believes that RCOM “does not think short term”. But he also points out that, “Often in its aggression, RCOM tends to cut corners and take short cuts. It faces a lot of issues like transparency but at the same time, it has a strong customer focus.”

In addition, the company has always concentrated on pricing which has led to a primarily low-end user base. This is something it needs to look into as it will now be a challenge for it to make a dent in the high-end customer segment. Thus, analysts feel that RCOM will have to consciously rework some of its strategies to take its services to a different level. Tapping this segment will also help the company reverse the trend of falling ARPUs, which currently stand at less than Rs 150 a month.

Furthermore, the company needs to improve its customer service and the quality of service as this is seen by some as a problem area.

Industry watchers expect the competition to escalate in 2010, and while Bharti Airtel is likely to be at an advantage with its Zain and Warid Telecom acquisitions, RCOM may need to look into similiar strategies to fuel the next level of growth. The company recently announced that it was open to acquisitions in India to expand its presence in the domestic market, provided the opportunity was right. However, it ruled out any immediate plans to expand operations in the overseas markets, preferring to focus on consolidating its position in the domestic market. “RCOM is not a company that throws money. In that sense, it will be keen on acquisitions but it will not offer an extra price. Past examples in this respect are the Vodafone deal and/or the MTN deal. While it was very keen to acquire them, it will only do so on its own terms,” says Uppal.

Future growth areas
If there is one view that adds up to the general opinion on RCOM, it is that the company has great confidence and skill in reaching the mass market. It understands the potential of the vast, untapped rural market and has created a niche for itself in this segment by introducing innovative schemes and handsets targeting rural users.

RCOM recently announced a slew of initiatives like BharatNet, Grameen VAS and machine-to-machine (M2M) to increase its presence in the rural segment. As a major strategic initiative, the company is aiming at increasing the mobile telecom and internet penetration in rural India. According to a statement issued by RCOM, its rural enabler blueprint is based on a three-pronged strategy. It states: “Drive internet penetration across rural and suburban terrain, thrust on high-impact M2M solutions, and provide value-added services specific to rural needs under the Grameen VAS initiative across 600,000 villages.”

The company has also been able to exploit the VAS segment effectively. CDMA, which offers superior voice and data capabilities compared to other competing technologies, has enabled RCOM to deliver content-rich data and voice applications including MMS and video streaming. This segment is expected to see further enhancement with 3G services being launched in the country.

Meanwhile, RCOM has received the regulator’s clearance for an IPO of its telecom tower unit, which, banking sources say, could raise as much as $1 billion. The company is yet to set a date for the IPO.

On the whole, the company is on a good wicket. It has been quietly pulling in all its resources to work towards achieving the 200 million subscriber mark. With the expansion of its GSM network, CDMA mobile broadband network and with the coming of 3G, it will be interesting to see how RCOM plays its cards and impacts market dynamics.

Future plans

• Moving away from conventional tariff metering plans, RCOM is likely to soon offer two unlimited monthly call plans (local and STD) for its CDMA customers. The local call scheme will allow RCOM’s customers to make unlimited local calls to any RCOM subscriber at a monthly recharge value of Rs 299, while the STD plan will allow customers to make unlimited calls to other Reliance customers for a monthly recharge value of Rs 599. 
• The company is in talks with leading smartphone players to generate increased revenues from data services. It is looking to tie up with Nokia to launch the latter’s network management system service on RCOM’s mobile network. This will allow RCOM to offer enhanced mobile email services to its subscribers with potential bundling of such services with its data service plans. 
• The company is also planning to offer free data plans with some of the top-selling smartphone models. RCOM is in talks with players including Nokia, Samsung, LG and BlackBerry.  
• The company is also set to place an order for 300,000 Android-based handsets valued at Rs 5 billion. For this, it is in talks with Samsung, LG and Motorola.
• RCOM plans to launch its much-awaited internet protocol television service in Delhi and Mumbai in the next three months.