With the Department of Telecommunications (DoT) clearing the decks for the entry of six new operators and the expansion of three existing ones, the world’s fastest growing telecom market is headed towards blistering competition. After receiving 573 applications for unified access service licences in October 2007, DoT moved faster than expected to issue 121 letters of intent (LoIs) to nine companies in mid-January.
The companies that were selected for the issue of LoIs from the diverse mix of applicants are the eight subsidiaries of realty major Unitech Limited (22 telecom circles), Swan Communications (13 circles), Spice Communications (four circles), Tata Teleservices Limited (TTSL) (three circles), S Tel (six circles), Ruiaowned Loop Telecom (21 circles), Videocon-promoted Datacom Solutions in association with HFCL Infotel (22 circles), Idea Cellular (nine circles) and Shyam Telelink (21 circles). Of these companies, Unitech, Swan Communications, S Tel, Loop Telecom, Datacom and Shyam Telelink (in which Russia-based Sistema has 51 per cent stake) are new to the telecom arena. The award of LoIs is to be followed by DoT giving licences in the order in which the companies meet the stipulations, starting with the payment of Rs 16.5 billion as pan-Indian licence fee.
The applications of Parsvnath Developers, Cheetah Corporate Services, Indiabulls-owned Selene Infrastructure and Allianz Infratech, who were the other prominent applicants, are being reconsidered by DoT. Like any selection process, this one too was subject to a certain amount of controversy and dispute. For instance, Bycell protested at not being issued LoIs for services in five circles ?? Assam, Orissa, Bihar, Northeast and West Bengal ?? despite topping DoT’s first come, first served list. According to DoT, Bycell lacked the required security clearances from the government. The company, however, has now received the clearances and will probably make it to DoT’s second list, as and when it is announced. Meanwhile, the company has gone ahead and made plans for rolling out mobile services. It has tied up with Quipo for providing services in the Northeast.
Spice Telecom, which was granted LoIs for four circles though it had applied for a pan-Indian licence, protested that it has been “discriminated against”. The company filed a complaint with the Telecom Dispute Settlement and Appellate Tribunal (TDSAT). According to DoT, Spice had not met the Rs 13 billion net worth criterion. With DoT sticking to its argument, it does not seem that Spice will get a review.
Chennai-based S Tel, in which Telecom Investments (Mauritius) holds significant stake, also criticised DoT’s policy of awarding licences. The company took DoT to court for being granted LoIs for only six circles against the application for a panIndian licence. The reasons behind the rejections were not made clear to the company. S Tel, however, subsequently offered to pay Rs 137 billion (in addition to the Rs 16.51 billion licence fee) to the government if awarded spectrum in all circles. DoT was reportedly inclined to accept the offer.
According to telecom analysts, DoT could have avoided some of the controversies that cropped up with the licence award process. As one analyst puts it, “DoT has done its bit to increase the overall muddle. It has not only left procedural gaps but has also kept changing its stance on policy matters.”
One example of this is the manner in which it managed the tricky spectrum issue. The priority for the allotment of 4.4 MHz of start-up GSM spectrum in each circle to LoI holders was changed arbitrarily. Previously, spectrum was to be allotted on the basis of the order in which the companies had applied for the licence. But according to the new policy, the criterion was changed to the order in which the licence fee was paid.
Naturally, this triggered a massive controversy. Vodafone Essar and Idea Cellular protested against the new policy as they had been in queue for spectrum since early 2006. Other operators, including Bharti Airtel, pointed out that the new rules would create a spectrum crunch and hit the growth of established players. These protests eventually led to DoT granting spectrum to the existing operators. The new companies, on the other hand, who had rushed to be the first to pay the licence fee, are still waiting as DoT works out an appropriate spectrum allocation formula.
The wait for spectrum, however, is worth it. With millions of people still waiting to be connected to telecom networks, the industry holds immense potential for both service providers and vendors. While the incumbents might not appreciate the entry of new players into the lucrative telecom space, companies from sectors as diverse as realty and white goods are busy drawing up telecom plans.
Analysts, however, are concerned whether the market is big enough to absorb so many companies. There are currently six pan-Indian telecom operators, and the number is expected to double with the entry of the new players. As a result, analysts are predicting extensive consolidation in the sector.
“Some of the new players will definitely look at alliances with either foreign players or existing ones. But it will probably be three years before any significant consolidation takes place. Then, the nine or 10 operators per circle will again come down to five or six,” says Romal Shetty, executive director, KPMG.
Sunil Bharti Mittal, chairman and chief executive officer (CEO), Bharti Group, was more critical. At the recent 3GSM Congress in Barcelona, he predicted the “collapse” of all new players in about 36 months. “These firms will take at least 12 months to build their networks and 24 months after that, they will struggle to survive in the market. I feel it does not make for a viable position. Who buys them after 36 months is not clear. Our position is that please don’t give spectrum at the cost of our (existing players’) growth path.”
At the same conference, Vodafone CEO Arun Sarin stated that only one or two of the new telecom operators would survive, and that a consolidation process is bound to begin.
In the meantime, what is certain is intense competition cutting through all sectors. The incumbents are already donning battle gear. The aggressive entrants will have to take on telecom heavyweights like Bharti Airtel, Bharat Sanchar Nigam Limited (BSNL) and Vodafone who have been in the telecom business for years and have created significant brand value and innovative marketing strategies. “The positioning of their services and quality will be the key to their success,” says telecom analyst Dr Mahesh Uppal. The first signs of competition will be reflected by falling tariffs. Kunal Bajaj, director, BDA India, predicts a 20-30 per cent reduction in tariffs to Re 0.20-0.50 per minute.
Equipment manufacturers, meanwhile, seem to be the best placed. To create capacity for another 250 million mobile subscribers, investments of about $24 billion, in the form of equity and borrowings, are expected to be made in the telecom manufacturing segment by 2010.
It is estimated that in the next two years, $12-15 billion will be invested by the new telecom players as well as Reliance Communications (RCOM) and TTSL (for their proposed GSM services). Meanwhile, in 2008-09, $12 billion is expected to be invested by the existing operators ?? Bharti Airtel, Vodafone Essar, Idea Cellular, BSNL, RCOM (for CDMA operations) and TTSL (for CDMA operations).
The massive need for network infrastructure, equipment and support services bodes well for even the smaller telecom equipment makers. Although the majority of the expected business will go to the established players, there will be adequate investment to support the smaller companies as well. For example, the total demand for base antennae is expected to be worth about Rs 9 billion by 2010. “With new players coming into the game, it is easily a $4-5 billion opportunity for the industry,” says C. Shivakumar Reddy, managing director, Kavveri Telecom.
New operators on the block
Unitech
Unitech, the second largest real estate firm in the country, is aiming to become a panIndian telecom operator. Though its expertise lies mostly in the realty sector, the company is not entirely new to telecom as it has been manufacturing towers for service providers for the past few years.
With LoIs for 22 circles, Unitech is planning to hive off its telecom business into a separate unit. The company intends to list the telecom subsidiary in the future.
Although funds are not an issue for the Rs 500 billion company, the availability of competent people to manage its foray into the highly competitive telecom business probably is. To tackle this, the company is scouting for a partner with technical telecom know-how. “We will be tying up with an operating partner who will provide expertise as well as finance,” says a Unitech official.
Unitech is reportedly negotiating with several international telecom majors and financial investors for technical and strategic partnerships. According to market sources, US-based AT&T is among the clutch of companies that is in talks with Unitech to form a joint venture (JV), in which the latter is likely to hold minority stake which could be as low as 40 per cent. “We need $1 billion as equity and $1 billion as debt. The telecom partner could even bring in as much as 70 per cent of the equity required,” says the company official.
The launch of telecom operations is entirely dependent on the availability of the most scarce resource in the sector, spectrum. Unitech expects to start offering mobile services within six months of spectrum allocation, with a focus on product differentiation.
It will be interesting to see whether Unitech makes as much of a success of its telecom venture as it has of its construction business.
Swan Telecom
Swan Telecom is another realty-backed firm. Its ownership, which was initially linked to RCOM, is still not clear. However, according to sources, the company is indirectly owned by the Mumbai-based Dynamix Balwas Group, which is an equal partnership between Shahid U. Balwa and Vinod K. Goenka. According to the Dynamix Balwas Group, RCOM’s 9.9 per cent stake in Swan Telecom was divested to Mauritius-registered infrastructure fund Delphi Investments before the LoIs were issued to Swan in January.
Unlike Unitech, Swan is currently not planning to rope in any Indian or international partner. According to company sources, while the 9.9 per cent cross-holding cap prohibits partnerships with an Indian mobile operator, an international player is not likely to contribute to Swan’s capital or credibility.
The company is planning to invest $2.5 billion in the next two years to roll out operations in 13 circles simultaneously. Although Dynamix Balwas claims to have enough internal cash flows, it also intends to raise funds to finance its telecom foray. Swan Telecom is considering a debt-equity ratio in the range of 1.5:1 to 2:1.
The company will be ready to roll out services within a few months of receiving the required spectrum.
Datacom
The booming telecom business has attracted consumer electronics giant Videocon, which owns majority stake in Datacom. According to DoT’s records as of November 1, 2007, Jumbo Techno Sol tions (a wholly owned subsidiary of Videocon) holds 90 per cent stake in Datacom while the rest is owned by Oswal Fertilisers and Chemicals. Datacom has set an ambitious target of 10 million subscribers in three to four years. The company plans to use Videocon’s extensive all-India network of over 10,000 retail outlets.
Datacom intends to launch GSmbased mobile services by the end of 2008, subject to allocation of spectrum. It is ready to make the required investments. With an aim to improve the efficiency and profitability of the business model, the com-pany plans to introduce various innovative services apart from the usual voice services.
Datacom is clear about roping in a global service provider as a strategic partner in the future. With interest rates in the US declining, many investment firms are eager to invest in the Indian telecom sector instead where the returns have been substantial. According to Datacom officials, a number of local and global banks and financial institutions have expressed interest in providing fund-, non-fundand service-based support to the company. Even Himachal Futuristic Communications Limited (HFCL), whose application for a UAS licence was rejected by DoT, is keen to share the ownership of Datacom. However, Videocon has not shortlisted any companies for the sale of stake.
Videocon also has a partnership with US-based Verizon Business. In 2007, it tied up with the latter to set up a JV ?? Verizon Business India. The JV recently received international long distance (ILD) and national long distance (NLD) licences. While Verizon Business India will offer the full suite of long distance services, including international private leased circuits with multi-protocol label switching and IP services, Videocon has no plans to rope in Verizon Business for its mobile services venture.
Loop Telecom
BPL Mobile, in which the Ruia-owned Essar Group holds 9.9 per cent stake, received LoIs to operate across all circles through Loop Telecom (formerly Shippinstop.com), its wholly owned subsidiary. BPL Mobile already has an NLD licence.
Hoping that spectrum will be available soon, Loop Telecom has initiated a detailed study for network expansion. It has earmarked $2-2.5 billion as investment to roll out GSM services across 21 circles in the next two years.
For funds, the company is exploring various options for equity as well as debt, and is also considering launching a public issue. It is looking for an equity partner for the pan-Indian foray and is believed to have started discussions with a few potential partners.
BPL Mobile, which operates only in Mumbai, has invested Rs 2 billion over the past one year for network improvement. It already has 1,100 towers, and will install 600 new towers by end-2008.
To reduce the investments in infrastructure, Loop Telecom will partner Essar Telecom Infrastructure, a tower company that is part of the Essar Group, for expanding its network.
Experts are concerned that there could be a conflict of interest for the Essar Group, which has 33 per cent stake in Vodafone Essar as well as 9.9 per cent stake in BPL Mobile. This may affect the relationship between the UK-based Vodafone Group and the Essar Group. Essar officials, however, are not too concerned as they are essentially investors in both companies and BPL’s plans to go panIndian should not impact their relationship with Vodafone.
S Tel
S Tel is a Chennai-based telecom company promoted by Skycity Foundations and Mauritius-based Telecom Investments. Although it had applied for licences in 22 circles, it got LoIs for only six. According to DoT, the company had not submitted its application before the cut-off date.
But according to company officials, the licence application for 16 circles had been submitted on September 28, 2007. However, the earlier deadline of October 1 had been arbitrarily and unilaterally changed by DoT to September 25. The company demanded an explanation from DoT regarding the change of dates, to which DoT replied that the remaining applications might yet be reconsidered.
Meanwhile, S Tel has filed an application with the Wireless Planning and Coordination wing of the Ministry of IT and Communications for the allocation of spectrum. The company has already paid Rs 251 million as entry fees and Rs 420 million as bank guarantee.
With plans to tap the vast rural market, S Tel has volunteered to pay additional spectrum charges of Rs 137.52 billion, with the commitment to charge not more than Re 0.30 per minute for all national calls for a period of 10 years. This was a massive increase from the Rs 60 billion it had committed to pay in November 2007. The amount will be payable after allotment of 6.2 MHz of GSM spectrum in the 900 MHz frequency for all circles.
The company is believed to have secured funds of about Rs 100 billion from equity investors for its pan-Indian (if it gets the remaining licences) GSM network.
Shyam Telelink
Russia’s largest private sector consumer services company, Sistema, which wanted to gain a foothold in India’s telecom market, picked up 51 per cent stake in Shyam Telelink, which provides mobile and fixed line services in the Rajasthan circle. According to Sistema’s president Alexander Goncharuk, Sistema has already invested more than $600 million in India and is open to increasing its stake in Shyam to 74 per cent over a period of two years.
Shyam Telecom was awarded LoIs for 21 circles. Apart from mobile services, the company is planning to offer broadband services including Wi-Fi and WiMax. In the Rajasthan circle, the company’s 4,000 km long optic fibre cables will be used to launch these services. However, Shyam is yet to decide whether to go with CDMA or GSM. The decision will be taken on the basis of the spectrum frequency the company is allocated. Sistema, which has a total subscriber base of 80 million, has expertise in providing both GSM and CDMA services.
Goncharuk is aware that it will be difficult to break into India’s telecom space as there is tough competition from the local players. However, he is confident that the company will eventually become a larger player. For this, Sistema intends to invest $5-7 billion in the Indian market and roll out mobile services in the next two to three years.
The telecom foray, however, is not the only reason behind Sistema coming to India. The Russian conglomerate plans to enter the booming market for real estate, hotels, hi-tech electronics, infrastructure and highway development as well. All of Sistema’s group companies are listed and the company plans to list its Indian businesses as well.
Struggling for spectrum
Spectrum allocation to companies that have been granted LoIs has been repeatedly stalled by a number of controversies. Several allocation criteria have been announced by the government in the past few months, all of which have invited opposition from either operators or the regulator. The former have filed multiple cases in the Delhi High Court, TDSAT and even the Supreme Court on issues related to availability, procedure and pricing of spectrum.
After waiting for close to two years, Bharti Airtel has obtained additional spectrum in five out of the 10 circles in which it had applied for spectrum. While Vodafone Essar, Idea Cellular and Aircel have received the clearance for allotment of start-up spectrum in circles where they have licences, RCOM too has managed to grab the initial spectrum for launching GSM services in 14 circles. But existing players need additional spectrum to grow and expand their subscriber base. Arun Sarin, CEO, Vodafone, recently indicated that the company was open to buying spectrum from the market.
Since the telecom ministry announced that new entrants would be allocated spectrum in the order of licence fee payment, the spectrum allocation chaos has intensified further. However, it is important that India ensures open and fair allocation of the scarce resource to wireless firms to spur competition. But that has yet to happen.
By announcing a plan for providing up to 15 MHz of spectrum for GSM operators, the telecom ministry has managed to get itself into a deeper mess. While in theory, 100 MHz of spectrum is available for civil use, only about 35 MHz is actually available to operators as the rest is locked with the defence forces. According to telecom experts, the government has committed more spectrum than it controls. This has severe implications both for the government and industry, particularly the new applicants.
The solution that DoT is currently considering is a one-time entry fee for all spectrum allocations beyond 6.2 MHz. This fee will be based on the market valuation of spectrum and will be in addition to the spectrum usage charges. All existing operators who hold spectrum in excess of 6.2 MHz will also be subject to this fee.
However, DoT is sticking to its earlier stance that the one-time fee will be applicable only for additional spectrum allocation and not for start-up spectrum. At present, GSM and CDMA operators get 4.4 MHz and 2.5 MHz of start-up radio frequencies per circle to launch operations, which comes bundled with the licence.
As of now, there is no clarity on how much spectrum would be available for new players. All that is clear is that the spectrum currently available will not, by any measure, be enough to cater to the demands of existing operators, licensees without spectrum, operators shifting from CDMA to GSM, and new licence awardees.
Datacom
Ownership: Wholly owned by consumer electronics firm Videocon.
Market cap: Rs 82.99 billion (Videocon)
Chairman: Venugopal Dhoot (Videocon)
LoIs awarded: 22 circles
Future plans: To roll out mobile services by end-2008 and enter into a partnership with a global service provider. Datacom is likely to use Videocon’s all-India network of over 10,000 outlets to reach out to customers. It expects to garner, by conservative estimates, 10 million subscribers within three to four years of launch.
Analysts’ Perspective
Telecom analysts present their views on how the entry of new players will affect the growing telecom market…
Kunal Bajaj, Director, BDA India
The entry of new players will encourage the existing companies to expand their operations. Consolidation, depending on the allocation method of 2G and 3G spectrum, can be expected. A pan-Indian operator is likely to buy out a regional operator due to the stiff competition the latter poses in its home circle.
Moreover, a regional operator may choose to set up a greenfield network with an existing, larger player. Two such companies may either work together or formally consolidate their operations. All the non-telecom companies entering the industry will look for partnerships as they would not want to do everything on their own.
Yogesh Kirve, Analyst, Anand Rathi Securities
Most of the new players are interested in selling spectrum. There is a possibility of two to three new players entering each circle. Although it is too early to comment on whether consolidation will take place, if it does, it will only be after a few years. Initially, a lot of investment will be made by the new entrants for setting up networks. The competition is going to intensify further with the subscriber base rising rapidly. However, expansion drives by RCOM and BSNL, which have not grown significantly in the past 12-18 months, are more of a threat to the other existing players than the entry of new players.
Dr T.R. Madan Mohan, Director, ICT Practice, Frost & Sullivan
Stiff competition in the mobile and data services segments and consolidation of services to a single vendor by enterprises will be important trends.
Romal Shetty, Executive Director, KPMG
The entry of new players will intensify competition, reduce revenues and force innovation and radical thinking. Today, a company like Bharti has an EBITDA margin of 47 to 48 per cent. So even if ARPUs come down, it is not likely that the margins will decrease to 5 per cent. A reduction in price will definitely impact margins, but they will still be high.
In all probability, consolidation will take place three years down the line. Some of the new operators will look to align themselves with either foreign players or the existing domestic ones.
Prashant Singhal, Telecom Industry Leader, Ernst & Young India
DoT’s decision to impose a fee for transfer of spectrum may deter merger and acquisition activity. However, consolidation may still take place as India cannot have a 12-player market. There has to be consolidation towards a sixor seven-player market.
New players will focus on customer segmentation and network quality. In the short term, subscriber additions may increase and tariffs will decline. In the long run, better customer service and better networks will be important trends. However, it should be remembered that we cannot have another Bharti, Vodafone or Reliance.
Dr Mahesh Uppal, Director, ComFirst
Consolidation will be an important trend for the next three years. Most of the new entrants will find it difficult to set up greenfield networks and will search for opportunities to collaborate, merge or tie up with existing players.
It seems that most of the entrants are not serious operators. Several would leverage on the cheap spectrum that is bundled with the licence.
Loop Telecom
Ownership: Wholly owned subsidiary of BPL Mobile. The ownership of BPL Mobile, in which the Essar Group has 9.9 per cent stake, is under arbitration.
Promoter: BPL Mobile
Director and CEO: S. Subramaniam (BPL Mobile)
LoIs awarded: 21 circles
Future plans: Has initiated a detailed study for network expansion across all its circles, and is exploring fund raising options to begin services in 22 circles in the next two years. The company is considering launching an IPO, and has reportedly started talks with potential equity partners for a pan-Indian foray. BPL Mobile has plans to install 600 new towers by end-2008, taking the tower count to 1,700.
S Tel
Ownership: Majority stake held by Telecom Investments (Mauritius).
LoIs awarded: Six circles
Future plans: Has applied for telecom licences for the remaining 16 circles; expects to be awarded LoIs for these circles soon.
Shyam Telelink
Ownership: Shyam Telecom owns 49 per cent stake, remaining 51 per cent held by Russian company Sistema. Sistema has signed a share-purchase agreement (call option) with Shyam to raise its stake to 74 per cent by 2009.
Market cap: $50 billion (Sistema)
Managing Director: Alok Tandon
LoIs awarded: 21 circles
Future plans: May launch an IPO.
