Vincent de la Bachelerie has been involved in the telecom sector for the past 15 years. Currently global telecom leader with Ernst & Young, he has been involved in several key telecom assignments, including mergers and acquisitions, valuations, etc. In a recent interview with tele.net, Bachelerie talked about business opportunities in Indian telecom, world technology trends, 3G and beyond. Excerpts…
What is the current global trend in telecom?
There can be only limited growth worldwide, especially in the developed countries. We see different patterns in the fixed line and mobile sectors. The growth that we have been seeing over the last 10 years globally is going to be steady, in the region of 5 to 8 per cent. The growth shows strong differences across regions. The growth engine clearly is in Asia. Across the world, the growth may not be as strong but will be steady.
How do you perceive the Indian telecom industry in terms of growth opportunities?
There are a large number of people who still do not have access to telephony in India, with the teledensity still quite low.The addressable market here is currently about 300 million people. This should grow. In certain patches of the country, people still do not have access to telephony. The pace of growth, however, is strong. Adding 5 million customers per month is huge ?? this may not be so for the Asian mindset, but from a European perspective it is. In Europe we cannot imagine that kind of growth as most of the countries are nearing saturation. Also, when we speak of India, something very interesting that emerges is the business model that exists here as compared to that in Europe.The business model here is based on volume with very low operating costs thanks to outsourcing of non-core services and networks, and subsidising of mobile phones. All this culminates into really low tariffs, one of the lowest in the world at 2 cents per minute while maintaining very strong EBITDAs at 40 per cent. This business model is very powerful because as we see it, India, with 80 per cent of its population in the rural areas, offers very strong growth opportunities for the Indian operator. However, we do believe that despite the growth, the operators need to understand the market better and go through segmentation of the market, addressing every section of the population ?? students, business enterprises, etc. We have not seen very much of it yet in India while it is very prevalent in Europe.
Which are the segments that will do well in the coming years?
There is still a lot to be done in the mobile sector so the efforts need to continue. The segment of importance may be just basic voice. Of course, telecom operators need to develop services like SMS, at least to the minimum prevalent level worldwide, till the language issues of the buyers are effectively addressed. But voice still has huge potential. So, before addressing the higher-end users in the market with new technologies and new devices, this market can be served. There is a huge addressable market in India.The area of growth definitely lies in basic telephony. The second area is certainly internet and broadband. Growth in this segment is linked to all Indians having a computer in the future, that is, 100 per cent PC penetration. Broadband is also important in Europe because penetration is still only about 40 per cent. So we have to close a gap in our countries too ?? from 30-40 per cent to 100 per cent ?? like inmobile here. Here there is a wider gap and hence wider opportunities.
When can developing countries like India be expected to adopt 3G?
Costs and the available services are the hurdle. Even in Europe, 3G acceptance is quite low. Worldwide, it is only Japan where 3G acceptance is almost 100 per cent. For Europe, it is still expensive, the phones are expensive, and the services are, in fact, not there yet. Many more services can be offered on 3G than on 2G or 2.5G. For instance, if I take a narrow segment of businesses that mainly use BlackBerrys to communicate, and if I have GPRS and BlackBerry, that is, 2.5G, I don’t need 3G at all. Currently, we don’t need video on demand, or news clips, or songs on our mobile phones so much. Perhaps in the future customers will need more interesting stuff on their phones and that is when the demand for 3G or UMTS will actually arise. That is not the scene even in Europe.The highest penetration of 3G UMTS in Europe is 10 per cent, in Italy. What is really interesting about 3G is the development in Japan. Japan developed its own standard, NTT DoCoMo i-mode, five years ago and invented all the services that go with this model. The problem is 3G is not just about voice but also about broadband and loads of other different services. Basically, you need to create the entire business model that will fit in the 3G highway. What we have seen in Japan is the appreciation of content providers working hand in hand with NTT DoCoMo in providing interesting content to Japanese users, whether it is corporate content or advertising or even entertainment for youngsters. So 3G will pick up only once the business model is clear and the services offered on it are complete.
What is the road beyond 3G?
Technical manufacturers are already working on the future after 3G, that is, 4G, which is a quicker network and also more intelligent. We are not technicians and that is a technical question, but to make it clearer, I would like to take the example of broadband and fixed line, which could offer video on demand, that is, a full movie download, but for that we need much higher capacity and speed. Currently, work is going on in this direction but it is not complete. In fact, I think the new technology, which will be more developed and advanced than 3G, will be adopted much faster, even before the full adoption of 3G telephony. In Europe, people are right now very happy with 2 MB in GSM, but we are looking at 50 MB and that is a huge difference, which will allow full movie downloads on the computer or television. If the new services, like movies, can be effectively run to the customer with high definition and if there is appetite, we will see telecom companies investing in next-generation networks.
India is right now in a consolidation phase.
Do you expect more mergers and acquisitions in the future?
We are not so sure about whether operators from the US or Europe would invest in India or what the quantum of investment is likely to be. This is not because there is no return on investment or no high growth opportunities but because we have seen such phases of consolidation both in Europe and the US. This consolidation has to be digested and become operational. Big telecom operators that did some shopping recently, expensive shopping with big numbers on the table, need to integrate the services. They need to be more efficient and reduce their cost base because competition is going to increase. So I think in all markets, the major players will concentrate on integrating their businesses and digesting the acquisitions. In the meantime, they also need to reduce their cost base.Moreover, past experiences of European and American operators in diversification in other countries outside the natural footprint of their boundaries have been disastrous. They have invested in Latin America, in many parts of Asia and Africa and have had to retreat from these investments, mostly because they don’t know how to manage these investments. In the case of India though, I may be wrong as the local management here is strong and really good. Although I don’t see too many foreign direct investments coming into India in the near future, certain operators who are specialised in these areas may want to come in. For example, you see Saudi Telecom or Orascom, which are looking to invest abroad, coming in. Also, private equity funds would be interested because there is huge return and potential growth.
How would you compare India to other South Asian markets? What, according to you, are the issues that need to be tackled?
Things are more open in India than elsewhere, that’s all I can say. I don’t know much about policy or regulation in India.Generally, there are certain factors that need to be dealt with for it to be more attractive to investments. First, there has to be political stability and skills ?? both of which India has at the moment. You also need a suitable legal environment and we have heard through our discussions with people that there is a very efficient legal body in India for settling suits and disputes. Plus, you need to have a fair regulator, which again is there in India. Now to compare India with other countries, everybody compares India to China based on the population structure and the size of the country. However, India is a democracy, which in itself offers a lot of potential. There are still assets to be tapped.India has the environment to attract investment, and it has the skills. So, we do see very strong growth opportunities in India in the future.
