NEW DELHI, India-The Indian cellular mobile market has always been fascinating, if only for the sheer number of players that compete here. Each of the 20-odd telecom circles, or geographic coverage areas, will soon have four cellular operators. In addition, there will be basic service providers offering wireless services based on wireless local loop (WLL) technology.
All this could easily add up to close to 100 operators in the entire country. But this is not to be. If the current consolidation trend continues, only about half a dozen cellular operators may be left in the fray in the near future.
The market saw rapid growth during the past two years-jumping from 1.2 million in 1999 to 4 million plus subscribers in June 2001. The cellular density in some of the small towns in south India has already exceeded that of fixed-line penetration. Now the market is at a turning point. The cozy duopoly of two private operators in each circle has been unsettled with the entry of a government operator and soon another private operator.
Each circle will soon have three private players and one government player. The entry of the third operator-state-run MTNL in Delhi and Mumbai and soon BSNL in all other circles-has not affected incumbent players in terms of subscriber additions. But the incumbents had to slash their airtime charges drastically to meet the low tariffs offered by state companies. With a third private player arriving soon, there will be further pressure on tariffs.
Two big operators, Birla-AT&T and the Tatas, which merged last year to form Birla-AT&T-Tata-popularly called Batata-triggered the consolidation spree. In June, Batata merged with BPL to create India’s biggest cellular service provider. The merged entity will own nearly one-fourth of the total subscriber base and has been valued at a massive US$2 billion. It will be present in 10 of India’s 21 circles, with close to 1 million subscribers.
This megadeal was soon followed by the acquisition of Spice Cell, owned by India’s ModiCorp and Hong Kong’s Distacom, by the New Delhi-based Bharti group, in an all-cash deal of US$90 million. The addition of Spice Cell customers takes Bharti’s total subscriber base to more than 800,000 in six circles, close to the Batata-BPL combination. Bharti’s latest acquisition has pushed Hutchison to third place with 770,000 subscribers in four circles.
The objective of this feverish pitch is to expand footprints and become pan-Indian operators. Carriers need nationwide coverage, “naturally, because their ultimate competitor is BSNL, which has a national footprint. What private players could not achieve through regulation, they are doing through consolidation,” said Dr. Mahesh Uppal, director of New Delhi-based consulting firm Telecommunications and Computer Information Systems.
And in this quest for expansion, the bidding for the fourth licenses has come in handy. Bharti bid most aggressively. It has won eight out of 17 circles for which the bidding took place. Bharti’s new licenses, including some lucrative circles like Mumbai metro and Maharashtra state circles, have helped Bharti emerge the undisputed king of the Indian cellular industry, with a presence in all the four metros and 10 state circles.
Bharti acquired Spice Cell in the middle of the bidding process for the fourth license. “It was important that Bharti took over a running operation in Kolkata as opposed to building a new one, as it would have cost much more,” said Sunil Mittal, chairman of Bharti Telecom. “The move is part of our strategy to acquire running operations to extend our service area in new regions as against making fresh investments to build infrastructure,” said Akhil Gupta, joint managing director, Bharti Televentures.
This indicates that further pressure will mount on small standalone players to either merge into one of the large national level players like Bharti or BPL-Batata or form an alliance with them. The small operators include RPG (Chennai circle), Escotel (Kerala, Haryana and Uttar Pradesh West circles), Modicorp’s Spice Communications (Punjab and Karnataka circles), Shyam Telecom (Rajasthan circle) and BPL Cellular (Maharashtra circle), which has been kept out of the BPL-Batata merger for regulatory reasons.
“The trend will continue as long as it costs more to set up a network than buy an existing one. The cost of setting up a network has not been lowered, though entry costs by way of license fees have come down,” commented Uppal.
In fact, he said, the risk in fresh investment is much higher now because the incumbents have relatively low marginal costs and a greater ability to compete.
Escotel, with 350,000 subscribers in three circles, has ruled out a merger and said it is looking for a new foreign partner to replace First Pacific of Hong Kong. In addition, Escotel won four more licenses in the recent fourth-operator auction. Other operations like Shyam’s Hexacom in Rajasthan are fledgling and may be looking for the right opportunity. RPG has been looking for a suitor for its Chennai property for a long time, and it is just a matter of time before it finds one.
But the path to consolidation will not be smooth. It is going to be some time before BPL-Batata begins functioning under one umbrella. The combine has four major players-Birlas, Tatas, AT&T and BPL-which will take time to throw up a professional management team and sort out branding-related issues. On the other hand, Bharti, with just one major foreign partner, SingTel, may be able to move fast. SingTel and Warburg Pinacus have stakes of 20 percent each in Bharti Televentures, the holding company of Bharti Cellular Ltd.
There are other challenges as well. The industry is yet to hear the last word on provision of WLL services by basic operators. Large players like Reliance, which kept a low profile in cellular bidding, have an eye on this cheap wireless service and may give cellular operators a run for their money, at least in smaller towns. The other pending issue is migration to the calling party pays (CPP) regime.
At present, there is a cap on foreign direct investment in the telecom sector. Indian companies want the limit of 49 percent on foreign investment in telecom services to be increased to 74 percent. This, they argue, will give Indian companies financial muscle to remain competitive and introduce new services like 2.5-generation (2.5G) and eventually third generation (3G) services.
