Reliance Keeps Cool Amid Hyper-Competition

[Arun 795]

Published: March 1 2010 17:07

Financial Times

For a man fighting a war of attrition, Syed Safawi, the head of Reliance Communications’ wireless division, appears remarkably sanguine.

It is a fact of life, he says, that Indian telecom subscribers are becoming more promiscuous when it comes to mobile operators, constantly switching between networks in search of the best deal.

The question is how to get the most out of each subscriber for the few days a month when he might be using the Sim card he or she bought from Reliance, India’s second-largest mobile operator.

“Having multiple Sims … is not necessarily a bad thing as long as we can get revenue out of those multiple Sims,” Mr Safawi says in an interview at Reliance’s headquarters on the outskirts of Mumbai.

Like the rest of India’s mobile operators, Reliance is gearing up for a second year of “hyper-competition”, in which operators are no longer focusing only on adding new subscribers but also on splicing up the business of existing users.

With the auction of third-generation wireless spectrum also expected as early as April, the coming months will be critical in deciding which among the India’s more than 12 operators will emerge victorious in the world’s fastest-growing large mobile market.

Controlled by industrialist Anil Ambani, Reliance is competing with Bharti Airtel, headed by billionaire entrepreneur Sunil Bharti Mittal, Vodafone of the UK, and a host of other operators. These include Tata DoCoMo, backed by Japan’s leading mobile operator; Uninor, partially owned by Norway’s Telenor; and other groups whose investors include Russia’s Sistema and United Arab Emirates’ Etisalat.

India has been adding new subscribers at a rate of nearly 20m a month, bringing the total to 545m at the end of January. The growth of the market is being driven by a price war, in which mobile operators are offering calls at a fraction of a US cent per minute.

Bharti is the market leader with 121.7m users, while Reliance has 96.6m and Vodafone Essar has 94.14m.

But it is newcomers, such as Uninor, which are growing fastest, adding 1.33m subscribers to reach 2.54m in January and the revamped Tata DoCoMo, which added 2.98m to reach 60.31m.

Mr Safawi says that even with the price war, his margin based on earnings before interest, taxation, depreciation and amortisation is at 31-32 per cent. With his networks in place, he just needs to drive up traffic.

“How long will it [the price war] be sustainable? It’s going to be different for different operators,” Mr Safawi says.

“My peak investments are behind me, I’m already at very competitive tariffs and I’m free cashflow positive this year, so my ability to fight this war for another 12 months, 18 months, 24 months is much stronger than a newcomer who’s trying to create a network.”

But analysts argue that the constant churn, with users switching between networks, means operators are paying a high price in terms of subscriber acquisition costs.

“Depending on which carrier it is, they do pay upward of Rs50 into their distribution channels for every subscriber who’s activated,” says Kunal Bajaj, managing director at advisory firm BDA in New Delhi. “At some point, you have to recover that cost.”

Beyond the price war, Mr Safawi is eyeing the forthcoming third-generation spectrum auction, in which the government is expected to sell three pan-India allocations at a reserve price of Rs35bn ($758m).

Reliance already offers data cards for laptops that use 3G mobile technology to provide broadband.

The launch of 3G will further enhance revenue opportunities. In a country in which fixed-line broadband penetration remains negligible, most Indians will access the internet and a range of online services, such as entertainment, banking and payments, social networking and gaming, through their mobiles.

“We’ll be in it very seriously,” Mr Safawi says of the 3G auction.

[KanagaDeepan 1,084]

Thank GOD... Very happy to hear that, our Rcom is safe even in this drastic competition... The power of RCom imho is the on-net pack, which will bring nice margins for them.. I somehow almost discarded my BSNL post for RGsm as secondary number (Indicom is primary)...

Also very happy to hear they are serious about 3G auction.. Hope RGsm will be one among the 3 PAN India 3G operators... But what worries me a lot is the present condition of 2G network of RGsm.. Even today I faced a lot of problems by today morning 11am, when trying to call my friend on Aircel number.. (FYI Rgsm tower is just 20m away from my home)...

[srk006 21]

I really doubt if any one operator actually wins pan India 3G spectrum. It is more likely to be fragmented with operators bidding for selective circles.

In fact I fear complete discard of C circles!!

[KanagaDeepan 1,084]

I don't think these telcos will neglect C circles.. But still C circles will get low bid, but NOT no bid..

What I am guessing now is Airtel has huge money to get pan-India 3G license , which sure is a BAD NEWS for all of us here and Vodafone/Docomo too in most A and B circles ... But from the above news, I guess RCom has found some ways to get money for 3G auctions for A & B circles as third bidder and C circles as second or first bidder(In C circles only RGsm/RTL has got 900MHz spectrum and huge userbase imho).. So RCom is here to rescue us from the National and International R0bbers I am now eagerly waiting for RCom's Simple 3G plans..

Even if say in some circles Docomo was 3rd bidder (RGsm lost) and in some circles RGsm is 3rd bidder (Docomo lost) they can have mutual agreement to use each other's 3G network with NO difference in voice charges and SMALL difference in Data charges (which sure will be much smaller than Airtel's data charges ) imho..

Edited March 2, 2010 by kanagadeepan

[srk006 21]

^^^ We can never under-estimate the small-ops like Idea/AirCel and the mighty Etisalat! They may spun a surprise and Rcom or Voda or Airtel may be one of the losers.

[vvinayakpai 26]

Not sure about Aircel though!!!!!!!!!!

I feel that Etisalat has the potential to turn around the telecom sector further.

[srk006 21]

Etisalat may become one of the 3G holders; but I seriously doubt Etisalat's willingness to bring/sustain a lower tariff structure. See the quote from wiki:

As the incumbent telecom services operator, Etisalat has enjoyed a virtual monopoly in the past and was reluctant to reduce service prices in line with international trends.

[Arun 795]

Real value for 3G services will come from top 110 towns: Syed Safawi

Economic Times - 16 Mar 2010, 0111 hrs IST

Reliance Communications (RCOM) is targeting a fifth of India’s telecom revenue market in the next three years, up from the current 12%. The telecom firm will bid for spectrum for 3G (third generation services), as well as broadband wireless access (BWA), in all the 22 circles of India. ET caught up with RCOM’s wireless business CEO Syed Safawi after the company announced reaching the 100 million customer mark. Excerpts:

What is your strategy for adding the next 100 million customers?

Our portfolio is diverse. The CDMA network is our value driver in terms of the data capabilities sitting there, while GSM is our growth driver. We are witnessing a horizontal growth in GSM, led by our 35,000 sites. We are beginning to see growth in rural India, which gives us the confidence that we can go to the next 100 million in less than 1,000 days.

Is the current tariff war sustainable?

Some players can fight out this war for 18-20 months and we will be among them who will fight. The new players will find it challenging because they will be driving from the first minute. The core business is with us. We see ourselves a winner.

Do you see tariffs nosediving further?

I don’t see a huge erosion in tariffs from here on unless transmission charges are reduced from 20 paise to 10 paise. If that change takes place, further customer value can be created.

Isn’t revenue market share as important as subscriber market share. What are you doing to improve that?

In the past two quarters, we have gained 0.2% market share and currently have 12%. We see ourselves with one-fifth of the Indian wireless market in the next three years. One of the levers will be data and the other will be value-added services. Some of these services will come out in the next 6-8 quarters. We have a roadmap for 3G (third technology) as well as long- term evolution (LTE, the successor to 3G).

Will you bid for both 3G and BWA across India or you will be selective? How will you fund it?

We are a complete services player. We will bid pan-India for both 3G and BWA. Our current business is cash positive and we are pre-paying part of our debt. Our capex for FY11 is also down to just Rs 3,000 crore, which we can take care of through internal accruals. We are finalising details and will close funding in a few weeks.

What kind of 3G services offtake are you anticipating, and how will 3G auctions affect financials of operators?

The value of business depends on the walkaway price of spectrum. If it goes higher, then each operator will have to evaluate the business case. The real value for 3G services will come from top 110 towns and how each company will be able to extract data revenues from these towns will decide their future.

When do you see the next round of consolidation setting in?

I believe that consolidation has already started. All the operators with pan-India licenses are not rolling out at the expected speed. They are not aggressive despite the existence of infrastructure that can be shared. Consolidation is not only M&A (mergers & acquisition). If someone is not in a hurry to reach the market, then that’s a way to consolidation. We may see complete closure in 18-20 months.