How Infocomm Shot Itself

[vishnu 0]

Sunil Jain / New Delhi March 21, 2005

If you have perfect hindsight, and who doesn’t, it’s easy to see that Mukesh Ambani’s Reliance Infocomm actually got the short end of the stick even while Ambani believed he was on to a good thing by walking away from the bidding for the fourth cellular licence (this was finally auctioned for Rs 1,633 crore in July 2001).

Instead, Ambani began offering full-blown mobile services on the fixed-line limited-mobility licence he got by paying a license fee of a much lower Rs 410 crore.

For, after the cellular phone firms forced the government to take action, Ambani had to pay another Rs 1,095 crore to match what had been paid by them for the fourth cellular licence apart from an additional Rs 485 crore as penal interest.

But surely that’s a foolish argument to make, for when Infocomm decided to stray from the straight and narrow, it didn’t know it would have to make the additional payments.

The point, however, is that even if Infocomm didn’t know this, its gamble was not worth the risk.

If its advisors/managers had thought through things, they would (should) have seen that each one of their perceived advantages would fall along the wayside, indeed some even collapsed before Infocomm embarked on its strategy of misusing its fixed-line limited-mobility licence to provide full-blown mobile services.

A useful way to go through the argument is to examine in detail each of Infocomm’s perceived advantages.

One reason given for Infocomm deciding to walk out of the bid for the fourth cellular licence (Infocomm bid Rs 581 crore in the second round of the 4th cellular bid before walking out) is supposed to be that it wanted to use CDMA technology as this was superior to the GSM one used by cellular firms.

While the technological superiority is not proven, the fact is that in September 1999 itself the government said firms could use any technology, GSM or CDMA.

Another big advantage limited mobility phones had was that they were treated on a par with fixed-line phones, and so got to keep 60 per cent of the revenue paid by their customers each time they called another phone.

Cellular phone companies, by contrast, got to keep just 5 per cent. So, if an Infocomm customer called a Hutch cellular phone and paid Rs 10 for this, Infocomm kept Rs 6 of this.

If the reverse happened, Hutch kept just 50 paise. But, in April 2001, when the cellular phone companies protested, the Group on Telecom and IT (GoT-IT) changed this and Infocomm also got to keep just 50 paise—this, by the way, happened even before Infocomm got its fixed-line licence with limited mobility.

Calling Party Pays (CPP) was the biggest advantage using the fixed-line licence with limited mobility was supposed to offer Infocomm. So, if a Hutch subscriber called an Infocomm subscriber, he was forced to pay Infocomm for the incoming call.

But if an Infocomm subscriber called a Hutch subscriber, he paid nothing to Hutch. Effectively, not only did Hutch subscribers have to pay a higher tariff in comparison with Infocomm ones, they even subsidised Infocomm’s operations.

Well, if Infocomm’s managers had thought this through, they’d have realised the party wouldn’t go on forever. It didn’t, and in January 2003, the cellular firms cited discrimination against their customers and cut off links to Infocomm and other “limited mobility” players. Immediately, the government allowed them CPP—so when an Infocomm subscriber called a Hutch one, he paid Hutch for the incoming call.

Not only did this level the field, it allowed cellular firms like Hutch to offer free incoming calls to their subscribers—in the two years a fter this, the cellular industry’s subscriber base has tripled.

Walking away from the fourth round of cellular licences had another impact. At the time of the bid for the fourth cellular licence there was no (repeat, no) telecom player that had an all-India presence.

The only one with a near pan-India presence was Bharat Sanchar Nigam Limited and it didn’t have the lucrative markets of Delhi and Mumbai.

MTNL, the other PSU, had Delhi and Mumbai but didn’t have anything else. Hutch had Delhi, Mumbai and Kolkata, but didn’t have Chennai, Andhra and Karnataka (it got the last three in the fourth round after paying Rs 465 crore).

Bharti, today’s real biggie, didn’t have Mumbai, Maharashtra, Gujarat and a host of others, and won these in the fourth round after paying Rs 692 crore.

So, if Infocomm had stayed on in the fourth round and bid out the others, the only way Bharti and Hutch could have got a pan-Indian presence would be by buying out existing players in each circle and that would have dramatically hiked their costs—and since only one of Bharti or Hutch could do this, there would be only one other pan-Indian player today instead of two.

The other area where Infocomm decided to be too clever was in relation to international calls, where it came up with something called Home Country Direct to avoid paying an Access Deficit Charge (ADC) of Rs 4.25 per minute to BSNL on any incoming overseas call on its network.

This is what the company has been fined Rs 150 crore for and will have to pay another Rs 600 crore to BSNL and MTNL —indeed, Infocomm is lucky its licence wasn’t cancelled and its directors punished for this as has been done to others who’ve been caught doing similar stuff in the past.

Well, guess what? Till the second ADC regime came into place, foreign carriers paid local firms like Infocomm and Hutch anywhere between Rs 3 and 4 per minute each time they carried an overseas call on to their networks.

So, if Infocomm had simply chosen to challenge the ADC order, it probably wouldn’t have needed to indulge in this activity!

If, as his well-publicised visit to the telecom regulator’s office was aimed to convey, Anil Ambani is indeed going to get Infocomm as part of the settlement with his brother, he’d do well to examine the quality of advice the firm has been getting so far.

suniljain@business-standard.com

[Basant 0]

The so called advisors of Ambani clan have indeed messed-up Infocomm. In all matters they have indulged in a manners which are unethical. The long term harm caused by these crooks will bleed the company for years.

It is not surpising that today no one ; Customers, Other Operators, Government, Marketing Agents, public included, trusts Relaince Infocomm. At one point or other each of these group have been s***ed by Reliance illegally.

[SexyGurl 0]

I would have very likely been living without a mobile phone today, if Reliance hadn't entered the market.

And I believe there are a large no. of people like me. When we bought our first mobile phone at Rs. 501/- and a monthy payout of Rs. 470/- p.m. .... that was just the maximum we could afford to pay at that time. It was like paying just the rental of 470/- and getting the phone free.

(Those days a GSM phone was available for about 5000/-).

Today, with the second phone, we pay only Rs. 400/- for 2 mobile connections in the family ... Imagining two mobile phones in one family was out of imagination in Dec. 2002. Reliance has really been fantastic for me / my family.

I hope they can be profitable, even while keeping these price levels. As per RIC Q304 statement, they had a loss of Rs. 164 crore for 9 months ... expected to be lower at about Rs. 100 crore for the whole of 2003-04. plus a Rs. 150 crore loss because of penalty (but maybe, they managed to cover some part of it, with their US revenues from selling international minutes in USA).

I would really love to see reliance infocomm highly profitable ... though on back of huge volumes (not price hikes .. which I don't think will come). On the net, I think Reliance Infocomm has done a fantastic job for India.

[anujit 0]

Yes we would like to see them do well.

But their corporate fundamentals is of lying stealing and cheating... either from the public or the government!

[SexyGurl 0]

Just to put the facts here -- this is how Reliance got eliminated from the first round of cellular licences in 1995:

1. Small time folks like Bharti, Essar et all bid towering high & unreasonable figures in the bids invited for celluar licences by Narasimha Rao Govt. --- Some Rs. 11,000 crores for a country wide license !! Reliance's economically realistic figures are outbid (Reliance bid something like 3-4 thousand crores).

---- Upto that all fair ... the highest bidder takes.

2. Here comes the drama.. 1998 !!! Bharti , Essar et all, start crying, with their pants all wet due to the heavy load of license fees. Their Rs. 16/- per min call charges are still too low to pay 11,000 crores

---- Again Fair they needed cry, they chose it in 1995. BUT, India was also suffering ---> while China's cellular base was booming, India's nascent industry dying under the load of Rs. 11,000 crore license feed.

3. Crying Pays ---> 11,000 crore license fee WAIVED off by AB Vajpayee Govt. and shift to "revenue sharing" basis.

---- Now, is that fair. No one would have heard (infact laughed), if Reliance having bid Rs. 11,000 crore plus in 1995 , had started crying in 1998. Reliance had the capability & resources to put up a pan-India telecom infrastructure, but got thwarted by an unreasonable process.

4. In retrospect, (who cares fair or not), it was excellent for India, that Reliance moved in thru WLL converted Unified licenses ... and all of India is now reaping the rewards.

[vb86 0]

Since reliance already has a presence in most urban areas, it would be wise to launch some quality handsets like the vx8000 and the treos and blackberrys as somewhere down the line, there is a market for them. Most of us know that many don't opt for relaince due to the poor choice of handsets available. I must also add that at the moment, reliance is not at all taking advantage of the "superior cdma" technology. There is a lot to offer if you look at the servives available in countries like korea.

[setu_garg 0]

attaway vb86!

[Basant 0]

But their corporate fundamentals is of lying stealing and cheating... either from the public or the government!

I quite agree. all good works done get washed when u look at the way the company functions.

[SexyGurl 0]

Re-reading my messages above, I myself felt that I'd be looked upon a reliance fanatic , but which is not really so. Let me give more facts:

In 1996 or so, when reliance was building it's gigantic refinery, the budget waived off all customs duty on capital goods imports on refineries (terming them as a vital infrastructure component).

By 1999, Reliance was thru with it's imports; refinery was done .... and the customs duties were back Everybody must have understood, what I trying to say ... and what must've happened.

Now that 14,000 crore refinery is pumping out rupees .... something like 5000 crores of cashflow every year .. I tend to think, ambanis are now sprinkling those rupees all over india in the form of Infocomm

By the same standards, it's a shame on ambani standards, that 15,000 crores dumped into infocomm ... is yielding an annual loss 100 crores (that is the depreciation of assets is not being fully covered). And infocomm doesn't pay any interest or finance charges on 15,000 crore ... so the real loss is understated to that extent.

Despite, the license fee drama and the international call routing ADC fun ... reliance is yet to unleash the real "loot" potential of infocomm.

Watch out ! Airtel, Hutch, BSNL & Tata are very critical, so the reliance doesn't convert the telecom markets to a petrochemicals-type monopoly in India

I am sure the govt. & TRAI are both wary of the same possiblity

[salamqatar 0]

Despite, the license fee drama and the international call routing ADC fun ...

But their corporate fundamentals is of lying stealing and cheating... either from the public or the government!

Hai All..

We all knows the issue related to illeagal call routing done by Reliance infocom and penalties they paid to BSNL and MTNL. All believes that Reliance is guilty and cheated the country so they must be punished!!!

I like to add something to this subject.

What they done or doing actually, They collect the calls from abroad by selling their calling card and bring to india by their data network and connect to the destination through their PSTN local lines. This is called VoIP. This is perfectly leagal in all developed countries including USA, UK, Japan China etc..

VoIP is allowed in india for the name but only point to point. Connecting a PSTN line to data network is totally illeagal. (this restriction will be lifted soon. it is happening all over the world) Reliance violate only this rule. As a result BSNL lose its access Deficit charges. Major blame on reliance is the same, they route international calls as local ones for just saving ADC.

I cannot agree with that. 3.25 rupees/min is not a subject here. Any such VoIP operator can pay this happily if TRAI lift restrictions. Problem is there is no methode to impliment international ADC to local calls.

Last year one of our poor neighbour Bangladesh Lifted such restrictions by a bill

and suggested 30 lakhs taka licence fee for such operators. ( I dont know they start issueing licenses or not).

VoIP definitly a threat to traditional PSTN companies. But think . Why Other countries including Poor Bangladesh Allowing VoIP and suffering the PSTN losses. Simple because All needs Foreign money without any efforts and investment. You know how? Let me explain.

There are more than 50 lakh keralites working abroad. Take 10 lakhs out of it for a minimum calculation.

When somebody calls kerala by PSTN, he is paying Rs35/min to foreign telecom company in which Rs3.25 only gets BSNL( I dont know exact figure they charging to foreign company but it is very low). In other words, for giving 3.25 rupees to BSNL, a caller giving more than 30 rupees to foreign agency.

An average NRE calls 50 minutes per month minimum. ( actually it is much more).

So he pays 1500 rupees/month. For 10 lakhs it is 150 crores every month!!!

If caller use VoIP, situation is different. He pays only 6 rupees(average)/ min. In which Rs 1/min gets BSNL or local telcom carrier, Rs 2/min gets the indian operator ( illeagal operator at present) and remaining 3 rupees for the main foreign VoIP provider.( He also may be an Indian like reliance) Our NRE saves Rs 29/min. (internet charges abroad is very negligible so not included).

So in real effects, all the 150 crors per month come back to India. Not paying anything to foreign telecom agencies. (if Voip provider also indian). This calculation only says for 10 laks indians abroad.

Unfortunately our authorities not realizing the real benefit of routing international calls as local ones. They only see Rs 2 loss of BSNL. They not see our citizens paying huge amount to forein telecom agencies. this is our earned money.

So the bottom line is reliance's voilation is not a big crime or revenue loss to our nation. This practice will help to boost our economy.

Comments please.....................

[Basant 0]

Indian telecom sector is getting deregulated gradually. The narrow ppolitical mind set is slowing the process. Presence of BSNL/MTNL is main bottleneck. Every politician wants to pamper PSU operators even at the cost of consumers.

Common economics says that one gets discounted price on higher spending. For years together PSU operators charged more to consumers who had higher usage.

Let us hope in next 3-4 years, this sector would be totally free and operators would be in a postion to offer attarctive packages without bothering for the Govt./TDSAT/Regulator.

Reliance past/present is so shaddy, even if it does something within the law, eyebrows are bound to be raised.