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Act II
Mukesh Ambani is readying for a grand come back in the telecom space and this time, it is more than a price play

Krishna Gopalan & Rashmi K Pratap

The lights are rarely turned off at the Reliance Corporate Park in Navi Mumbai these days. Expats and Indian executives can be seen working late into the night on Reliance Industries’ newest baby — high speed data and voice services over fourth generation (4G) telecom networks. At about 1 am or sometimes even later, buses ferry them to RIL’s corporate guest houses across the city. There are telecom engineers and executives here from the US, Germany and China, most of them working on project basis. They will leave when the services are rolled out, expected in the last quarter of CY13. But there’s no fixed time-table — not officially, at least.

Given the state of the telecom business in India, being a late entrant with strong financial backing can actually be a plus. At Reliance, it’s obvious that the group, with the full backing of chairman Mukesh Ambani, is gearing up to seize any advantage it can in what promises to be an epic battle. Certainly, this time round, the stakes are much higher: whoever cracks the 4G code first will walk away with the crème de la crème of mobile subscribers. With average revenue in voice services dropping almost by the day, mobile operators are pinning their hopes on data services. And when it comes to speed (the yardstick by which most subscribers judge data plans), 4G and LTE (long-term evolution) are the most advanced technologies right now.

LTE can deliver speeds of up to 100 megabits per second (mbps) in an ideal environment, which allows users to access rich content and multimedia applications such as e-learning, HD movies, multiple downloads of heavy files, online streaming of videos without buffering as well as HD online gaming and other services. 

For Ambani, this is a second entry into a sector that’s especially close to his heart. He was the brain behind Reliance Industries’ foray into CDMA in 2002 through Reliance Infocomm. In the split between the Ambani brothers in 2005, younger brother Anil got control of the telecom assets but Mukesh’s soft spot for the business is evident: his new venture is called Reliance Jio Infocomm (Anil’s company is now called Reliance Communications). Although the telecom sector has changed dramatically in the past decade, there is a sense of déjà vu around Ambani’s ambitious plans. 

Wild card entry

RIL’s re-entry into telecom came as a surprise to most observers. In June 2010, it bought the only company to get a pan-India broadband wireless access (BWA) licence — Mahendra Nahata’s Infotel Broadband — a day after Infotel won licences to offer BWA in all 22 circles. In addition to the ₹4,800 crore it paid for a 95% stake in Infotel (now rechristened Reliance Jio Infocomm), RIL also paid ₹12,848 crore for BWA spectrum. Now, Ambani is ready to pay another ₹1,658 crore for a Unified Access Service Licence (UASL), which will allow Jio Infocomm to offer voice as well as data over its 2.3 GHz spectrum across India using any technology. 

Then and now: How Ambani’s strategy has changed

This start-up cost of nearly ₹20,000 crore is a little more than the ₹17,267 crore (₹1,658 crore for 2G, ₹12,295 crore for 3G and ₹3,314 crore for BWA spectrum) that Bharti Airtel has paid so far to get spectrum for voice and data services. But Reliance has actually got a huge cost advantage by opting for the BWA route to offer voice and data. The biggest saving is in terms of the annual spectrum usage charge (SUC), which is 4% of revenues for GSM operators and 1% for BWA. Take a look at the numbers: analysts estimate the combined revenue of telecom operators in FY13 to be ₹1.5 lakh crore. If Jio Infocomm gets even 10% of this market, it will earn ₹15,000 crore of which 1%, or ₹150 crore, will be payable to the government as SUC; at 4%, the outgo would be ₹600 crore. Assuming its revenue stays constant for the next 20 years (the duration of the licence), that’s a cumulative saving of ₹9,000 crore. In reality, the figure is likely to be much higher since revenues could increase annually. 

Not surprisingly, GSM operators are up in arms, saying the government loaded the dice in RIL’s favour and gave it an unfair advantage (see: Operators outraged). For Reliance, though, the cost saving will prove an unbeatable advantage when it comes to gaining
market share — it will be able to price its products far more competitively than its rivals. Reliance did not respond to queries from Outlook Business for this story.

Operators outraged

Beneficial policies have worked to Reliance’s advantage in the past as well. Between 2001 and 2003, by virtue of being a pan-India basic services operator, for which the licence fee was ₹495 crore, Reliance Infocomm was allowed to provide wireless in local loop (WLL) services. 

By November 2003, UASL guidelines were announced. To migrate to the UASL, the company would pay just ₹1,650 crore for a nation-wide presence. That’s the same price a pan-India GSM licence had fetched in an auction two years earlier. “Reliance wanted full mobility without paying for a mobile licence,” says a rival operator. 

That wasn’t the only benefit. As a CDMA operator, the SUC for Reliance was fixed at 2% of adjusted gross revenue for upto 5 MHz of spectrum. GSM operators, in contrast, were paying at least 2%, going up to 4%, depending on spectrum used. “With CDMA, it was possible to get at least twice as many subscribers on the same amount of spectrum,” adds the same official quoted earlier. GSM players estimate that CDMA players have saved close to ₹30,000 crore on SUC between 2003 and now. Still, the saving on spectrum costs is no guarantee of success, as Ambani knows only too well. 

The wrong numbers

When Reliance rolled out its CDMA services in December 2002, it was with a bang. LeadCap founder Sangeeth Varghese, who was with Infocomm when it launched CDMA services, recalls that even a decade earlier Ambani spoke of “democratising telephony in India”. “He wanted to get to 10 million at the end of the first year and he got there. He may have lost money in the process but that really did not matter.”

At a time when incoming calls were charged at almost ₹4 a minute, Reliance India Mobile (RIM) offered it for free, along with a pulse rate of 15 seconds for outgoing calls. Negotiations with handset manufacturers ensured that high-end devices were offered at a third of the market rate. But essentially, this was an industrial company with no experience in customer-facing businesses. Distribution was a mess, and the backend was unforgivably mismanaged, especially in key areas such as billing, customer verification and overall customer service. 

The Monsoon Hungama offer in July 2003 was a telling example. The idea was simple. For ₹501, a new subscriber would get a handset and a connection, with monthly rental as low as ₹149; tariffs were already just 40 paise a minute. Not surprisingly, customers poured in. But the billing and collection functions weren’t upto the mark and while call volumes grew, revenue didn’t keep pace.

Even the technology that allowed RIM to offer such huge discounts proved the wrong choice. The company bundled talk time with handsets, and offered a fairly decent line-up of devices. But customers wanted the freedom to choose their devices, which GSM offered. More-over, RIM’s deals involved lock-in periods of up to three years to allow the company to recover the cost of the handset. So, not only could the customer not switch operators, he was also tied to the device for a long period, which proved unacceptable.

The proof is there in the numbers: just eight months after Anil Ambani took over the business, Infocomm wrote off ₹4,500 crore of liabilities relating to regulatory matters, bad debts and irrecoverable amounts. Even now, Reliance Communications continues to pay for those early sins of omission and commission. Mukesh, though, is clearly determined to learn from the past. 

Doing it differently

Ambani’s vision for Jio Infocomm is clearly spelt out within the company and the group. He doesn’t want to just create a robust broadband network; rather, his focus is on the entire digital value chain, from networks and devices to digital content and apps and, of course, customer services. 

But he’s treading cautiously. For starters, the initial 4G rollout will be in just three cities, Delhi, Mumbai and Bengaluru, unlike RIM’s pan-India launch a decade earlier. For these circles, Jio Infocomm is learnt to have tied up with Samsung to provide the 4G LTE network equipment — the Korean giant is already setting up 4G LTE networks for Telefonica in Chile and 3UK in Britain. 

Then, it’s also ensuring the CDMA handset issue isn’t repeated. Most customers today are hooked to their own devices — handsets and tablets — and are unlikely to change easily. Instead, Reliance is working on a device that can convert LTE signals to wi-fi, allowing network access in a given area on any handset or tablet. These devices, internally called “My-fi”, are portable and can be carried in the pocket, so users can opt for the wi-fi option and latch on to the high-speed LTE network even on the go. The Reliance Corporate Park is already using 4G through these devices. In the US, Sprint Wireless offers a similar pocket wi-fi
station that can support upto eight devices.  

That’s not to say bundled offers won’t be available. They will — some media reports say Samsung will be providing devices as well as network equipment — but not at dirt-cheap rates like earlier. “Our target is to be a complete solution provider, offering plans that can cater to multiple devices in a household,” says a company executive who is familiar with the developments. “We will give them at compelling price points but certainly not cheap.”

The bigger task, though, will be to provide good quality voice services. The 2.3 GHz network — in which Jio Infocomm has spectrum — is notorious for call drops, and Jio Infocomm doesn’t have a layer of 2G or 3G beneath its 4G offering to take care of this, an advantage that Airtel has. “A user may end up experiencing call drops while changing circles or base stations,” agrees Abhishek Chauhan, senior consultant, information and communication technologies practice, Frost
& Sullivan. 

Reliance has developed a technology to offer voice over LTE (VoLTE) networks, which is currently being tested. But some tech experts are sceptical of the prospects of VoLTE, although the services have already been launched in South Korea (SK Telecom and LG u+) and in the US (Verizon and MetroPCS). “VoLTE would require significant capex on equipment from operators. Even the device ecosystem is very nascent, with only a few premium devices being available,” points out Chauhan.  

Towering concerns

The best and easiest way for Reliance to tackle the inefficiency of the BWA spectrum is by adding towers. The 2.3 GHz spectrum band is a poor performer in terms of reach of each cell site. To provide seamless connectivity it will require at least three times the number of towers required by the 900 MHz or 1,800 MHz band (in which GSM operators function). “That means the capex requirement in this band would be approximately three to four times more compared with other bands,” points out Chauhan.

Ambani’s Save-On-Spectrum strategy in numbers

Well, Ambani is certainly not stinting on cash when it comes to his pet project — he is said to be investing about $8 billion (₹44,000 crore) in the 4G telecom venture. But the Reliance group is also notoriously value-driven, which means it will seek the cheapest option wherever possible. According to industry sources, the company has decided to roll out 8,000 cell towers in Mumbai over the next year, followed by 5,000 in Delhi and 2,500 in Bengaluru. This is more than twice the number of towers in Mumbai currently — 3,600, owned by Vodafone India, Bharti Airtel, Idea Cellular, RCom as well as Tata Teleservices. 

Although Reliance will be setting up its own towers, renting will help roll-out its service quickly and more economically. Compared with an investment of ₹25-30 lakh for setting up a tower, monthly rental charges for cell towers range from ₹25,000-40,000, depending on the location and topography. Tower-sharing is a win-win situation for the owner and tenant. The owner gets someone to share operating expenses such as air-conditioning, diesel back-up and maintenance, while the advantage for the tenant is in getting to roll out networks fast and cutting down on capex and time-to-market. 

Mukesh’s first choice for renting towers is apparently younger brother Anil’s RCom. Sources say Jio Infocomm is in advanced stages of negotiation with RCom for tenancy on its towers across India. RCom is a natural fit because, says the company source, “the majority of people working on the telecom foray now are the same who had set up RCom’s infrastructure and they know it’s reliable”. (See: Ambani’s A-team) 

Ambani’s A-team

The estimate is that RCom could earn annual revenue of nearly ₹2,000 crore from its 55,000 towers, which have no external tenancy after Etisalat exited India in the wake of the Supreme Court cancelling some licences in February 2012. RCom did not respond to an e-mail query.

If the deal materialises, it will boost the sagging fortunes of the Anil Ambani-owned company. For the nine months ended December 2012, while RCom’s net income grew marginally to ₹14,309 crore from ₹14,138 crore in the year-ago period, net profit slipped from ₹596 crore to ₹370 crore. Interest costs, meanwhile, went up from ₹1,051 crore to ₹1,752 crore; the company is sitting on a debt of ₹37,361 crore. Anil Ambani has repeatedly said he is open to selling stake in the tower arm, Reliance Infratel, and sources in Jio Infocomm say RIL may well turn buyer. “A purchase is not ruled out if the valuation is right,” they say. It’s not known what price RCom is setting on its tower business but analysts peg the firm’s valuation at ₹16,000-18,000 crore.

When it comes to tower management, it clearly pays to be late to the party — Reliance’s infrastructure costs will be significantly lower than its competitors’. And that’s not because it can rent where the rest had to build. Even where it’s setting up its own towers, Jio Infocomm can take advantage of a leap in technology: in collaboration with IIT Mumbai, it’s developed a newer version of telecom towers that will cost under ₹10 lakh. “These towers use less steel and have battery back-up [instead of diesel],” says the company source. “They can be mounted on street lights and will merge easily with the city landscape.” Importantly, these towers are pre-fabricated, so the installation time is just four days. Companies like Alcatel-Lucent have also devised similar cell towers but RIL’s technology will be a first in India. “We will begin with three cities and hope to complete pan-India rollout in about five years,” the company official adds.

That’s a reasonable target, say industry observers. DK Bansal, managing director of Poly Qual India, which has been exporting telecom towers for the past decade, says the time to get these towers up and running will shrink if the municipal clearances are in place and the structure is ready. “If the towers are mounted on street lights, their height won’t be more than seven to eight metres. This means less material will be used, bringing down the costs,” he adds. More than cost, though, Reliance’s telecom success will depend on its ability to sell its differentiated offering. 

Big picture thinking

If telecom is Ambani’s big dream business, its roots lie in his thinking — unlike father Dhirubhai who sought to create gigantic, heavy industries, Mukesh’s eye is on grabbing the maximum share of the consumer’s wallet. Hence his interest in customer-facing sectors such as retail and telecom. 

Those who have been part of the Infocomm project since the early days say Ambani is still smitten by the concept of triple play — voice, data and video. “Even in 2001, the concept of IPTV was discussed and trials were conducted. He is convinced there is a huge market in businesses like these,” says one executive. At a meeting in 2002, when the market for entertainment was being discussed, the consensus (barring movie buff Ambani) was there was little opportunity, given rampant piracy. “His solution was to drop prices to the point where copyright pirates would go out of business. Buy content in large quantities and give it out in small quantities, was his thinking,” the executive recalls. “He spoke of having a black box at home that would be the last mile broadband for data, voice and video.”

Jayanth Kolla, partner at tech consultancy Convergence Catalyst, points out that with convergence, all tech requirements, including voice, video and data, can be met through the same terminal (the black box that Ambani had spoken about). “It could be a portable dongle or a set-top box at home that will allow video streaming on TV, broadband data and VOIP calls. The bottomline — a single pipe that meets all requirements,” he says, adding that such an offering will do away with multiple players for various functions such as direct-to-home, broadband (through dongle or wi-fi) and mobile. Reliance (and LTE) has the capability to enable all this on a single device and a single bill.

Looking back, Ambani’s moves over the past couple of years seem to be leading to the fulfilment of his dream of convergence. Consider his decision to acquire a controlling interest in Network18 and the Eenadu group — he now has access to content across genres such as news and entertainment and, more importantly, in several languages. Then, in November 2011, group company Reliance Strategic Investments acquired 38.5% stake in digital learning solutions firm Extramarks Education. Meanwhile, if his relationship with Anil improves, Mukesh can also possibly leverage Anil’s vast media and entertainment interests — from film production, distribution and exhibition, to FM radio and direct-to-home satellite television. Anil could in his own interest, offer video-on-demand and IPTV to his mobile subscribers. It is this bundling with the right pricing that will help Mukesh succeed. 

Pricing it right

As with everything else in the Indian market, in 4G, too, price and content will be vital. It’s pointless looking for clues in the strategies of existing 3G and 4G operators — they’ve clearly not yet managed to get it right. Two years after 3G services were launched in India, India’s subscriber base is still very small (see: A long way to go). Even overall, there would be only 15 million broadband users in India by the end of December 2012, says Telecom Regulatory Authority of India. (Broadband refers to speeds of at least 256 kbps while the maximum internet speed on 2G networks is 128 kbps.) And even these users aren’t taking full advantage of the service: for instance, Idea’s 3G Arpu (excluding voice) is just ₹97 per subscriber. “Given the slow adoption of 3G in the country, the 4G business case will continue to be conservative for a while, unless the technology ecosystem is made available and affordable,” says Frost & Sullivan’s Chauhan. 

A long way to go

A newcomer to 3G, India is still playing catch-up

That’s certainly turning out to be the case. Airtel’s 4G services, which started last April, have been limited to data services through dongles priced at ₹4,999 a piece. The base plan, with a monthly rental of ₹999, offers 6GB free at what it claims to be speeds of 100 mbps in an “ideal environment”, after which it drops to 128 kbps, much lower than the 22 mbps 3G offers. The offtake in Pune, Kolkata and Bengaluru is abysmal, with a subscriber base of just 8,000, according to industry estimates; Airtel has not revealed any numbers for 4G yet.

It’s not known what price points Jio Infocomm will adopt for its services but in India, the definition of affordable is under ₹3,000. That’s a price barrier smartphone makers have not been able to breach so far, and it will only be tougher for 4G devices. Similarly, service plans will have to be priced accordingly to encourage maximum offtake. The average Indian household’s monthly spend on cable TV, movies, voice and data is currently around ₹900 at the lower end of the scale. By that token, if Reliance can bundle these offerings at slightly lower price points, it will be attractive to customers. 

Along with the price and the lack of suitable devices, another stumbling block, believe analysts, is the dearth of relevant apps. Infocomm is dealing with that — it has an in-house team of developers. Group company Reliance Payment Services is also working to create captive payment gateways so users can pay for apps on a monthly basis, rather than per transaction.

The only firm it is learnt to have tied up with is the Nahata group-promoted DigiVive Services. Its claim to fame is nexGTv, a mobile app that allows users to watch over 100 live TV channels on their handsets, from news to entertainment, music and movies. It is among the top 10 apps on the Apple Store where it costs $1.99; on other platforms, it is available for free. One thing’s for sure: no matter what it does, RIL’s entry into telecom is going to increase competitive pressure on the incumbents. 

All shook up

As things stand, the big three telcos have one decided advantage over Reliance — brand perception. That aside, they have no differentiated data plans, which could prove disastrous going forward. Already, voice is a fading business — commoditised, with low margins — which means the revenues have to come from data. That’s where Reliance can score with converged offerings. And while Reliance has always followed aggressive pricing, this time it needn’t even go dirt-cheap; if the pricing is attractive, customers will come — as long as the product is differentiated and offers value. If Reliance can cross-subsidise services such as free voice calls with a certain GB of data and some free minutes of video streaming, says Kolla, then 3G operators may be in for trouble. The cream of the market, especially metros, is ready for this triple play. But this may not be great news for 3G players. “Operators offering 3G are trying to increase data usage among subscribers and an (converged) offering like this would definitely impact the adoption of their services,” says Kolla. 

The emphasis this time, then, will be about much more than price. Says Sivarama Krishnan, executive director, risk advisory services, PricewaterhouseCoopers, “Infocomm’s play is not going to be price but creating differentiated services.” That’s especially because it is initially targeting only three metros. “In metros and big cities, price sensitivity and elasticity is lower than in tier-2 cities. Infocomm will have to come up with innovative product delivery on the data side to garner top-end users,” he adds.

That’s something Ambani only knows all too well. He’s working all over again on his 2002 pet project, but times have changed — in his favour. His biggest rivals have their own troubles to contend with — Bharti, for instance, has a massive challenge on its hand: to make its costly African acquisition Zain pay off. Brother Anil Ambani may be all too willing for a handshake now, than the last time when they were looking in opposite directions. Perhaps the numbers are finally ringing right for Ambani.

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