Indian opportunity

With MENA operators eyeing opportunities in India, analysts at Frost & Sullivan and Ovum give CommsMEA the lowdown on one of the world’s fastest growing telecom markets.

Tags: 3GBahrain Telecommunications CompanyBharti AirtelCompetitionFrost and Sullivan Middle EastGSMIndiaReliance Communications
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Indian opportunity Trivedi believes significant opportunities exist for new operators that are able to differentiate their services in India.
By  Roger Field Published  October 27, 2009 Communications Middle East & Africa Logo

Recent months have been marked by headlines that indicate growing connections between the telecoms sectors of the MEA region and the Indian Subcontinent. From Batelco's 49% stake in Indian mobile start-up STel, to Etisalat's joint venture with Swan Telecom, and ongoing talks between Bharti Airtel and South Africa's MTN Group, the telecoms sector across the two regions is becoming increasingly intertwined.

Girish Trivedi, deputy director, South Asia and Middle East, Frost & Sullivan, says that opportunities for Middle East operators interested in India can broadly be split into brown field, where they invest in an existing operation, and green field, where they seek to create a new operation.

Brown field opportunities, which tend to attract interest from foreign operators, are dwindling, according to Trivedi. Most of the country's top private players such as Bharti Airtel, Vodafone and Aircell already have significant investment from foreign companies, he says.

Apart from a limited number of companies such as Reliance Communications and Idea Cellular, the only entities that lack foreign investment are the two state-run companies, BSNL and MTNL, which are viewed as inefficient operations unlikely to attract much interest from foreign investors.

Competition watch

India's mobile sector has been divided into four geographic categories referred to as ‘circles' based on the purchasing power present in each particular state. These categories are metros, which are the four major cities in the country; ‘A' circles which include larger cities outside of the "big four"; ‘B' circles, which comprise medium sized cities and towns, and ‘C' circles, which comprise smaller cities, towns and rural areas.

Competition is fierce in most of these circles, according to Trivedi. "If you look at the majority of circles in the country at the moment, you have a minimum of 5-7 players operating in a particular state or circle and there are 8-9 plus networks operating, CDMA as well as GSM, in the same circle. The level of competition is extremely high," he says.

Trivedi adds that while most of these operators appear to be operating profitably at the moment, the level of competition is so great that a level of "shake out" - or consolidation - is inevitable, despite the country's low mobile penetration rate of about 36%.

"It doesn't feel like the same level of competitors can survive profitably and continue to grow in the market place, so there is definitely a shakeout likely," he says. "I think that 18-24 months should be a realistic timeframe for any consolidation to start happening."

Despite this, opportunities remain for companies that are able to enter the market with an offering that is suitably differentiated from that of the existing players. "It is vital for new green field players to see where any niches lie, target that and create an identity.

"If you invest in the country right now and make a niche for yourself, India has a level of income that can match any developed country. You have big high income groups, a big middle class and a big rural opportunity if you have the right products at the right price."

The cost of competition

Trivedi warns against trying to compete on price in a market where margins are already tight.

"If you are a new player you can bleed to death if you start competing on price with already existing pan India players, because they will already have volume, breadth of coverage and their costs have been rationalised over a period of time," he says.

"The existing players will be fierce when it comes to price competition. A new player, whatever price a new player is asking can probably be matched or beaten by another existing player."

3G in sight?

Foreign operators interested in India also need to be aware of the slow development of mobile data in the country. Indeed, there are so far no private 3G networks in the country, with the Department of Telecommunications (DoT) having already backed out of a plan to auction licences in December 2008.

While the DoT has set December 2009 as the new date to auction the licences, the costs appear to be prohibitively high, with a reserve price for pan-India 3G spectrum having been raised to $722 million from an earlier figure of $414 million.

Furthermore, uptake of existing 3G services operated by India's state-run operators, BSNL and MTNL, has been "dismal", according to a recent report from research firm Ovum.

While Trivedi agrees that the development of data services is slow in India, he believes the current low broadband penetration rates and lack of broadband infrastructure in much of the country could help drive demand.

"Mobile devices will be the first devices that most people in India will go and surf the net on," he says.

He adds that 3G is "born from the high paying customers" and that it takes time for users to mature from pure voice to more advanced data services.

"It might be a slow process, but could be the best way to spread broadband access in the country. I don't see any player laying down fibre or fixed network in the far flung rural areas purely because the cost doesn't support it," Trivedi says.

India's state-owned laggards

While India's two state-run operators, BSNL and MTNL, may be among the last remaining investment opportunities for companies looking to buy a stake in existing operators, serious doubts remain about the potential of these operations, given their lack of efficiency, according to research from advisory and consulting firm, Ovum.

Indeed, despite the high growth and impressive results of India's private operators, the performance of the two state owned operators continues to decline.

Speculation around divestment in these companies and their merger have been rife for many years, according to Amit Gupta, principal analyst at Ovum. While the current government has not expressed any intention to further divest in MTNL, it has renewed its efforts to divest a 10% stake in BSNL.

The government plans to explore a possibility of merging BSNL and MTNL after divestment in the former is completed, the Ovum report adds.

Furthermore, BSNL's management and the government believe that divestment will help the company raise capital required for its long-term growth and turnaround. BSNL has also laid-out a strategy to reverse the company's declining performance. However, the "cure for these companies' malaise" could require different medicine, Gupta says.

Indeed, for Gupta, political intervention, a bureaucratic culture and pre-liberalisation mindset are the root causes for BSNL and MTNL's poor performance.

"The inadequacy of a divestment solution to address these weaknesses is evidenced in the case of MTNL, which has been a listed company for many years but nonetheless continues to see declining performance," she says. "Potential investors would need control over management and decision-making in order to turn these companies around, which is impossible while the government owns a majority stake." While privatisation will provide potential investors the required control, they would still face a huge challenge to transform BSNL and MTNL from "state-owned sick companies into customer centric service providers", she adds.

"Due to the size and complexity of these companies, it won't be possible for an outsider to manage change without the cooperation of the existing employees," she says.

"At the same time, investors will have to cut the flab from a bloated workforce. Employees of these companies are likely to be strongly entrenched with a keen sense of internal loyalty, so achieving both objectives will require time as well as efforts."

But while privatisation may the "only economically viable option" the two state-run firms are unlikely to be able to cope with the increasing level of competition in the Indian telecoms sector.

"With their culture and mindset, along with the political baggage they come with, BSNL and MTNL as state-owned companies cannot face such a competition," Gupta says.

"The realities of coalition politics will prohibit the Indian government from taking the radical and unpopular decision of privatising these companies. However, if political will is there, it is still possible to save these companies from their eventual demise."

3055 days ago
Maroof Ahmed

I think the writer is ignorant of the fact that BSNL & MTNL offer better services than either Saudi Telecom or Etisalat. It caters to more clients & good customer service too. Hope the writer seeks a better insight before painting a bleak picture of state run telecom firms.

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