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Life Beyond The Line Of Control

With its international long-distance monopoly under threat, the PSU needs to reconfigure itself and add fresh revenue streams

Life Beyond The Line Of Control
outlookindia.com
-0001-11-30T00:00:00+0553

Nervous. That’s what Videsh Sanchar Nigam Ltd (VSNL) chairman and managing director S.K. Gupta was this Independence Day. Gupta was in New York, to ring the morning bell at the city’s stock exchange. With a 30 per cent foreign holding, VSNL was moving to the New York Stock Exchange (nyse) from the London bourse in an attempt to increase scrip price.

On the Indian market, where 17 per cent of the stock floats, the VSNL counter hadn’t been doing well, hovering around the issue price of Rs 740. But if Gupta pinned his hopes on Wall Street giving his company a better valuation, he had a rude shock coming: sabotage. And from no less than communications minister Ram Vilas Paswan.

Days before the scrip’s listing in New York, Paswan told a financial daily that VSNL, the monopoly provider of international phone services in India, would probably have its tina (there is no alternative) status removed before 2004. This, when the government had in its prospectus assured investors that VSNL’s monopoly would stay till 2004. Sure, there had been talk that under World Telecom Organisation pressure the Centre may revoke the company’s monopoly status by 2002. But no official statement had been made. And yes, when the monopoly is removed, VSNL is expecting compensation. "The government considers itself dutybound to compensate VSNL for any potential loss of monopoly," says Amitabh Kumar, director, operations. "We could be compensated in cash or by allowing us to expand the scope of our operations."

The Cup and The Lip

Threats

  • VSNL’s international long-distance monopoly may go in 2002.
  • As a result, adr prices could fall, reducing VSNL’s valuation and ability to raise funds.
  • If government maintains majority stake in VSNL, it will hamper its ability to invest and sign joint ventures.
  • VSNL needs to change its monopoly mindset to operate in a competitive environment.

    Opportunities

  • A competitive environment will allow VSNL to enter into flexible international agreements, which will reduce cost of international telephone calls, spur demand and increase revenue.
  • VSNL is focusing on increasing revenues from Internet and value-added services.
  • To compensate VSNL for its loss of monopoly, the government could grant it licences to enter into new lucrative areas, like domestic long-distance and 3G services.

    But international precedent shows that monetary compensation is not enough. The best option is to venture into new telecom areas. There is talk of that, but for the moment, confusion rules.

    So Gupta must have been mighty relieved when the scrip eventually listed at $11 per American Depository Receipt (adr). Since two adrs are equal to one VSNL share, at $22 a share, the scrip was trading at the equivalent of Rs 1,000 a share, a markup of about Rs 250 over the Indian price.

    VSNL’s purpose had been achieved. But if Gupta is to face competition, he won’t be able take time off to even mop his brow.

    For, it’s time for the company to reinvent itself. Once the company’s monopoly is broken in 2002 - which is now expected - not only will VSNL need to increase revenues from its main business of international phone calls, it will also need to expand into other telecom areas. "Our investors want VSNL to be a broad-based operator of IT-enabling and information-based services," says Kumar. "These include domestic long-distance telecom, multimedia and video services, tele-housing and Internet-based applications, 3G and mobile Internet."

    That’s a lot of new stuff for a company which derives 86 per cent of its gross revenues of Rs 7,230 crore from international calls. So before we get to the exciting new stuff - like watching graphics on your mobile - let’s look at what competition will do to VSNL in its bread and butter business.

    We all know that an international call from India costs a lot more than from many other countries. That’s because DoT subsidises its rural phone network through money earned from domestic and international long-distance calls. And it can afford to do so as long as DoT and VSNL are monopolies. For, since VSNL has a monopoly over international long-distance, companies like British Telecom (BT), at&t, Sprint and mci in the US and ntt in Japan have to agree to VSNL’s revenue sharing formula on calls made from India to these countries or the other way round. For instance, DoT charges approximately Rs 60 (equal to $1.33) per minute for a call to the US. Of this - under a deal - DoT gives Rs 41.74 to VSNL. That means DoT makes about Rs 18 per minute for every international call you make. The remaining Rs 41.74 is split equally between VSNL and the foreign carrier on whose exchange the call terminates. Under the International Telecom Accounting Rate (itar) formula that VSNL follows, it shares $1.08 a minute (at a fixed exchange rate) with the foreign carrier equally. If you are calling from Delhi to an at&t phone in New York, at&t will get almost Rs 21 (approximately 54 cents) per minute.

    But when a call is made from an at&t phone in New York, at&t might charge its customer only 58 cents (Rs 24) a minute. But since it has to give 54 cents for every minute to VSNL, it actually loses money. at&t can’t charge higher rates because of market competition. Since it’s much cheaper to call from abroad, only one in four calls handled by VSNL are outgoing. So, it misses out on massive potential revenues as DoT has tied VSNL’s arms on outgoing international call charges.

    Then there are the other smaller foreign pre-paid phone card companies who charge up to 39 cents a minute to call India. They do this by routing traffic - at times illegally - through other telecom lines, bypassing the bilateral circuits between, say, India and the other country. It is estimated that traffic between India and the US is about one billion minutes a year. But VSNL’s network gets to handle only half of that.

    "VSNL operates on the basis of the archaic itar mechanism, which is at least 25 years old," says an industry source. "The world now operates on the basis of termination charges, which spur demand by reducing the cost to the customer." For instance, BT could sign three different bilateral deals with Sprint, mci and at&t where these companies would pay BT a termination charge of 6-8 cents a minute. With the result, BT could charge its customers the equivalent of 15-20 cents a minute, nearly as much as a local call.

    Unfortunately, with the government holding 53 per cent in VSNL, and DoT monopolising domestic long-distance, VSNL can’t operate on the basis of termination charges. "VSNL has been requesting for a reduction in accounting rates and the calling rates from India," says Kumar. For the moment, it appears that this will happen only when domestic long-distance is opened up and VSNL can negotiate rates with private companies. Today, it has to go by DoT’s diktat.

    "But that’s provided the government cuts its stake below 50 per cent," says an analyst. Otherwise, VSNL will have to keep subsidising DoT and will lose out on business. After 2002, other international long-distance operators, who have the flexibility to negotiate rates, will take traffic away from it.

    "The at&t and BT international long-distance alliance, Concert, controls between 30 and 40 per cent of international traffic to India," says an industry source. "If VSNL isn’t flexible and they sign up with another domestic long-distance operator, VSNL stands to lose a lot of revenue."

    Be it in negotiating termination rates, or for VSNL’s new ventures, the problem is government interference. "For any investment of over Rs 50 crore, VSNL needs government clearance; joint ventures still need to be tendered and there is a lot of political interference," says an analyst at a Mumbai-based securities firm. Beyond that, it’s about changing a mindset. Companies and managements need to learn how to deal with a competitive environment.

    Some feel that VSNL has shown innovation in its Internet foray. Today, the company controls about 40 per cent of the market with about 4.7 lakh subscribers. This, despite having only a six-city licence. "VSNL has competed favourably with private isps," says Yashwant Kini, analyst at SG Securities.

    With cash reserves of Rs 2,800 crore, the corporation also has dollops of cash to bankroll its expansion. Therefore, it’s not surprising that VSNL has set its sights on the 3G licences which the government is expected to give within the next two years. Internationally, these licences come for a premium. The UK recently auctioned its licences for $34 billion.

    Prospective competitors feel that with its low-cost international gateways and existing infrastructure, VSNL will be a strong player in the domestic long-distance market. In fact, the company has already had some success in diversifying its revenue stream. Its isp, leased line and television broadcasting businesses brought in Rs 611 crore, or nearly 30 per cent of its net telephony revenues (what VSNL is left with after paying DoT and government licence fees).

    Most believe that VSNL will only succeed in its makeover if the government lets it free. But is that asking for a bit too much?

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