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Tango On Tower-I
It was a contentious issue between the two Ambani siblings, Mukesh and Anil, during their public spat in 2004-05. The latter didn't agree with the strategies initiated by Mukesh in Reliance Infocomm, the lynchpin of the group's telecom business. So, after the split last June, Anil, who got control of Infocomm, was expected to rejig the existing business model. He did that a few weeks ago with a surprise move that's likely to rewrite many of the existing rules in the telecom sector.
Now a leader in the CDMA mobile technology segment, Reliance Communications, the holding firm for Anil's telecom forays, sought approval from the DoT to provide GSM services in two of the largest markets in India—Delhi and Mumbai. (Globally, CDMA and GSM are competing technologies providing similar mobile services.) It sent a shockwave through the industry as, apart from a Chinese operator, China Unicom, and our state-owned BSNL, no one offers both technologies in a serious and profitable way.
So, why has Anil chosen to tread this path? Before answering that question, it'll be good to know that Reliance does offer GSM services in eight circles, in states like West Bengal, MP, Orissa, Bihar, Assam and also Calcutta, with a combined subscriber base of 2.16 million. Compared to its CDMA base in May '06 of 19.6 million (7.3 per cent of the global CDMA figure), the GSM operations seem minuscule. But one way it can become a national GSM player is by storming the lucrative Delhi and Mumbai markets.
In fact, it's been Anil's dream to become a major player in the GSM segment. This had taken a backseat in the pre-split days as Mukesh's strategy was always to channelise investments into CDMA technology. Post-split, there was speculation that Anil was likely to chase the GSM strategy. And that's precisely what he's doing now.
The new plan is also based on fundamental reasons. T.V. Ramachandran, D-G, Cellular Operators' Association of India (COAI), is upbeat. "We have welcomed Reliance's GSM plans. They may have taken this decision looking at the potential of GSM, which has 82 per cent of the global mobile marketshare. Our understanding is that more of its future capex will flow into GSM operations," he says.
Others feel it's because GSM is more attractive than CDMA from a financial perspective. For instance, the cost of GSM equipment and providing the service is cheaper than CDMA, and even revenue per subscriber is higher in the former case. For Reliance Communications, the economics work out much cheaper if it ventures into GSM. Experts say it'll also have the advantage of lower start-up costs, thanks to existing CDMA infrastructure.
Industry estimates say Reliance will need to cough up only 20-30 per cent of the investments required to start a greenfield GSM venture. Most of its CDMA cell sites (towers used to transmit and receive signals) can be used for GSM services too, but it'll need to set up a few more as the 1800 band where it plans to operate requires a closer concentration of sites. At present, Reliance has nearly 500 cell sites each in Delhi and Mumbai, compared to Bharti's 1,200 in Delhi alone. Reliance's CDMA operations are unlikely to be affected as its infrastructure has 40 per cent spare capacity.
On the revenue per subscriber front too, GSM is a more profitable technology. Industry sources contend that the average revenue per user (ARPU) per month for CDMA is Rs 256 while for GSM it is a higher Rs 362. In metros like Delhi and Mumbai, the latter figure will be even higher. Therefore, it makes sense for any CDMA operator to also woo GSM subscribers. Especially for a firm whose CDMA customers have a low-usage pattern, compared to the high-spending corporate users who generally opt for GSM.
Being a listed company, Anil's obvious aim is to improve his firm's valuation to match those of competitors like Bharti. Entering the GSM segment, with higher ARPU customers and low investment costs, will help achieve this objective.
There's yet another way that GSM can improve Reliance Communications' balance sheet. Sources say Indian CDMA players pay a high royalty of 7 per cent to the US firm Qualcomm for using its CDMA technology, while other huge CDMA markets like China and Korea pay a mere 2 per cent and 2.9 per cent respectively. In the US, Qualcomm's home country, there's no royalty. Since Reliance Communications accounts for roughly 8 per cent of Qualcomm's global revenues, Anil can now use his GSM strategy to force the US firm to reduce the royalty. Qualcomm, though, has said they will not reduce royalty in percentage terms.
Reliance isn't revealing much, except confirming that it has applied for GSM licences in Delhi and Mumbai. A company spokesperson said: "We are committed to pursuing the world's leading mobile technologies, whether CDMA or GSM, to provide the best and most competitive services to our many million customers." However, sources say it's planning to add 10 million lines in its GSM operations with an estimated investment of Rs 1,500 crore.
A few analysts, though, are sceptical about Reliance's GSM avatar. Says a Bangalore-based analyst: "It doesn't make sense. It's the largest CDMA player with a high level of penetration. If it wanted to do the GSM play, the acquisition route was the best. Spice is up for grabs now, Aircel and Idea were available till recently. Why did Reliance have to opt for a greenfield route, start with a disadvantage?" Moreover, when 3G services begin in India in April '07, the sector will have to migrate to WCDMA technology, which would have been easier through CDMA, rather than GSM.
Explains Prashant Singhal, head (telecom practice), Ernst & Young: "The decision to get into GSM seems beyond business reasons. It would be difficult for Reliance to succeed as the fifth operator in the two metro circles, when even the fourth operators haven't been able to capture much marketshare." Both Delhi and Mumbai have a high mobile penetration of about 40 per cent, fourth operators like Bharti in Mumbai and Idea in Delhi have had limited success.
For Anil, who's trying hard to prove his credentials as a hard-nosed and smart entrepreneur—and shrug off his so-called playboy image—GSM may prove to be a test case. If he succeeds, shareholders will be ecstatic; if he doesn't, they'll write him off quite quickly.