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As voice players become weaker, will Reliance move in for a kill as it did with the much smaller polyester business more than a decade ago?
As Reliance Industries re-enters the telecom business through a side door, it is worthwhile to ponder that this would be the first time RIL would be entering a business as one of the last competitors, especially where established global and local giants already rule. Remember that Reliance simply has no competition in petrochemicals and in exploration. In oil-refining, no major capacities except that of Essar have come up after Reliance decided to enter the sector.
The story is different in telecom. Global telecom giants like Vodafone, NTT and Sistema are in India. Bharti, the Indian market leader, is a global player now with footprints in Bangladesh and Africa. There are deep-pocketed mavericks as well like Shivasankaran (Aircel) and Videocon. Of course, Reliance has not entered voice telephony-not as yet-and there are very few serious players in the broadband business. But if you mix the possible RIL success in broadband, some regulatory changes and oodles if free cash flow-suddenly you have a business that is a threat to the existing giants in more ways than one.
As Macquarie said in a research note, "In a repeat of 2003, we are seeing the birth of four new players in the Indian telecom space. While one could dismiss their entry citing competition only for wireless data, this clearly thwarts the future growth option for incumbents from wireless data during the next five years." And what if wireless data is as big and a more profitable business than voice? With their resources spent on expanding into voice and grabbing 3G licences, the existing mobile players will look like weak lumbering giants.
The timing could not have been worse for existing operators. With more than 50% citizens covered (which essentially is 100% of the market-eliminating many women, the elderly and the bone poor), there are fewer chances of significant growth in subscriber volumes. Instead, operators will have to focus more on higher usage per subscriber. After acquiring 3G licences, mobile operators were looking for an opportunity to create products and tariff plans with data-based services as the base product instead of voice-based services, thus unlocking new revenue segments. (read more http://www.moneylife.in/article/8/5639.html ). "We believe that the revenue contribution of new subscribers and incremental revenue from existing subscribers has a greater importance than subscriber growth.
With the operators adopting minute factory model and the secular fall in average revenues per user (ARPUs) and revenues per minute (RPMs), we believe minutes of usage (MoUs) will be the key metric to watch," said Kisan Ratilal Choksey Shares and Securities Pvt Ltd, in a research report.
But with the kind of money and technology that Reliance is bringing in, the operators may not have a chance to push up their MoUs-certainly not enough to cover their high costs of 3G licences. As it is, nobody makes any money in the cellphone business now except Bharti. As voice players become weak, would Reliance be lying in wait to launch a process of "consolidation?" If it does so, it would be a much bigger repeat of what happened in the polyester fibre business-RIL bought the loss-making fibre businesses of Raymond, ICI, RP Goenka and Deccan Polyester one by one at throwaway prices after they had bled to near-death.
Of course, the path of RIL and the voice players will cross right now itself, in a minor way. RIL Infotel already has an Internet Service Provider (ISP) licence, so it can sell both data and Voice over Internet Protocol (VoIP), although it would need to acquire a UASL licence if it wants to offer circuit-switched voice.
Currently, ISPs are not subjected to any revenue-share licence fee. However, on 19th May, telecom regulator TRAI has recommended bringing all ISPs under a uniform licence fee regime, suggesting licence fees of 4%, 5% and 6% of revenue in FY11, FY12 and FY13, respectively. Nevertheless, this should not be any hindrance for big players such as RIL. More importantly, this foray into broadband services has given RIL a virtual free hand compared with incumbent players in mobile and wireless data services. Who knows, tomorrow we may get a data-based tariff plan which may offer unlimited or free talk time.
While RIL does not have any legacy network or technology to burden itself with, all other 2G operators will have to continue 2G services. Operators who have won 3G spectrum may think they have an advantage over broadband, but the technology which RIL is planning to use for its broadband services, is already 4G-ready, leaving incumbent operators in a 'helpless' situation.
Globally, technology has started its progression towards 4G networks. At present, 4G technologies include LTE, ultra mobile broadband (UMB) and WiMAX. For WiMAX, operators have to build a new network whereas LTE only needs an upgrade in existing mobile infrastructure which is already used by over 80% of mobile subscribers globally. This is one of the reasons that many carriers intend to support LTE-which RIL is adopting. Interestingly, according to an RCom spokesperson: "RCom prefers LTE standard, offering a single evolution path for both CDMA and GSM networks."
RCom, of course, is controlled by Anil Ambani, until the other day a fierce rival of Mukesh Ambani on the natural gas issue. Now the junior Ambani is making extremely friendly overtures such as this. Welcoming the entry of RIL into broadband services, a spokesperson of Reliance ADA group said, "We welcome the entry of Reliance Industries into the high-potential wireless broadband space.
As leading telecom infrastructure and content service providers, we look forward to offering our services to RIL and other BWA players, even while we compete for customers in the marketplace through our choice of different technologies." If recent reports about the Ambani brothers spending 'quality time' together in Africa are any indication, we may soon see more than "co-operation" between RIL and ADA group companies-possibly a takeover by RIL of RCom?
In 2003, there were four new entrants in the cell-phone market, the most notable of which was RIL, which began the remarkable telecom foray in 2003 of what is now called RCom. Eight years later there are again four, led by RIL moving into broadband. It is going to be the start of another big wave of changes, the contours of which we can only imagine now.