In a fiercely competitive market, the big fish always eat the small ones. But remember that story where the small fish swam together in the shape of a big fish and scared the big one away? Something similar is reshaping the Indian cellular telephony sector. Consolidation and mergers are the buzzwords and could lead to a radically differently-structured industry in the next couple of years.
Size does matter: that's the message from last fortnight's merger of cellular operations of two major telecom firms—bpl Communications and Birla-at&t-Tata (Batata for short)—to create the nation's biggest cellular service provider. The new entity will own 24 per cent of India's entire cellular subscriber base. It will push current market leader Hutchison to second place and Bharti Cellular to third spot. The combined entity has been valued at a massive $2 billion (Rs 9,400 crore). Its geographical reach is phenomenal. It will be present in 10 out of India's 21 circles, including Mumbai, Maharashtra, Tamil Nadu, Kerala, Goa, Andhra Pradesh and Gujarat.
The partners of the new combine are clear their coming together is to pool resources and strengths. Tata group chairman Ratan Tata says the merged entity would have the benefit of considerable scale, sharing common benefits and enhancing continuous footprint. The pooling of back-up operations and resources would lower costs, improve services and benefit customers.
Yes, but hastening the merger was clearly the looming shadow of the Reliance group over the sector. Reliance has announced telecom ambitions which border on science fiction and it seems to have a bottomless warchest. It is spending Rs 10,000 crore to lay 60,000 km of fibre optic cables covering 115 cities and towns. And the recent policy imbroglio over allowing Wireless in Local Loop (wll)-based telephony was seen by operators as Reliance's attempt to make a backdoor entry into the cellular business. Currently, wll is on the backburner but in the recent bidding for the fourth cellular operator's licence in 21 circles, Reliance accounted for 30 of the total 57 bids.
Juxtapose this development with other trends in cellular telephony and it is clear that the Big, and not the meek, shall inherit the earth. Since the first metro cellular network began operating in Calcutta on August 15, 1995, the sector's been growing robustly. But investments are drying up in this highly capital-intensive business. No foreign direct investment has come in in the last eight months. Many players are finding the going tough. Service costs are already extremely low. A cellular call in India is now cheaper than a landline call in the US. The entry of mtnl into the cellular fray forced all operators to cut prices. The race for the fourth operator's slot has opened up the possibility of bringing in new deep-pocketed companies who may force another round of price reductions. Freebies to seduce customers, like free handsets with connections, are expected to become de rigueur in the next few months.
Of course, the potential spoils are massive. In the last two years, the subscriber base has shot up from 1.2 million to four million in April 2001. But even this high growth is nothing compared to what could come. After all, as a top official in a telecom firm offering services in Delhi points out, "India adds as many subscribers in one year as China does in a month." Till 2000, the industry had invested funds in excess of Rs 15,000 crore. The Cellular Operators' Association Of India (coai) estimates that the industry's financial commitment over the next five years would be about Rs 20,000 crore. Going by growth trends, coai expects the subscriber base to gallop from the present four million to 50 million by 2005.
Clearly, operators need to cut costs yet spend big in the next push forward. They need to make large investments for the latest technologies, they need size and scale, and consolidations and mergers are the only way out. The bigger you are, the better you are placed.
The bpl-Batata merger has now divided the market into a few large blocks with plentiful resources and deep pockets. Hong Kong's Hutchison has taken the aggressive acquisition route right from the beginning. Among its deals, it bought over 41 per cent of its partner Max India's stake in the Mumbai circle for Rs 560 crore, spent Rs 465 crore to acquire Malaysia Telekom Berhad's shareholding in Usha Martin Telekom, one of the two Calcutta operators, and another Rs 470 crore for control of Essar Cellphone's Delhi operations. It's still looking for smaller cellular operators to snap up.
A few months ago, Bharti Mobile mopped up Rs 265 crore of debt, a few days after the group announced $460 million (Rs 2,200 crore) of equity investment by global partners like Singapore Telecom and Warburg Pincus. Barely weeks later, Bharti announced that it planned to raise another Rs 600-800 crore of debt to finance its national long distance telephony plans. Says Prakash Nanani, chief operating officer (telecom business), Modicorp, which runs the Spice cellular service: "Today, Reliance and Bharti are trying to get into everything in the telecom sector."
Says bpl Innovision Group chairman Rajeev Chandrashekhar: "I'm not foolish not to take cognisance of the developments. There's so much hype created about Reliance's plans. It has psyched everyone and clearly, all of us see their plans as threatening for us." Though he agrees the Reliance factor was an input for his company's current consolidation but not the deciding one, the message is visible, loud and clear.
Of course, some believe the consolidation moves are too much, too soon. Says Nanani: "For those just in the cellular business, this strategy may be far too early. After all, convergence has to first take place in India."
So will we have a market utterly dominated by a few big fish? "The telecom market will always remain one of high-speed fish, who can continuously provide technology-led speedy service. And since this needs big investments, only the big fish will remain," says the ceo of a leading cellular service provider. Adds Chandrashekhar, "To survive in today's scenario, you will have to be big. The industry today needs at least $1 billion (Rs 4,700 crore) in investments a year which no one company can bring in. Consolidations and mergers can thus be expected naturally. Small identities will go."
As things stand, the identity of the four big fish who will rule the market seem to be clear: the bpl-Batata combine, Hutchison, Bharti and Reliance, if its ambitious plans work out. Says Chandrashekhar: "This is a mirror image of global developments. It happened in France and the US." And it's definitely happening in India.