Airtel recently launched 4g services in Kolkata
It's just one city. That too Kolkata, not Mumbai or Delhi. Yet, the launch of the latest generation of broadband services in India by Bharti Airtel, in the eastern city today, says a lot about the state of mind of the country's telecom leader. This is new territory for Bharti.
Never in its 18-year history has the Rs 59,601 crore company led-and shaped-a technology. In 2G (short for second-generation) telephony and broadband, it followed.
In 3G broadband, it followed. But this time around, in 4G broadband, which delivers Internet access at thrice the speed of 3G services, Bharti is the first mover in India in a technology that is still evolving.
Sanjay Kapoor, the man directing this show at Bharti, puts it down to confidence that comes from being a global player, which it has been for three years now, and a founding partner of certain technologies.
"Earlier, we would not have been confident of making an early entry in new technologies," says Bharti's CEO for India and South Asia. "We have greater capabilities to take the punt now."
Capabilities apart, Kapoor leaves something unsaid: the threat from a man who is making a comeback to the communications business. Mukesh Ambani muscled his way into the telecom business in 2002, and changed the rules of the game. He gambled on a new technology and pricing that was a fraction of the market. He made Bharti think about existential questions.
In an earlier interview to ET, Sunil Mittal, chairman and managing director of Bharti, described 2002 as "a scary 12 months" and that "everybody expected the other side to win."
Bharti survived-and, in time, found its sweet spot. Mukesh quit telecom in 2005, when his estranged brother Anil and he carved the Reliance empire between themselves and agreed not to compete against the other. But in May 2010, the brothers tore up that non-compete pact, paving the way for Mukesh's re-entry into the communications business, one he always had a thing for.
Just a month later, Mukesh gave expression to that ambition. His flagship Reliance Industries Limited (RIL) bought Infotel Broadband-the only company to win 4G spectrum on a pan-India basis-a day after the auctions.
By comparison, Bharti has 4G licences for only four circles, and its attempts to add more through buyouts and tie-ups have hit regulatory walls. Mukesh has followed the licence up with a string of content tie-ups, notably the Rs 4,000 crore deal that gives RIL preferential access to all Network18 content.
In June 2010, Manoj Modi, seen as second-in-command at Reliance, told analysts that RIL would invest Rs 22,000 crore in its broadband business. For a company of RIL's size and profitability, that's affordable. In 2010-11, RIL generated free cash flows of Rs 34,100 crore. RIL's revenues and net profit in 2010-11 were about four times and three times, respectively, that of Bharti.
Conversely, Bharti has more to lose than RIL. Its telecom business, its sole cash guzzler, has seen its EBIDTA margin erode to 32% in the December 2011 quarter, from 39% in the March 2010 quarter.
"In the grand scheme of things, RIL is more strongly placed in 4G," says Mahesh Uppal, director, Com First (India), a consultancy dealing in telecom regulatory affairs. "They are the only player with 4G spectrum at a pan-India level and therefore do not need to depend on roaming agreements. They enjoy huge economies of scale and have made significant inroads in the content space."
Even Bharti officials, speaking on the condition of anonymity, concede they are looking out for RIL more than anyone else in the broadband space. Soon after Mukesh signalled his return as a rival, Bharti redrew its organisation structure and made big hires for its data business and bet on a new technology for the first time in its history.
Bharti shapes up
A senior Bharti executive, speaking on the condition of anonymity, says the first step, in February 2011, saw the company join a global grouping of seven companies developing the 4G ecosystem on a technology platform called Long Term Evolution (LTE). For any new communication technology to gain traction, it needs hardware and software makers to synchronise their offerings to it.
Other members of this Global TD-LTE Initiative, which now has 20 members, include Vodafone, China Mobile, Softbank Mobile, Clearwire, E-Plus and Aero2. This was the first time Bharti was entering into an alliance as a developer of a technology.
Traditionally, its strength has been adopting established technologies, combining it with the 'minutes factory' model of large volumes and outsourcing all key functions. This is also a contrast to Mukesh's approach in 2002, when he opted for a technology that was cheaper but also less proven-CDMA-and built an ecosystem around this platform. He called his maiden offering 'monsoon hungama'.
Reliance Infocomm (now, Reliance Communications) offered a handset for Rs 501, against the effective starting price of Rs 6,000-odd for a Bharti customer. Reliance's call rate was 40 paise per minute to another Reliance customer, against Bharti's Rs 2, and free incoming calls. Mukesh is looking to do a similar number in 4G.
RIL declined to participate in the story, but a senior company official managing the rollout told ET in December on the condition of anonymity: "We want to do in video what we did in voice."
Other RIL executives involved in the broadband rollout say the plan is to offer data services at about Rs 10 per GB, which is one-tenth of current 3G prices, and bundle this with entry-level tablets that are powered by Google's Android operating system and cost Rs 3,000-8,000.
BK Syngal, who was the CEO of Reliance Infocomm between 1999 and 2002, has no doubt that Mukesh's second coming will match his first for impact, but adds that it's a different time and a different business. "Bharti is a lot more confident today," says Syngal, senior principal, Dua Consulting, a New Delhi-based telecom consultancy.
In 10 years, Bharti has built a well-respected consumer business, whereas Mukesh has been tested in all his three previous attempts to cross over from servicing industrial customers to individual consumers (telecom, retail and oil retailing).
"As market leaders, they (Bharti) don't need to wait for someone else to come up with the equivalent of the monsoon hungama," adds Syngal. A senior Bharti official, not wanting to be named, dismisses comparisons between 2002 and 2012. "It was a voice game then and it revolved around providing the first telephone in the hands of a customer," he says. Adds Kapoor: "The potential data guzzlers, or the high-end customers, are all with established operators. It costs more to get these customers than to give a first-time connection."
In the last 18 months, Bharti has reorganised itself to align itself to the upcoming business paradigm, where voice shares top billing with data. In 2011, it reconfigured its organisation structure to change the focus from businesses to customers.
The earlier structure that branched out into four business divisions- mobile, DTH, fixed-line broadband and enterprise-has been replaced by two business units, one to service corporate clients and the other to service individual subscribers.
"We are now aligned to handle data," says Kapoor. Bharti has also created new, independent divisions within data. "We have unbundled the concept of value-added services into several independent divisions such as e-commerce, entertainment, m-health, m-advertising and m-banking, among others," says Kapoor. "We have hired the best of industry experts to head each of these sectors for data play."
The biggest hire was to lure back Gopal Vittal, in February, to drive its international business strategy and build its data business.
Previously, Vittal was the executive director of the home and personal-care business ofHindustan Unilever, and was considered the second-most powerful executive in the company, after CEO Nitin Paranjpe. This is Vittal's second stint at Bharti, and he will spend a year with theSingapore and Australian businesses of SingTel, which owns 32.5% in Bharti, before joining the Indian company's headquarters in New Delhi.
Strengths and weaknesses
According to Bharti executives, the company wants to be the first to offer 4G in the four circles it has licences for: Maharashtra, Karnataka, Kolkata and Punjab. On a parallel track, it wants to rectify the mismatch between itself and RIL in 4G geographical reach.
Bharti identified Delhi and Mumbai, which are expected to bring in a third of 4G customers in the next five years, as the two key markets it did not have a 4G presence in. The company was reportedly in talks to buy US-based chipmaker Qualcomm's 4G spectrum in Delhi and Mumbai, which would enable it to map 50% of the current data revenues on 4G and the remaining on 3G.
After a year of negotiations and planning, and just before it was about to seal the deal, Bharti received a shocker. In September 2011, the department of telecom (DoT) rejected Qualcomm's application on "technical grounds" despite the company having paid $1 billion to buy 4G spectrum.
In November, Bharti received another setback to its data plans: DoT banned telecom companies from entering into 3G roaming pacts, which allowed them to acquire customers even in areas where they did not own spectrum.
In other words, when it came to offering highspeed broadband services, be it through 3G or 4G, Mukesh remained the only pan-India player. The matter is currently with a government telecom tribunal. If Bharti lacks pan-India coverage in 4G services, RIL lacks voice. It can obtain a licence for voice services, the cost of which the upcoming telecom policy has proposed at Rs 20 crore.
But spectrum will be expensive, as will building infrastructure, though it can tie up for voice services with another player, notably brother Anil's Reliance Communications. "This round is very different," says Shiv Putcha, principal analyst in the emerging markets team of Ovum Research, a technology research firm. "I'll be surprised if RIL were to launch data-only services. Historically, there is no successful example of a data-only business doing well."
He adds that even if RIL ties up with an existing player for voice, Airtel will still have an edge. "It (Airtel) already has a big voice network, which can subsidise its data business for a while," says Putcha. The 4G spectrum with companies is on the 2,300 MHz band.
Voice standards for this band are yet to be specified, and players can offer only Internet telephony and data access through dongles.
Till these voice standards are specified, Bharti can bundle offerings: voice on 2G and 3G, and data on 4G. In fact, industry watchers say RIL has delayed its 4G launch to at least October 2012 as it is waiting for the larger ecosystem-including voice standards, handsets and cheaper tablets-to fall in place.
Among other 4G licence winners, Tikona (five circles) says it will launch its services in the second half of 2012 and Augere Wireless (one licence) in July. After RIL, Aircel has the maximum number of 4G circles (eight), followed by Tikona and Bharti, respectively.
New twists
RIL's competitive advantage of pan-India coverage is also fraying. At the end of 2011, the government said it planned to auction additional 4G spectrum in a new band: 700 MHz. "The 700 MHz band will be a game changer," says Kunal Bajaj, India head of Analysys Mason, a telecom consulting firm. "Its technological efficiency and coverage ability is far superior to the 2,300 MHz band (what RIL and Bharti currently have)."
DoT estimates the 700 MHz band to be thrice as efficient as the 2,300 MHz band. This effectively means the capital and operating expenditure of companies using the 700 MHZ band will be a third of those using 2,300 MHz. "It (700 MHz) offers a much more mature ecosystem," says Putcha of Ovum.
"Even smartphones are coming in this band. Devices are more easily available, including Apple's latest iPad." Such is the superiority of this frequency that analysts say that if an early auction of 700 MHz was to happen, even Reliance would bid, even if it ends stocking up twice the spectrum it needs.
"Reliance will take part-no question about that," says Bajaj. "Auctioning of fresh wireless broadband airwaves, including the 700 MHz band, will enable us to stave off the threat posed by Reliance's proposed 4G services," Mittal told ET last year. And this February, during an industry event in Barcelona, he added: "We are eagerly awaiting government policy in this matter."
During the same event, telecom minister Kapil Sibal said the 700 MHz auctions would be held in 2012-13. The government has, so far, moved faster in the matter than in the past.
On March 5, an empowered group of ministers (EGoM) on spectrum-related issues, in its very first meeting on 700 Mhz band, cleared a proposal to earmark these airwaves for 4G services. Chaired by finance minister Pranab Mukherjee, the EGoM dismissed demands by the information & broadcasting ministry for those airwaves.
By comparison, the same EGoM took two years and five meetings previously to make the defence ministry vacate 3G airwaves for auctioning. Bharti's prospects brightened further whenQualcomm won its legal battle against DoT and received its licences late last month.
Industry executives say the American chipmaker has revived talks with Bharti to sell its 4G licences, notably in Delhi and in Mumbai. Qualcomm declined comment, as did Kapoor of Bharti. Clearly, this is one battle that will be fought both in the market place and outside it.
Never in its 18-year history has the Rs 59,601 crore company led-and shaped-a technology. In 2G (short for second-generation) telephony and broadband, it followed.
In 3G broadband, it followed. But this time around, in 4G broadband, which delivers Internet access at thrice the speed of 3G services, Bharti is the first mover in India in a technology that is still evolving.
Sanjay Kapoor, the man directing this show at Bharti, puts it down to confidence that comes from being a global player, which it has been for three years now, and a founding partner of certain technologies.
"Earlier, we would not have been confident of making an early entry in new technologies," says Bharti's CEO for India and South Asia. "We have greater capabilities to take the punt now."
Capabilities apart, Kapoor leaves something unsaid: the threat from a man who is making a comeback to the communications business. Mukesh Ambani muscled his way into the telecom business in 2002, and changed the rules of the game. He gambled on a new technology and pricing that was a fraction of the market. He made Bharti think about existential questions.
In an earlier interview to ET, Sunil Mittal, chairman and managing director of Bharti, described 2002 as "a scary 12 months" and that "everybody expected the other side to win."
Bharti survived-and, in time, found its sweet spot. Mukesh quit telecom in 2005, when his estranged brother Anil and he carved the Reliance empire between themselves and agreed not to compete against the other. But in May 2010, the brothers tore up that non-compete pact, paving the way for Mukesh's re-entry into the communications business, one he always had a thing for.
Just a month later, Mukesh gave expression to that ambition. His flagship Reliance Industries Limited (RIL) bought Infotel Broadband-the only company to win 4G spectrum on a pan-India basis-a day after the auctions.
By comparison, Bharti has 4G licences for only four circles, and its attempts to add more through buyouts and tie-ups have hit regulatory walls. Mukesh has followed the licence up with a string of content tie-ups, notably the Rs 4,000 crore deal that gives RIL preferential access to all Network18 content.
In June 2010, Manoj Modi, seen as second-in-command at Reliance, told analysts that RIL would invest Rs 22,000 crore in its broadband business. For a company of RIL's size and profitability, that's affordable. In 2010-11, RIL generated free cash flows of Rs 34,100 crore. RIL's revenues and net profit in 2010-11 were about four times and three times, respectively, that of Bharti.
Conversely, Bharti has more to lose than RIL. Its telecom business, its sole cash guzzler, has seen its EBIDTA margin erode to 32% in the December 2011 quarter, from 39% in the March 2010 quarter.
"In the grand scheme of things, RIL is more strongly placed in 4G," says Mahesh Uppal, director, Com First (India), a consultancy dealing in telecom regulatory affairs. "They are the only player with 4G spectrum at a pan-India level and therefore do not need to depend on roaming agreements. They enjoy huge economies of scale and have made significant inroads in the content space."
Even Bharti officials, speaking on the condition of anonymity, concede they are looking out for RIL more than anyone else in the broadband space. Soon after Mukesh signalled his return as a rival, Bharti redrew its organisation structure and made big hires for its data business and bet on a new technology for the first time in its history.
Bharti shapes up
A senior Bharti executive, speaking on the condition of anonymity, says the first step, in February 2011, saw the company join a global grouping of seven companies developing the 4G ecosystem on a technology platform called Long Term Evolution (LTE). For any new communication technology to gain traction, it needs hardware and software makers to synchronise their offerings to it.
Other members of this Global TD-LTE Initiative, which now has 20 members, include Vodafone, China Mobile, Softbank Mobile, Clearwire, E-Plus and Aero2. This was the first time Bharti was entering into an alliance as a developer of a technology.
Traditionally, its strength has been adopting established technologies, combining it with the 'minutes factory' model of large volumes and outsourcing all key functions. This is also a contrast to Mukesh's approach in 2002, when he opted for a technology that was cheaper but also less proven-CDMA-and built an ecosystem around this platform. He called his maiden offering 'monsoon hungama'.
Reliance Infocomm (now, Reliance Communications) offered a handset for Rs 501, against the effective starting price of Rs 6,000-odd for a Bharti customer. Reliance's call rate was 40 paise per minute to another Reliance customer, against Bharti's Rs 2, and free incoming calls. Mukesh is looking to do a similar number in 4G.
RIL declined to participate in the story, but a senior company official managing the rollout told ET in December on the condition of anonymity: "We want to do in video what we did in voice."
Other RIL executives involved in the broadband rollout say the plan is to offer data services at about Rs 10 per GB, which is one-tenth of current 3G prices, and bundle this with entry-level tablets that are powered by Google's Android operating system and cost Rs 3,000-8,000.
BK Syngal, who was the CEO of Reliance Infocomm between 1999 and 2002, has no doubt that Mukesh's second coming will match his first for impact, but adds that it's a different time and a different business. "Bharti is a lot more confident today," says Syngal, senior principal, Dua Consulting, a New Delhi-based telecom consultancy.
In 10 years, Bharti has built a well-respected consumer business, whereas Mukesh has been tested in all his three previous attempts to cross over from servicing industrial customers to individual consumers (telecom, retail and oil retailing).
"As market leaders, they (Bharti) don't need to wait for someone else to come up with the equivalent of the monsoon hungama," adds Syngal. A senior Bharti official, not wanting to be named, dismisses comparisons between 2002 and 2012. "It was a voice game then and it revolved around providing the first telephone in the hands of a customer," he says. Adds Kapoor: "The potential data guzzlers, or the high-end customers, are all with established operators. It costs more to get these customers than to give a first-time connection."
In the last 18 months, Bharti has reorganised itself to align itself to the upcoming business paradigm, where voice shares top billing with data. In 2011, it reconfigured its organisation structure to change the focus from businesses to customers.
The earlier structure that branched out into four business divisions- mobile, DTH, fixed-line broadband and enterprise-has been replaced by two business units, one to service corporate clients and the other to service individual subscribers.
"We are now aligned to handle data," says Kapoor. Bharti has also created new, independent divisions within data. "We have unbundled the concept of value-added services into several independent divisions such as e-commerce, entertainment, m-health, m-advertising and m-banking, among others," says Kapoor. "We have hired the best of industry experts to head each of these sectors for data play."
The biggest hire was to lure back Gopal Vittal, in February, to drive its international business strategy and build its data business.
Previously, Vittal was the executive director of the home and personal-care business ofHindustan Unilever, and was considered the second-most powerful executive in the company, after CEO Nitin Paranjpe. This is Vittal's second stint at Bharti, and he will spend a year with theSingapore and Australian businesses of SingTel, which owns 32.5% in Bharti, before joining the Indian company's headquarters in New Delhi.
Strengths and weaknesses
According to Bharti executives, the company wants to be the first to offer 4G in the four circles it has licences for: Maharashtra, Karnataka, Kolkata and Punjab. On a parallel track, it wants to rectify the mismatch between itself and RIL in 4G geographical reach.
Bharti identified Delhi and Mumbai, which are expected to bring in a third of 4G customers in the next five years, as the two key markets it did not have a 4G presence in. The company was reportedly in talks to buy US-based chipmaker Qualcomm's 4G spectrum in Delhi and Mumbai, which would enable it to map 50% of the current data revenues on 4G and the remaining on 3G.
After a year of negotiations and planning, and just before it was about to seal the deal, Bharti received a shocker. In September 2011, the department of telecom (DoT) rejected Qualcomm's application on "technical grounds" despite the company having paid $1 billion to buy 4G spectrum.
In November, Bharti received another setback to its data plans: DoT banned telecom companies from entering into 3G roaming pacts, which allowed them to acquire customers even in areas where they did not own spectrum.
In other words, when it came to offering highspeed broadband services, be it through 3G or 4G, Mukesh remained the only pan-India player. The matter is currently with a government telecom tribunal. If Bharti lacks pan-India coverage in 4G services, RIL lacks voice. It can obtain a licence for voice services, the cost of which the upcoming telecom policy has proposed at Rs 20 crore.
But spectrum will be expensive, as will building infrastructure, though it can tie up for voice services with another player, notably brother Anil's Reliance Communications. "This round is very different," says Shiv Putcha, principal analyst in the emerging markets team of Ovum Research, a technology research firm. "I'll be surprised if RIL were to launch data-only services. Historically, there is no successful example of a data-only business doing well."
He adds that even if RIL ties up with an existing player for voice, Airtel will still have an edge. "It (Airtel) already has a big voice network, which can subsidise its data business for a while," says Putcha. The 4G spectrum with companies is on the 2,300 MHz band.
Voice standards for this band are yet to be specified, and players can offer only Internet telephony and data access through dongles.
Till these voice standards are specified, Bharti can bundle offerings: voice on 2G and 3G, and data on 4G. In fact, industry watchers say RIL has delayed its 4G launch to at least October 2012 as it is waiting for the larger ecosystem-including voice standards, handsets and cheaper tablets-to fall in place.
Among other 4G licence winners, Tikona (five circles) says it will launch its services in the second half of 2012 and Augere Wireless (one licence) in July. After RIL, Aircel has the maximum number of 4G circles (eight), followed by Tikona and Bharti, respectively.
New twists
RIL's competitive advantage of pan-India coverage is also fraying. At the end of 2011, the government said it planned to auction additional 4G spectrum in a new band: 700 MHz. "The 700 MHz band will be a game changer," says Kunal Bajaj, India head of Analysys Mason, a telecom consulting firm. "Its technological efficiency and coverage ability is far superior to the 2,300 MHz band (what RIL and Bharti currently have)."
DoT estimates the 700 MHz band to be thrice as efficient as the 2,300 MHz band. This effectively means the capital and operating expenditure of companies using the 700 MHZ band will be a third of those using 2,300 MHz. "It (700 MHz) offers a much more mature ecosystem," says Putcha of Ovum.
"Even smartphones are coming in this band. Devices are more easily available, including Apple's latest iPad." Such is the superiority of this frequency that analysts say that if an early auction of 700 MHz was to happen, even Reliance would bid, even if it ends stocking up twice the spectrum it needs.
"Reliance will take part-no question about that," says Bajaj. "Auctioning of fresh wireless broadband airwaves, including the 700 MHz band, will enable us to stave off the threat posed by Reliance's proposed 4G services," Mittal told ET last year. And this February, during an industry event in Barcelona, he added: "We are eagerly awaiting government policy in this matter."
During the same event, telecom minister Kapil Sibal said the 700 MHz auctions would be held in 2012-13. The government has, so far, moved faster in the matter than in the past.
On March 5, an empowered group of ministers (EGoM) on spectrum-related issues, in its very first meeting on 700 Mhz band, cleared a proposal to earmark these airwaves for 4G services. Chaired by finance minister Pranab Mukherjee, the EGoM dismissed demands by the information & broadcasting ministry for those airwaves.
By comparison, the same EGoM took two years and five meetings previously to make the defence ministry vacate 3G airwaves for auctioning. Bharti's prospects brightened further whenQualcomm won its legal battle against DoT and received its licences late last month.
Industry executives say the American chipmaker has revived talks with Bharti to sell its 4G licences, notably in Delhi and in Mumbai. Qualcomm declined comment, as did Kapoor of Bharti. Clearly, this is one battle that will be fought both in the market place and outside it.
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