Mukesh Ambani is re-entering the telecom business and is betting big on wireless broadband. Can he put India on the world data map?
His targets were ambitious: At least 40 per cent of the total revenue (mobile and broadband) and at least 25 per cent of the mobile revenue of Reliance Infocomm should come from data within five years. “We are gung ho about data. We expect this market to boom if we offer customers at home and office applications at affordable rates,” he had said in an interview to Business Standard. But his dream of putting India on the world data map came a cropper. The Ambani brothers split in 2005, and Mukesh Ambani had to turn Reliance Infocomm over to his younger brother, Anil Ambani. (It is now called Reliance Communications.) He also promised never to enter telecom again.
Meanwhile, large telecom service operators like Bharti Airtel, Vodafone and Tata Teleservices continued to concentrate on voice calls. Tariffs consequently dropped to amongst the lowest in the world. And data took the back seat. There are over 600 million users of mobile telephony in the country, but only 10 per cent of the industry’s revenue comes from non-data streams, that too largely SMSs. The inability of state-owned MTNL (in Mumbai and Delhi) and BSNL (in the rest of the country) to offer last-mile connectivity has led to broadband penetration of less than 1 per cent with only 9 million subscribers. The market for data remains hugely under-serviced.
In the last few weeks, the wheel has turned a full circle. The Ambanis have smoked the peace pipe and Mukesh Ambani is free to pursue his data-driven telecom dream one more time. No sooner had the ink on the Ambani agreement dried that he picked up 95 per cent in Mahendra Nahata-promoted Infotel Broadband Services, the only company which has broadband wireless access (BWA) spectrum — a technology which offers high speed wireless broadband to consumers — across all the 22 telecom circles in the country. It had paid Rs 12,847 crore for this spectrum in an auction. Mukesh Ambani will pay Rs 4,800 crore to subscribe to fresh equity in the company.
So what will be his second-innings strategy? Mukesh Ambani and his team are not talking officially yet, but internal presentations, discussions with analysts and vendors who have had detailed meetings with his A team as well as key executives clearly give some idea of the method in the madness. To be sure, a lot has changed in the last five years. With over nine operators in each circle (compared to four or five in 2006), voice tariffs have dropped to their lowest and the service has become a commodity. This has depressed the profit margins of the service operators. The realisation has sunk in that data alone can help them out of the logjam. This explains why there was such a scramble for 3G spectrum in the recent auction. Also, mobile penetration in metros has hit 100 per cent; data thus becomes crucial for service operators to drive up revenue. New devices like the Apple iPad will fuel growth in the market.
Data over voice
It is clear that wireless broadband is the way ahead. And that is what Mukesh Ambani is banking on. In a presentation to analysts, his people have said that China has over 130 million broadband customers, India can reach that number in the next three to four year, and they want leadership position in that market. They could get subscribers by offering unmatched data speeds. This shouldn’t be a tall order because only 5 per cent mobile subscribers use broadband wireless at the moment.
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Their claims are backed of course by unmatched spectrum assets — 20 MHz in BWA compared to 5 MHz in 3G. It means Infotel can offer high-speed applications to more subscribers than its 3G counterparts. To the consumer, it means he can get data speeds which are five to seven times faster than 3G. Says a senior executive of a leading mobile service operator which has successfully bid for 3G spectrum: “If you are looking at data, BWA is far superior. But its potential to offer voice is still not tested. And India has a large voice market.” Analysts and experts say that Mukesh Ambani has got the timing right. Karvy Stock Broking Analyst Harit Shah says: “As of now, the data market is in its formative stage. Voice is still the major revenue generator but there is potential demand for data, and tapping that demand effectively will define success.” Shah expects Mukesh Ambani will not go for the retail market initially; he will start with the enterprise market.
On its part, Infotel has clearly identified the market: Small businesses which are looking to connect their employees, the retail market which entails connecting millions of homes as well as offering mobile solutions, and the vast rural markets which cannot be connected by expensive copper for broadband. “The strategy, considering the licence cost, would be to build a model which will be able to attract a large volume of customers,” says Protiviti Consulting Country Head Mrityunjay Kapoor.
Most experts say that Mukesh Ambani will choose the long-term evolution (LTE) technology route instead of WiMax (an alternate technology which he might use for the intermediate period). Compare the speeds: At present, companies like Tata Teleservices offer dongles which transfer data at 3 megabyte per second; 3G services will give speeds of 14 to 20 megabyte per second; and LTE, which is a fourth-generation or 4G technology, provides speeds of 80 to 100 megabyte per second. The technology is of course new. Its commercial deployment was done recently by Telia Sonera in Spain, that too in a few cities. But the good news is that over 22 LTE networks will be up and running by the end of this year, and 110 networks in 48 countries are backing this technology. This means there will be enough equipment available for Mukesh Ambani at reasonable prices.
Vendors say that initially high-speed access on LTE will be available only through dongles (like Tata Photon), which means you can be mobile with a laptop or take a fixed wireless connection at home. But mobile devices are expected to hit the market by next year which would be compatible with 2G, 3G as well LTE networks. It may take these handsets up to two years to gain scale and become affordable. (The entry-level prices are expected to be $200 to $300.) These phones will ensure seamless transfer from one network to another. Thus you could be on 3G network in Delhi but in congested areas like Connaught Place the phone will switch to an LTE network on its own.
What about voice?
But won’t Mukesh Ambani ever offer voice connectivity? Yes, he has said he will offer voice over internet protocol or net telephony, but this service under the current regulatory framework will be limited to consumers within his broadband wireless network. That is because net telephony is limited between personal computers; you cannot call a phone outside your network or a fixed line. But, as analysts say, the rules could always change. Technology experts say that LTE networks are not geared for voice telephony, as this can lead to a fall in the utilisation of the spectrum. Though Mukesh Ambani has said that he will not look for a 2G or a 3G network, most competitors say he has no alternative if he wants to become a big player. Says the CEO of a CDMA mobile company: “I don’t see any business case based on just data in India. He has to buy a 2G or 3G company and offer BWA over it. Otherwise, he will remain a small player.”
But there are alternatives. One, Mukesh Ambani could initially bundle free net telephony minutes with data services to create traction amongst consumers, especially in the small-scale sector. Two, he could go for a virtual network by buying capacity in bulk from incumbents and sell it under its own brand. The policy for this is expected to be cleared soon by the government. Three, he could sign a roaming agreement with a 3G operator to offer LTE as well as 3G services.
Mukesh Ambani will look at low-cost deployment of network. Since Infotel is the only pan-India BWA operator, the vendors and technology it selects will virtually determine who controls the Indian market. Says telecom analyst Mahesh Uppal: “Mukesh Ambani choosing LTE will determine the way technology will evolve in India. The fact is that he has bought a good asset; whether he has paid too much, only time will tell.” Mukesh Ambani doesn’t have to start from scratch because infrastructure can now be shared. “Part of the strategy is to be asset light; so Infotel will outsource about 15,000 towers and the fibre optic network, which it requires for a pan-India launch. This will reduce costs substantially,” says a source close to the deal.
Mukesh Ambani is aware of the challenges such a strategy could face. One is to build applications which will make high-speed broadband worthwhile to subscribe. It has to go beyond just surfing the net. His team in its internal presentations has argued that personal computers and broadband internet are perceived to be business applications. This perception needs to be changed which requires bringing in entertainment-based broadband applications. Two, the 3G networks are unlikely to let him walk away with the market without a fight. Vodafone, Reliance Communications and Tata Teleservices might not have BWA spectrum but are depending on 3G for their data services, which gives adequate speeds for the mass market. The battle for the data market could see a bloodbath like in the voice market.
(Katya Naidu also reported for this article)