Sunil Jain: How Infocomm shot itself

RATIONAL EXPECTATIONS

If you have perfect hindsight, and who doesn't, it's easy to see that Mukesh Ambani's Reliance Infocomm actually got the short end of the stick even while Ambani believed he was on to a good thing by walking away from the bidding for the fourth cellular licence (this was finally auctioned for Rs 1,633 crore in July 2001).

Instead, Ambani began offering full-blown mobile services on the fixed-line limited-mobility licence he got by paying a license fee of a much lower Rs 410 crore.

For, after the cellular phone firms forced the government to take action, Ambani had to pay another Rs 1,095 crore to match what had been paid by them for the fourth cellular licence apart from an additional Rs 485 crore as penal interest.

But surely that's a foolish argument to make, for when Infocomm decided to stray from the straight and narrow, it didn't know it would have to make the additional payments.

The point, however, is that even if Infocomm didn't know this, its gamble was not worth the risk.

If its advisors/managers had thought through things, they would (should) have seen that each one of their perceived advantages would fall along the wayside, indeed some even collapsed before Infocomm embarked on its strategy of misusing its fixed-line limited-mobility licence to provide full-blown mobile services.

A useful way to go through the argument is to examine in detail each of Infocomm's perceived advantages.

One reason given for Infocomm deciding to walk out of the bid for the fourth cellular licence (Infocomm bid Rs 581 crore in the second round of the 4th cellular bid before walking out) is supposed to be that it wanted to use CDMA technology as this was superior to the GSM one used by cellular firms.

While the technological superiority is not proven, the fact is that in September 1999 itself the government said firms could use any technology, GSM or CDMA.

Another big advantage limited mobility phones had was that they were treated on a par with fixed-line phones, and so got to keep 60 per cent of the revenue paid by their customers each time they called another phone.

Cellular phone companies, by contrast, got to keep just 5 per cent. So, if an Infocomm customer called a Hutch cellular phone and paid Rs 10 for this, Infocomm kept Rs 6 of this.

If the reverse happened, Hutch kept just 50 paise. But, in April 2001, when the cellular phone companies protested, the Group on Telecom and IT (GoT-IT) changed this and Infocomm also got to keep just 50 paise""this, by the way, happened even before Infocomm got its fixed-line licence with limited mobility.

Calling Party Pays (CPP) was the biggest advantage using the fixed-line licence with limited mobility was supposed to offer Infocomm. So, if a Hutch subscriber called an Infocomm subscriber, he was forced to pay Infocomm for the incoming call.

But if an Infocomm subscriber called a Hutch subscriber, he paid nothing to Hutch. Effectively, not only did Hutch subscribers have to pay a higher tariff in comparison with Infocomm ones, they even subsidised Infocomm's operations.

Well, if Infocomm's managers had thought this through, they'd have realised the party wouldn't go on forever. It didn't, and in January 2003, the cellular firms cited discrimination against their customers and cut off links to Infocomm and other "limited mobility" players. Immediately, the government allowed them CPP""so when an Infocomm subscriber called a Hutch one, he paid Hutch for the incoming call.

Not only did this level the field, it allowed cellular firms like Hutch to offer free incoming calls to their subscribers""in the two years a fter this, the cellular industry's subscriber base has tripled.

Walking away from the fourth round of cellular licences had another impact. At the time of the bid for the fourth cellular licence there was no (repeat, no) telecom player that had an all-India presence.

The only one with a near pan-India presence was Bharat Sanchar Nigam Limited and it didn't have the lucrative markets of Delhi and Mumbai.

MTNL, the other PSU, had Delhi and Mumbai but didn't have anything else. Hutch had Delhi, Mumbai and Kolkata, but didn't have Chennai, Andhra and Karnataka (it got the last three in the fourth round after paying Rs 465 crore).

Bharti, today's real biggie, didn't have Mumbai, Maharashtra, Gujarat and a host of others, and won these in the fourth round after paying Rs 692 crore.

So, if Infocomm had stayed on in the fourth round and bid out the others, the only way Bharti and Hutch could have got a pan-Indian presence would be by buying out existing players in each circle and that would have dramatically hiked their costs""and since only one of Bharti or Hutch could do this, there would be only one other pan-Indian player today instead of two.

The other area where Infocomm decided to be too clever was in relation to international calls, where it came up with something called Home Country Direct to avoid paying an Access Deficit Charge (ADC) of Rs 4.25 per minute to BSNL on any incoming overseas call on its network.

This is what the company has been fined Rs 150 crore for and will have to pay another Rs 600 crore to BSNL and MTNL ""indeed, Infocomm is lucky its licence wasn't cancelled and its directors punished for this as has been done to others who've been caught doing similar stuff in the past.

Well, guess what? Till the second ADC regime came into place, foreign carriers paid local firms like Infocomm and Hutch anywhere between Rs 3 and 4 per minute each time they carried an overseas call on to their networks.

So, if Infocomm had simply chosen to challenge the ADC order, it probably wouldn't have needed to indulge in this activity!

If, as his well-publicised visit to the telecom regulator's office was aimed to convey, Anil Ambani is indeed going to get Infocomm as part of the settlement with his brother, he'd do well to examine the quality of advice the firm has been getting so far.

suniljain@business-standard.com