Telecom - Making sense of the licence rush

300! That isn't the name of the recently released English movie. It's the number of new applicants for the UASL (Unified Access Services Licence) telecom licence.

The driving force behind this deluge of applications is the desire to participate in the fastest growing telecom market in the world — India — which is seeing over 7 million mobile telephone subscribers being added every month. Before we categorise and analyse the prospects of the applicants, it must be highlighted that any new player would have to contend with the following:

Although the UAS licence allows provision of the entire gamut of wireless and wireline voice and data services, this rush for licences could be purely by players interested in tapping the mobile telephony market.

For a player who bags the licence, a countrywide (23 service area/circle) UASL entry fee may cost at least Rs 1,400 crore — licences are usually issued through the auction route. In addition, there is an annual fee of 6-10 per cent linked to revenues, as well as spectrum charges of 2-6 per cent of revenues.

Spectrum, the band of airwaves used for communication that is licensed, is scarce and its allocation to operators is based on subscriber numbers and satisfaction of the Department of Telecom's (DoT's) stiff service area rollout obligations.

A current countrywide rollout of fresh network is estimated to entail investments of about $1 billion for a normal 2G network. If it is to be an Internet Protocol-based NextGen Network or any advanced technology rollout (EDGE, WCDMA, EVDO, HSDPA or TD-SCDMA), it could be much more. There could be a two-three year timeline involved in a nationwide rollout.

Given the substantial investments as well as staying power involved in a successful telecom foray, we evaluate which among the recent crop of applicants is likely to enjoy success.

Real-estate, telecom synergies?

Real-estate companies have been the most prominent set of applicants in this particular phase, with DLF, Unitech, and Parsvnath among the key players in the fray. There is speculation that some of these players may be in talks with overseas telecom companies for a joint foray into Indian markets, but nothing is confirmed as yet.

Real-estate players, although they have no previous expertise in running a telecom business, have a few factors favouring them. Most of them have huge land banks to build townships. This could be used to house a part of their tower infrastructure, thus reducing rental costs, a key part of operational expenditure involved in telecom operations.

In this context, players such as DLF, Omaxe and Parsvnath are flush with cash after their successful IPOs as well as other fund-raising over the past couple of years. This might allow them to operate at low or even negative profitability for the first few years of operation, which is inevitable.

But with most of the leading real-estate players having significant land banks in the metros or major cities, the land holdings may not offer any edge to these players in telecom rollouts in rural areas or even tier 2 towns. DLF and Parsvnath have some land banks in these areas and may be able to put part of them for productive telecom usage.

While these players have staying power, a tie-up of such companies with a domestic or international telecom operator could bring in the business expertise required for telecom operations. In that event, the time for the combined entity to roll out operations could also be reduced.

Existing players on firm ground

A good number of existing players from telecom and related businesses, such as Idea Cellular, Spice Communications, Reliance (ADAG), Maxis-Aircel, Tulip IT Services, BPL and Hinduja TMT are also among the prospective applicants. The first four companies have existing operations on a regional/national scale and their applications are directed towards having a wider footprint across India.

Each of these applicants is approaching its foray with a different strategic intent. Idea Cellular, which has operations in 11 service areas, applied for licence to commence operations in Mumbai and Bihar nearly a year ago and is awaiting spectrum allocation. As the company is a leader in the Maharashtra market, this move appears synergistic.

Reliance Communications' application appears to be a move to expand its GSM footprint. The telecom regulator TRAI (Telecom and Regulatory Authority of India) has, incidentally, allowed a single operator to offer both technologies (CDMA and GSM) within a circle.

Spice Communications has ambitious plans of becoming a national player from the 2-circle player that it currently is. Aircel, which has operations in Chennai, Tamil Nadu and the North-East (under the name Dishnet Wireless), has also applied for licences to create a more pan-India footprint.

The above applicants appear to stand a better chance of obtaining licences in new areas, given their existing operations.

There are indications that applications would be considered as per existing guidelines on a first-come-first-served basis, which suggests preference to these players, on a case-to-case basis. However, even if some of the new applicants manage to secure licences, spectrum allocation remains an issue.

Even on this score, the existing players appear better placed than the rest. A separate committee has been set up to look at licensing and spectrum allocation norms for new entrants into the telecom space. Given the current spectrum crunch, new players may also have to contend with very stringent norms for rollout as well as usage norms for spectrum.

Tulip IT, which is a countrywide provider of data connectivity, has applied for licences in six circles. With its VPN and network integration expertise, Tulip has the expertise to enter the fray as a service provider. But, as mentioned earlier, this would mean huge capital expenditure and low margins in the first few years of operation.

Pact with global players

Mahindra & Mahindra appears to be the only applicant in this category that has confirmed interest. The company plans an alliance with AT&T for this foray. Tech Mahindra, a telecom software company in which M&M holds a 44.4 per cent stake, has substantial experience in working with telecom service providers as well as equipment vendors and has a strong relationship with AT&T.

This trio appears to be a strong contender to offer significant competition to the entrenched players. An alliance with AT&T brings with it the latter's expertise from running a highly successful telecom business in the US as well as its earlier experience partnering Idea Cellular in India; both appear to be huge pluses.

Alternative routes to a telecom foray

All the prospective applicants, however, need not take the traditional route to rolling out telecom services. Here are a few alternative avenues that they can explore:

MVNO (mobile virtual network operator): These kinds of operators do not own any spectrum or network infrastructure but buy it from existing operators and act merely as resellers. MVNOs usually have a strong brand image in one line of business and look to leverage on that in another business. Virgin Mobile, Disney Mobile and Tesco Mobile are a few successful examples.

This might work especially well for leading real-estate players such as DLF and Unitech, which have high visibility for their brands and may use this for providing connectivity to their townships. However, this concept is yet to evolve in India and the telecom regulator has asked operators for their opinion on this and is looking at evolving guidelines for the same.

Inorganic growth: The option of acquiring a presence through inorganic growth or acquisition of regional players is a route that is open to all applicants. There are a few regional and relatively small players, such as Shyam Telecom, HFCL Infotel, and Spice Communications, which may not be growing at a rapid pace. These companies (if they are open to stake sale) may offer new players an entry point into the market through the M&A route. Such acquisitions may offer a prospective entrant a readymade subscriber base and spectrum to work with.

Bidding for 3G alone?: A comprehensive policy on 3G services is still awaited from the telecom regulator/DoT. 3G services, at the most basic level enable provision of feature-rich voice, data and video services with a much faster throughput.

In this regard, new players may win licences and choose to focus only on high-end 3G services, if there is an auction for 3G spectrum, and new players are allowed to bid. These are high revenue earning services, though predicting the market for such services in the Indian context is a challenging task.