ILD: Betting on Connectivity

Videsh Sanchar Nigam Limited (VSNL) is all set to acquire Tyco Global Network
(TGN) and its 60,000 Rkm of submarine cable, for $130 million. Tyco had been
valued between $2.5 billion and $3.5 billion and has operations across North
America, Europe, and Asia. The Tata acquisition comes almost a year after
Reliance bought the 55,000 Rkm submarine cable company Flag, for $211 million.

Immediately after the Tyco deal, Tata also launched the 3,175 km Chennai-Singapore
submarine link. With these undersea cable links and the SEA-ME-WE 2 link, VSNL
can now provide international connectivity across the globe, from India.

Advantage VSNL

While Reliance scored last year-by acquiring Flag which connects Asian
economies with West Asia, Europe, and US and by offering cheap ILD rates-VSNL
was struggling to put its house in order. Now with Tyco and the Chennai-Singapore
cable link, VSNL can also compete in the end-to-end international connectivity
space.

Tyco
gives VSNL seven terabit connectivity on the Pacific, and the Chennai-Singapore
link 5.12 terabit. Tyco's total capacity is in excess of 10—15 terabit. Of
this, say Tata officials, only 10 percent has been lit. Before Tyco, it had over
10 Gbps of bandwidth on Sat3/Wasc/Safe, Sea-Me-We 2 and 3, and Flag. VSNL also
has a $40 million investment in the 1.28 terabit Sea-Me-We 4 link.

Will ILD Rise from the Ashes?

Globally, huge investments in submarine cable networks, have seen troubled
times companies like Flag, Reach, Tyco, Global Crossing, and 360 Network landed
in trouble. Competition forced them to keep the prices down and the undersea
bandwidth prices crashed 80—90 percent.

Today, Indian telecom companies are putting their bets in this very basket by
either buying out these companies at considerably low prices or by investing in
projects like Sea-Me-We 4. If they succeed, India would emerge as an
international connectivity hub. If they fail, there would be no one to their
rescue this time.

Voice or Data?

While Indian companies may dream of selling bandwidth (voice and data)
globally, the domestic market is dominated by voice traffic. And 60 percent of
that voice traffic is inbound traffic. International data connectivity from
India is mostly limited to the multinational, multi-location companies and the
ITeS-BPOs. Owing to its monopolistic past, VSNL has led in almost all these
segments of the ILD business. But, not owning a Pacific link had handicapped it.
That gap has now been filled and we can expect ILD rates to crash further.
However, the real battle is for the 60 percent inbound voice traffic, where
Reliance has been stoking a tariff war.

But, a crash in ILD rates is ominous for a market that has seen revenues
crash by almost 13 percent in FY 2003—04 and traffic go up by almost 22
percent. The trend is expected to continue this financial year too. But, as the
officials say, these acquisitions are not for short-term gains and returns would
take at least four years to reflect in the balance sheets.

The confidence for the new investments emerges from the rising data traffic
globally. And sooner or later there would be an increase in demand for
international bandwidth. India is also expected to follow this trend. And with
the services industry set only to grow in the next few years, the market is also
expected to grow.

Today, India pays sums to international telecom carriers. With IT giants like
TCS, Infosys, and Wipro moving towards network management solutions; this bill
would rise further. With VSNL now going global, at least TCS' bills would be
slimmer. Although, Tata officials deny that any special treatment would be given
to TCS.

With Tyco and Flag coming to Tata and Reliance, the focus shifts to Bharti's
Sea-Me-We 4 project and BSNL's ILD plans. While 2004 was a year of wireless
connectivity, 2005 could well turn out to be a year of international submarine
connectivity. But watch out for the hyper-competitive pricing and how these
telecom companies maintain their balance sheets.

Anurag Prasad