ILD : No Room For Minnows

Price slashes have been happening in the national long distance (NLD) as well
as the international long distance (ILD) business. Entry norms for both have
been eased, yet the enthusiasm shown by new players to enter the NLD segment did
not penetrate the ILD scene in India.

The three ILD players in India majorly had the market split up between them
and took the ILD market to Rs 7,251 crore with a growth rate of over 89%. VSNL
led the pack with about 50% market share and Rs 3,579 crore in revenue. Reliance
grew 314% to clock revenue of Rs 2,714 crore. Bharti closed the ranks with Rs
958 crore on a growth rate of 18.3% and a market share of 13.3%.

On the policy front, the government slashed the entry fee to Rs 2.5 crore
from Rs 25 crore, annual license fee was reduced from 15% to 6% of adjusted
gross revenue (AGR), and rollout obligations were limited to just one switch in
India. But all this fanfare resulted in more tariff reduction.

TRAI has made several recommendations for the ILD segment. It wanted the
players to be allowed to resell bandwidth by 2007, and all ILD players be
allowed access to existing cable landing stations in the country. Equal access
to facilities of landing stations has already been permitted, but some of the
other recommendations remain in limbo-the fate of carrier selection being a
case in point.

The reduction in IPLC prices finally happened after VSNL raised objections on
the price ceiling and the manner of setting those ceilings. The price ceilings
now stand at Rs 1.3 mn per annum for E1 for IPLC (Half Circuit); Rs 10.4 mn per
annum for DS-3; and Rs 29.9 mn per annum for STM-1. Despite that reduction, the
gray market remained a force to content with, claiming about 1.3 bn minutes of
usage in FY 2006-07. The problem, it seems, is not about price alone and it will
not go away without an industry-wide effort.

TRAI had also recommended that international cable carriers, without ILD
licenses, be allowed to terminate cable capacities on existing cable landing
stations. The authority recommended that such carriers be licensed as
'international infrastructure providers' and they should not pay any entry
fee or annual revenue share.

This move would increase the competition in the ILD and IPLC sector even
further.

Winners and losers

BSNL: Despite all the sops, BSNL (which has a license for ILD services)
still held back its ILD plans. The only movement from its side was progress on
the Rs 80 crore submarine cable to Sri Lanka. It plans to eventually link up
this cable to wider markets across the region, but till the end of FY 2005-06,
the cable had not been commissioned. The cable would be laid between Tuticorin
(India) and Mt Lavinia (Sri Lanka) and the cable distance would be about 325 km.
It is likely to start with an initial capacity of 20-40 Gbps that can later be
upgraded to 960 Gbps.

VSNL: The company's market share slipped below 50% for the first time, but
it continued growing at 72% to gross Rs 3,579 crore in FY 2005-06. Faced with
competition from the Indian companies, VSNL decided to make the world its arena
by entering the league of the AT&Ts and the MCIs.

Revenues aside, VSNL went global this year with the Tyco's acquisition
being finalized and Teleglobe becoming its latest prized catch. The company
expects Tyco to be profitable by FY 07-08.

VSNL is now the world's fifth largest carrier of voice. It now has 206,356
Rkm of terrestrial and submarine fiber network, with 75 PoPs in 25 countries and
access to five geo-stationary satellites through more than 30 dedicated earth
stations. The acquisition was made at about Rs 1,000 crore.

It also became the second network operator in South Africa. With a 26% stake
in the joint venture, it is the largest stakeholder in this new entity. The
company is expected to invest Rs 850—1,000 crore in the venture over the next
four years. Some of the other partners in the second network operator license
are-Eskom, Transtel, Black Empowerment Enterprise, and Communitel. The venture
is expected to provide VSNL a base for going to other African countries.

The company also had 15 international IP-VPN PoPs in 2005-06 compared to 10
in the previous year.

Reliance: The company went ballistic with its ILD plans, growing at more than
314% and cornering a market share of 38% in FY 2005-06. Its 'Reliance India
Call' cards gave a large share of the international voice traffic to India.
With its FLAG and FALCON cables, the company did well in the wholesale bandwidth
business. FLAG connects with 28 countries: from the US to countries in Europe,
West Asia, and South and East Asia.

When the FALCON cable system is completed, it would connect 12 countries in
the Arabian Gulf, North Africa, Europe, and Asia. The company now has a
formidable international connectivity from India to West Asia. FALCON is
estimated to be $400 mn project. It has 25 international cable landing stations
including, four ILD gateways (LA, NY, London, HK), and five ILD gateways in
India.

On the voice front, Reliance did well with 445.3 crore minutes of usage. The
success of the company's retail long distance calling cards made the revenue
even more lucrative. Taking an aggressive stand on its ILD business, the company
took lead in the slashing of ILD rates by 45-69% on the last day of the 2005-06
fiscal. The company's ILD business was further boosted (at least the traffic)
by the introduction of flat rate calling plans. Reliance also added value to its
ILD revenue by offering voice service to international call centers and
corporates.

Its IPLC business also grew, contributing 14% to its revenues from long
distance services.

Bharti: Bharti's ILD business looked pale in comparison
to the other two players. It had revenues of Rs 958 crore in FY 2005-06 and a
market share of about 13%. The most significant happening at Bharti in the last
fiscal was Vodafone's acquisition of 10% stake in the company. Besides that,
on the ILD front, it commissioned the Se-Me-We-4 cable successfully. The cable
has a capacity of 81 STMs. It has three ILD gateways in Singapore, Los Angles,
and London; and plans facilities at Hong Kong and New York too.

The company began to look at terrestrial fiber route too, with links to Nepal
and Pakistan. But it is still to get the clearance for a cable to Pakistan.

On the international connectivity part, the company worked with 18
international carriers, to provide connectivity to most parts of the world.
Unlike the other ILD operators, the company has not been very aggressive on
inorganic growth internationally. The company is also pushing its world calling
cards through outlets at various airports.

International Connectivity

With the bandwidth becoming a commodity, profits were for the taking with
the international connectivity services provider. Call centers and
multinationals expanding their operations in India, the sector grew gradually.
All the ILD players collaborated with the international service providers to
cater to the customers. The sector saw some new players with VSNL International
and FLAG reinvigorating their operations.

Equant went under the brand Orange of France Telecom, though its operational
office in India continued to be known as Equant. One characteristic of Equant
was that it took bandwidth from almost all the utility players. Some of the
other players that continued to remain active in India are: AT&T, MCI, Cable
& Wireless, SingTel, BT, Sprint, BT Infonet, NTT, KDDI, Orient Networks,
PCCW, and Sify.

Outlook

While the business is no longer as profitable as it used to be, the demand
for it is huge, and the business has acquired the proportions of a vital
infrastructure for the country. While the serious submarine cable activity till
a few year ago had been concentrated in the trans-Atlantic arena (driven by the
macro-economic factors), the new arena of activity is most likely to shift
eastwards, thriving on demands from the newly emerging markets. Companies in
India are alive and open to these opportunities, as is evident from the
acquisition spree in the international connectivity market. Not just the growth
in India, the ILD activities of Indian players are banking on growth in the
entire Asian region. Given that, the large players will only be getting larger,
and the war of the Indian companies' ILD operations will be fought at global
level-India becoming only a small part of that business.

Alok Singh

aloksi@cybermedia.co.in