ILD: The Southward Plunge

T he telecom services market in India is moving up but that is not the case
with the long-distance services. Both national long distance (NLD) and
international long distance (ILD) have shown a negative growth to the tune of
around 13–14 percent. The main reason for this negative growth was the
aggressive competition between service providers in the ILD space. The Indian
ILD market in FY 2003–04 is estimated to be around Rs 4,346 crore, a drop of
around Rs 655 crore from the FY 2002–03.

Though revenues have dropped, India´s ILD traffic has increased by around
22 percent. India´s total ILD minutes were pegged at around 4.5 billion
minutes, of which around 3.42 million minutes were incoming and 1.08 million
minutes were outgoing. The gray market contributes a sizable amount and is to
the tune of around Rs 1,655 crore. With ADC (access deficit charge) moving
towards revenue share, we might see the gray market dropping with decrease in
ILD tariffs.

The Players

A negative growth of around 13 percent has impacted VSNL revenues to a large
extent and its revenues have dropped by around 30 percent. VSNL´s problem is
further compounded by the coming of new competitors like Reliance Infocomm. With
revenues of around Rs 2,718 crores, VSNL leads the group with a market share of
around 63 percent. VSNL´s voice business has reduced by 23 percentage points
and is presently is pegged at around 58 percent. Though the company performed
badly on in international voice, its market share in the international
connectivity front increased and presently it has a market share of around 87
percent.

With its revenues coming down, VSNL has started focusing on international
markets. The company is focusing on Sri Lanka (where it has started operations),
Europe, Singapore, and the US. On the value-added services front, the company
has launched outbound calling cards called Hello Duniya and inbound calling
cards under the banner India-on-call. All this will help VSNL to increase its
top lines, and also improve on its bottom line.

V&D estimates CyberMedia Research

Data Access, with revenues of Rs 835 crore, is firmly seated at number two. A
strong voice player, Data Access has an overall market share of around 19
percent. On the voice front, the company did pretty well and increased its
market share from around 13 percent to 19 percent but failed miserably on data
front, as the company is dependent on satellite bandwidth, having high latency.
Its tie up with Hughes Escorts Communications was unable to bring enough data
revenues and it seems the company has revisited its plans and is focusing more
on voice than on data. The company is also looking for traffic in West Asia. On
the international front, the company has set up operations in the US and UK.

Bharti Infotel is at the third position with revenues of Rs 505 crore. It did
well on voice as well as data fronts in FY 2003–04. Its voice market share
increased from 6.5 percent to 11.8 percent. Even on the data front, it has
performed well and presently has around 10 percent market share—in spite of
the high latency limitation of its i2i cable. Due to this limitation, the
companies are not taking it up for high bandwidth capacity, but using it mainly
for redundancy purposes.

Reliance is at the bottom of the table with revenues of Rs 288 crore. With
subscribers swelling on the mobile front, it has been doing pretty well on the
ILD front since January 2004. The company has launched prepaid card in the US
market for calling Reliance phones in India and its charges are cheaper by
around 40 percent over average ILD rates for US to India. All this will help in
pushing RIM sales in India.

The Flag acquisition by Reliance, in January 2004, will help Infocomm to
reach global markets. Flag is Reliance´s first international acquisition,
giving it access to 55,000 Rkm of undersea cable across 17 countries and four
continents. The submarine cable will also help in fueling enterprise broadband
and consumer broadband markets, to name just a few of its benefits.

The Trends

The international bandwidth prices have come down by around 20 percent and
will further come down, as three undersea cables have landing points in India.
All this will bring more capacities to India. It is good news for broadbanding
India. But bad news for service providers as corporates are no longer opting for
long-term commitments in anticipation of better deal in future. With prices
coming down corporates are opting for large capacities, both for requirement as
well as for redundancy thereby driving the growth of IPLC in the country.

V&D estimates

CyberMedia Research

The international connectivity market is fast picking up with call center/BPO/ITeS
boom in the country. The Indian market in FY 2003–04 is estimated to be around
Rs 665 crore, registering a growth of around 65 percent. The international
connectivity market includes IPLC, Frame Relay, ATM, IP-VPN, and MPLS based
services. IPLC will remain the largest revenue earner in the international
connectivity space and has shown an excellent growth thanks to the BPO/call
center/ITeS boom in the country. It contributes around 80–85 percent of the
total international connectivity market.

V&D estimates CyberMedia Research

In the Indian context, VSNL and Bharti Infotel are the only players active in
the international connectivity space. Data Access is focused more on voice
telephony whereas Reliance Infocomm has launched its corporate services recently
and due to bandwidth constraints would like to go slow. With MPLS fast catching
up among corporates, all international connectivity players like AT&T,
Sprint, SingTel, MCI, Cable & Wireless, PCCW, Orient, BT, and others are
either planning or have deployed MPLS services in the country.

VoIP (voice over IP) is moving forward at a fast pace, at a rate of around 15
percent. It is expected that this rate will further increase in FY 2004–05.

Almost all the operators have launched their calling cards and we might see a
sizable amount coming from them in FY 2004–05.

The Outlook

Having succeeded in the ILD space, Data Access is also planning to enter NLD
services depending upon how the unified licensing shapes up. This will help
pure-play ILD service provider, Data Access, to focus on international
connectivity services thereby increasing its revenue in the ILD space.

V&D estimates

CyberMedia Research

On the access deficit charge (ADC), TRAI has issued a consultation paper for
review of ADC. It is considering phasing out ADC funding for basic service
operators, other than BSNL, and is considering moving to a revenue sharing
regime. The new ADC model can lead to further reduction of ILD tariffs in the
country.

With bottom lines getting affected due to frequent tariff cuts, service
providers should now focus on value-added services like prepaid cards, toll-free
numbers, premium-rate numbers, audio conferencing, video conferencing, and
call-back system. Presently, some of these services cannot be offered by private
service providers. So, TRAI should have a fresh look and allow toll-free and
premium-rate services for private service providers.

V&D estimates CyberMedia Research V&D estimates CyberMedia Research

If one looks at ILD deregulation worldwide (which has happened in the past
and what is presently happening), India is different as it has only four players
in the field. The reason for this seems to lie in the constant drops in ILD
tariffs, which acts as a deterrent for the companies planning to take up ILD
services. The market is in a consolidation mode with newer players increasing
their share and the incumbent operator, VSNL, losing its share.

With BSNL also planning to jump into the ILD race—by building its own
infrastructure or by leasing the infrastructure from other service providers—the
market will change for players like VSNL who carries almost all of the BSNL and
MTNL traffic now. The company has a market share of around 82 percent in the
outbound voice market. Word in the industry circle is that BSNL is planning to
renegotiate rates with VSNL and is planning a tender in couple of months. Even
this will lead to drop in VSNL´s revenues in FY 2004–05.

V&D estimates CyberMedia Research V&D estimates

CyberMedia Research

Indian service providers are also looking at the international space in an
aggressive way. VSNL is already active in Sri Lanka. It appears, Reliance
Infocomm is not planning to be left behind and has applied for a Pakistan
license. With markets deregulating in Latin America and West Asia, one can
expect lot of opportunity for Indian ILD service providers.

With Indian operators betting heavily on submarine cables, it is a good time
for the operators to focus on the neighboring countries too. As, India will soon
have three new international submarine cable systems: Tata Indicom Chennai,
Sea-Me-We-4, and Falcon.

Carrier access code will provide a lot of relief to the end consumers, as it
would allow them to choose their own carrier, instead of being bound to a single
carrier. With carrier access codes, consumers would be able to pick the operator
who would be willing to offer a better deal.

Pravin Prashant