NLD: Catch 22

Despite apparent fall in margins, the NLD players learnt to make money and
the NLD segment clocked about Rs 9,017 crore in FY 2005-06. The predominant
position of BSNL remained unchallenged in the NLD segment in
FY 2005-06, Bharti stayed put at the second place with Rs 801 crore,
Reliance stood third, and VSNL fourth.

The regulatory changes that were made, put the market in a dilemma. The entry
fee for NLD license was reduced to Rs 2.5 crore from Rs 100 crore. That was good
news for the market-more players could join into the telecom and
infrastructure revolution of India, and the demand for infrastructure would
increase.

While already established payers are not publicly complaining about this new
explosion in the market, they know that their margins would be chased even
further away.

The Players

Banking on the sheer size of its network, BSNL continued to lead in NLD
business in India with revenues of about Rs 6,792 crore. Though its market share
continued to decline, it grew at about 35% in FY 2005-06. It had laid about
496,000 Rkm of OFC and about 63,820 Rkm of microwave links till the end of FY
2005-06. The company plans to add another 16,000 Rkm of OFC in the remainder of
FY 2006-07. It also had 281 satellite stations in FY 2005-06 and had invested
about Rs 2,100 crore into its backbone infrastructure.

Bharti came in second with revenue of about Rs 801 crore, growing at more
than 66%. It also increased its market share slightly to corner about 9% of the
market. Bharti had more than 32,900 Rkm of optic fiber on its NLD network,
adding about 5,000 Rkm in the FY 2005-06 fiscal. From this network, it made Rs
43.5 crore from sale of IRUs. The company terminated more than 70% traffic at
local exchanges. For the data network, it had 17 domestic switches and 102 MPLS
nodes.

Reliance continued its impressive growth, slowing down only slightly to a
growth rate of 81% to clock revenue of about Rs 689 crore. The company stayed in
the third place and had a market share of about 8%. Its network stood at more
than 61,500 Rkm of OFC in the country, in addition to 20,000 Rkm of metro
ethernet network in the cities. The NLD network was kept busy with about 9.5 bn
minutes of voice, and with 90% of this traffic being terminated on local
exchanges, the company also made the most of these minutes. The company had MPLS
network in more than 170 cities. Its city network was connecting more than
50,000 buildings and providing broadband to more than 500 buildings. The company
also had over 150 MPLS VPN customers, and it claimed a 25% share of the market.

VSNL grew at 158% to post about Rs 595 crore in revenue
from its NLD business. The growth was fuelled by a four-fold increase in the
subscriber base, increased presence in the country, and its strong presence in
the enterprise connectivity market. It grabbed about 7% of the market. The
company increased its presence to 197 cities in FY 2005-06, compared to 137
cities in FY 2004-05. The company also grew its data services net with 118 MPLS
PoPs in 75 cities during FY 2005-06. In 2004-05, it had 110 PoPs in 68 cities.
The IP VPN PoPs also increased from 10 to 15 in FY 2005-06. VSNL's NLD network
is now one with that of Tata group for all practical purposes, and this network
stood at 34,670 km in FY 2005-06.

Utility Players

Three utility players-RailTel, GailTel, and PowerTel-are part of a
strategic alliance to face competition in telecom business together. Sure there
are overlaps in their existing network, but when this consortium does
materialize, its network would be larger than that of most of the private NLD
players. With migration to NLD, these utilities will be able to serve a wider
market and the government departments too.

RailTel: It led the utility players with Rs 62 crore, growing at more than
77%. Undoubtedly it has the largest network of all the utility players, with
about 2,500 PoPs over 29,000 Rkm of fiber along its railway tracks and stations,
of which 25,000 Rkm is lit. Its operations currently include activities under IP
I, IP II, and IP VPN licenses. It had a letter of intent for IP VPN when the
migration path to NLD was opened up. It has received a letter in intent for NLD
license, and has ambitious plans from it.

Its MPLS network is now ready to start servicing. The company is also
analyzing the prospect of getting into the retail STD business, and is open to
the prospect of becoming a basic operator too.

Its total investment in the network till FY 2005-06 was about Rs 800 crore,
most of this by Indian Railways, RailTel's contribution to it is around Rs 250
crore, mostly in electronics. It proposes to invest another Rs 120 crore in the
current fiscal. In FY 2005-06, it sold 2464 E1, and targets around 4000 E1s for
FY 2006-07.

PowerTel: The company brought in about Rs 40 crore, growing at 48%. It has a
letter of intent for NLD license, and proposes to tap the enterprise data and
VPN market after getting the NLD license. PowerTel has an OFC network of 18,800,
15,300 Rkm overhead, and 3,000 Rkm underground. It only plans to scale to 20,000
currently, and then it will look to strengthen the network with activities such
as closing the linear loops. The company is now present in all regions of the
country, though it is strong in the north. With a strengthened network, the
company is planning to go for NLD as well as ILD offerings. Like RailTel, this
company too is evaluating the switched voice business. The capacity used on its
network was 9Gbps.

PowerTel had invested about Rs 855 crore in its network till March 2006.
Despite its network being smaller, PowerTel network is of a very high quality,
and being overhead, it is vandalism free and costs less in maintenance.

GailTel: The company brought in slightly more than Rs 18 crore in FY 2005-06.
The company is into the activities of IP I (leasing of dark fiber) and IP II
licenses. It has the smallest network of the three consortium partners with
12,500 Rkm. After a major expansion last year, it now has a presence in South
India too, and the network has a current capacity of 2.5 Gbps, which is of
course upgradeable to any levels. GailTel invested around Rs 31 crore in its
network last year, taking the total investment to Rs 330 crore.

It has an ambitious plan to get into city access networks by forming JVs with
its city gas partners. Wherever the company has a JV for city gas activities, it
plans to have a city access network, which would be primarily set up for gas
station connectivity. This project will complement GAIL's plans on the NLD
license, after which it will be able to provide intra/inter city links to the
service providers and enterprises. The company earned revenue of Rs 18.32 crore
in FY 2005-06.

Outlook

Every industry seems to go through a phase when it becomes so lucrative that
everybody runs to it. The hope is that the huge potential will be able to
accommodate many more players in telecom. Some of the new NLD players have hopes
of going on to become larger players in the telecom business in India.

However, there remains a fear that a shake out may happen before all players
are able to find foothold in the market. The established players in the industry
had already been crying hoarse that there is already too much competition in the
market. There are too many scenarios to cite as examples. The current crop of
ILD players in India is already benefiting from the collapse of players who
rushed in to benefit from the huge potential of the international connectivity
market.

God forbid that a similar fate meets the new telecom moguls of India.

Alok Singh

aloksi@cybermedia.co.in