NLD: Competition at Last!

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2002—03 was the first full year in the history of national long-distance (NLD)
telephony concluded in a non-monopoly environment. This was subsequent to NLD
licenses granted to Bharti Telesonic on 29 November 2001, Reliance on 28 January
2002 and VSNL on 8 February 2002. VSNL too was granted the NLD license in lieu
of giving up its international long-distance (ILD) monopoly in 2002 ahead of the
scheduled date of 2004. That BSNL–the erstwhile NLD monopoly and incumbent
player–is also all set to move into the ILD space, is a different story.

Market Scenario

BSNL continued to rule the roost in the NLD market, with only Bharti doing the
commercial launch of its services in FY 2002—03.

The total NLD market in India at the end of the fiscal was pegged at around
Rs 5,970 crore, with BSNL having the lion’s share of over 92 percent. This was
possible owing to BSNL’s tremendous reach all over the country. As on December
31, 2002, BSNL’s vast switching network had a capacity of 484.55 lakh lines
with 8,045 exchanges in urban areas and 28,583 exchanges in rural areas. The
behemoth’s nationwide network covered all district headquarters,
sub-divisional headquarters, tehsil headquarters and almost all block
headquarters. Out of 6.07 lakh villages in the country, 5.04 lakh villages were
provided telephone facility by BSNL by the end of December 2002.

At the end of 2001—02, there were 427 TAXs in the country with the total
equipped capacity being 41.22 lakh lines. The number of stations connected to
the National Subscriber Dialing Network through these TAXs was 29,365. During FY
2002—03, 10.11 lakh additional TAX lines were implemented. As on 31 March
2003, the total number of TAXs was 438, while 4.50 lakh lines were added to TAXs
in the BSNL network.

BSNL also added 14,371 rkm of microwave systems during FY 2001—02, to have
204,551 rkm as on 31 March 2002. Against the target of 5,000 rkm in FY 2002—03
for microwave, 8,000 rkm was achieved in FY 2002-03. Also, 99,620 rkm of optical
fiber systems was commissioned, which brought the total to 326,271 rkm as on 31
March 2002. Moreover, 75,812 rkm of OFC was commissioned during FY 2002-03
against a target of 75,000 rkm for FY 2002—03.

In areas that cannot be covered by cable links, BSNL provided the STD
facility by using satellite-based multi-channel per carrier (MCPC) VSATs. Such
places are mostly remote, hilly areas and islands, typified with small telephone
exchanges and low volume of traffic. The capacity of one MCPC-VSAT is seven
channels, which has been upgraded to 10 channels in the recent supplies. In FY
2001—02, the total number of the MCPC systems made operational was 13, thus
taking the cumulative total of MCPC-VSATs in the country to 425 as on 31 March
2002. The total deployment of MCPC-VSATs in the fiscal under consideration stood
at 40.

However, due to closure of some MCPC-VSATs, the cumulative figure as on 31
December 2002 was 414.

The Pricing

BSNL was forced to go for a major cut, following the reduction in tariffs from
private players. BSNL announced its first rate cut last year when it brought
down peak time calling charges to a maximum of Rs 9 per minute. This was
significantly lower than Rs 24 charged earlier. These rate cuts were announced
when Bharti Telesonic announced competitive rates for its IndiaOne long-distance
service. The second round of rate cuts resulted in a uniform reduced rate of Rs
4.80 throughout the day for distances greater than 500 km. For lesser distances,
the earlier rates prevailed. The second round of rate cuts came after Reliance
Infocomm announced long-distance tariffs at Rs 1.20 per three minutes (40 paise
per minute). Because of the steep drop in tariffs, BSNL’s revenues from NLD
services also showed southward movement to end up at Rs 5,500 crore in 2002-03,
a decrease of around Rs 2,000 crore from FY 2001-02.

Though BSNL has been corporatized for almost three years, it still does not
have a system in place for separating its revenues category-wise. This is a
legacy from its monopoly days. Being the incumbent operator, with a near
monopoly on the basic and STD market, BSNL did not separate its revenue streams.
It instead chose to provisionally assess the revenues from NLD services at 30
percent of its total revenues, and use the same for calculation of license fees.
DoT has now mandated that separate revenue streams ought to be provided for
license fee calculation.

The Players

Bharti made its foothold in the NLD market, garnering revenues of Rs 430
crore from its NLD services business. At the end of 2002—03, the company’s
NLD services are operational almost throughout the country except in the
Northeast and Jammu & Kashmir. It has so far laid down 23,500 km of cable
with some amount of work left in Kolkata and parts of eastern India. As far as
the infrastructure is concerned, it has put in 15 switches from Siemens all
across the country except in the Northeast and Jammu and Kashmir. However, it is
GAIL that has provided most of its infrastructure to Bharti on shared basis.

Ever since Bharti forayed into NLD, most of its revenues have been coming
from cellular operators scattered all across the country. It tied up with almost
all major service providers in the country for its NLD offering. However,
eventually most of them have gone back to BSNL as the latter is offering the
services at cheaper rates. BSNL is currently charging Rs 1.10 per minute for
carrying STD calls, as compared to Bharti’s rate of Rs 1.49 per minute.
Moreover, BSNL has also been offering discounts of up to 10 percent to cellular
firms. That apart, BSNL had allowed the firms to fix their retail tariff, and
thus maximize their margins. Bharti, on the other hand, had fixed STD tariffs at
Rs 2.99.

Nevertheless, Bharti managed to get traffic of 100 million minutes per month
last year.

Meanwhile, VSNL, though a rival of Bharti in the international space, is said
to be in talks with its telecom rival Bharti to share the latter’s national
long-distance (NLD) infrastructure. Since there is bound to be an overcapacity
in the bandwidth space, with companies like Reliance, Bharti and BSNL already
having their networks and many utility companies like PowerGrid, RailTel and
GAIL proposing to do so soon, it makes business sense to lease capacity from
them, rather than putting up one’s own network in place. RailTel plans to tie
up with some organization for offering NLD services. According to a current
mandate from the government, only PSUs can pick up the equity and therefore
RailTel is currently in negotiations to offer the equity to DoT.

VSNL has consciously decided to adopt a build-and-buy model for its NLD
operations, which would mean setting up the infrastructure in some areas and
leasing or acquiring broadband infrastructure businesses of other companies.
Currently, VSNL has 321 PoPs across the country. Since NLD tariffs have fallen
by two-thirds in the last few months, Bharti is forced to sell NLD minutes below
cost. The weighted cost per minute is Rs 1.70 but due to the interconnect
agreement Bharti is selling at Rs 1.10.

Reliance too has nearly finalized its infrastructure with PoIs in 514 SDCAs.
Of these, testing has been completed in only one SDCA, while commercial traffic
is yet to be commenced. For its NLD services, Reliance has 17 switching PoPs and
five gateways in Delhi, Mumbai, Kolkata, Chennai and Ernakulam.

The CAC Imbroglio

Now that Carrier Access Code (CAC) issue is under consideration at TRAI, NLD
players are expecting that its inception will give MTNL and BSNL subscribers the
choice of using any NLD service provider. In fact, with all private operators,
this has been a sore issue for long. They say that the very spirit behind
opening up the NLD sector to private players would be defeated if CAC is not
implemented. CAC would help users choose and pick up any carrier they wish to.
In this scenario, without the implementation of CAC, in most cases it would be
impossible to break BSNL’s monopoly. Currently, only the digital exchanges are
CAC-ready and unless the remaining analog exchanges are also brought into the
fold, CAC implementation would remain a dream.

How would the CAC work? DoT, in its recently finalized National Numbering
Plan 2003, has mandated that for an STD call, the subscriber would have to
prefix ‘010’ for selection of the NLD carrier, followed by the CAC, the STD
code and the subscriber number. The new numbering plan, formulated after a
decade, has a projected forecast of 50 percent teledensity by the year 2030.
This would translate into a numbering space for 75 crore telephone connections
comprising 30 crore basic and 45 crore cellular connections. Initially, CIC is
to be a two-digit code, which would be sufficient for allotment to 40 NLD
operators. However, the length of CIC may be reviewed and changed to a
three-digit code as and when required.

Rajneesh De