Tata: Big Is not Enough

Tata’s entry in telecom as a complete service provider is a welcome sign
for the industry. Tata is one of the most valuable brands in the Indian
subcontinent and evokes trust among consumers, employees, and shareholders. The
group contributes around 2 percent of India’s GDP and has a turnover of $8
billion.

In the past decade, Tata streamlined its operations by focussing on its core
businesses and planned to move away from non-core businesses. The group’s
restructuring was done in line with the ‘Fitment and Performance’ model. The
model was developed to structure the Group’s business interests and meet three
criteria: first, being among the top three in the market; second, fetching
returns greater than the cost employed, and third, companies providing economies
of scale.

Among the seven business segments that the group is planning to focus on,
communications and information systems currently contribute around 12 percent of
the overall revenue of the group, which is planned to go up by around 25 percent
by 2006. Not only communications is going to boost the overall revenues of the
group, it will also help boost its bottomline by increasing profitability
margins. Considered to be an asset intensive industry, telecom has high margins
and it is Tata’s top-of-the-mind business at present, given the huge
opportunity that the group will like to encash in future.

The coming of Tata in a big way has opened up new avenues in the Indian
telecom sector and it is now looking attractive even on the basic services
front, with the introduction of limited mobility services. Having successfully
managed its basic services along with limited mobility services in Andhra
Pradesh, Tata is the only group in the integrated players space that is running
fixed wireline as well as wireless services (limited mobility). More
specifically, Tata will have an edge over Bharti and Reliance who are yet to
deploy limited mobility services in their respective license areas.

According to Kishore Chaukar, managing director, Tata Industries,
"Telecom is a long-term business and is dependent on long-term commitment,
deep pockets, and staying power, as the game has to be played over a period of
20 to 30 years. The group is strong in all the three areas, which is
advantageous for it and it just has to wait and watch to see how the market
moves and then formulate strategies accordingly.

This is also a time when there is the challenge of wiring up the country and
achieving the objectives of NTP ’99. The incumbent operators, BSNL and MTNL,
along with Bharti and Reliance, are doing their bit. Tata’s entry will most
likely speed up the process. At the same time, it will also help promote
competition in all areas of telecom services. Even on the funding front, the
investment needed for Indian telecom is huge and Tata will help in contributing
a significant slice to the overall pie, for building the telecom infrastructure
in the country.

Business Model

The telecom objective of the group is to capture 6 million wireline and
wireless subscribers by 2006 and 12 million by 2011. The group, as of now, does
not want to be a conglomerate and wants to run business as separate companies.
This is a good model today as one can offer different products and services at a
differential price catering to the differential needs of customers. The company
plans to attract customers through attractive product bundling.

The group’s strategic intent in telecom is to focus on customer ownership
with a bundled offering of access and value-added services (See Table I). On the
infrastructure front, the company has been focusing on international and
national services through VSNL, city infrastructure through Tata Teleservices
and Tata Power, and last mile (wireless or wireline) infrastructure through Tata
Teleservices. It will be providing cellular services through Idea Cellular,
basic through Tata Teleservices, data through Tata Internet and Tatanet, and
video also through Tatanet. The company is also looking at providing value-added
services like content, e-commerce, e-education, and entertainment through Tata
Teleservices and its group companies like Tata Infotech, TCS, Tata Interactive,
and Tata Infomedia. The group is open to tie-ups for providing value-added
services to customers.

Tata Group has been slow on the domestic long-distance (DLD) front but it
seems that the strategy planned by Tata Power for building an information
superhighway between the key cities will now be executed by VSNL, and the
process has already started. The role of Tata Power will be limited to Mumbai
metropolitan area network (MAN) as the group will utilize the DLD license of
VSNL. Tata is also not present on the VSAT front which is advantageous for its
competitor, Bharti Group as the latter has a VSAT wing called Bharti Broadband.
However, Tatanet, the internal VSAT closed user network (CUG) of Tatas is
planning to get a VSAT license by enhancing the CUG network to a shared hub
network, thereby providing VSAT services to corporates.

Speaking about the focus as a service provider in telecom, Chaukar said,
"The service provider should look at what the customer wants, what are the
resources available with the service provider, and how best the service provider
can deliver." The company plans to launch a world-class service and plans
to provide a full range of service consisting of all elements of the value
chain. The group will focus on an appropriate mix of fixed/wireless and
voice/data services to customers. As the company moves along, it will provide
value-added services too. It is planning to compete on superior product quality,
customer care and innovative bundling of services.

Tata believes in the sharing of infrastructure and operations across
businesses in areas of backbone, switching, manpower, space, and branding. With
the margins in telecom decreasing with each passing month and year, it believes
that there will be increase in the extent of sharing in years to come. Though
initially the reduction in cost due to sharing will be too small but in years to
come sharing will reduce the cost significantly. "Though we compete in the
market, we also cooperate for the sharing of infrastructure," S
Ramakrishnan, managing director, Tata Teleservices, said.

The company is planning to share cell sites of Idea cellular and other GSM
operators for the limited mobility service. Backbone sharing will be limited to
Idea Cellular, Tata Power, and VSNL. In the coming year, the company is looking
at sharing business with other operators to minimize capital expenditure of the
infrastructure.

Tata Teleservices is planning to optimize resources by using the billing
system, IN system, and Internet system used by Tata Teleservices. All these
systems will be based at Hyderabad and different circles can avail of the
service by connecting the main system through a leased line. Hyderabad will be
the central hub for all circles, with around 100 IT personnel while in the
remaining circles there will be minimal staff just for support and operations.
For IN, the company is planning to use Hughes Tele.com’s IN and has sought
permission from Hughes for sharing its infrastructure across the circles,
according to Ramakrishnan.

Tata Teleservices is also leasing ducts, dark fibers and bandwidth from IP-I
and IP-II carriers like GAIL, PGCIL, among others. The company has bought ducts
from Spectranet in Delhi. In Gujarat, the company is planning to lease ducts
from Fascel and is in the final stages of the deal. In Bangalore, the company
has tied up with Incable.

The Tata group is working on a common brand for all the services that fall
under basic services. It is working on the same lines as that of Bharti which
has Touchtel as its basic services brand. The brand is expected to be revealed
with the launch of basic services in new circles.

Operational Areas

The Tata Group started its operations in telecom through Tata Communications
by launching cellular services in Andhra Pradesh under the brand name Tata
Cellular in December 1996. Tata Communications was a 51:49 JV between the Tata
Group and Bell Canada. In 2000, Birla AT&T and Tata Communications merged to
from a new company called Birla Tata AT&T (BTAL) which had operations in
Maharashtra, Gujarat, and Andhra Pradesh. In February 2001, BTAL bought RPG
Cellcom, the cellular service provider in Madhya Pradesh for Rs 490 crore and
increased the number of its cellular circles to four. Recently, Birla Tata
AT&T unveiled its new identity known as Idea Cellular. Idea will replace the
AT&T brand in Maharashtra and Gujarat, Tata cellular brand in Andhra Pradesh,
and RPG cellular brand in Madhya Pradesh. Idea cellular has also bagged the
fourth operator license for Delhi and is planning to start services in Delhi in
the June—July timeframe.

Idea Cellular plans to further merge with the BPL Group, which has cellular
operations in Mumbai, Maharashtra, Kerala, and Tamil Nadu. Since Idea Cellular
has also got the Maharashtra license, BPL Group has to first sell its
Maharashtra license for the merger to take place so that the merged entity does
not have two licenses for the Maharashtra circle. Once the merger takes place,
the combined entity will have operations in Andhra Pradesh, Gujarat, Maharashtra,
Madhya Pradesh, Mumbai, Kerala, and Tamil Nadu, and will be the No. 1 cellular
company in India with a market share of around 25 percent. At present, Tata
Group has an equity participation of 33.33 percent in Idea Cellular.

On the basic services front, Tata Teleservices has been operational in Andhra
Pradesh since March 1999 and currently has a customer base of around 150,000. In
the second round of licenses, Tata has bagged Delhi, Gujarat, Karnataka, and
Tamil Nadu. The six circles in the basic services together contribute around 56
percent of telephones lines and around 65 percent in terms of revenues. Tata
Teleservices is planning to launch the basic services in all the state circles
minus Maharashtra in the third quarter of 2002.

The company is in talks with Hughes Tele.com. If the talks does not
materialize by June, it plans to go ahead with the new licenses, said
Ramakrishnan. In that case, the company will bank heavily on Tata Power as it
has laid considerable amount of fiber in Mumbai and has been leasing
infrastructure to telecom service providers.

With the VSNL acquisition Tata got the 100 percent share in the lucrative ILD
business, a leading share in Internet services, and a favorable NLD license.
Tata bought 25 percent stake in VSNL for Rs 1,439 crore and is now in the
process of acquiring another 20 percent stake through an open offer which will
cost around Rs 1,151 crore. Buying VSNL has also given Tata the DLD license and
it is working on the modalities. Tata Broadband had done the homework for the
national backbone but VSNL will be the vehicle for national backbone and the
work has started for different places, according to Ramakrishnan.

Tata Power has also been very active on the telecom front. The company has
set up a Mumbai-based OFC network of approximately 485 km and has the right of
way for 1,200 km. It seems that 30 percent of the network has been lit and the
company has also signed with customers like Bharti, Orange, Satyam, and Hathway.
Besides direct investment in telecom infrastructure, Tata Power is also
investing in other group companies in telecom. The company’s telecom plans are
still evolving, post the VSNL acquisition and the focus is mainly on the
infrastructure part of the telecom space.

There has not been any clarity on which company who is going to provide
Internet services from the Tata Group. At present, VSNL as well as Tata Internet
Services have been providing Internet services on the prepaid front whereas Tata
Teleservices has been using the services of Tatanet for the post-paid mode. On
the VSAT front, the company is planning to activate Tatanet by enhancing the CUG
network to a shared hub network. Tata Telecom will focus on providing voice,
data, and video solution to enterprise users.

Investment Plans

The Tata Group plans to invest between Rs 12,000 and Rs 14,000 crore in
telecom in the next six years. For a 25 percent stake in VSNL, the company has
invested Rs 1,439 crore and will invest another Rs 1,151 crore for getting
another 20 percent stake. Tata Teleservices, in the Andhra Pradesh circle, has
invested around Rs 1,500 crore. Even on the cellular front, the company has
invested around Rs 900 crore while more than Rs 200 crore have been invested in
the Mumbai MAN network by Tata Power. In the new circles of Tata Teleservices,
the company has invested or is in the process of investing around Rs 400
circles.

According to Morgan Stanley, the Indian telecom services revenues will be to
the tune of Rs 74,000 crore in 2006. The Tata Group is considering a revenue
projection of Rs 8,000—9,000 crore by 2006. Tata Teleservices will contribute
around Rs 4,600 crore by 2007, of which 60 percent will come from fixed line and
40 percent will come from mobile services.

Pravin Prashant

Tata Teleservices: Service Plans

Tata Teleservices has been very successful with its current basic services
operations in Andhra Pradesh, as currently around 75 percent of the new
connections have been bagged by it. The company wants to repeat similar
performances in new circles of Delhi, Gujarat, Karnataka, and Tamil Nadu and is
moving as per plans. On the technology front, the company is going for the CDMA
3G-1X network. In terms of network deployment, it is in the process of erecting
switches in all the four circles and as of date it has installed 50 percent of
the cell sites. It is expected that the remaining cell sites will be ready
within a month’s time. Things might get delayed but if the spectrum allocation
takes place without any delay, the company plans to go with the alpha testing of
the services by August 2002 and once it is satisfied with the quality of
service, it will commercially launch the services in September or October,
according to S Ramakrishnan, managing director, Tata Teleservices. Ramakrishnan
feels that in a competitive market one should not rush for a commercial launch.
The company will launch value-added services after three months of the launch of
voice services.

In the first year, the company is planning to launch services in the urban
areas and move to semi-urban and rural areas in the second year. It plans to
cover all the SDCAs in the seventh year as per the rollout obligations laid out
in the license agreement. In the first year of its operations, Tata plans to
launch services in 6 SDCAs in Karnataka, 7 SDCAs in Tamil Nadu, and 5 SDCAs in
Gujarat. In Delhi, services will be available all across the Delhi SDCA from day
one.

To fulfill the rollout obligation, Tata Teleservices is planning to have
wireline capacities of 10,000—15,000 lines in the capital cities and wireless
capacities of around 30,000 lines. But for Delhi, the company is planning for
almost double the capacity and is working at a wireless capacity of 70,000
lines. In second-level cities, the company is opting for a wireline capacity of
5,000 lines and wireless capacity of 10,000—15,000 lines.

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To provide quality coverage for WLL customers, the company is installing a
large number of cell sites. Till date, around 80 cell sites are operational in
Andhra Pradesh. In the four new circles, the company is planning to install a
cumulative base of around 322 cell sites at the launch of service. In terms of
OFC deployment, Tata Teleservices has deployed around 2,000 km in the Andhra
Pradesh circle and plans to deploy 6,154 km of OFC collectively in the first
three years of its operations in all the four circles.

The company is planning to have a two-tier model for marketing of its basic
services operations in state circles. Corporates will be directly sold by the
company whereas franchisees and distributors will sell to the home and SME
segments. Distributors will sell wireless terminals whereas fixed wireless
terminals and wireline terminals will be sold by franchisees.

According to Kishore Chaukar, "Telecom is dynamic and changing and one
cannot plan on paper and deliver it for next ten years. Service providers have
to remain flexible as there are risks of economy, technology, and
regulation."