IT TOOK A THREE-syllable word that rolls off the tongue in an easy cadence for the Tatas to storm back into telecom. After nine months of tough negotiations between NTT Docomo, Japan’s $51 billion (Rs 2.3 lakh crore) communications giant, and the $70 billion Tata group, a deal was stitched together in November 2008. Docomo would pay $2.7 billion for 26% of Tata Teleservices, and another $127 million for 12% of Tata Teleservices Maharashtra (the two mobile operators also have cross-holdings), with an option to own 51% majority in Tata Teleservices by 2015. The deal was like adrenalin to the Tatas’ flagging telecom business. By August this year, they were fourth in the country, with 78 million subscribers: In September 2008, some months before the deal, they were No. 6, with 30 million users.
Now, the group has an ambitious plan to bring together its disparate telecom arms in one big push. This involves Tata Tele, Tata Tele Maha, and Tata Communications (enterprise and carrier data): Tata Consultancy Services (TCS) may also throw its weight behind them.
This reflects new thinking within the group, and a willingness to do whatever it takes to win in telecom. “It is important for us to make our mark organically, particularly in the global enterprise market,” says Srinivasa Addepalli, senior vice president, corporate strategy, Tata Communications (Tata Com).
For Docomo, whose subscriber numbers and revenues are stagnating in Japan, the Tatas are a perfect match. “A bigger player would have limited their scope for involvement. With a new operator, the cost of building the business would be higher,” says Vikash Mantri, telecom analyst at ICICI Securities.
Though the Tatas were among the first to see telecom as an industry of the future, their ventures never matched other Tata businesses in scale or importance. In contrast to the telecom companies—Tata Tele Maha posted a Rs 318 crore loss in fiscal 2010, and Tata Com, a loss of Rs 598 crore—Tata Steel, Tata Motors, TCS, and Indian Hotels are leaders. Sanjay Mehta, partner, BMR Advisors, an audit firm, says the Tatas have seen no “upside on their investment. They should have made pots of money, like others. Instead, they’ve lost value.”
But that may change. Every now and then, Tata officials even discuss merging the three telecom companies. This may not be feasible, given how they are owned. The government still holds 26% of Tata Com; Tata Tele Maha is publicly owned, and Tata Tele is a private company. But there are synergies that can be juiced out. Already, since July, the two mobile outfits are being run by the same team. Gather all Tata telecom products under one brand name, as rivals Bharti and Reliance Communications (RCom) do, and a very different picture emerges.
Group chairman Ratan Tata wasn’t available for comment, but a manager with direct access to him says he takes a keen interest in telecom. “He meets people from Qualcomm and Nokia on his own, and we only learn of it later.” He travels to Docomo’s headquarters in Japan, and is often present when senior Tata telecom officials meet formally five or six times a year.
Another Tata group insider says Ratan Tata is keen to make his telecom labels as much a part of everyday life as its tea, salt, steel, and car brands.
It’s tempting to think of the Tata telecom businesses as an AT&T in the making. They have undersea cables, almost nationwide fixed line and mobile networks, and support from an in-house software company.
“A key strength is that we’re more an ICT services company than a telecom infrastructure provider,” says N. Srinath, MD and CEO, Tata Com. “The convergence of IT and telecom is a natural consequence. TCS is a logical ally.”
Of course, the AT&T model, which has its share of problems as well as successes, isn’t exactly the poster child for telecom success. For the record, while none of the Tata officials Fortune India spoke to leapt at the idea of Tata telecom companies being an AT&T in the making, they all agreed it was a useful construct to evaluate what they were attempting to do.
THE SUPREME IRONY of telecom is that it’s primarily about voice—people talking to each other—and yet, that’s what has stopped making money for operators. Tata Com saw this early on.
The Tatas bought Videsh Sanchar Nigam (VSNL) from the government in 2002, with the aim of becoming India’s largest Internet company and controlling all voice communication within and from India. VSNL (renamed Tata Com in 2008) had a monopoly on international long-distance (ILD), which accounted for the bulk of its sales. But within a year of divesting it, the government allowed Bharti, Reliance, and others to offer ILD services. Tariffs crashed and Tata Com’s business model came unstuck. Today, voice accounts for Rs 1,247 crore in revenue and Rs 253 crore in profits: The margins are a laugh. The story is similar at AT&T.
But Tata Com isn’t fussed by this. Over the years, it has invested in enterprise and data. And if there’s one reason it can be compared with AT&T, it is this. Tata Com bought Tyco Global Network in 2004, and Teleglobe the following year. These helped it achieve traffic of 32.6 billion minutes by fiscal 2010. “The Teleglobe acquisition helped us become global. The boost it gave us in key segments such as wholesale voice and IP networks can hardly be undermined,” says Addepalli.
Srinath says entering the enterprise business seven years ago was the smartest thing the Tatas could have done. “We got it right when we hit that market. This was when ILD prices were crashing around us.” (Reliance Infocomm spotted the same opportunity in 2004, when it bought Flag.)
Since then, Tata Com has been building capacity. Over the last five years, it has built 42 data centres around the world, mostly in Asia and the U.S. It has 8 terabytes of bandwidth lit (‘lit’ is industry lingo for active capacity) and around 1,600 petabytes (1 petabyte equals 1,024 terabytes) run on its Internet backbone every month. AT&T manages 18.7 petabytes a day, or about 560 a month. Tata Com is among the top five globally in this business, where margins are a hefty 84.5%.“The challenge is not the opportunity, but efficient execution,” says Srinath.
He’s matching words with deeds. Tata Com upped its stake to 49% from 26% in Neotel, a South African telecom network company, in early 2009. Neotel is now investing to build capacity, because of which Tata Com made losses in fiscal 2010. Also, new investments ($200 million) are planned for the Middle East, which could impact profitability further. For Srinath, this is investing in the future. The markets concur: Tata Com’s stock has moved up in the last 10 months.
Kishor Chaukar, MD of Tata Industries, the company that oversees entry into high-tech businesses, agrees that this is where the future is. “You can’t beat voice when it comes to widening reach. Profitability, however, flattens after a point. Enterprise reaches out to smaller numbers, but can be hugely profitable if managed well.”
Tata Com’s approach resembles AT&T’s in many ways. The American company reaches out to every segment—households, students, companies—and is a one-stop shop for voice, broadband, IPTV, Wi-Fi, and so on.
So, to start really looking like AT&T, the Tatas need to strengthen the domestic business, handle data traffic on handhelds and then meld it with the undersea cables and data centres.
It’s nearing 8 o’clock on a Thursday evening, and Anil Sardana’s review of Tata Tele’s GSM numbers isn’t over yet. It’s been almost three hours, and his schedule has gone haywire. Sardana, the company’s managing director, holds these reviews every month in his office on Delhi’s Mathura Road. The numbers aren’t looking good today, and haven’t done so for a while. After doubling since the launch of usage-based billing in June 2009, Tata Tele’s new subscriber numbers have begun to flatten. (They peaked in September 2009, with 4 million new users, and were back to 2.1 million in August 2010).
So far, Sardana’s biggest contribution has been to match, often best, his competitors in sheer aggro. Rahul Gupta, senior manager at Strategy Analytics in Delhi, says Tata Tele was always perceived as laidback. “But in the last couple of years, it has taken an aggressive approach to subscriber acquisition.” Sardana plays down any suggestion that he’s a street fighter. “My mandate is to build an institution,” he clarifies. If he succeeds, the domestic piece of the AT&T approach will fall into place.
Tata Tele, using the Docomo brand, shook up the industry in June 2009 with its usage-based model that measured talk time in seconds. Till then, calls were charged by the minute. While this triggered a price war, it allowed Tata Tele to harvest large wireless subscriber numbers—up from 29.33 million in September 2008 to 76.9 million in August 2010.
For the Tatas, this represents hope. Between 2005 and 2008, the same company, in a bruising battle, totted up losses of Rs 7,400 crore using CDMA technology, which brought in all of 29.33 million subscribers. Much of the loss has been written off.
Analysts, however, fear that while Sardana’s aggression may have snagged a few million subscribers, it has also weakened the industry. Between the quarters ending September 2009 and March 2010, the average revenue per user (ARPU) fell from
Rs 164 to Rs 131, as did usage minutes (from 423 minutes per month per subscriber to 410), dragging companies’ margins down. A combination of the two determines a telecom company’s financial health, and this drop could come back to bite Tata Tele’s recovery.
Sardana shrugs off these concerns. “To assume that we caused the price war is not correct. With so many new players coming in, it was inevitable.”
He has no reason to complain. Numbers from the Mumbai-based Centre for Monitoring the Indian Economy—the privately held Tata Tele doesn’t share its financials—show that between fiscal 2005 and fiscal 2009, the company’s operating losses fell. From a Rs 614 crore loss, it operationally broke even in fiscal 2009 after adjusting for treasury income. Sardana says it made a post-tax profit in fiscal 2010.
But he will need a second act, as falling margins are sure to catch up with him. The big players are abandoning the subscriber game and focussing on profitability. Tata Tele, however, needs new subscribers for scale. Santosh Sathanur, senior analyst, Ovum, a telecom and technology advisory firm, says Tata Tele may be painting itself into a corner. “Airtel, Vodafone, and RCom won’t mind Tata Tele gaining more subscribers, as long as their base remains intact and they can
raise ARPUs.”
Sardana has a more compelling reason: telecom regulation. He points to the Tata credo of not calling in favours. Evidence: Two years after applying, they still have no GSM spectrum in Delhi, India’s largest metro telecom market. “Give us a level playing field and see what we can do,” he says.
That’s where 3G fits in. Spectrum allocation here, recently concluded, was driven by bids, which kept regulators at bay. Sardana says the Tatas will finally compete on a level playing field, backed by Docomo. Deepak Gulati, president (GSM and 3G services), Tata Tele, says with Japan phasing in 4G, it’s in Docomo’s interest to “promote this foray”.
Tata Tele has begun to muster its forces. Its chief strategy officer, Koichi Takahara, is a Docomo implant—one of 10. “Every quarter, 30 to 40 people from Docomo visit TTSL ,” adds Gulati.
If Tata Tele can withstand margin pressure and make a go of 3G, its pairing with Tata Com will yield dividends. They can then offer packages to companies that will take care of all their needs: local as well as international voice and data. AT&T does just that.
but a new threat has emerged. Mukesh Ambani has re-entered telecom. This time, he’s targeting broadband. If he plays price warrior, he will spoil the market for Tata Com, which opted out of the broadband wireless auction.
Tata Tele could help. Its CDMA network is 3G-ready and comparable to what Ambani may offer. If the Tatas play their cards right, they can match others without fresh investment.
10% to tata tele’s incremental growth. Its CEO,
M.A. Madhusudan, says it has exceeded targets.
There was a time when the industry had almost written Tata Tele off, and wasn’t too sure where Tata Com was headed. If Ratan Tata has demonstrated one thing in his 19-year stewardship of the Tata group, it is his ability to pull off surprises. There’s one in the making in telecom.
Making CDMA cool again
The Indian telecom market proved too tempting for Richard Branson to resist. In 2008, Branson’s Virgin Group joined hands with Tata Tele to create Virgin Mobile, India’s first youth-oriented mobile brand. Globally, Virgin is a mobile virtual network operator, and uses other operators’ networks to offer value-added services. But laws prevent it from doing the same in India. To get over this, it has a revenue-sharing deal with Tata Tele, under which Virgin Mobile gets a success fee for every new customer and for services he or she uses.
Virgin Mobile India CEO M.A. Madhusudan says his company is exceeding targets, although he isn’t giving away the numbers. But he underscores that it’s a separate business entity. “Our thinking is different. If we were part of TTSL, we wouldn’t have achieved what we have.” So while Virgin gained a foothold in the world’s fastest growing telecom market, Tata Tele found a way to draw young customers to its underutilised CDMA network and to break the perception of this technology as ‘uncool’.
When the laws permit it, Virgin Mobile India (and T24, a Tata Tele brand sold through Future Group retail outlets such as Big Bazaar) could be spun off as an independent mobile virtual network operator. But for now, it reflects Tata Tele’s strategy of mustering subscribers through targeted offerings without diluting the Tata Docomo and Indicom brands.