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Reliance Communications: Riding the broadband wave

December 31, 2012
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Telecom operators have been facing tough times for the past two years, struggling with policy and regulatory uncertainties, the fallout of the 2G spectrum controversy, wafer-thin margins, falling profitability and stiff competition. Reliance Communications (RCOM) – India’s third largest telecom and broadband operator, and the flagship company of the Anil Dhirubhai Ambani Group – has also been caught in this spiral. The biggest challenge before Anil Ambani, the head of RCOM, is to tackle the company’s heavy debt.

RCOM’s debt, at Rs 350 billion as of June 2012, is huge. It is three times the company’s market capitalisation of around Rs 120 billion and nearly 10 per cent of the cumulative debt of the entire telecom sector. Even more worrying is the operator’s continued lack of success in raising funds through an asset sale. The planned sale of 95 per cent stake in telecom tower unit Reliance Infratel has dragged on for two years with no conclusion. Further, due to weak investor appetite, in July 2012, RCOM had to shelve its plan of listing Reliance Globalcom, its undersea cable unit, on the Singapore Stock Exchange and subsequently coming out with its initial public offering. RCOM was expecting to raise Rs 50 billion-Rs 65 billion by divesting 75 per cent stake in the submarine cable business.

Ambani hopes that 2013 will be better. At the company’s annual shareholder meeting, he stated, “By January 2013, there will be more clarity in the sector. Also, we should be able to conclude the value-unlocking strategy for Reliance Infratel.” Outlining a four-step strategy to pare the company’s debt load, Ambani said, “Our focus will be to monetise all assets of Reliance and increase the cash flow and profitability. We also want to be the lowest-cost operator in the industry. Going forward, we are committed to unlock value and pursue several initiatives to reduce the overall debt of the company. I expect RCOM to achieve a very low debt-EBITDA ratio by fiscal year 2015.”

Current status

An integrated telecom operator, RCOM delivers a full suite of telecom services including mobile and fixed line telephony, national and international long distance services, and broadband and data services. In 2010, the company became the world’s fourth largest single-country mobile service operator.

Valued as one of the world’s top 10 telecom companies, RCOM today serves a corporate clientele of 2,100 Indian and multinational companies, apart from 800 global carriers that use its network. Over the years, RCOM has made significant investments in infrastructure roll-outs. It owns and operates one of the world’s largest next-generation IP-enabled connectivity infrastructures. Through Reliance Globalcom, it owns the largest private cable network in the world with over 277,000 route km of fibre optic cable connecting the US, Europe, the Middle East and Asia Pacific. This includes 68,000 km of subsea fibre.

In 2003, RCOM had trailblazed into the telecom sector with its game-changing Monsoon Hungama scheme, which kicked off an industry trend in tariff undercutting. This eventually led to India becoming the country with the lowest telecom tariffs.

Originally a CDMA operator, RCOM launched GSM services across the country in 2009. This was the largest and possibly the quickest network roll-out undertaken by any company, and was completed six months ahead of schedule.

In 2010, RCOM became the second private sector operator after Tata Teleservices Limited (TTSL) to launch 3G services. To make good its investment of Rs 85.85 billion for 3G licences in 13 circles, the company aggressively rolled out 3G services including video calling, mobile TV and video streaming on a variety of mobile and personal computing devices at a base speed of 21 Mbps.

However, the heavy capex, including a GSM investment of over $2 billion, along with the cost of acquiring 3G spectrum in 2010, resulted in its net debt increasing from Rs 189 billion in end-2009 to over Rs 350 billion today.

Meanwhile, RCOM’s subscriber base has been slipping and as of September 2012, stood at 135 million. It now trails Bharti Airtel (185.92 million subscribers) and Vodafone India (152.66 million users).

Process management

To stymie the slide and streamline operations, RCOM has been taking several initiatives in the past few months. It has, for instance, started weeding out inactive subscribers from its network. In September, it disconnected 20 million subscribers who had not used its services for two months. This, according to company officials, has resulted in the decline in subscriber base.

In the same month, RCOM hiked 2G prepaid tariffs by as much as 25 per cent. This was the company’s biggest tariff hike to date, and elicited positive reactions from industry analysts. “The tariff hike is a good step,” noted a telecom analyst from KPMG. “It indicates that RCOM is focusing more on profitability and moving away from being competitive on the price front.”

In the post-paid segment, however, RCOM played the price card. It reduced tariffs by as much as 40 per cent as compared to those offered by GSM operators. According to analysts, this competitive pricing was intended to take on incumbent GSM operators such as Bharti Airtel, Vodafone India and Idea Cellular, which had hiked call tariffs by nearly 60 per cent in 2011. By offering a cheaper value proposition, it was hoping to attract the high-end and corporate users that make up the post-paid segment. RCOM’s post-paid users, which constitute only 4 per cent of its total GSM customers, bring in about 18 per cent of the company’s total revenue. Moreover, on an average, post-paid users tend to stay on longer with an operator. It is, therefore, strategically important for the company to tap this segment, which is expected to be worth Rs 200 billion in the next 12 months.

RCOM also plans to step on the gas with respect to the mobile data segment. According to senior company officials, five years from now, revenue from the data business is expected to comprise 20 per cent of the Rs 1,850 billion telecom market. If RCOM plays its cards right, it could look to increase its data revenue from Rs 14 billion at present to Rs 90 billion in the next five years.

To this end, RCOM is looking to invest Rs 15 billion in network optimisation and data services in 2012-13. It is currently deploying MIMO technology in select circles, including Mumbai and Delhi, which can offer ultra-high data speeds of up to 42 Mbps on the go.

RCOM is also forging partnerships with CDMA smartphone makers to provide upgrades to its existing CDMA subscribers. Apart from this, it has created a specialised vertical and an exclusive sales team for data and devices that will take its dongles, tablets and handsets to the market through its 150,000 dedicated retail outlets. Tie-ups with laptop makers to provide bundled solutions at points of sale are also on the anvil. It has already tied up with Dell and Intel for the same.

To some extent the sharpening of focus is beginning to pay off. The weeding out of non-active customers, aggressive pricing and cutting down on freebies is beginning to yield results. For the first time in two years, RCOM increased its revenue market share during the quarter ended September 2012. RCOM announced a revenue market share of 8 per cent in September 2012 compared to 7.67 per cent in June this year.

Analyst speak

RCOM is an unorthodox, canny operator with aggressive go-to-market confidence. As a brand, it has managed to stay relevant by innovating its products. It has deep pockets and the mettle to survive. Therefore, market observers believe that RCOM will be able to resolve its current financial problems before long.

Today operational on both the CDMA and GSM platforms, “RCOM is a formidable player,” says Abhishek Chauhan, senior consultant, information and communication technology practice, South Asia and Middle East, Frost & Sullivan. “It also has an edge in providing broadband access to customers in the USB modem segment. RCOM is the number two player, after TTSL, in this segment. It also has tremendous experience in offering data on the CDMA platform. It already has partnerships with existing device manufacturers. Moreover, the kind of penetration that RCOM has in villages gives it an edge over smaller operators. However, in terms of strategy, RCOM needs to pull up.”

The aggressive ambition displayed by the company in the past has toned down significantly. Faced with stiff competition, RCOM is taking a hit on both the 3G and 2G fronts. According to market experts, the company needs to take rapid remedial measures to push ahead of competition.

In terms of ARPU, for instance, RCOM with Rs 102 is well behind Airtel’s Rs 177, Vodafone India’s Rs 174 and Idea Cellular’s Rs 148. In terms of minutes of usage (average talktime), RCOM’s is the lowest at 236 minutes compared to Airtel’s 417 minutes, Idea Cellular’s 401 and Vodafone India’s 359, as of September 2012. Analysts say that increasingly these are the parameters that will go towards determining operator profitability rather than the overall subscriber base.

According to analysts, Bharti Airtel’s debt component is perhaps as large as RCOM’s. However, Bharti has a much higher component of high-usage, premium subscribers in metro and Category A circles who can switch easily to 3G and 4G data services, thus contributing higher revenues for the company. In comparison, RCOM’s subscribers are mostly voice-based users belonging to Category B and C circles. RCOM, therefore, has less opportunity to get its users to scale up to 3G and 4G data usage.

“RCOM’s main disadvantage is its large share of marginal customers. Also, it has failed to capitalise on its early lead in different segments. For example, RCOM was an early entrant in the dongle business and had succeeded in acquiring a large customer base. However, the revenue generated by the company is not commensurate with its high subscriber base,” observes Dr Mahesh Uppal, director, ComFirst.

Over the past year, RCOM has been losing revenue market share to Vodafone and Idea Cellular. “RCOM needs to focus on its post-paid customer base to retain high-end users. It is also required to innovate in terms of content and price points for its data packages,” notes Chauhan.

Overall, analysts agree that RCOM, though among India’s leading players, needs to engage with its customers. It needs to reposition itself as a brand that attracts high-end consumers. “It also needs to rebrand itself or come out with an impactful advertising campaign to net high-end customers without compromising on its appeal amongst budget consumers,” says Uppal.

Future focus

As part of its new strategy to attract and retain users, RCOM has started focusing on its post-paid and enterprise users. It is also concentrating its efforts on popularising its 3G services and has undertaken several initiatives in this regard. Taking a cue from Bharti Airtel and Vodafone India, RCOM too has reduced 3G tariffs by 61 per cent. This, it hopes, will spur the uptake of 3G services in the country. As per the new tariffs, users will need to pay Rs 250 for high speed internet usage up to 1 GB and will, thereafter, be charged Re 0.20 for each MB of data used. Earlier, 1 GB of data usage was priced at Rs 650 with Re 0.50 being charged for each MB of data used thereafter.

RCOM has also launched a 3G tablet priced at Rs 14,499. The device packs in the Android 2.3 operating system, a 1.4 GHz processor, 512 MB RAM and a 3 megapixel camera. Besides, it has bundled a data plan with the device, wherein its 3G customers can avail of 3 GB of free 3G data for three months, apart from free video calling to other RCOM 3G numbers, free voice rental for 12 months (for post-paid users) and free global calling worth Rs 250. Commenting on the initiative, Sanjay Behl, group head, brand and marketing, RCOM, says, “The new 3G TAB is sure to enhance the customer experience on our seamless IP-enabled superior 3G network bundled with exciting offers at an affordable price point.”

To shore up its enterprise segment, RCOM is repositioning this vertical as Reliance Business Services through the “Makes It Easy” campaign. The vertical will provide a full suite of managed services across all product lines for data and voice services. It will also offer services like application-aware networking, managed security services and cloud-based services like managed storage for its existing customers. This will enable the company to serve all enterprise segments – small, medium and large.

That apart, RCOM has recently launched the Connect Prime service, which enables large and medium enterprises to connect their remote offices anywhere in India at a competitive price. The product offers bandwidth options from 64 kbps to 512 kbps.

As a customer retention strategy, RCOM has launched several value-added services and talk plans for customers. A notable example is its partnership with WhatsApp, as a part of which it has launched the WhatsApp Plan for its prepaid GSM subscribers and the My College Plan for students.

Going forward, RCOM intends to pursue a data-centric strategy with the aim of ensuring that its data business contributes 25 per cent to its revenues over the next five years. To this end, its thrust will be on enhancing wireless broadband penetration. “The key pillars for the execution of our data strategy are leveraging our infrastructure, providing innovative products and solutions in narrowband to broadband, and forming partnerships with application developers and device makers,” states Gurdeep Singh, chief executive officer, RCOM, in the company’s annual report.

Meanwhile, voice will continue to be important to RCOM’s business strategy. The focus will be on extending services to smaller towns and remote areas, and realigning and restructuring its tariffs and service offerings across customer segments to attract high-end users. Further enhancing customer experience by improving network quality and enhancing point-of- sale visibility will only help the company clinch its position in the top slot of the telecom ladder.

 
 
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