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Significant Others - MTNL, Aircel aspire for a bigger role

January 15, 2010
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In spite of the hyper competition in the sector today, with companies like Bharti Airtel, Reliance Communications (RCOM), Vodafone Essar and Idea Cellular dominating the market, state incumbent Mahanagar Telephone Nigam Limited (MTNL), with operations in only two circles in the country, has managed to hold its own. Meanwhile, erstwhile regional player Aircel, which earlier had a strong presence only in the Tamil Nadu and Chennai circles, steadily ramped up its operations in the latter half of the past decade to emerge as a strong competitor with a pan-Indian presence. tele.net takes a look at the growth of these two companies...

Set up in 1986 to provide telecom services in the country's business and political capitals –­ Mumbai and Delhi –­ MTNL, a publicly listed company, has shown mixed performance over the past decade. While the company is a dominant player in the fixed line and broadband segments and has established operations overseas in countries like Mauritius and Nepal, it has been unable to cash in on its first-mover advantage in the 3G arena and has been struggling to retain its wireless market share in the face of intense competition from the private players. Its financial performance has also declined.

It is the second largest fixed line and internet service provider in the country, after Bharat Sanchar Nigam Limited (BSNL), despite operating in only two circles. The feather in MTNL's cap is its extensive fixed line subscriber base, which accounts for the bulk of its revenues. A decline in its wireline subscriber base over the past few years notwithstanding (it has lost approximately 300,000 subscribers since March 2007), the company accounts for nearly 10 per cent of the fixed line market with close to 3.5 million subscribers visà-vis operators like Bharti Airtel (the largest private fixed line operator) which has only 1.21 million subscribers in the Delhi and Mumbai circles and 2.96 million subscribers across the country.

Capitalising on its fixed line subscriber base, MTNL launched its wireline broadband products under the brand name Tri Band in January 2005. Today, with a broadband subscriber base of over 0.7 million, the company accounts for approximately 10 per cent of this market. In order to further increase its broadband subscriber base and stem the decline in its fixed line subscriber base, the company is now rolling out Wi-Fi services and has also introduced prepaid broadband services. MTNL has many firsts to its credit in the broadband segment. It was the first company to introduce asymmetric digital subscriber line (ADSL) 2+ technology in the country. It pushed the broadband speed to 1 Mbps and all telecom providers followed in its footsteps. It also recently introduced very high bit rate DSL technology, which is expected to increase data speeds from 1-2 Mbps to 10-20 Mbps. Stealing a march over its rivals, MTNL was the first operator to introduce IPTV services in 2007. It currently has over 5,000 subscribers in Delhi and Mumbai. In the past year, the company has taken several initiatives to strengthen its IPTV business and in collaboration with BSNL, is now rolling out the country's largest IPTV service called MyWay.

MTNL has, however, not been able to capitalise on the wireless revolution in the country. A late entrant in this segment, it offers both CDMA and GSM services. It was the first operator to introduce 3G services in early 2009. However, with a little over 4.5 million subscribers in both the circles, the company trails far behind Bharti Airtel, Vodafone Essar, RCOM and Tata Teleservices, each of which has over 8.5 million subscribers in these circles. As it continues to lose out to the more efficient private operators, it is increasingly being seen as a marginal player.

On the 3G front, while the incumbent  had hoped to capture not only higher revenues but also a new market segment, it has been able to garner only a little over 129,000 subscribers and is now intending to take the franchisee route for its 3G operations. It has invited bids from experienced operators to manage and operate these services. MTNL intends to adopt this model for its Wi-Max operations as well.

Shareholding pattern: 56.25 per cent state owned
Fixed line subscribers: 3.49 million (December 2009)
Mobile subscribers: 4.56 million (December 2009)
Internet subscribers: 2.22 million (September 2009)
Market capitalisation: Rs 51.89 billion (January 2010)
Total income: Rs 52,895.39 million (March 2009)
Delhi and Mumbai

Financially, the company witnessed a decline in its net profits and revenues for a major part of the past decade. Its net income fell from Rs 63,968.55 million in March 2004 to Rs 52,895.39 million in March 2009, and its profit after tax declined from Rs 12,776.77 million to Rs 1,626.15 million for the same period. Higher employee costs following the Pay Commission increase have impacted the company's earnings before interest, tax, depreciation and amortisation (EBITDA) margins. Moreover, a steady decline in its fixed line connections, which are the company's mainstay, has resulted in a decrease in its income from basic services.

The biggest stumbling block for the company is its limited operations in only two circles which already have penetration rates of over 100 per cent. The company, clearly, cannot rival the countrywide presence of most of its competitors. Moreover, with the government owning more than 56 per cent in MTNL, it has to constantly contend with political intervention and a bureaucratic work culture.

These challenges notwithstanding, the company is determined to come out of the woods and has taken several initiatives to combat its declining fixed line subscriber base and compete in the wireless segment through increased focus on IPTV, broadband and 3G services.

Aircel commenced operations in 1999 and became the leading mobile operator in Tamil Nadu within 18 months. In December 2003, it acquired RPG Cellular which had operations in the Chennai circle. The company rapidly established itself as a market leader in the circle, a position it has held ever since.

Originally a part of the Sterling Infotech Group, the company underwent a change in its shareholding pattern in December 2005 with Malaysia-based Maxis Communications buying a 74 per cent stake in Aircel for Rs 44 billion ($1.1 billion). The balance 26 per cent is held by the Reddy family of the Chennai-based Apollo Hospitals. With the financial backing of the Maxis Group, the company embarked on an aggressive outward expansion from 2005 to create a national footprint and expand its subscriber base.

Today, with operations in 18 of the 23 circles and over 31 million subscribers, up from less than 0.41 million subscribers in 2003, the company has clearly come a long way in the past decade, with most of the growth taking place from 2006 onwards when Aircel acquired licences to operate in all 23 circles.

Having obtained the licences, Aircel's first foray was into the eastern circles, where it planned to replicate the success it had achieved in Chennai and Tamil Nadu. It succeeded in garnering a fair number of subscribers in the Assam, Northeast, Orissa, Bihar, West Bengal and Kolkata circles, as well as in Jammu & Kashmir and Himachal Pradesh. In fact, in the Assam and Northeast circles, it quickly emerged as the number one operator in subscriber terms. Today, it has over 3.56 million subscribers in the two circles. This can be attributed to Aircel's strategy of targeting interior locations which did not have access to mobile connectivity.

The company has targeted potential users in all segments –­ business, corporate, youth/students as well as migrant populations from the Northeast, West Bengal, Bihar and Uttar Pradesh, and has come up with innovative tariffs and services. In Delhi, where the company launched operations in March 2009, it rewarded usage by offering lifetime validity on its prepaid mobile services.

Aircel's biggest asset is its strong financial backing. Despite the current economic downturn, it has earmarked a total of $10 billion for investments till 2011 for countrywide capex rollouts. The company intends to complete its nationwide rollout by mid-2010. As a result of its expansion into new circles and its incumbent position in the Tamil Nadu and Chennai circles, Aircel's market share has increased from less than 3 per cent in 2006 to over 4.5 per cent currently.

To expedite network rollout, the company intends to double its current tower portfolio. It is also open to renting or sharing of towers to save on capex. Aircel has opted for a mix of owning and renting towers for its passive infrastructure requirements in Mumbai.

On the technology front, Aircel has shown considerable speed in tapping the opportunities arising from emerging technologies such as Wi-Max and 3G. Following the launch of Wi-Max services in Chennai in October 2006, Aircel expanded its network to cover 44 cities, serving thousands of corporate users. The company believes that this initiative will help increase its revenue and stem churn rates among existing customers owing to better quality services.

The company has also successfully tested 3G in Chennai and is ready to offer the services across the country once the spectrum auctions take place. In fact, Aircel has set aside funds to bid for spectrum at the base price of Rs 20.2 billion.

With India being a significant market for the Maxis Group, accounting for more than half of its total subscriber base, Aircel will continue to play a major part in the group's future plans. Given the growth path the company has been following of late, it is likely to be a strong pan-Indian operator in the days to come.

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