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India Market Holds Promise

We would like to welcome all of our subscribers to the first issue of the India Weekly Telecom News (IWTN). IWTN will keep you up-to-date on the latest developments in India's growing telecommunications market. It will cover regulatory issues, market trends, network deployments, new services, contract awards, and much more. IWTN's broad coverage of the Indian telecom market will provide decision makers with the information necessary to make their business grow. We hope you enjoy Information Gatekeepers' India Weekly Telecom News.

Sincerely,The Editors

Some of the issues covered this week include:

• The debate to raise the foreign direct investment cap from 49% to 74% • Development of mobile games by Indian developers• Launch of prepaid services by Reliance• Latest row between FLAG and VSNL• Financial results posted by Bharti, Sify, and VSNL

• Coverage of Morgan Stanley's Indian operator $4.4 billion capex forecast • LG and Samsung discover the Indian mobile market is worth investment

REGULATORS

Increasing FDI component in TelecomThe Union Cabinet has decided to defer the decision regarding proposed

increase in FDI (foreign direct investment) limit in the telecom sector, from the present 49% to 74%. This decision has been a disappointment for cellular operators, since this growing sector is in need of funds. While members of The Association of Basic Telecom Operators abstained from commenting on the issue, Bharti group chairman Sunil Mittal said that while the decision would not impact Bharti, it would help if the FDI cap was raised. Less than a month ago, the government had announced raising the foreign investment cap as a part of

© 2004 Information Gatekeepers, Inc. 1

package for mobile operators, consequent to which, the COAI (Cellular Operators Association of India) had withdrawn its case against government allowing basic operators entry into mobility.

In a separate story, The Department of Telecom (DoT), in a recommendation to the Cabinet has proposed that it be a mandatory requirement for basic telecom companies and cellular operators, to issue equity afresh if they seek foreign funds beyond the 49% FDI cap. According to DoT, this step would ensure that the FDI component would always be lesser than the domestic holding in the telecom companies, even if the FDI cap were raised to 74%. While relaxing the FDI cap will get the funding for the telecom industry, the additional rider would address the security concerns, since the domestic holding would be higher than the FDI. Raising the FDI cap would be a cause of concern for Indian players like BSNL, Tata and Reliance, since their competitors like Bharti and Hutchison would be able to access additional funds.

Telecom service providers allowed to set tariffsThe Telecom Regulatory Authority of India (TRAI) has allowed telecom

operators to announce tariffs without getting prior approval, provided they are compliant with the interconnect norms. Operators will be expected to file their new tariffs with TRAI within 7 days of implementation. Cellular operators will be required to allow pre-paid mobile users to receive calls and SMS within the validity period, even if the talk time on the pre-paid card is exhausted. All cellular operators will carry forward the unused balance of pre-paid subscribers within the grace period.

Call centers for the Indian farmerThe Indian government hopes to help the farmers in India through

technology and telecommunication. With an aim to enhance the knowledge of the government and farmers equally, the Indian government plans to set up 13 Kisan call centers in the country. The call centers will serve as an information pool which farmers can tap into to get information on agriculture. The farmer would have to dial a four-digit toll-free number that would connect him to the nearest call center. Information would be provided in the local language. The call centers would be run by agricultural experts and will employ people from the local community. The project is expected to be launched sometime this month and is expected to cost between $1.3-1.5 million a month.

Dedicated body to monitor telecom security?The Indian government deferred its decision to raise the limit of foreign

direct investment in telecom service companies from 49% to 74% in the interest of national security. Intelligence agencies have asked the government to set up a body that will be exclusively engaged in monitoring security issues in the telecom sector. The Intelligence Bureau has stated that telecommunication, which plays a vital role in the security of the nation, needs to be protected. It felt that the total foreign equity in a telecom services company should be capped at


49%, whether it was through foreign direct investment or foreign institutional investors.

Exclusion of non- core revenueThe Telecom Regulatory Authority of India (TRAI) is considering exclusion

of non-telecom revenues from the total revenues for the purpose of annual license fee calculation for telecom operators. TRAI has communicated with the Department of Telecom (DoT) in this regard. The cellular and basic operators have joined hands on this issue and are keen to meet the Communication Minister Arun Shourie to discuss the issue further.The Cellular Operator’s Association of India (COAI) has said that the exclusion of non-telecom revenues would enable further reduction in tariffs. Presently, the operators pay between 8-12% of their total annual revenues as license fee to the government.

WIRELESS

Airtel launches SMS kiosks for the publicAirTel will set up 500 SMS kiosks in Bangalore. The kiosks which will be

branded as Airtel ExpressSMS, will allow people in the city to send messages without owning a mobile phone. The service will be similar to a coin operated public telephone. People can send messages, locally and nationally, for just 2 cents a message. A message to an international mobile number will cost 6 cents. Users will receive a confirmation when a message is delivered. Incase the message is not delivered the payment will be refunded to the customer. Users of Airtel ExpressSMS can also receive messages.

Soon dual mode phones for IndiaWith two competing technologies in play in the Indian cellular market –

CDMA and GSM – roaming subscribers cannot switch between networks which operate on different technologies. For instance a Reliance subscriber (based on CDMA technology) cannot switch to the Hutch network (GSM platform). To bridge the gap between the two technologies, the CEO of Qualcomm believes that India will soon have dual mode phones. The handsets will allow users to connect to both CDMA and GSM based networks, without changing the SIM card. The phones will be available from Samsung. Qualcomm has developed the chip that will support both technologies. According to market sources, Motorola is in the process of developing a phone that can be used as a fixed line, mobile phone and a device to connect to the Internet. The product is likely to hit the Indian market by the middle of this year.

$2.8 billion expansion plans for BSNLBharat Sanchar Nigam Ltd (BSNL) is looking at expanding its network with

an investment of $2.8 billion during 2004-05. The company will expand its capacity of GSM and CDMA connections. BSNL is targeting to increase its GSM capacity to accommodate 7-8 million additional connections, CDMA by 1.8 million


and fixed line capacity by 1.5 million connections. The company will also look at expanding its broadband services, which is now available only in Bangalore, across 20 cities

Gaming – the latest rage in IndiaMobile gaming is all set to become a lucrative business in India this year.

The country is becoming the new creative hub for creating mobile games. Gaming companies are developing games around Indian themes – Bollywood, politics, cricket, Hinduism, Indian mythology, etc. Alok Kejriwal, the owner of a Mumbai-based gaming company, made $10 million last year selling his mobile games to the world. He develops around 20 games a month for companies like MSN.com, yahoo.com and China Mobile. Analysts have projected that the Indian wireless market will grow to 50 million users over the next three years. According to Hutch, which has almost 100 games for its mobile subscribers, after ring tones, games are the next big revenue earners. Airtel offers its users around 50 games.

Tel.Me. launches high-end handsets Tel.Me., an Austrian mobile handset manufacturer, launched two handset

models targeted at the affluent Indian who views a mobile phone as a ‘fashion statement’. The handsets will cost between $570-680. The company plans to sell about 100,000 phones this year, and hopes to garner a 20% market share in the premium segment. Although the mobile handset market is very price sensitive with $50 phones available, Tel.Me. is confident of carving a niche for itself in the market. The company believes that service providers will soon start subsidizing high-end phones.

Mobile Phones to have BroadbandGSM mobile operators are evaluating upgrade of their networks to EDGE,

also called 3G. This technology enables Internet connectivity 3 times faster than the 2.5 g GPRS. While Idea cellular would launch EDGE service in Delhi, this week, Bharti would upgrade by middle of 2004. Upgrading to EDGE enables mobile service operators to maximize the frequency spectrum allotted to them, while it enables subscribers to connect to enterprise applications. EDGE also helps improve productivity of mobile workers by getting access to the Internet, Intranet, and emails.

Hoax SMS doing the rounds on Reliance’s networkA false and misleading SMS was received by around 5000 Reliance

mobile subscribers in Gujarat recently. The message read “Reliance celebrates its anniversary by giving a special offer. Just forward this message to five Reliance India Mobile (customers) and make 100 free calls.” Officials from Reliance stated that the message was a hoax and the miscreants responsible for it were probably trying to confuse Reliance subscribers

In a related story, SMS pranksters seem to have hit the Hutch network now. A message promising free talk time if a certain message is forwarded to five


more persons is prank that has been doing its rounds with the Hutch subscribers. The company has said that this is a just a prank, and Hutch has nothing to do with this. A similar case of ‘prank SMS’ had occurred with Reliance subscribers also.

Reliance to soon launch pre-paid servicesReliance Infocomm has tied up with Comverse Technologies to offer pre-

paid services in India. The service will be launched in February. The company had recently withdrawn its popular “Rs 501” post-paid scheme. For its launch, Reliance will bundle its pre-paid cards with Motorola’s CDMA based handsets. Later on, Nokia and Samsung handsets may be offered. The denominations of the pre-paid cards are likely to range between $4.40 and $22. The company has plans to open pre-paid recharging centers across the country. Later on, customers would be able to re-charge their cards over their telephone using their credit or debit cards.

SATELLITE

Hughes launches new satellite broadbandHughes Network Systems India, a satellite broadband equipment provider,

has introduced DW6000, its latest broadband terminal, under the brand name DirecWay. According to Mr Nagesh Singh of Hughes Escorts Communications Limited (HECL), the minimum bandwidth offered is 256 kbps, under the new service and Hughes has the capability to offer bandwidth in multiple mbps to corporates through the DirecWay satellite broadband. The service plans for corporates involve offering bandwidth costs based on the company's requirements. The new terminal will provide access to Internet, Intranet and an Ethernet output for easier connectivity to LAN networks and satellite-based service activation along with the previously offered features like content delivery, digital media streaming, multicasting and distance learning.

BUSINESS

Flag lashes out against VSNLThe CEO of Flag Telecom Mr. Gallagher has lashed out at VSNL’s

monopolistic control, despite not being a government body any longer. According to Mr. Gallagher, VSNL is restricting capacity available at the Indian landing station at Mumbai. Despite a huge demand for bandwidth, the supply has been artificially clipped by VSNL in order to keep competition in check and keep the prices at a high level. Flag's main competitor at the Mumbai landing point, is Sea-Me-We-3 (Southeast Asia-Middle East-Western Europe 3), a submarine cable which is owned by a consortium of about 100 carriers, which also includes VSNL. Flag has alleged that its capacity is being restricted to help its rival; Flag had to refuse the requests for capacity from more than 20 carriers due to the bottleneck imposed by VSNL.


BSNL Cellone orders go to Motorola, EricssonThe network equipment for the GSM based cellular service of BSNL,

called Cellone, will be procured from Motorola and Ericsson. Ericsson would be supplying for the northern and eastern regions and Motorola for the southern region. The western region details are still being worked out. The total order has been placed for two million lines and the capacity expansion would be around 50% for the south and 50% for east and north. BSNL had floated a tender for additional capacity in September 2003, and these orders are a consequence of that tender. Earlier Lucent was the equipment supplier for the western region, but now has stopped manufacturing GSM equipment.

Ericsson expects $400mn order from BhartiAccording to industry sources, Ericsson is likely to receive an order worth

between $300-400 million from Bharti. The deal is likely to be announced in a few weeks. The company had received a $70 million order from Bharti in 2001 for telecom networking equipment.

Masterline and Qtek 2020 in discussion over distribution rights in IndiaQtek 2020 is in discussions with Chandigarh-based Masterline to

distribute its Windows-powered GSM mobile pocket PC in India. Qtek 2020 is one of the largest telecom logistics groups based in Scandinavia. Masterline, a leading supplier of telecom solutions and phone cards in India, has over 55% share of the recharge cards market in India.

Qtek 2020 could either enter into a joint venture agreement with Masterline or appoint the latter as its exclusive distributor for its products in India. If the companies were to enter into a JV, the foreign partner is likely to hold 70% of the equity. The phone set is likely to be retailed a little below $1320. The company has projected that 15,000 – 20,000 units would be offered in 2004-05. Revenues are estimated to be $22 million.

The managing director of Masterline believes that there will be a decline in revenues through voice and SMS. Soon the new revenue stream would be data services via Wi-Fi and GPRS through pocket PCs.

VSNL to buy Internet and DSL businesses of DishnetVidesh Sanchar Nigam Ltd (VSNL) plans to buy the Internet and digital

subscriber line (DSL) businesses of Dishnet for $68 million. The acquisition would help the Tatas (owners of VSNL) to diversify into the wireless data transmission business and the company would also get an edge over its competitors in the broadband segment. Dishnet has 36,000 DSL subscribers making it the largest DSL operator in India. It has 150,000 dial-up Internet subscribers. Currently Bharti is the only telecom operator providing DSL services extensively. State-owned MTNL and BSNL have big plans of offering DSL services. Dishnet plans to enter the mobile broadband market using CDMA-based technology specially designed for data traffic. The company’s revenues are estimated to be $40 million in this financial year. By the next financial year, revenues are expected to increase over 30% to $53 million.


Tata Tele may acquire HFCL Infotel’s circle in PunjabAccording to market sources, HFCL Infotel’s circle in Punjab, offering

mobile, wire line and fixed wireless services, may be acquired by Tata Teleservices. Although neither company confirmed the news, Tata Teleservices did state that they had carried out a due diligence to assess the value of the company. Whether Tata Tele will absorb HFCL Infotel’s $132 million debt could be the deciding factor of the deal going through.85% of HFCL Infotel’s stake is held by Himachal Futuristic Communications Ltd, 10% is held by the public and the balance is held by banks. The company’s average revenue per user of $26 was well above the industry average of $9.

GTL to set up a 100% subsidiary to cater to MotorolaThe GTL board is considering setting up a 100% subsidiary to cater

exclusively to the cellular infrastructure projects of Motorola India Private Ltd. The services would include managed network services, system engineering, project management, technical resource pool management and training. GTL’s board could allow Motorola to acquire a 49% stake in the new subsidiary.

Potential ATT wireless sale could impact IdeaAT&T Wireless is looking for a buyer, according to international media

reports. AT&T Wireless has split from AT&T, its parent company in July 2001. In India, AT&T has a 33% stake in Idea Cellular, the Tatas and Birlas hold a major portion of the remaining stake and AIG holds about 2% stake. AT&T Wireless has exited from BPL Cellular where it had 49% stake, a few weeks back. There are diverse views in the industry regarding the impact of potential sale of AT&T Wireless, on Idea Cellular. Analysts are of the opinion that since the company has been looking to exit from this investment, it is unlikely to have an immediate impact on Idea; the Tatas or the Birlas could possibly buy out the stake. Interestingly, Idea Cellular is planning to go public soon.

New Internet exchange in ChennaiThe National Internet Exchange of India (NIXI) will start the Chennai node

by February 2004, to be followed by activation of the Kolkata node soon. Delhi and Mumbai nodes have been operational since last few months, and already have ISPs registered with them. The NIXI was set up as an initiative of the ISP Association of India and the Dept of Information Technology, Ministry of Communications and IT in September 2003. The primary aim of NIXI is to connect ISPs across India at common points, and enable exchange of domestic Internet traffic while ensuring that the traffic is routed within India. Routing local traffic domestically helps the ISPs in reducing costs upto 15%, along with lower bandwidth consumption.


FINANCIAL NEWS

Shyam gets Hexacom stakeShyam Telecom will be raising its stake in GSM mobile firm Hexacom

India to 67.5%. This will be done by buying a stake held by TIW (Telesystem International Wireless) Canada. Shyam will buy the TIW Inc's 27.5% stake in Hexacom, for $22.5 million. Shyam Telecom manufactures telecom equipment and provides basic phone services in the state of Rajasthan. It also provides GSM mobile services to about 225,000 people in the state, through Hexacom, where its main competitors are Bharat Sanchar Nigam Limited (BSNL) and Hutchison Essar. Telecommunications Consultants India Ltd. owns 30 per cent share in Hexacom, while the remaining 2.5% is owned by a Kuwaiti firm. In December Bharti had agreed to buy the stake, but being unlisted, the main shareholders of Hexacom had the right to match any offer, which was exercised by Shyam.

Idea buys Escotel for $250 MillionIdea Cellular has bought out Escotel Mobile Communications for $250

million. The cash transaction in the deal is of about $60 million and $190 million approximately is in the form of debt. This transaction includes more than 825,000 subscribers, across six telecom circles and would take Idea Cellular’s subscriber base to over 3 million across 11 circles, from the present 2.24 million in five circles. The Idea network will now cover 65% of the total telecom market, and its market share will go up from 10% to 15%. This step will also enable Idea to have a national footprint, like its competitors, Bharti, BSNL, Reliance and Hutch. Analysts feel that setting up a new network after acquiring the unified license would have been a cheaper investment for Idea, but acquiring a substantial subscriber base would have needed a heavier investment. This acquisition enables Idea to get 800,000 subscribers right away.

Bharti posts healthy Q3 resultsBharti Tele-Ventures, a leading Indian telecom services company offering

cellular, basic and long distance services, has reported a net profit of $35.5 million, while total revenues increased to $279 million for the quarter ended December 2003. This was far ahead of the results posted in the quarter ended December 2002 when the company reported a net loss of $1.5 million and revenues of $186 million. For the nine-month period (April to December 2003), Bharti recorded a profit of $63 million compared to a loss of $44.8 million during the same period in the previous year. The company’s subscriber base stood at 6.07 million at the end of 2003, up from 3.09 million the previous year. Bharti, 16% of which is owned by Singapore Telecommunications Ltd, plans to spend another $50 million on capacity expansion taking its total investments on network expansion to over $400 million by the end of March this year.


A large IPO to be filed by Idea CellularIdea Cellular would file for an IPO with the Securities and Exchange Board

of India (SEBI), and the issue would be managed by JM Morgan Stanley and DSP Merrill Lynch. The size of the issue would be in the range of $100 – $250 million. The equity raised through the IPO would be used to expand operations and also for funding potential acquisitions. Presently the company provides cellular services in Maharashtra, Gujarat, Andhra Pradesh, Madhya Pradesh and Delhi, where it has a subscriber base of more than 2.2 million.

Sify registers profit in Q3Sify Limited, an Internet, network and e-Commerce Services Company in

India, has announced its third quarter results for the period ended December 31st 2003. The sales revenue during the quarter was $15.62 million; 37% higher than the same quarter last year. The cash profit registered was $0.97million during the quarter, in contrast to the $3.1 million cash loss in the same quarter last year.

Tata Teleservices net loss increases in Q3Tata Teleservices, a fixed line telecom service company, reported a net

loss of $15.25 million for the quarter ending December 31, 2003. The net loss recorded in the corresponding period in the previous year was $4.77 million. The company’s capital expenditure on its CDMA services caused an increase in interest and depreciation charges resulting in a higher net loss. Income from operations rose 72.5%, from $20.8 million in the third quarter of 2002 to $35.88 million. Operating profit, excluding other income, rose from $3.58 million to $4 million. Marketing and business promotion expenses increased from $0.35 million to $3.6 million, which was caused by the company’s promotional expenses on its CDMA launch in Maharashtra.

Data Access likely to announce an IPO soonData Access, a private international long distance telecom player, is likely

to announce an initial public offer in the next couple of weeks. The size of the public offer would be between $33 – 44 million. Pacific Convergence Corporation Mauritius has a 24% stake in the company, while the balance 76% is owned by Indian promoters via SPA Limited and Pacific Net Invest. The promoters will issue fresh shares rather than offload their existing stake. According to market sources, the money raised would fund a 300,000 seat business process outsourcing project and the undersea cable between India and the UAE.

VSNL’s Q3 net profit rises 102%Tata-owned Videsh Sanchar Nigam Ltd (VSNL) reported that its net profits

for the third quarter ending December 31, 2003 rose over 120% to $40 million. The company recorded a net profit of $18 million for the corresponding period in the previous year. The increase was mainly due to the sale of its entire investment in Inmarsat Ventures.


VSNL’s net sales fell 23%, from $220 million in the third quarter of 2002 to $170 million in the quarter under review. The company’s total revenues fell from $230 million to $181 million

MARKET INTELLIGENCE

Investments in Asia-Pacific telecom to grow 9% in 2004According to Gartner, for the first time in five years investments in Asia-

Pacific telecommunications will grow by 9% in 2004. The growth however is still 11% lower than investments made in 1999. According to Gartner estimates, investments last year stood at $33.8 billion.

Telecom service providers are beginning to shift focus from cost containment to growth. There will be an increased spending on technologies that will bring voice and data on the same network. Investments will support services such as high-speed data and video services. Countries like China and India will see investments going directly into Next Generation networks rather than into the older switched infrastructure.

Gartner predicts that the region will add 125 million fixed and mobile connections this year, taking the total subscriber base to 1.1 billion. Revenue growth by the end of 2004 is estimated to reach US$ 17.1 billion - about 7% higher than 2003.

Gartner is betting heavily on China. It expects China to become the largest digital subscriber line market this year. It has estimated that more than 70 million handsets will be sold in the country in 2004 resulting in a Chinese handset manufacturer making it to the list of top-10 global phone makers.

Samsung, LG to target IndiaSamsung and LG, ranked third and fifth largest mobile phone makers in

the world, consider India to be a key market, similar to China. The number of mobile phone subscribers is expected to cross 125 million by end of 2006, some market watchers believe that by 2009 India would overtake the Chinese mobile service sector. Since the Korean domestic market is rather saturated, Samsung and LG are targeting the Indian market. Korea uses CDMA technology developed by Qualcomm Inc. While the two companies are sharpening their CDMA technology, they are also investing heavily in the GSM technology to be able to target the Indian market. LG has a 35% market share and Samsung 32% in the CDMA phones segment. LG is slated to intensify its marketing in India to consolidate its position. In the GSM segment, Samsung has a 17% share while LG is yet to carve a place.

Telecom operators to invest $4.4 bn in 2004According to a report by Morgan Stanley, telecom operators in India are

expected to invest $4.39 billion on capital expenditure in the next financial year (Apr 2004 – Mar 2005). Of this, 10% will be spent on wire line infrastructure, 39% on GSM based wireless equipment, 33% on CDMA-based infrastructure and the balance 18% on broadband infrastructure. State-owned Bharat Sanchar Nigam is


expected to be the biggest investor followed by Reliance Infocomm, Bharti and the Tatas. Subscribers are expected to spend $1.69 billion on handsets in the next financial year of which 53% will be spent on GSM phones and the balance on CDMA-based handsets. The report states that equipment providers are expected to earn $19.4 billion between 2004 and 2008 and handset makers could make $8.4 billion from the Indian market. During the same period, capex in wire line is expected to grow 7.5%. GSM-based wireless capex will decline at 5.2%, while capex on CDMA-based infrastructure will declines at 7.9%.

Four majors will survive shakeout in telecom According to Gartner’s forecasts, the only four big cellular groups to

survive through 2004 will be Bharti, Tata, Reliance and BSNL. There would either be mergers and acquisitions in store for the remaining operations or they would survive as niche market players. The cellular connections would show 96% growth over 2003 and could reach 56 million by the end of 2004. The cellular connections would outnumber the fixed phone lines. The unified licensing regime would catalyze this consolidation and the government would support industry’s demand to increase the FDI (foreign direct investment) cap to 74% from the present 49% according to Gartner analysts.


india market holds promise · web viewtata-owned videsh sanchar nigam ltd (vsnl) reported that its...

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