Vital Ingredients
What particularly excites the investor is the rapid economic growth and rising consumer spending. Internet services and broadband will remain the mainstay, as broadband penetration in India is likely to improve remarkably in the next five years. With calling rates as low as $0.02 per minute in India, carriers are increasingly looking to value-added services. Multiple opportunities can be explored in the next generation of VAS services, especially in the search, advertising / couponing and entertainment categories, multimedia messaging, WAP, and mobile payments, as a way to differentiate their services and boost revenues.

Rahul Khanna, director, Clearstone Venture Advisors remarks on what could get investors like him interested, "Telecom operators and service providers are likely to attract PE's and institutional investment. On the other hand, a majority of the VC investments are likely to be in the value added space including gaming, user generated content and cross platform services."

IndusView, a Delhi based company that advises multinational companies on business opportunities in India, says that the trend of investment in VAS will now rest on non-voice revenue "In India the take off of non-voice services has not happened as big as elsewhere," explains Rishi Sahai, board director of IndusView. "The time is ripe now for applications and services companies to take risk and explore innovations to lower the ARPUs, mainly based on non-voice applications. Intelligent location based content on mobile similar to a Google product can be the next big killer application. Content for 3G also needs to be developed," he suggests.

The attention-grabbing companies will be those with innovative idea and a unique business model to support its commercial viability. Several early stage investors like Clearstone and JumpStartup Fund are particularly interested in funding opportunities that are 3 to 5 years away from maturity in the telecom sector.

As WiMAX steps in, a whole new ecosystem consisting of WiMAX device manufacturers, content providers and service providers will mushroom, setting the stage for heightened investments.

While investors are excited about the emergence of new technologies like 3G, WiMax and others, they are complaining about the lack of interest shown by Indian companies in developing such core technologies. "Right now we do not see enough Indian companies addressing core technologies for communication. Mobile infrastructure that includes software and middleware are some of the neglected core technologies which we hope will pick up in 2007," adds TC Meenakshisundaram, CFO & executive director of IDG Ventures India, a global family of venture capital funds affiliated to the International Data Group (IDG).

Crystal Ball for 2007
In 2007, a new benchmark may be on the horizon with several private equity players eyeing Hutchisson-Essar. Among the many suitors, Vodafone will submit an independent bid, while others-Reliance Communications, the Ruias and the Hindujas are expected to team up with financial institutions.

Sahai believes this will be remarkable for telecom investments in the country. "Irrespective of which combination clinches the Hutch deal, a lot of private equity money will be pumped in." He estimates, "If Hutch deal wraps up, the PE investment in telecom alone could be around $4 bn -$5bn in 2007. Even in the absence of the Hutch deal a satisfactory investment of at least $2.5 bn can be expected."

Few prominent Indian telcos have decided to de-merge their tower businesses and it's likely some private equity funds would pick up stake eagerly. While Bharti Airtel has decided to de-merge its towers, Reliance Communications will be seeking shareholders' approval for the separation of its tower assets. Besides, American Towers, the US-based company, has also declared its intention to invest in the towers business in India.

2007 is touted to be a year of massive foreign investment inflow as global IT and telecom giants including AMD-SemIndia, Microsoft, Nokia, LG, Ericsson and Cisco have committed investments of over $8 bn in India over the next 3-5 years. Cisco has allocated $100 mn toward VC investments in high-growth, early stage companies based in India. In 2005, Cisco invested $5 mn in Indiagames and Bharti Telesoft and expects to invest another $25-$30 mn over the next few months in companies involved in broadband content and digital media.

For a smooth road ahead, companies and venture firms, both have to ensure that unrealistic expectations do not derail the momentum. For now, from start-ups to the more mature players-everyone is invited to take a bite off the money pie.

Malovika Rao
malovikar@cybermedia.co.in