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Investment is the buzzword in the telecom industry this fall. And it comes as no surprise considering the fact that almost all big service providers have positioned themselves directly in the eye of a massive evolutionary storm spurred by the advent of new technologies. The Tata Group is no exception, it has recently announced $26 bn investment across the domains they operate in. Interestingly, investment in their telecom services has been at a very slow pace. The group would invest over $2 bn this year in its telecom services. But what is its significance for the Tatas?

Tatas have been quite laidback, compared to thier peers when it comes to telecom. But recently with VSNL's global acquisitions and TTSL and TTML's increased national footprint, telecom has become the key of their overall growth strategy.

Telephony Transformation
The telecom industry has seen steep price falls since deregulation. It is also undergoing a profound technological shift. Keeping this in mind, TTSL's total investment in telecom domain would be Rs 15,000 crore by the year 2007. It has already spent Rs 8,000 crore and the remaining would be spent in another one year in expanding capacity and network.  It is targeting 18 mn customers by this fiscal to capture 20% market share. The focus is to consolidate its position and provide coverage across length and breadth of the country. It will add 1,500 new towns this year.

TTSL will roll out services in new towns, especially in second and third tier towns with a focus on rural penetration, targeting first time users, introducing variety of handsets, products and services for various segments.

The new focus areas would be semi-urban and rural areas, as consumption trends and income growth of the populace in these areas show a higher splurge compared to their urban counterparts.

Similarly, TTML too is targeting around three million customers by end of this fiscal, an addition of another million subscribers. At present, it offers services in 171 towns and would add 45 new towns this year. It invested around Rs 500 crore last year and would invest same amount this year as well.

TTSL and TTML have put themselves on the transformation stage. There have been three areas of transformation for them. First, there's been transformation of the leadership of the company. Daryl Green and Charles Antony have been appointed as new chief executives to turn around the fortunes of TTSL and TTML, respectively. Second, there has been clear transformation in the balance sheets of the companies. TTSL generated revenue of Rs 2,575 crore in FY 2005-06 as against Rs 1,347 crore in FY 2004-05, a growth of 91% while TTML made significant progress on its turnaround plan. The company grew by 31.2% and clocked revenue of Rs 1,097 crore, as against Rs 836 crore last year. The company posted a net loss of Rs 493 crore, down 6.63 %, as against Rs 528 crore last year. The good financial performance gave both the companies to do the third thing-transform business models.

But TTSL and TTML are caught between a rock and a hard place. They are slowly becoming boring utilities with few real growth prospects yet urge companies not to do anything too radical, such as a big acquisition, that might make it a riskier investment proposition.

The core market of both the companies is not getting any easier. It is facing increasing competition in the domestic fixed line and wireless business from state owned MTNL and other private players like Bharti and Reliance.

The important thing to understand about investing in telecom is that it can be a miler coaster ride. Sometimes, total returns are way up; other times, they're in the tank. In this new world, the question for carriers is whether the services they have traditionally offered will cease to pack a margin punch and whether, if so, they can move into services that do have real clout. Hence, it becomes imperative for both the companies to focus on its core strengths and view the long-term strategy to avoid debacle, which global operators have been through in the past.

New Bandwidth Baron
VSNL continues to roll the dice, as it has now completely changed its focus from being a mere domestic operator to become a global giant. The company bets that global markets will be a smooth sail than the Indian market has lately been. It expects that it is a multinational in making and next year onwards, major chunk of its revenue would come from international market.

The company is riding high on its global acquisitions-Tyco and Teleglobe. These acquisitions have given company a new lease of life with bandwidth capacity in abundance. It now plans to invest around Rs 2,700 crore in two terabit cable systems. The first one is a trans-continental cable system linking India-Middle East- Europe, which is expected to be completed by mid -2008. The second one is an intra Asia cable system linking Singapore, Hong Kong and Japan, expected to be ready by the end of 2007. These systems will link with other existing and proposed networks in the region and also interconnect with VSNL's global network. The cables will be built in partnership with other major carriers in the region.

VSNL has already invested nearly Rs 1,600 crore in the last 30 months in submarine cables, including the Tata Indicom Cable, TGN acquisition and other cable investments. VSNL has been upgrading its networks to meet the increasing demand, and now plans to upgrade the TGN-Pacific network to 1 terabit (1000 Gbps) from the present capacity of 640 Gbps.

As any growing organization should have, VSNL also has an ongoing investment plan to support and grow its various businesses. The company is also investing substantially in building out its broadband network in all major cities in India.

As this suggests, the investment that VSNL has made in its global network is focused on infrastructure rather than services. There is a glut of bandwidth to lease or acquire under appropriate market circumstances. The precipitous price falls in the bandwidth market mean that it is cheaper for VSNL to lease capacity rather than bother about buying and operating a network even if it that network were to be acquired at zero cost. Price stability is not looking very realistic in the market than it was couple of years back. Customers are willing to pay a price for those things that are unique.

Hence, though the coming days look glorious relying on excess bandwidth could turn out too costly for VSNL. It needs to keep an eye on global bandwidth prices and also on players like Bharti and Reliance, as competition would be cut throat in the coming days.

All the three telecom companies of Tata Group-TTSL, TTML and VSNL have closely aligned their business operations, strategies, and share certain infrastructure, which include billing platform and intelligent network. All the three companies benefits from the goodwill associated with Tata Indicom brand, which is used for marketing its products and services. The company's infrastructure sharing agreement jointly negotiates with equipment suppliers and service providers and benefit from economies of scale. 

The investments made by Tata Group in their telecom venture are in line with what global operators did in past. But it's always returns on these investments that makes all the difference. Operators like BT suffered and were in huge debt couple of years back due to lack of right business model. Therefore strategic investments are the need of the hour. If Tata's strategy of investment is wrong, it represents a loss of billions of dollars, perhaps more than that. If it is right, it is the future of this company for the next century.

Rahul Gupta
rahulg@cybermedia.co.in