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Krishnan Thiagarajan

The Reliance settlement could well mean a new round of action for Reliance Infocomm.

THE seven-month-long spell of uncertainty that had engulfed the Reliance empire over ownership issues between the two brothers Mukesh and Anil Ambani has finally been amicably resolved. Though the finer details will be worked out over the next few weeks, Reliance Infocomm, representing the telecom business built painstakingly by Mukesh over the past three years, has been formally handed over to Anil as a part of the settlement process.

As Anil takes over the mantle of Reliance Infocomm, it will be interesting to watch how skilfully the company negotiates the challenges that are likely to dominate the domestic telecom arena over the next year. The three likely trends are:

Mobile tariff wars

Competitors, both in the CDMA and GSM mobile space, are likely to track the changes in the top management structure at Reliance Infocomm quite closely.

Though there are indications that there will be no changes in the professional team managing the company, it will be scouting for a new Chief Operating Officer and a few new members on the Board.

It may appear logical to expect Tata Teleservices, the closest rival of Reliance Infocomm in the CDMA space, to launch a tariff war to exploit the opportunity opened by the transition structure in the latter or at least test the speed of decision-making within the new management.

Since the entry of Tata Teleservices in the prepaid segment in November 2004, it has managed to notch up fairly impressive customer addition numbers, averaging over 1 lakh subscribers every month since then (except the month of March), with month-on-month percentage growth being comfortably over 10 per cent.

In absolute terms, however, its customer additions have been only half that of Reliance of over 1.2 million between December and May.

Considering that Tata Teleservices' marketing has been getting stronger over the past few months, it will be in a position to launch an aggressive tariff war aimed at bridging the customer addition gap with its key competitor.

And it has little choice, since its CDMA subscriber base at 1.3 million is sharply lower than Reliance Infocomm's 9.96 million subscribers as of May 2005. In turn, this can have a cascading impact as GSM operators will also have to match these tariffs to stay competitive.

For that matter, the first salvo of the mobile war using bundled offer packages (with cheaper handsets) and zero rental schemes has already been fired in an attempt to woo consumers.

Take, for instance, the recent bundled package by Tata Teleservices offering a CDMA handset by Huawei, a connection and free talk time of Rs 1,500, all for a one-time payment of Rs 1,999.

This effectively means that it is offering a subsidised mobile handset for Rs 499. This package was in response to similar packages offered by Reliance Infocomm and Bharti's Airtel some time ago at slightly higher rates.

Similarly, select mobile operators, including Reliance Infocomm, have also started testing the marketing opportunity with zero rental schemes.

Considering that these competitive trends have worked well in the developed countries such as the US and Europe, in India too, this innovation is bound to find favour among mobile subscribers.

If this mobile tariff war escalates, there will be greater stress on Reliance Infocomm's operating margins, which were at 17 per cent for the year ended March 31, 2005 compared to Bharti Tele-Ventures healthy margins of 37 per cent.

Unless the data and other value-added services pick up sharply or a new line of business opportunity such as broadband opens up in a big way, the pressure on margins for Reliance Infocomm may continue. The strategic response from the new management will be watched closely.

The IPO rush/Consolidation

Since the ownership structure is now clear within the Reliance fold, plans for an initial public offering are already in the works for the end of this year. This is bound to put pressure on other mobile players such as Hutch to reconsider its plans for an IPO, that it had recently deferred for the second half of this year.

The lack of clarity over changes in the foreign shareholding rules, even as the FDI limits were raised from 49 per cent to 74 per cent, had pushed the IPO deadline.

In addition, the delay was also on account of breakdown in the deal with Aircel, the mobile operator in Chennai and Tamil Nadu, a few months ago, on account of regulatory issues.

Since the Communications Minister has indicated recently that the guidelines on the hike in FDI investment cap on telecom services to 74 per cent are expected to come out soon, Hutch may push through its IPO faster than expected.

Similarly, consolidation in the GSM mobile space has once again picked up momentum. The GSM players, who have been on a sell-out mode over the past year, have gone through a rough ride. While Aircel stake sale fell through with Hutch, Cingular Wireless 33 per cent equity stake held in Idea Cellular that was to be bought by Singapore Technologies Telemedia and Telekom Malaysia combine was called off recently on regulatory glitches.

However, there is no dearth of bidders for these GSM operators. For instance, BPL Mobile has been receiving a spate of unsolicited offers in the past few months and sooner or later, consolidation activity is slated to pick up again.

Every single deal by domestic players such as Bharti or Hutch can change the mobile subscriber sweepstakes in a big way and put greater competitive pressure on Reliance Infocomm.

Regulatory battles

The mettle of the new management will be tested in the battle over allocation of additional spectrum to both GSM and CDMA camps. As the GSM camp has mounted pressure on the government questioning the spectral efficiency of CDMA and allocation based on subscriber numbers, the outcome of this battle will be quite significant for Reliance.

If the additional spectrum is allotted as recommended by the telecom regulator, Reliance will be in a position to launch 3G services and gain a head start over its peers in the 3G arena.

At the same time, the controversy over alleged illegal call routing done by Reliance Infocomm refuses to die down completely. In the months ahead, there will be greater pressure on the new management to settle this controversy with the Department and Telecommunications and the state-owned Bharat Sanchar Nigam.

maverick@thehindu.co.in

Picture by K. Ananthan

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