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Anil Kumar
Will Reliance Spur Competition Or Consolidation?
Mukesh Ambani’s entry into the telecom sector will make rivals edgy.

The competitive balance in India’s telecom industry is about to be disrupted. Reliance Industries, headed by Chairman and Managing Director Mukesh Ambani, has bought a 95% stake in a firm that recently won a broadband wireless licence. That deal was made possible by the recent cancellation of a non-compete pact between Ambani and his brother, Anil, whose company is also active in telecoms.

Reliance Industries (RIL) bought into Infotel Broadband Services only hours after it emerged as the sole winner of a pan-India broadband-wireless-access (BWA) licence, paying $1 billion, in addition to the $2.8 billion that Infotel will pay the government for its licence. Reliance has estimated its total investment in telecom services at $5 billion, including infrastructure and rollout costs.

The build-up to Ambani’s telecom foray had all the ingredients of family drama. On May 7, the Supreme Court delivered its judgement in a long-running Ambani vs Ambani feud. Mukesh and Anil, two sons of the late Dhirubhai Ambani, have been warring since the patriarch’s demise in 2002. The brothers parted ways in 2006 with a settlement mediated by KV Kamath, then ICICI Bank’s managing director and now its Non-Executive Chairman. That settlement included a non-compete clause that barred the brothers from encroaching on each other’s turf. Anil’s territory included financial services and telecoms, while Mukesh retained crude-oil refining and exploration.

While the non-compete agreement has been respected, each of the battling brothers—the richest pair in the world—has been building roadblocks to thwart the other’s plans. In the best-known instance, Mukesh’s Reliance Industries thwarted an attempt by the Anil Dhirubhai Ambani (ADA) group’s Reliance Communications (RCOM) to take over MTN of South Africa. The Supreme Court ruling in May, which involved the quantity and price at which natural gas was to be supplied by Reliance Industries to Anil’s power ventures, favoured Mukesh. It came with a rider, however: The court asked the two brothers to go back to the negotiating table.

On May 23, in an unexpected move, peace between the two parties was officially declared. The non-compete arrangements were cancelled.

What will the entry of Reliance mean to the telecom market?

“We can certainly expect RIL’s entry to create a significant disruption in the Indian telecom industry,” says Rajesh Jain, Managing Director of Netcore Solutions, a mobile-and-messaging-services company. “It is going to be very unsettling for the incumbents and very good for consumers. Reliance is known for innovations and very attractive price points. It will certainly introduce a significant dimension of competition in the marketplace.”

Alok Shende, Principal Analyst at the marketing and consulting firm Ascentius Consulting, feels that the Reliance plan was no overnight strategy. “This is clearly a well-crafted entry,” he says, “and has been in the pipeline much before the brothers smoked the peace pipe.”

A Good Strategy

The Reliance deal is a game-changer, everyone agrees, and will likely blur the distinction between broadband and telecom.

“Even if regulations do not allow voice on BWA,” Jain says, “RIL will get around it. I don’t think RIL has got into this only for data.”

The Reliance deal is a game-changer and will likely blur the distinction between broadband and telecom.
Shende says that it is typical of Reliance to have “a very strong vertical-integration strategy” in every one of its businesses.

“Having control over the complete vertical chain gives it a monopolistic power in that sector,” he says.

But data is where Jain is putting his money. “Voice is being commoditised in India,” he explains. “There is a huge potential to offer a wide range of next-generation data services through a variety of connected devices. There may not necessarily be one killer application—the thickness of the pipe itself through which a host of innovative data services can be delivered through devices other than PCs and mobiles will be the key. The disruptive, blue-ocean opportunities are in high-speed broadband wireless access.”

Working out the technology choices is the first step, but there could be some complicating factors. For one, the US-based Qualcomm has won four BWA circles, including the important Delhi and Mumbai markets. Its obvious aim is to promote its long term evolution (LTE) technology.

According to the newspaper DNA, “While supporters of WiMax, including Samsung, Intel and Motorola, worry about the implications of Qualcomm’s win, the Chinese equipment vendors too are very worried. They fear that they are not in Qualcomm’s good books, as they cater to both LTE and WiMax technologies, unlike the European vendors such as Nokia Siemens Networks and Ericsson, who only support LTE. At stake is around $3 billion worth of 3G equipment and installation contracts, besides around $2 billion worth of 4G equipment contracts.”

Reliance has indicated that it will opt for LTE. As his next telecom move, Shende says, Ambani may attempt to buy the ADA Group’s RCOM, among other candidates. RCOM received board approval on June 6 to sell a 26% stake to a “strategic investor.”

“It is a foregone conclusion that, on the voice front, Reliance will go in for a big-bang acquisition of a 2G-3G company,” Shende says. “Three likely targets are Aircel (owned by Maxis of Malaysia), Idea (owned by Aditya Birla Group) and RCOM.”

K Raman, Head of Information Communications, Media and Education for the Tata Strategic Management Group, a consulting firm, also considers it likely that Reliance Industries soon will find a way to enter voice-based telecom services.

“I can’t think of even one player worldwide who has successfully built an entire business from only the new-generation technology,” he says. “Typically telecom operators have a mix of different technologies. But that in no way means that a new, unique model cannot emerge from India...I wouldn’t be at all surprised if Reliance goes in for another acquisition of a different type of licence holder.”

Indian telephone rates have reached one cent a minute and are still falling, yet the 3G auction in May raised $15 billion and the BWA auction netted $8 billion. Together, that’s around three times what had been predicted.

Despite sceptical analysts, however, valuations of telecom companies are still increasing: RCOM has gained nearly 200% during the past 52 weeks.

New York Times News Service

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