Reliance Infocomm: Cell Shock
India Today
December 30, 2002
Vivek Law
The much contested launch of Reliance India Mobile service promises to shake the industry, cut tariffs and test the Ambanis' ability to succeed against odds
It started three years ago as just another bedtime conversation between a father and his elder son. One night, during the customary 30-minute chat with his father, the late Dhirubhai Ambani, before lights out, Mukesh Ambani proposed creating a business in information and communication. The Reliance Group patriarch asked his son how much it cost to make a mobile call to Surabhai (a family elder) in Chorwad, Gujarat, to just ask "Kem chho (How are you?)" "Rs 36," came the reply.
"Too expensive. It won't work," Dhirubhai told his son. "If you can make every Indian talk to every Indian at less than the cost of a post card and still make money, you are in business." Mukesh first checked how much a postcard cost (Re 1 for the uninitiated), and then got down to putting together the Rs 25,000-crore Reliance Infocomm project. The aim was simple: create a huge bandwidth with enough capacity to fulfil the needs of the country for the next 50 years and get as much traffic as possible to flow on it. Then, as voice and data zip across on its 60,000-km optic fibre network, sit back and count the profits. "Mobility is just the trailer. People would also use mobile phones for data. And once we have Ethernet (high bandwidth technology) connectivity you will have people connecting to their hospital, their schools and even their banks through high-speed connectivity links from their homes," says Mukesh (see interview).
Easier said than done. A few days away from unveiling the first phase of the project on December 28 to coincide with Dhirubhai's birth anniversary, Mukesh is far from relaxed. He is gearing up for what may be the last big battle in the Indian cellular industry-Reliance versus the Rest. And with Rs 15,000 crore already committed to Infocomm, the risks are far too high for Reliance.
Right now there are question marks on both the validity and pricing of limited mobility service. On December 17, the Supreme Court set aside an April 2002 verdict of the Telecom Dispute Settlement and Appellate Tribunal (TDSAT) allowing basic operators to provide limited mobility. The court asked TDSAT to re-examine the issue by taking into account the objections of cellular operators on the procedure being followed for allowing limited mobility and ensure that there was a level playing field. Significantly though, the court has not stayed the expansion or roll-out of new limited mobility services. So while limited mobility does appear inevitable, the sword of the final decision will continue to hang on Reliance. But this is unlikely to hold the group back now, for it has gone too far ahead and will be willing to pay up and concede some benefits to get rid of pending litigation.
Reliance's tariffs too have not yet been cleared by the Telecom Regulatory Authority (TRAI). The company's introductory offer is 5 paise for a 15-second call anywhere in India. At 20 paise per minute, it is half the charge that consumers pay for making a fixed-line local call. In a so far untested marketing strategy, Reliance will take a fixed amount-Rs 14,400-upfront from its subscribers (either from the customer or through a financing deal arranged for him) and give him 800 minutes of talk time free per month for three years. That's about Rs 400 a month (minus the interest cost) of which Rs 240 is the rental and Rs 160 the usage charge. The tariffs may have to be altered as TRAI is examining charges of predatory pricing-pricing a service below cost to kill competition-by Reliance. TRAI's non-clearance is the reason why Reliance will only have a test launch on December 28 in 104 cities. "We are No. 5 in the batting list. So we have to ensure our tariffs are attractive. But this is an introductory offer price like an IPO," says Mukesh.
Existing cellular players have decided to join hands against Reliance. A further cut in cellular tariffs is certain. But with Reliance offering rock-bottom carrier charges for long-distance calls they may just all move to its network, thus leading to a crash in long-distance tariffs from a few rupees per minute to a few paise. "The industry is well prepared to compete with anyone but we can't obviously compete with a government-mandated advantage for some operators," says Rajeev Chandrasekhar, chairman of the Cellular Operators Association of India and of BPL Mobile. It is another matter though that cellular operators have also benefited from a change in the NTP 1999, which allowed them to move from fixed licencing to revenue sharing.
Most of Reliance's current troubles stem from its decision to offer limited mobility through a fixed line licence rather than go for a full-fledged cellular licence. It argues that this was the only way it could have got the radio spectrum for the CDMA wireless standard it had opted for. Tata Teleservices' launch of limited mobility in Delhi on December 19 will further strengthen Reliance's case.
Cellular operators say Reliance can offer such low rates only because it does not pay a hefty licence fee (a licence comes for about Rs 900 crore).
Mukesh counters this by saying that Reliance is ready even today to pay up for a cellular licence if it gets the required spectrum, and that its low tariffs have more to do with its choice of technology and its ability to drive down costs. Cellular operators don't buy that logic. "GSM and CDMA technologies have co-existed since the mid-1990s and GSM is the overwhelming choice the world over," argues Asim Ghosh, MD, Hutchison.
For Reliance, there are more pressing issues after the December 17 court judgement. Like getting its tariffs cleared without much change. And convincing people to stay locked into its service for three years with very little exit option (Reliance handsets will not be compatible with other operators'). CDMA handsets are still expensive compared with GSM handsets, and Reliance will be able to bring these rates down further only as volumes pick up.
Reliance will also have to convince Indians to transmit more data on mobile phones than they do today (SMS accounts for less than 5 per cent of revenues) and the group will also need to get approval for offering its concept of roaming. In this, one could take multiple registration numbers and even if a call drops once he breaches the geographical range of a short distance charge area he can continue using the phone wherever he travels. But the range of limited mobility may be curbed as cellular operators have moved TDSAT for tightening of limits.
What is stacked in Reliance's favour is its big-picture approach. It wants to straddle the complete communication needs of an individual through wireless and wireline solutions. It is clearly not putting all its eggs in one basket. A lesson Ambani junior may well have learned during those bedtime conversations with his father.
INTERVIEW: MUKESH AMBANI
We are obsessed with affordability
Reliance Infocomm Chairman Mukesh Ambani shares with Associate Editor Vivek Law the challenges in executing his biggest venture.
On why Reliance opted for limited mobility
The spectrum that was being offered in the fourth round of bidding for cellular services was not compatible with the CDMA technology we had opted for. Therefore, we had to go through the limited mobility route. Even now we are ready to move to a fifth cellular licence if we get the same spectrum. After immense discussions we realised that for data at affordable rates, CDMA wins hands down. We are obsessed with affordability.
On what will happen if limited mobility is prevented
We do not believe that in a democracy like ours you can prevent an enterprise from delivering value to consumers. We find it amusing that leading MNCs are writing letters to the prime minister seeking protection.
On Reliance Infocomm's focus
We are betting heavily on data. We want to put a computer into your mobile phone. And at a price that is affordable to most Indians.
On competition
The mobile telephony market will go up to 16-20 million by the end of March 2004 and we should have a 20-25 per cent share. Today, the dominant players are MNCs and they have deep pockets, perhaps far deeper than ours. We need to get crores of subscribers and deliver value to them.
On chances of succeeding in retail
Going retail is our biggest challenge. We are doing it after Vimal's launch almost 20 years ago. We have worked very, very hard on it and put in place systems and procedures to achieve this.
On charges of predatory pricing
We first fix what the customer can afford to pay. And then we work towards adopting that technological configuration which enables us to ensure that affordability. We are offering the same carrier rate to everyone. Our costs are there for all to see.
RELIANCE VERSUS THE REST
Reliance's entry has cellular operators closing ranks. Looking to add 10 million subscribers in the next year, they will cut rates and pool infrastructure.
BSNL
Has just ventured into cellular and limited mobility.
Reliance-engineered fall in long-distance rates will hit its profits.
Could tap its 40 million captive fixed-line user base.
BPL MOBILE
Pure cellular player, with good circles but not deep pockets.
Will ally with others to match Reliance's tariffs.
HUTCHISON ESSAR
Only in cellular. Will be forced to cut rates; benefits from long-distance rate cuts.
Will forge alliances with other cellular players.
THE RELIANCE OFFER
Limited mobile services to be test launched in 104 cities on December 28, to cover 600 cities by January 2003.
Introductory offer called Dhirubhai Ambani Pioneer gives subscribers 800 minutes of air time every month for three years for upfront payment of Rs 14,400.
Call rate 5 paise for 15 seconds for local and STD calls from one Reliance phone to another anywhere in India.
Tariffs may rise after 6-8 weeks, but not for those opting for introductory package. Subsidised handsets to be offered.
Targeting 4-5 million subscribers by March 2004.
TATA GROUP
Conflict of interests since it is present in both cellular and limited mobility.
Will cut rates in limited mobility to match Reliance.
BHARTI
Largest cellular player faces biggest threat. Will also offer limited mobility.
Will be forced to cut long distance rates for cellulars.
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3 of 5 Indian cellular carriers are now adding cdma WiLL infrastructure... that is identical to cdma mobile infrastructure.
What of Hutchison, who understands cdma efficiencies - and wCDMA liabilities - first hand?
What wireless interface will dominate India by 04, if Reliance targets 10M subs on its own in 03? |
