Cell Consolidation Sweeps India

Electronic News, July 10, 2000 by Uday Lal L Pai

Cochin, IndiaaIn the last six months, the cell phone market in India has witnessed it allaacquisitions, equity sales and mergers. And the market shows no sign of slowing down.

Cellular companies in India are consolidating with a vengeance. As Rajiv Chandrasekhar, chairman of India's leading cellular player BPL Mobile, puts it, "You can either acquire or get acquired. There is no third option."

Last year was a real testing period for fledgling cellular service providers in India. India's cellular industry had the highest penetration level in the developing worlda1.8 million cellular subscribers in just four yearsaplacing India among the fastest-growing wireless telephony markets in the world.

Frost & Sullivan, an international marketing consultancy, predicts that India will have five million subscribers by 2005. Industry experts expect a growth of around 66 percent during the current year and estimate that the total mobile subscriber-base will stand at 2.7 million by 2001. However, with a population nearing one billion people, the potential future is huge for cell phones in India.

Still, multinational developers have pulled out of the country. Swisscom, the Switzerland-based telecom, Telia of Sweden, Bell Canada, Bell South International, AT&T, Jasmine International, and Telecom Organization of Thailand either pulled out or froze investments in India.

"There was much hype when cellular services started. There was tremendous hope that the Indian market would take off in a big way. Everyone was talking about high growth levels and a strong Indian middle class of 250 million, which is equivalent to that of the United States," said TV Ramachandran, executive vice chairman of the Cellular Operators Association of India (COAI).

The market has been characterized by low airtime usage. Bad debt has also been high, with collection a major problem for all operators. The result has been that in many circles the licensed operators have been unable to secure project funding, while in others the low returns are causing the breakup of consortia as the foreign partners lose patience and bail out.

"The multinational companies (MNCs) feel that (the) Indian telecom market has not developed as anticipated, said one market analyst. "The reasons include unfavorable regulatory environment, lower customs uptake, high license fees, lack of clarity in the Indian telecom environment and overly optimistic assumptions at the outset."

However the industry's mood has been brightened by the late-1999 consolidation wave. "Cellular operators are realizing the importance of economies of scale and that is why the mergers and acquisitions are taking place," Ramachandran said. "This is happening all over the world and has now started in India."

The deals in cellular industry have involved almost the whole industry; the Hong Kong-based Hutchison Whampoa, the Mittals of Bharti Enterprises, homegrown HFCL, and now even the venerable Tatas and Birals.

For now, the big fish eat the small fish. Bharti Cellular, the biggest of them all, gobbled Skycell and JT Mobile. Hutchison picked up equity in Essar Cellphone. But the splash that displaced the most water was the merger of Birla AT&T and Tata Cellular Services. Together, they now account for a substantial chunk of the cellular market in India

India's cellular sector is fast changing and in two years time barely three to four prominent operators with a "national footprint" are likely to survive. "It all started when the government shifted from a fixed license fee regime to revenue sharing regime," the market analyst said. "This is a fine example of what a little policy-tuning can do to the big telecom picture."

Sunil Mittal, chairman and managing director of Bharti Enterprises, is of the view that three to four operators, including the Department of Telecom Services or MTNL, will eventually operate in India with one or two niche operators in some of the circles.

"The stand-alone players have no option but to sell out," he said. It's important for these operators to become a part of the national footprint for their businesses to be viable. Besides contiguity of cellular territories, brand building will be another factor that will influence the course of events, according to Mittal.

"Not all the companies that exist today are necessarily long-term players," Manoj Kohli, chief executive officer of Escotel, said. "There is bound to be a shake-out with four to five players."

Once the dust settles down in less than 18 months, the number of players in the business will come down from 22 to five or six. The probable long-term players could be Bharti, BPL, Hutchison Whampoa, Reliance and the Tata-Birla/AT&T combine, not counting Mahanagar Telephone Nigam Ltd. (MTNL) which is readying to offer its own mobile services in Delhi and Mumbai soon.

BPL, a strong player with presence in Maharashtra (including Mumbai), Tamil Nadu and Kerala was the first company to emerge as the country's No.1 cellular operator when it established nearly 300,000 customers. This was a commendable achievement since the company reached to the top without any acquisitions or buy-outs.