The Tata Group's big telecom gamble: VSNL's recent acquisition of Tyco Global Network and announcement that it plans to acquire Teleglobe show that the Tata Group—controlling stakeholders of VSNL—is ready to up its telecom stakes

Telecommunications International, Sept, 2005 by Ken Wieland

The Tata Group, an India-based conglomerate with a huge turnover--US$14.25 bn during its 2004/05 fiscal year, which is around 2.6 per cent of India's GDP--is making waves in the telecom sector. Videsh Sanchar Nigam Limited (VSNL), India's international and national carrier in which the Tata Group owns a controlling 46 per cent stake, is on the acquisition trail for assets overseas.

In May this year, VSNL received regulatory approval for its US$130 m purchase of the Tyco Global Network (TGN), a sub-sea cable system connecting North America, Asia and Europe; two months later, VSNL then announced it was acquiring Teleglobe International Holdings--a provider of wholesale voice and data services--in a proposed deal worth US$239 m.

"I can't think of any other telco that has made such a big transformation as we have in the last four years," says VinodKumar, president of VSNL International.

He has a point. VSNL, when the Tata Group made a move for it in early 2002, was India's monopoly provider of international telecom services with 98 per cent of its revenue coming from voice.

But later that year, VSNL lost its monopoly status and consequently had to find new and higher-margin revenue streams to offset falling voice prices and inevitable market share reduction. This led to a greater focus on providing data services and 'end-to-end solutions' for multinational corporations (MNCs) based in India--the TGN acquisition being an obvious part of that strategy--and to move into the domestic long-distance and local access markets.

"For both our international and domestic businesses, our revenue mix is roughly 65 per cent from voice and 35 per cent from data [total VSNL revenue for year end 31 March was US$780.5 m]," says Kumar. "Excluding the effect of the Teleglobe acquisition [whose revenues derive primarily from voice] we expect data to account for around 50-55 per cent of turnover in the next few years."

The purchase of VSNL equity and subsequent acquisitions represents a comparatively new interest in telecom by the Tata Group. With a history stretching back over a hundred years, the Tata Group's wealth has been generated across a number of other industries, including steel, chemicals, energy, tea, textiles and car manufacturing. It also has a highly successful software services operation, Tata Consultancy Services (TCS), which was established in 1968.

With its foray into telecom via VSNL and the recent purchase of TGN and intention to acquire Teleglobe--made possible by TCS' flotation on the Bombay Stock Exchange in April this year, which raised US$1 bn--the Tata Group clearly intends to be a major international player. But isn't this an enormous gamble given the notoriously difficult trading conditions that still exist within the telecom sector, particularly in the international wholesale and MNC markets that VSNL is targeting?

"We believe that the international wholesale bandwidth and subsea markets are reaching a point of rational behaviour," responds Kumar. "Yes, it will take a few years before we reach true stability but we are not seeing as much reckless pricing [below cost] as we have in the past. While there is still surplus capacity on some routes [Kumar wouldn't be drawn into naming them] we see greater demand for bandwidth as broadband penetration increases and new applications come on board. We [the Tata Group] take a long-term view of the market."

But Kumar is not looking to base the VSNL business purely on the low-margin areas of wholesale and voice, even though it has expanded its operations to gain greater scale in these areas. Teleglobe, for example, is the one of the largest voice carriers in the world with over 13 billion call minutes going over its network annually; moreover, in March this year, VSNL, via its UK affiliate (VSNL UK), launched a wholesale voice offering to European carriers seeking call termination in India.

No, where the higher margin revenue can be made--says Kumar--is in serving the MNC market and it is here, following the TGN acquisition, where VSNL is hoping to make a bigger impact. "We see TGN as a very snug fit with our operations in India as it will enable us to give our enterprise customers end-to-end connections and solutions to key locations around the world," he says. "For applications such as grid computing, disaster recovery and business continuity, TGN has phenomenal reach and scalability. In fact, the network has the largest designed capacity in the world."

Kumar was reluctant to talk about capacity fill-rates on individual TGN routes other than to say that lit capacity (480Gps) falls well short of overall design capacity (7.68Tbps). However, he is keen to turn the TGN from a pure wholesale play to an asset that also serves directly the enterprise market as quickly as possible. "We're just beginning to roll out services to enterprises at the STM-1 level and upwards but won't have the facility to offer lower speeds for a few months," says Kumar. "I expect in three years' time, 20-30 per cent of traffic over the TGN will be retail."