Corporate: Then There Were Four

It's shake-out time. Six years after the cellular services industry made its debut in India, the stage is set for another round of consolidation.

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There will eventually be only four players left in the fray,'' predicts a sombre Sunil Bharti Mittal, 43, CEO, Bharti Enterprises. The doomsday prediction is meant for cellular services, with 16 companies operating across 22 circles. In hindsight, the provenance of the shake-out that is already happening can be traced to the point where it all began.

The birth of the cellular services industry in India in October, 1994, saw companies bidding stratospheric amounts as licence fees to operate in geographically defined cellular circles. Magnitude characterised everything in those early days: usage projections were inflated; subscriber-bases were expected to be huge; and the growth exponential.

Six years on, companies have a far more pragmatic take on the future. Revenue projections have been scaled down. And many realise that they can't go it alone. Acquisitions and alliances are the order of the day. The fever began with Hutchison Max's Analjit Singh selling out to Hong Kong's Hutchison Whampoa in 1998. It intensified when Bharti acquired JT Mobile's Karnataka and Andhra Pradesh licences in November 1999 and the Chennai-operator Skycell Communication this year. It broke when Birla AT&T (circles: Gujarat and Maharashtra, including Goa) merged with Tata Cellular (circle: Andhra Pradesh) this year, the B.K. Modi Group bought out Telstra's stake in Calcutta-operator Modi Telstra, and Hutchison acquired Delhi-operator Sterling Cellular in December, 1999 and Calcutta-operator Usha Martin in May this year. Somewhere in between, Bharti's Sunil Mittal and BPL's Rajeev Chandrashekar forged a loose alliance to counter Hutchison's onslaught. Nor does the action show any signs of abating. Hutchison Whampoa, BPL, and Escotel are at present locked in a three-way race to acquire the Hinduja-promoted Fascel. And the RPG Group is considering selling its cellular businesses in Chennai (RPG Cellular) and Madhya Pradesh (RPG Cellcom).

Thus, in a span of just two years, the first phase of consolidation in the cellular market seems to be nearing completion: the number of players has dropped from 22 to 16. And the stage has been set for the second round of consolidation-one that could see Mittal's prediction come true.

A bit of history: the first shake-out in the cellular services market was caused by the inability of some companies to recoup initial investments, which ran as high as Rs 1,000 crore in several cases. As it became evident that the market wasn't as big as companies had expected, sources of funds evaporated. Worse, companies had to contend with the high costs associated with setting up GSM-based cellular networks in the mid-1990s. The costs associated with the relatively new technology were high. Making matters worse was a customs duty of 85 per cent. And hand-sets were priced prohibitively high, forcing service providers to subsidise them, which added to their losses. Result? Subscriber acquisition costs were between US$600 and 700.

The worst affected were the companies that bid for circles. For, those who opted to operate in the metros paid only a token licence fee of Rs 1.5-6 crore, while circle operators had to shell out hundreds of crores. Predictably, the Delhi-licensee Bharti and Mumbai-licensee Hutchison have been at the forefront of the M&A binge.

Today, the GSM technology is available at throwaway prices; the customs duty on equipment has crashed to 20 per cent; hand-set prices are down; and customer awareness is high. Consequently, the number of cellular subscribers has zoomed from eight lakh in 1998 to 18 lakh in 2000. And the cost of acquiring a subscriber has plummeted to US$100-125. The regulatory environment has matured too. The revenue-sharing model is in place; tariffs are declining; the Calling Party Pays (CPP) regime, which makes incoming calls free, and inter-circle connectivity, which will, for instance, make a Delhi-Mumbai call as cheap as a local call, are just around the corner. Says Virat Bhatia, 32, Managing Director (International Public Affairs), AT&T India: ''An improved regulatory environment and a clear M&A policy is key to long-term funding and consolidation.''

The numbers paint a happy picture: the market is expected to swell in size to 2.7 million subscribers by March 2001; and revenues set to cross Rs 5,000 crore by March 2002. ''I expect at least 50 per cent of the demand for basic telephony services to shift to cellular telephony once the service becomes affordable,'' predicts S. Rajagopalan, 60, CMD, MTNL. Bottomline: the second phase of consolidation will be driven by good-old economies of scale.

Put simply, a wider presence will allow a company to establish itself as a national brand, endow it with greater bargaining power, and afford it the luxury of being able to reduce tariffs as the volumes grow. And, all told, experience does matter. Explains Mittal: ''You don't need a different set of skills for each operation. In Karnataka, we've done just what we did in Delhi.''

When inter-circle connectivity does become a reality, companies that have a presence across circles can pass on the benefits of lower costs to the customers. Agrees Deepak Kapoor, 41, Head, Technology Practice, Pricewaterhouse Coopers: ''Companies will make lots of money once they have synergies across circles.'' More significantly, if the mobile phone does become the preferred device of the future, companies having a presence across circles will be able to offer value-added voice, data, and commerce services at far more competitive rates than those companies operating in a single region.

As companies proceed along the path of consolidation, their scope could extend to basic services too. A company that operates both the cellular and the basic service in a region can leverage its presence in both to slice inter-connect charges.

The interesting poser: who are likely to emerge on top at the end of it all? Any list of winners will have to include Hutchison, Bharti, BPL, and the Birla-AT&T-tata combine. And, with huge resources and an ability to weather competition make Reliance Telecom the dark horse.

The company starts at an advantage: it paid Rs 116.47 crore for its seven contiguous circles, the lowest any operator did. And Reliance Telecom executives maintain that they have procured their equipment at the lowest possible rates. Says Kapoor: ''By delaying its entry, Reliance got into a position from where it could negotiate better. Its investment in switches, for instance, have been the lowest." And Reliance is creating a fibre-optic network that can catalyse its entry into long-distance telephony. Rajan Nanda's Escorts Group, through Escotel, and the B.K. Modi Group, represented by Modi Telstra and Spice Telecom are others in the fray.

However, this second phase of consolidation could be some time away. M&As were the preferred route in the first phase, and they cost money. It isn't easy to raise funds for telecom acquisitions: global investors are busy eyeing China, which is set to throw open its cellular market. Nor are domestic institutions keen. Says Bhatia of AT&T: ''A few successful IPOs could transform the scenario.''

Thus, Mittal is looking to list Bharti Televentures, the group's holding company for cellular services; and BPL is considering an IPO. However, none is likely to materialise till the first half of next year. The first few months of 2001, then, could witness another spate of acquisitions. By then, the operations of the Essar-owned Aircell Digilink (circles: Rajasthan, Haryana, and UP East), and Usha India's Koshika Telecom (circles: Bihar, Orissa, and UP West & East) should be on air. Given Essar group's waning interest, Aircell could end up the Sterling way-in Hutchison's kitty. Global re-alignments, too, could impact the Indian market. The Federal Communications Commission (FCC) of the US is about to clear AT&Ts acquisition of Media One. The latter owns US West, which has a 49 per cent stake in BPL-US West-the operator in Maharashtra, Kerala, and Tamil Nadu. Companies could even seek to integrate operations, on lines of B.K. Modi plans to do with Modi Telstra and Spice Telecom. However, Usha India CEO, 50, Vinay Rai, is dismissive: ''Hutchison's investments are not consolidation-oriented.''

That may be the case, but technology does offer a pressing argument for consolidation. Says Dilip Modi, 26, Head of Modicorp's cellular business: ''We will soon witness the convergence of the information, communication, and entertainment industries.'' When that happens, the number of players will increase. Meanwhile, the private cellular operators can keep their fingers crossed on the impending entry of MTNL and the Department of Telecom Services (DTS).