Forum: A single entity - Should BSNL and MTNL be merged?

VOL. NO. 3 ISSUE NO. 5 MAY 2002

2002-05 A Single Entity - Should BSNL and MTNL be Merged

Mr. Vishvjeet Kanwarpal CEO GIS-ACG
Global InfraSys - Asia Consulting Group

BSNL
Published: May 2002 by tele.net

Change is teh buzzword

New rules in long Interview with Profile of

distance game N. Sharma P. Banerjee

10 30 50
 contents

24
special focus

Bharat Sanchar
Nigam Limited
T h e tim es are changing, slow ly
but surely. B SN L , till recen tly a
fixed line m on op oly, is gettin g
sensitised to the c o n c e p t o f cu s­
to m e r care, all thanks to increas­
in g com petition . T h e giant pu blic
se cto r entity is trying to m ov e
away fro m its traditional role o f
m erely a p p rovin g p h o n e c o n n e c ­
tio n s and is n o w a ggressiv ely
m arketin g basic services. U n d o u ­
btedly, co m p etitio n is a b ig lev­
eller. W ith th e en try o f n ew
players in to its traditional turf,
BSN L is q u ick ly lea rn in g the
ro p e s o f the business and p o lish ­
in g u p its m arketing skills.

News Briefs
5 N ational Events
8 International Events
Special S t o r i e s
10 N ew rules o f the game:
C om petition sets the pace in the
lo n g distance market
14 W L L update: C O A I takes the
battle to the Suprem e C ou rt
16 Touchtel heads south: R olls out
basic services in Tam il N adu and
Karnataka
19 N ew identity: Birla-Tata-AT&T
gets a com p osite im age with
Idea Cellular
19 O n Again: Tata, H u gh es m erger
talks
20 Stru gglin g for survival: ISPs
grapple with falling grow th and
m oun tin g losses
20 O p en Offer: M ediocre response to
Tatas
22 China opens its doors: But uncer-
tanties still remain for foreign
telecom entrants
23 Plague o f technical difficulties:
U pdate on 3G/GPRS
Companies
24 BSN L: Change is the buzzw ord
28 M T N L : Learns survival skills in an
increasingly com petitive market
Forum
30 Interview with N arinder Sharma
32 A single entity: Should B SN L and
M T N L be m erged?
Testing and Management
36 T h e “
A”route: T h e best option for
G SM Q oS
38 M on itoring performance: W hat
G P R S is capable o f
42 L ocating network faults: Critical
maintenance using reflectom etry
Finance
45 N ew skill sets: G row in g role o f
C F O s in telecom com panies
46 R ecent financings: In India and
overseas
Sales & Marketing
48 W hat’
s new in the market

2 tele.net | May 2002

 contents

Long distance
Page 10
T he long distance market is
undergoing a metamorphosis.
Age-old monopolies have disap­
peared, calling volumes are set to
expand and tariffs are following a
southward spiral. Both N L D and
ILD tariffs have fallen sharply. A
look at the changing dynamics in
the long distance market.

survival skills
Page 28
Faced with increasing competi­
tion from private players such as
Hughes Tele.com and Bharti
Telenet. M T N L is striving hard
to discard its PSU baggage
and reposition itself as a mar-
keting-sawy, customer-friendly
organisation.

People
50 Partho Banerjee, H u gh es E scorts
C om m un ications Lim ited
52 VP. Chandan, Q u a lcom m (India)
52 N irm al Saroop, Maharashtra
T elecom C ircle
52 Ruchir Godura, U T S tarcom
53 Gautam Bakshi, Tata Teleservices
54 Swarup Choudhury, IB M India
L im ited
54 Ravinder Jain, NavinM ail Services

FO RM IV
T eledata
Publisher Alok Brara
56 Bihar: K ey telecom statistics Printer Alok Brara
59 Cellular subscribers: G row th over Owner Alok Brara
Editor Alok Brara
three m onths
Printing Thomson Press
Press B-315, Okhla Ind. Area, Ph. 1, N.D.-20
Place ot D-4/5 Vasant Vihar
Publication New Delhi 110 057

tele.net | May 2002 3

 forum

A Single Entity
Should BSNL and MTNL be merged?

V ishvjeet Kanwarpal Mohit Saraf M ahesh Uppal

Managing Director, Partner, Director,
Asia Consulting Luthra & Luthra Telecom and Computer
Group Information Systems

Should BSNL and MTNL continue to operate as separate entities? Telecom M T N L and BSNL are the dominant
experts debate the logic of merging the two state-run telecom operators, the players in basic telephony in India. There
benefits that could accrue and how well-eguipped the merged entity might are two other private operators in each o f
the circles and the regulatory authority is
be to cope with the new competition. We present their views...
expected to announce guidelines for the
Should the governm ent consider merging tive m onopoly status in the country with fourth. But instead o f taking advantage of
MTNL and BSNL? Why or why not? 32 million subscribers and operations in being the first player in a circle, poor ser­
17 telecom circles, Chennai and Kolkata. vice has drifted the demand towards the
Vishvjeet Kanwarpal_ _ _ _ _ _ Along with M TN L’ s 4 million subscribers second operators. Some members o f
T he Indian telecom sector has experi­ in Delhi and Mumbai this would consti­ Parliament had made a representation to
enced substantial consolidation in the tute a formidable competitive advantage. the erstwhile communications minister
form o f M&As and strategic alliances T he synergies and advantages inherent Ram Vilas Paswan urging him to merge the
involving leading private players such as in an integrated national telecom infra­ BSNL telecom districts with M TNL.
Birla-AT&T, Tata, Bharti, Spice and structure involve lower cost o f investment Consumer bodies had taken up the matter
Hughes in the past year. T he drivers in infrastructure and greater joint ability with the MPs as they thought the merger
behind these trends are as much to face competition. would ensure not only better quality o f ser­
economies o f scale and the synergies o f vice but also a whole range o f telecom and
multiple circle rights (particularly with Mohit Saraf related services that M T N L offers. The
respect to N L D and ILD services) as are Consolidation through M&As is the buzz­ recent spate o f mergers and acquisitions
the disadvantages o f stand-alone circle word in the industry. The thumb rule for shows that what we have is the formation o f
operations. any telecom business is either to expand monopolies in telecom. The Department o f
Merging M T N L and BSNL would be and modernise or to perish. Disinvestment is planning to refer the tele­
a good idea and perhaps even necessary for com behemoths M T N L and BSNL to the
their long-term survival and success. An “ An MTNL-BSNL merger Disinvestment Commission.
M TNL-BSNL merger would give both a On a long-term basis consolidation will
fighting chance against the emerging con­ would give both a fighting result in two-three companies in each basic
solidated private sector players. With the and cellular service. W e are entering an era
chance against the
two competing against each other as well o f strong regional players, where contigu­
as the private sector players, their value emerging consolidated ous circles are important. Every strong
attrition can only accelerate. player will consolidate his position in the
private sector players.”
However, merging the two entities will area in which he is strong by gobbling up
involve considerable logistical and coordi­ Vishvjeet Kanwarpal smaller players till he attains a critical mass
nation challenges. BSNL enjoys an effec­ or till the point from which further con-

32 tele.net | May 2002


solidation becomes economically unviable.
Both can be provided by BSNL and
M TNL, if they act together.
Why are contiguous circles so impor­
tant? First, the dependence on the N L D
carrier goes down as the adjacent circles
can operate effectively as one circle. This
in turn increases operating margins.
Second, the telco can offer a bouquet o f
services to subscribers, creating a barrier
against potential competition. Third, the
telecom business is primarily a capital-
intensive business and if the circles are
strategically placed with each other, the
overall capital cost can be brought down.
In a major reversal o f stand, the gov­
ernment has allowed BSNL and M T N L
to compete with each other in basic ser­
vices. Although the present guidelines do
not allow companies with a common pro­
moter to operate in the same circle, the
government has decided to alter the
guidelines in the interest o f the consumer.
Instead o f competition, the better way
might be consolidation.
Mahesh Uppal
Yes, merging M T N L and BSNL is a very
good idea. There is really no good reason
why Delhi and Mumbai should be singled
out as a separate territory from an other­
wise national licence. However, an impor­
tant corollary is to allow all private opera­
tors to be as small or as big as commercial
considerations dictate. Otherwise the
merger would exacerbate a very inequitable
situation where a behemoth o f an incum­
bent competes with circle-level players who
must be licensed for each service separately.
A second reason for merging M T N L
and BSNL is that government-owned or
controlled incumbents competing is as
much o f an anomaly as two private com ­
panies with common promoters competing
with each other. The latter is currently dis­
allowed for good reason and is hardly the
kind o f competition that will benefit the
consumer or the sector.
What is your outlook on BSNL? How can it
cope with the competition in terms of loss of
monopoly in long distance and basic services?
Vishvjeet Kanwarpal
In the near future, BSNL will face negligi­
ble competition and will maintain its
m onopoly in both long distance and basic
services. Its greatest advantage is its own­
ership o f a national integrated telecom
network and infrastructure. Investment in
this area by the private sector has been
unimpressive. T h e prohibitive risks
involved in such large network invest­
ments and the incumbent’ s advantage will
ensure that new investments at a national
level are slow.
However, private players are unlikely
to attempt to develop a parallel national
telecom network. M ore likely, they will
focus on the main cities and towns, which
account for the lion ’
s share o f telecom traf­
fic and potential for value-added services.
With decreasing ARPU [average rev­
enue per user] and a competitor strategy to
cherry-pick higher value corporate and
commercial customers, the advantage o f a
“ Consolidation through
mergers and acquisitions
is the buzzword in the
telecom industry. The
thumb rule for any
telecom business is
either to expand and
modernise or to perish.”
Mohit Saraf
large subscriber base can quickly turn into
a liability. In this sense the mission o f
BSNL to service the rural and less devel­
oped areas could prove to be a disadvan­
tage. With both BSNL and the private
players shirking their rural network roll-
out mandates, the overall news for telecom
in rural India is not very positive. BSNL
will have to seriously address the problems
o f work culture, operational efficiencies
and customer service. The quality o f ser­
vice will need a total overhaul if it is to sur­
vive in the long run.
M ohit S araf
Times have become very hard for BSNL
lately. The face o f the telecom industry has
changed forever. In one straight shot, tele­
com giant Bharti ended the 100-year-old
monopoly o f the state-owned BSNL by
tele.net | May 2002
forum
unveiling its long distance service. And by
slashing rates by 50 per cent for mobile-
to-mobile ST D calls, it achieved in a day
what the US took 10 years to accomplish.
N o wonder cellular operators didn’ t think
twice before switching from BSNL to
B harti’ s new network, IndiaOne. Then
Bharti came up with another surprise. It
signed an agreement with VSNL to allow
mobile-to-mobile international calls to be
routed through IndiaOne instead o f
BSNL. This will lead to a drop in interna­
tional calling rates by at least 10 per cent.
T he two consecutive developments have
come as a real blow to BSNL which, till
now, used to carry all the cellular interna­
tional call traffic.
So far, BSNL was the only legal third-
party carrier. But now, with Bharti
Telesonic’ s foray into the N L D segment,
the tables have turned. Cellular operators
now have a choice to ride over the network
o f BSNL or that o f IndiaOne. And since
IndiaOne is offering half the existing rates,
almost all the cellular operators (except
Reliance, which has also applied for an
N L D licence) have grabbed its offerings.
Thus, in a competitive environment, BSNL
will have to rework its strategies and
improve efficiency. As part o f a massive
restructuring exercise, BSNL will split
into four separate business units - one each
for basic, cellular, N L D and value-
added services. Each business will be
headed by a director.
It will be a battle o f rates that BSNL
will have to enter if it wants to compete
with the new players. All these years, STD
and ISD rates had been deliberately over­
priced. The best way to cover any losses in
this process is to retain or possibly increase
market share by dropping tariffs.
Entering new areas would also be a
solution. From April 1, 2002 operators have
been permitted to offer VoIP telephony;
they will, however, be compelled to install
special VoIP networks and have to specify
whether the service is o f toll quality or less
than toll quality so that the regulator can
ensure it is priced accordingly. Further,
BSNL will roll out its nationwide cellular
operations by July 2002. In the first phase,
over 1,000 cities will be covered for GSM
services. BSNL has already started cellular
operations in Kolkata and parts o f Bihar as
a first step in that direction.
33
 forum
Mahesh Uppal
BSNL should have no problems at all in
the short to medium term. It “ owns”close
to 36 million subscribers who are worth
their weight in gold. These subscribers
will take a long time to churn to new play­
ers who will have a tough time beating
BSNL’ s prices. An effective and fair-priced
interconnection with BSNL’ s existing net­
work will be a massive challenge for the
regulator as well as for new entrants. This
does not mean newcomers will necessarily
lose money. Even small players may have
sizeable revenues but that may not be
enough to worry BSNL.
What is your outlook on MTNL? How can it
cope with greater com petition in Mumbai and
com petition for the first time in Delhi?
Vishvjeet Kanwarpal
M T N L will enjoy a m onopoly for some
time in basic services. However, the
major thrust o f the private players will be
on the corporate and high value market
segments. Given that 10 per cent o f
M TN L’ s customers contribute nearly 70
per cent o f its revenue, the strategy o f the
competitors will undermine the advan­
tages o f M TN L’ s existing infrastructure
and customer base.
M T N L and BSNL have both per­
formed poorly in the cellular market, even
though they had the advantage o f existing
infrastructure. Birla-Tata-AT&T BPL,
Hutchison and Bharti have secured over
60 per cent o f the total cellular subscriber
base o f about 6 million users in India.
On the basic services’front, corporates
are likely to turn to private players for bet­
ter services. Hughes Tele.com is already
making inroads into M T N L territory in
Mumbai. In Delhi, the market has
acknowledged the presence o f Bharti in a
very short span o f time given its reputation
in the cellular market.
The greatest threat to M T N L lies
more in its weaknesses rather than the
immediate strengths o f its private sector
competitors. A long-standing reputation
for poor quality o f service and complaint
handling, tedious customer application
processing, erratic and faulty billing and
unfriendly payment facilities is difficult to
overcome. On the operational front, poor
system maintenance and employee moti­
34
vation to deliver quality are additional
areas o f challenge. Both BSNL and
M T N L must cope with the fact that cus­
tomer care and quality o f service are fast
becoming a key buying factor in the Indian
consum er’ s mind. Cost-cutting and lower
prices alone will not be an adequate defence
strategy. Customer loyalty has to be
earned and the advantages o f decades o f
monopoly can erode in a few years, in a
competitive environment.
Mohit S a r af
M T N L has about 70,000 employees and
4.5 million customers operating basic and
mobile services in Mumbai and Delhi cir­
cles only. It has become the second Indian
telecom PSU to be listed on the New York
Stock Exchange. Its position is quite stable
in the market. And it has already taken
“ Merging MTNL and BSNL
is a very good idea. There
is really no good reason
why Delhi and Mumbai
should be singled out as a
separate territory from an
otherwise national
licence.”
Mahesh Uppal
steps to be prepared for die new situation.
In mobile communication, it was M T N L
that forced the private operators to bring
down tariffs by as much as 50 per cent.
Further, it has decided to offer a series o f
new schemes to its Dolphin subscribers.
These are the Night Talk Scheme and the
Free Number Scheme. Hence, M T N L
seems to be fairly competitive.
In terms o f new telecom facilities to be
provided to customers, M T N L has decid­
ed to apply for an ILD licence. Although
the company does not plan to enter the
business for the next two years, it wants to
be ready with its business plan and net­
works. During this two-year period,
M T N L will continue to route its cus­
tomers through the network o f VSNL.
Further, M T N L has announced plans
to launch a new form o f limited mobility
service within a given area in select parts
tele.net | May 2002
o f Delhi. The new service, based on a per­
sonal access system, will be available at the
same cost as a fixed line phone.
Presently M T N L is going through the
process o f restructuring in order to keep
pace with the changing requirements
brought in by new technologies and busi­
ness opportunities. The vision o f M T N L
seems to be to become a global telecom
player and be in a position to provide
e-commerce, global roaming, high speed
m obile internet services, internet
exchange connectivity services, video-on-
demand and wireless ATM services. It is
harnessing attractive opportunities for
profitable growth in the existing areas and
is also considering entering into profitable
joint ventures in India and abroad.
M TN L’ s focus is probably on expanding
its operations beyond Delhi and Mumbai
through strategic linkages with basic, cel­
lular and internet companies either
through tie-ups, taking major equity stake
or by acquisition.
In order to cope with competition,
M T N L needs to work on the same lines as
suggested for BSNL earlier, namely, drop
tariffs and improve efficiency, so that migra­
tion o f customers to other service providers
is checked. Further, M T N L should work on
increasing its customer base.
M ahesh Uppal
What applies to BSNL will apply to
MTNL, but to a lesser extent. This is
because M T N L does not have a long dis­
tance business. Its lucrative subscribers
can be poached more readily since they
are more concentrated in business and
few residential localities where the com ­
petitors will try and set up their infra­
structure first. However, the calls have to
be terminated too. This is where the
incumbent’ s advantages lie. M T N L is still
not under any serious threat. Fixed line
revenues do not seem to justify the high
costs o f new operators. This is why we
have not seen the latter make much head­
way. There are ten times as many private
mobile lines as fixed lines in India in
roughly the same time period since new
players were allowed to provide services.
WLL-based “ limited mobility” services
will change that to some extent. But the
people who should worry about that are
mobile players, not M TNL. ▲