India: Lost connections
His accent is unmistakably Russian, but Vsevolod Rozanov faces one of the toughest jobs in Indian business.
The chief executive of Sistema Shyam TeleServices found his company's mobile phone licences abruptly cancelled by the supreme court this year, along with those of other foreign operators, including Telenor of Norway. Both groups, like UK-based Vodafone and India's market leader, Bharti Airtel, must now choose whether to enter a hastily organised auction in November, potentially bidding more than Rs140bn ($2.5bn) to win back their licences.
So the deep-voiced 41-year-old faces a particularly wrenching decision: having invested more than $3bn in the country's ferociously competitive telecoms market, should his company double down or go home?
Yet as Mr Rozanov considers his options, he says companies such as his face an even bigger problem â€“ namely regulators and politicians who fail to recognise how distressed the country's mobile sector has become. "They still think we are living in an earlier time, when mobile operators were becoming very rich," he says, referring to some of those he has met in recent weeks as he seeks compensation for his cancelled licences. "But in India that time is over."
From tentative beginnings in the early 1990s, the mobile sector surged from the middle of the last decade, becoming the largest after China, with more than 900m connections. A profound economic and social transformation followed, as rising penetration underpinned booming growth and placed modern communications into the hands of hundreds of millions who had never owned a telephone.
But now that growth has slowed, with revenues stagnating and debts rising amid price wars, unpredictable regulation and high-profile corruption investigations. The result has dented investor confidence, damaged India's image as a fast-growing economy and raised awkward questions about the future of this young industry â€“ and the inability of an increasingly dysfunctional government to nurture one of its most admired sectors at the very moment slowing national growth badly needs a boost.
The mobile telecoms revolution is thus only half complete: hundreds of millions of potential consumers, especially in rural areas, remain without connections, while lucrative data services are yet to take off, which is why the likes of Sistema and Telenor seem keen to stay put. Meanwhile, international investors and battered foreign operators are watching for signs that regulators and domestic operators can move quickly to reverse the decline in a sector that, almost more than any other, encapsulated their country's transition from closed economy to aspirant superpower.
If not, industry leaders warn, one of the most celebrated success stories from any emerging market in recent decades faces an increasingly perilous future. "India was once the poster boy for global telecoms, but in the last three years it has become the troubled child," says Marten Pieters, chief executive of Vodafone India, the country's second-largest operator by revenue. "This industry is in trouble. You will see a shake-out."
The troubles began in 2008, when the government allocated more 2G, or second-generation, mobile licences â€“ offering basic voice and text services â€“ to boost competition. The plan worked only too well: typical telecoms markets have three or four operators, but India's expanded to 15, creating a market notable for tariff battles that led to rock-bottom prices for consumers.
This was clearly good news for cost-conscious conversationalists but proved disastrous for the industry, whose profitability quickly declined. "Because of the number of players, there is a structural deformity which has set in," says Sanjay Kapoor, chief executive of Bharti Airtel. "Consolidation has to happen, and eventually only five or so players will survive."
Unfavourable regulations mean this shake-out has been placed indefinitely on hold, however â€“ part of a wider problem of unpredictable rulemaking in New Delhi that has driven operators to distraction. Their most frequent complaint is that inadequate spectrum has been made available: China Mobile, the world's largest mobile operator by subscribers, owns 70 per cent more than all India's telecoms companies combined.
Then came corruption. The 2008 licences were handed out by Andimuthu Raja, the disgraced former telecoms minister until recently in prison awaiting trial on charges, which he denies, of mis-selling the licences; he is now on bail. Investigations by government auditors alleged widespread irregularities and billions in lost revenues, beginning the process that led the supreme court to issue its cancellations in February.
Their ruling caught the industry by surprise, and kicked off a fresh series of spats with Delhi. These were partly about the justice of the court's decision: Telenor is in dispute with its Indian partners over the licence loss, for instance, while Sistema insists the decision ought not to apply in its case.
But the biggest complaint came over the price of the licences to be auctioned. Despite the industry's financial woes, the government last month unveiled a reserve price roughly 10 times higher than it charged back in 2008 â€“ raising doubts among some analysts as to whether the process will work at all.
As yet, Mr Rozanov has not said whether his group will participate, although both Sistema and Telenor have said they would like to stay in India, if they can make their sums add up. But other foreign groups have packed their bags already: Etisalat of the United Arab Emirates quit this year, writing off most of its $1bn Indian adventure in the process.
Either way, the auction will have important implications for the sector, including groups such as Bharti and Vodafone that neither suffered cancellations nor look likely to take part. This is because the price paid in November will almost certainly form the basis of the bill they face when they renew their own 20-year-old mobile licences from 2014 â€“ potentially an extremely expensive undertaking.
Decisions taken in the next two months will therefore play a crucial role in shaping India's mobile industry, and the sector's ability to deepen its already far-reaching impact on the country. "The mobile phone is to my mind the instrument that is most emblematic of India's transformation over the last 20 years," says Shashi Tharoor, a politician and author of The Elephant, The Tiger and The Cell Phone, on the nation's economic rise.
Mr Tharoor recalls a world where few owned land lines, and those who did found they rarely worked. He recalls, as a student, having to book calls between cities many hours ahead, although those able to pay premium rates could opt for a "lightning" connection taking just 30 minutes. "This being India, even lightning took a long time to strike," he recalls.
Early 1990s liberalisation swept away such problems, creating in their place a uniquely Indian business model. Pioneered by groups such as Bharti, it featured ruthless efficiency, outsourcing and sharing of infrastructure, and falling prices. In the process, modern telecoms came not only to companies hindered by antiquated technology but also to millions lacking even electricity or running water. "This mobile revolution will endure because it empowered the underclass of India in a way in which 45 years of talking about socialism never did," Mr Tharoor says.
The effect of this cut-price revolt is easy to see in Mumbai, the financial capital. "If a sweeper or banana wallah can listen to FM radio, Bollywood songs, watch cricket and multimedia on a Rs1,000 Chinese knock-off mobile phone, why shouldn't he?," says Santosh, a 30-year-old phone seller.
"These days calling, internet, downloading, everything is available for so cheap," he adds. It is a fact industry leaders know only too well: their hopes now rest on persuading customers from the fast-growing middle class at shops such as these to keep using their phones even as prices rise, while also graduating to more advanced, and more expensive, data services.
"There are times when [prices] go up â€“ either taxes are raised or you get less talk time for the same price," says Naveen Jain, 37, who runs another of the tiny mobile top-up stores that dot the city. "People complain but keep using anyway because mobile phones are too important now. They look more for network quality ... some even go for two sim cards to get the best combination of prices for calling, texting and downloading."
Multiple sim ownership means perhaps only 600m actually own a phone â€“ leaving half of the country's 1.2bn people still to be connected, most in rural areas. Mr Kapoor, Bharti's chief executive, calls this the "biggest opportunity market in the world", arguing that the overwhelmingly youthful population will take quickly to a host of potentially lucrative new offerings, from mobile banking to gaming.
If they do, it will provide part of the solution to another problem: the sector's precarious finances. "The total debt of the industry is close to Rs2,000bn ($33bn), which is an extraordinary number," says Mr Pieters of Vodafone. "The balance sheets of many of the players have been completely destroyed." But November's auctions will make this worse, with total debt set to more than double to Rs4850bn in just one year.
"The industry is going to be hit by a funding crunch," says Mohammad Chowdhury of PwC in Mumbai, noting that many businesses have already slashed capital expenditure, threatening rollout plans in rural areas. "Many companies will almost certainly have to sell off stakes, or do some sort of a market listing."
Faced with this crunch, Bharti has already announced plans to float its mobile phone masts business. Vodafone, too, is planning a flotation, although this is on hold pending the resolution of a long-running tax-dispute. Debt levels also make consolidation more pressing, given that revenues are unlikely to increase until competition has abated. However, the industry says it needs greater regulatory clarity on issues relating to future spectrum allocation and mergers before this can begin in earnest.
Yet behind the worries and dilemmas lies a more conventional business problem, argues Mr Chowdhury. "These companies have made a name for themselves by acquiring zillions of subscribers and building out networks really quickly," he says. "But now the initial euphoria over growth is over, they must prove they can innovate, and build new business models that give good returns to shareholders."
If they can, he says, the future of this gigantic market will be just as exciting as its tumultuous first two decades: "For India's telecoms revolution, the party might be over, but the fun is only just beginning".
Ambani family: mixed signals
Few in India split opinions more quickly than Mukesh Ambani, the head of Reliance Industries. Now the billionaire industrialist is dividing analysts too, as telecoms experts and worried competitors try to divine whether India's richest man will enter November's telecoms auction â€“ potentially setting up a showdown with his estranged younger brother, Anil.
The stakes were made clear in mid-August, when a report from Sunil Tirumalai, a Mumbai-based Credit Suisse analyst, argued that Reliance would jump in. Shares in incumbent operators fell â€“ a sign that investors believe the pugilistic tycoon will cause trouble for existing players.
There is an undeniable logic behind such a move: while Mr Ambani makes most of his money from oil, gas and petrochemicals, he also owns a nationwide licence for superfast "4G" data services. Yet most analysts think this business will struggle without an accompanying "voice" telecoms offering, the licence for which is up for grabs in the November auction.
Others are more sceptical, suggesting that Mr Ambani will bide his time, or try to buy his way back in â€“ perhaps by making an offer for Aircel, a struggling smaller operator owned by Maxis Communications of Malaysia.
The most tantalising potential acquisition, however, is also the most controversial: Reliance Communications, the debt-burdened operator picked up by his younger sibling as part of the 2005 agreement under which the duo split their family's conglomerate â€“ and launched the most famous family feud in Indian business.
Any hint of interest from the cash-rich elder brother would buoy RCom's depressed share price, while igniting speculation about an ultimate reunion of the two halves of the empire their late father Dhirubhai built from nothing to be India's biggest private sector company.
What the brothers think of such an idea is unknown. Mukesh Ambani has so far kept typically quiet about his plans â€“ although those familiar with the company's thinking say it is examining the auction route carefully. Whichever avenue he takes, the return of India's most powerful businessman to the mobile telephone market is likely to make for an uncomfortable period â€“ for competitors and close family alike.
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