Should BSNL and MTNL continue to operate as separate entities? Telecom experts debate the logic of merging the two state-cum telecom operators, the benefits that could accrue and how well-equipped the merged entity might be to cope with the new competition. We present their views….

Should the government consider merging MTNL and BSNL? Why or why not?

Vishvjeet Kanwarpal
The Indian telecom sector has experienced substantial consolidation in the form of M&As and strategic alliances involving leading private players such as Birla-AT&T, Tata, Bharti, Spice and Hughes in the past year. The drivers behind these trends are as much economies of scale and the synergies of multiple circle rights (particularly with respect to NLD and ILD services) as are the disadvantages of stand-alone circle operations.

Merging MTNL and BSNL would be a good idea and perhaps even necessary for their long-term survival and success. An MTNL-BSNL merger would give both a fighting chance against the emerging consolidated private sector players. With the two competing against each other as well as the private sector players, their value attrition can only accelerate.

However, merging the two entities will involve considerable logistical and coordination challenges. BSNL enjoys an effective monopoly status in the country with 32 million subscribers and operations in 17 telecom circles, Chennai and Kolkata. Along with MTNL’s 4 million subscribers in Delhi and Mumbai this would constitute a formidable competitive advantage.

The synergies and advantages inherent in an integrated national telecom infrastructure involve lower cost of investment in infrastructure and greater joint ability to face competition.

Mohit Saraf
Consolidation through M&As is the buzz-word in the industry. The thumb rule for any telecom business is either to expand and modernize or to perish.

MTNL and BSNL are the dominant players in basis telephony in India. There are two other private operators in each of the circles and the regulatory authority is expected to announce guidelines for the fourth. But instead of taking advantage of being the first player in a circle, poor service has drifted the demand towards the second operators. Some members of Parliament had made a representation to the erstwhile communications minister Ram Vilas Paswan urging him to merge the BSNL telecom districts with MTNL. Consumer bodies had taken up the matter with the MPs as they thought the merger would ensure not only better quality of service but also a whole range of telecom and related services that MTNL offers. The recent space of mergers and acquisitions shows that what we have is the formation of monopolies in telecom. The Department of Disinvestment is planning to refer the telecom behemoths MTNL and BSNL to the Disinvestment Commission.

On a long-term basis consolidation will result in two-three companies in each basic and cellular service. We are entering an era of strong regional players, where contiguous circles are important. Every strong player will consolidate his position in the area in which he is strong by gobbling up smaller players till he attains a critical mass or till the point from which further consolidation becomes economically unviable. Both can be provided by BSNL and MTNL, if they act together.

Why are contiguous circles so important? First, the dependence on the NLD 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 of services to subscribers, creating a barrier against potential competition. Third, the telecom business and if the circles are strategically placed with each other, the overall capital cost can be brought down.

In a major reversal of stand, the government has allowed BSNL and MTNL to compete with each other in basic services. Although the present guidelines do not allow companies with a common promoter to operate in the same circle, the government has decided to alter the guidelines in the interest of the consumer. Instead of competition, the better way might be consolidation.

Mahesh Uppal
Yes, 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. However, in important corollary is to allow all private operators to be as small or as big as commercial considerations dictate. Otherwise the merger would exacerbate a very inequitable situation where a behemoth of an incumbent competes with circle-level players who must be licensed for each service separately.

A second reason for merging MTNL and BSNL is that government-owned or controlled incumbents competing is as much of an anomaly as two private companies with common promoters competing with each other. The latter is currently disallowed for good reason and is hardly the kind of 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 negligible competition and will maintain its monopoly in both long distance and basic services. Its greatest advantage is its ownership of a national integrated telecom network and infrastructure. Investment in this area by the private sector has been unimpressive. The prohibitive risks involved in such large network investments 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. More likely, they will focus on the main cities and towns, which account for the lion’s share of telecom traffic and potential for value-added services

With decreasing ARPU [average revenue per user] and a competitive strategy to cherry-pick higher value corporate and commercial customers, the advantage of a large subscriber base can quickly turn into a liability. In this sense the mission of BSNL to service the rural and less developed areas could prove to be a disadvantage. 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 of work culture, operational efficiencies and customer service. The quality of service will need a total overhaul if it is to survive in the long run.

Mohit Saraf
Times have become very hard for BSNL lately. Thee face of the telecom industry has changed forever. In one straight shot, telecom giant Bharti ended the 100 year old monopoly of the state-owned BSNL by unveiling its long distance service. And by slashing rates by 50 per cent for mobile-to-mobile STD calls, it achieved in a day what the US took 10 years to accomplish. No wonder cellular operators didn’t think twice before switching from BSNL to Bharti’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 of BSNL. This will lead to a drop in international calling rates by at least 10 per cent. The two consecutive developments have come as a real blow to BSNL which, till now, used to carry all the cellular international call traffic.

So far, BSNL was the only legal third party carrier. But now, with Bharti Telesonic’s foray into the NLD segment, the tables have turned. Cellular operators now have a choice to ride over the network of BSNL or that of IndiaOne. And since IndiaOne is offering half the existing rates, almost all the cellular operators (except Reliance, which has also applied for an NLD licence) have grabbed its offerings. Thus, in a competitive environment, BSNL will have to rework its strategies and improve efficiency. As part of a massive restructuring exercise, BSNL will split into four separate business units-one each for basic, cellular, NLD and value added services. Each business will be headed by a director.

It will be a battle of 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 overpriced. 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 of 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 of Bihar as a first step in that direction.

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 players who will have a tough time beating BSNL’s prices. An effective and fair-priced interconnection with BSNL’s existing network 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 competition in Mumbai and competition for the first time in Delhi?

Vishvjeet Kanwarpal
MTNL will enjoy a monopoly for some time in basic services. However, the major thrust of the private players will be on the corporate and high value market segments. Given that 10 per cent of MTNL’s customers contribute nearly 70 per cent of its revenue, the strategy of the competitors will undermine the advantages of MTNL’s existing infrastructure and customer base.
MTNL and BSNL have both performed poorly in the cellular market, even though they had the advantage of existing infrastructure. Birla-Tata-AT&T BPL, Hutchison and Bharti have secured over 60 per cent of the total cellular subscriber base of about 6 million users in India.

ON the basic services’ front, corporates are likely to turn to private players for better services. Hughes Tele.com is already making inroads into MTNL territory in Mumbai. In Delhi, the market has acknowledged the presence of Bharti in a very short span of time given its reputation in the cellular market.

The greatest threat to MTNL lies more in its weakness rather than the immediate strengths of its private reputation for poor quality of 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 motivation to deliver quality are additional areas of challenge. Both BSNL and MTNL must cope with the fact that customer care and quality of service are fast becoming a key buying factor in the Indian consumer’s mind. Cost-cutting and lower prices alone will not be an adequate defence strategy. Customer loyalty has to be earned and the advantages of decades of monopoly can erode in a few years, in a competitive environment.

Mohit Saraf
MTNL has about 70,000 employees and 4.5 million customers operating basic and mobile services in Mumbai and Delhi circles 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 steps to be prepared for the new situation. In mobile communication, it was MTNL that forced the private operators to bring down tariffs by as much as 50 per cent. Further, it has decided to offer a series of new schemes to its Dolphin subscribers. These are the Night Talk Scheme and the Free Number Scheme. Hence, MTNL seems to be fairly competitive.

In terms of new telecom facilities to be provided to customers, MTNL has decided 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 networks. During this two-year period, MTNL will continue to route its customers through the network of VSNL.

Further, MTNL has announced plans to launch a new form of limited mobility service within a given area in select parts of Delhi. The new service, based on a personal access system, will be available at the same cost as a fixed line phone.

Presently, MTNL is going through the process of restructuring in order to keep pace with the changing requirements brought in by new technologies and business opportunities. The vision of MTNL seems to be become a global telecom player and be in a position to provide e-commerce, global roaming, high speed mobile 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. MTNL’s focus is probably on expanding its operations beyond Delhi and Mumbai through strategic linkages with basic, cellular and internet companies either through tie-ups, taking major equity stake or by acquisition.

In order to cope with competition, MTNL needs to work on the same lines as suggested for BSNL earlier, namely, drop tariffs and improve efficiency, so that migration of customers to other service providers is checked. Further, MTNL should work on increasing its customer base.

Mahesh Uppal
What applies to BSNL will apply to MTNL, but to a lesser extent. This is because MTNL does not have a long distance business. Its lucrative subscribers can be poached more readily since they are more concentrated in business and few residential localities where the competitors will try and set up their infrastructure first. However, the calls have to be terminated too. This is where the incumbent’s advantages lie. MTNL is still not under any serious threat. Fixed line revenues do not seem to justify the high costs of new operators. This is why we have not seen the latter make much head- way. There are ten times as many private mobile lines a 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 MTNL.