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Down But Not Out: Can 3G and broadband salvage BSNL’s flagging fortunes?

April 29, 2011
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Once reigning but today floundering, state-run integrated telecom operator Bharat Sanchar Nigam Limited (BSNL) is betting big on broadband. Of all its service segments - fixed line, mobile, MPLS-VPN, VSAT, VOIP, internet protocol television (IPTV), long distance and others - broadband is the one in which the operator is leading strongly, with more than 70 per cent market share.

Owning the country’s largest fixed line network and 625,000 route km of optic fibre, BSNL is perhaps the most favourably placed operator to offer fixed line internet and broadband services. This is an exclusive advantage it has over its rivals as the majority of broadband connections are still on fixed lines.

In the past one year, BSNL’s total broadband and internet subscriber base has grown by nearly 25.9 per cent, increasing from 8.07 million in September 2009 to 10.17 million in September 2010. BSNL expects the numbers to increase further with the growth of wireless internet, 3G and broadband wireless access (BWA) services picking up.

In line with the government’s objective of connecting 160 million households with high speed internet by 2014, BSNL has made broadband, and more particularly rural broadband, its key area of focus. Over the year, it has added several innovative moves to its marketing strategy. It has tied up with various mobile stores for promoting broadband services and is training 10,000 salespeople specifically to increase service awareness among the masses. Further, apart from individual consumers, the operator is also targeting the more lucrative small and medium enterprises, large companies, government institutions, schools and colleges for selling its fixed line and broadband services.

Being the first operator to be allocated BWA spectrum, BSNL was mandated to launch Wi-Max services in several circles ahead of its peers. To make good its investment of Rs 83.13 billion for securing the pan-Indian BWA licence forced upon it, BSNL opted for a revenue-sharing franchise model. But that venture hit a roadblock with the Central Vigilance Commission (CVC) probing the selection of BSNL’s franchise partners, especially one of the selected companies, Ampoules and Auto Private Limited.

To sort this out and prove any intention of malpractice will take time, and will, therefore, delay the rollout of Wi-Max services across the country, especially in rural areas.

For BSNL, which has always been unsure about the commercial viability of the government-initiated rural Wi-Max project, this is a serious setback. Earlier, the operator had strongly expressed its inability to continue with the project unless it was provided a Rs 23.95 billion grant to support the venture.

BSNL has been reluctant to run businesses that involve huge capex and opex, leading to losses. For the year ended March 2010, the company recorded losses of Rs 18.22 billion for the first time in its history. This trend is expected to continue unless immediate measures are taken to stymie the bleed. According to a senior analyst from Anand Rathi Securities, “BSNL has been incurring losses over the past few years but has managed to stay afloat on the back of the interest earnings on its Rs 300 billion cash reserves. With the losses rising, the company has been dipping into its reserves by around Rs 4 billion each month. Today, its reserves have dropped to Rs 50 billion, which will sustain the company for perhaps a year or two. And if corrective steps are not initiated now, BSNL will soon find itself as a BIFR (Board of Industrial and Financial Reconstruction) case.”

Weighed under 

The government has realised that being a PSU operator, BSNL, with its unwieldy size and rural responsibility, has been unable to keep pace with competition. For now, the government has assured BSNL of continued subsidy to support its operations in rural areas from the Universal Service Obligation Fund. However, this will only help in a small way.

The operator’s problems are many. BSNL can do precious little about bureaucratic delays, long tendering processes, frequent governmental interference, discontinuation of licence fee reimbursements, and its 350,000-odd workforce with associated trade unions problems. They have all added to the operator’s woes.

The company’s top management is currently grappling with a number of worrying trends. BSNL ceased to be the largest player in the telecom market several years ago with operators like Bharti airtel, Vodafone Essar and Reliance Communications (RCOM) overtaking it, even in terms of subscriber additions in rural areas.

With users moving from landlines to the more convenient mobile phones, BSNL’s fixed line business – its mainstay from which it still derives 63 per cent of its revenue and holds 72.79 per cent market share – has taken a huge hit. Between December 2009 and December 2010, the company lost 2.45 million wireline subscribers. And this slide is expected to continue, notwithstanding the operator’s efforts to bundle broadband services with landline connections in order to retain its subscribers. As of February 2011, the operator’s wireline subscriber base stood at 25.37 million.

The operator, which in 2006 was a serious contender for the top spot in the country’s booming mobile industry, has, in the past few years, been facing a severe network capacity crunch. Every effort to procure equipment has failed owing to a series of controversies. Moreover, unrelenting competition with rivals pitching for cheap and innovative mobile deals has pushed BSNL to the wall.

Its mobile market share slid to 11.41 per cent as of February 2011. It is currently the fourth largest player in the country with a mobile user base of 90.3 million. It trails Bharti airtel (158.9 million users), RCOM (132.1 million) and Vodafone  Essar (130.9 million users).

The introduction of mobile number portability (MNP) has also done little for the company. Apart from a few pockets like Orissa and Andhra Pradesh, where BSNL has been the top performer and gained a substantial number of new users, following the launch of MNP on January 20, 2011, as many as 459,804 of its customers have ported out while only 171,582 have ported in. This amounts to a net loss of 288,222 users.

Leadership choice 

The beleaguered PSU currently does not have a chairman and managing director (CMD). For the past year and a half, the company has been functioning with only acting CMDs – first Gopal Das and now S.C. Misra.

Sam Pitroda was brought in to help restructure BSNL into a more corporatised and profitable entity. The review panel headed by Pitroda drafted a 15-point recovery road map for the company. It included a strategic stake sale of 30 per cent; pruning the staff by a third; hiving off the fixed line business from the more rapidly growing mobile business; listing the company; and significantly, hiring outside professionals for key management positions, especially that of the CMD.

None of the recommendations has seen any positive movement so far. In fact, they have faced serious opposition from the trade unions. However, the government has shown its keenness in finding the right person for the CMD’s position since the Pitroda panel’s recommendations.

More than 15 applications were received for the job early this year. But, despite the efforts of the Department of Telecommunications (DoT) to attract talent from outside, BSNL received only three applications from the private sector. According to industry experts, among the many reasons why BSNL has not been able to attract talent from the private sector is the huge disparity in the compensation structure.

Also, BSNL’s operations are huge and finding the right person to lead such a large corporation, and handle the frequent political interference and remote control by mandarins in DoT is not an easy task. As analysts point out, the challenge of resurrecting BSNL’s fortunes is not much of a draw. In light of this, appointing an able insider for the job is a better option for the company.

Infrastructure lapse 

For BSNL, delays in infrastructure expansion, especially in the mobile segment, have been the biggest bane. Attempts at revival are being made after the blanket ban on the import of Chinese equipment was lifted in late 2010.

However, to enhance its 2G and 3G mobile network, having cancelled the previous two controversial mega tenders, BSNL has now settled on ITI for supplying equipment. The contract has been divided into two parts of Rs 366.8 million and Rs 2.3 billion and requires ITI to complete deliveries by the first half of 2011.

For the supply of Wi-Max systems for its broadband rollout, BSNL has placed a Rs 3 billion order with ZTE Corporation. Apart from this, it has entered into an agreement with RailTel to execute various telecom-related projects.

Analyst view 

The company has been beset with problems in the past few years. Yet, there is no denying that it is one of the country’s leading service providers.

While BSNL does not have access to lucrative markets like Delhi and Mumbai, the brand is visible in all corners of the country. It has a high capacity core and access infrastructure; high capacity fixed infrastructure; a large copper and fibre network;  and high capacity international gateways, backbone, dark fibre and transmission capacities. In other words, it is an incumbent with muscle, reach and massive resources that are way ahead of its peers.

As Sridhar Pai, chief operating officer of Tonse Telecom, says, “BSNL is a jewel that has been unfortunately left to languish in a silly system that neither has the ability nor the willingness to fix it. Worse, it may never get fixed. Unfortunately, this is true for most public sector incumbent telecom companies the world over. Large corporations were created for monopoly regimes to work in a different scenario. And then privatisation began, with some largesse provided to the incumbents but never equipping them to face the free world of competition. Thereafter, the decline started.”

Dr Mahesh Uppal, director, ComFirst, agrees. “While there is no doubt that BSNL is a great company, it currently lacks a sense of ownership from the government. As a result, the company is drifting aimlessly. Leadership is its biggest issue.”

The immediate need for BSNL is to make structural changes. For this, the PSU and, more importantly, the government need to take concrete action. “The company needs to be freed from the policymakers’ clutches. It has to be equipped to take decisions and implement them like a  private business. The management needs to be given more power to execute and show profit and loss responsibility. Vendor selection needs to be tightened, corruption checked and the workforce disciplined within the next three years. Only then will the company be successful in arresting the slide or else it will be looking at the government for doles to survive,” says Pai.

Analysts believe that one of the best ways out of this troublesome period for BSNL would be to leverage its existing infrastructure better. According to an internal assessment of the finance wing of DoT, BSNL currently has over 50,000 towers across the country and over 30 per cent of its mobile network capacity is unutilised. So, if the company wants, it can garner over Rs 50 billion from interconnect charges by merely leasing its base transceiver stations (BTSs) and optic fibre cables. In fact, according to market experts, if BSNL goes the joint venture way, it can raise over Rs 350 billion from BTSs alone.

Further, if BSNL’s real estate were to be leased, the rent could fetch over Rs 100 billion. And if the operator were to hive off its tower business, it could generate over Rs 500 billion, going by the Reliance Infratel valuation.

“Meanwhile, if BSNL can market its products in a different fashion, perhaps by even tying up with other operators, it could go a long way,” observes Uppal.

To cut through the red tape and consequent delays, analysts believe that BSNL will stand to gain if it can bypass the current tendering system and opt for outsourcing its network management system to international vendors, as was done by Bharti airtel.

Of late, talks for the proposed merger of BSNL and Mahanagar Telephone Nigam Limited (MTNL) have been revived. These talks had been going on for the past three years without much progress. The merger could result in several synergies. For one, the BSNL-MTNL combine will climb up the ladder and reach the third position in the GSM wireless segment in terms of subscribers and market share. Second, it will help the combined entity to serve customers better and more seamlessly, without any roaming charges.

As KPMG’s executive director and head of telecom Romal Shetty notes, “To go through, the merger will require a long-term vision. It will not be simple. A whole lot of planning and analysis will be required to weigh the pros and cons. Besides, both companies will need to work hard on the branding exercise that will follow the merger.” The obvious hitch to the merger is that MTNL is a listed company while BSNL is not. Also, BSNL’s employees are strongly opposed to the merger.

So far, there has been no progress on the merger plans or with regard to the disinvestment of BSNL. DoT is believed to be waiting for BSNL to achieve the right valuation after improving its financial performance, among other things.

Looking ahead 

For BSNL, the way forward is tapping the still largely underserved broadband market in India. It is a segment in which the operator has a clear edge. On the customer service front, the focus is expected to be greater on content provisioning and better service offerings. On the technology front, the focus is on migration to higher data speeds in the mobile segment using HSDPA and LTE (4G).

The company is investing in upgrading its network to an IP-based, high speed, 3G network for the seamless migration of different technologies. For this, it has earmarked Rs 153 billion as capex for 2011-12.

In an effort to salvage its flagging wireline business, BSNL, apart from offering IPTV and broadband at competitive tariffs, has also dropped its national long distance tariffs to the level of local calls for its landline subscribers across the country. In the future, more value-added services (VAS) are expected in this segment.

As such, BSNL will be focusing on VAS, which contributes nearly 20 per cent to its total revenues. The operator has also pinned its hopes on 3G to increase and evolve its VAS offerings.

In 2010, BSNL introduced 3G services in over 700 cities. It has since notched up a customer base of 3 million. The operator has already started upgrading its network to enhance the current data speed by three times in order to compete with private players in the 3G space.

Though the company’s 3G services are yet to pick up significantly (for it to meet the stiff competition expected this year from its peers), its 3G bouquet is comparable with that of other operators. On offer are services such as video calling, videoconferencing, TV channels, video-on-demand, movie and song downloads.

Leveraging on its pan-Indian 3G licence, the operator recently invited bids from private telecom companies to share its 3G network. It hopes to raise Rs 25 billion-Rs 50 billion from 3G roaming agreements within a five-year period. Though no operator has bid so far on account of price point conflicts, BSNL is expected to come out with a revised offer to attract buyers.

Meanwhile, BSNL is focusing on serving the enterprise segment in a big way. It has devised an enterprise strategy that is looking to target corporate customers through unique and differentiated solutions via dedicated account management sales teams and channel partners. Further, BSNL has made a business unit-wise distinct vertical structure, which is being implemented across the organisation by mapping the existing executives in their new roles.

Meanwhile, the company will continue to expand its reach to the remotest parts of the country where none of the private operators has managed to gain a presence so far. 

All in all, BSNL has potential. But it does not have the freedom or the flexibility of its peers to take on the aggressive competition in the market. What it really needs in order to effect a turnaround is to devise a fresh strategy, with a market-facing, dynamic management leading the way.

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