Why two factions of Tata Group are in a bidding war for Tata Teleservices

Mukund Rajan, head of international business, Tata Sons
It’s a Rs 350 billion (Rs 35,000 crore) business, and if the huge demand explosion for data is anything to go by, the domestic fibre network business will only grow many times over. That explains why a senior executive from the Tata group, Mukund Rajan, together with private equity fund TPG Capital, thought it a good idea to make an ambitious bid of over $1 billion bid to buy out the fibre optic transmission business of Tata Teleservices (TTSL) last week. The deal includes retail wired broadband, national long distance and enterprise connectivity. It is notable because Rajan is head of TTSL’s international business and he is up against another internal rival for TTSL in Tata Communications, a major TTSL client and leader in the international long distance business.

TTSL, which sold its mobile business (including the spectrum) late last year to Bharti Airtel virtually for free after the company saw its debt and losses rising unsustainably, has been looking to sell the remaining fibre and enterprise business as part of its strategy to reduce its exposure to telecom. According to sources, the business has revenues of over Rs 30 million (Rs 3 crore), a fibre network of over 125,000 km (a large part for national long distance) and some stable corporate clients. But its retail wired broadband business has seen a steady decline with just over 100,000 customers, far behind competitors BSNL, Bharti and Bangalore-based ACT Fibrenet. 

The Rajan-TPG combine will have to put in substantial investment to expand operation, say experts, if it wins the bid. It has promised that it will both absorb the employees and continue with the contracts that it had signed with Tata Communications to carrying its international traffic within India. 

Whoever wins the bid will have to hit the ground running because the business is buzzing with action. In the last week of December last year, Reliance Jio snapped up Reliance Communication’s fibre network of over 178,000 km as part of a comprehensive deal that, according to sources, is valued at around Rs 5,000 crore. Together with its own pan-India fibre network, Jio will command over 450,000 km of optic fibre network across the country and is all set to disrupt this business. Jio has been busy last year concentrating on getting a large share of mobile subscribers. Come 2018 it is all set to launch fibre-to-home with a target to reach 30 million households across the country, offering triple play (high speed data, voice and TV). It is also finalising plans to get into the enterprise business for large companies and small and medium enterprises.

Not to be outdone Bharti Airtel, which had announced its interest in buying out the TTSL fibre and enterprise business but seems not to have not followed it up, is also looking at a huge push to increase its over 2 million wired broadband subscribers in 95 cities offering triple play. 

And don’t underestimate state-owned BSNL, the largest player in the game with over 700,000 kilometres of fibre network, and with over nine million wired broadband subscribers.   

With Jio’s entry in the fibre business, however, everyone expects a price war. Says a senior executive of one of the companies that has shown interest in buying TTSL’s business: “We expect Jio to replicate what it did in the mobile space by dropping prices dramatically. So there will be mayhem in the market, and no one in the fibre business can make money in the next three to four years”.  

But after the bloodbath, he predicts, two to three players will be left standing and all of them will have enough business as data becomes key to growth. 

Currently the fibre and wired broadband business has as many over 20 players which also includes cable operators and smaller regional players who have a reasonable market in their own areas of operations. Some have become pretty big. One such player Bangalore-based Atria Convergence Technologies, which started out as a cable operator and now sells under the ACT Fibrenet brand. It offers broadband services in over 12 cities grabbing over 1.25 million customers, making it the third largest player. The company recently offered 1Gbps of data at Rs 5,999 targeted at the SME segment, which otherwise cannot afford the high cost of leased lines. It is also expanding its operations in two or three more cities. 

Cable companies that have a large household base using their TV services have also joined the bandwagon. Hathway, for instance, has over 1.2 million broadband homes tied up in over 22 cities and are now rolling out fibre-to-home in various areas to take on the Jio challenge.   

This is a business only for those with deep pockets, however, Currently 60 to 70 per cent of the revenues come from the enterprise business, which include mainly the big corporations; the national long distance is already commoditised, and there is the smaller retail wired business which will slowly become bigger. 

There are also large entry barriers.  For instance, laying new fibre underground is not only expensive (costs Rs 150 million per km in Mumbai to get right of way), it is time consuming and also unfeasible in dense areas. That gives existing players a headstar. Then, only 80 per cent of the country’s towers have fibre back-haul, but with explosion of data and the coming of 5g (which will require many new towers to be built), there is very little option for them to use fibre if they want fast data speeds. By 2020 the number of cell sites are estimated to go up to 1.5 million by 2020, a threefold increase. 

The penetration of wired broadband is currently a mere 1.4 per 100 inhabitants against a global average is 11.6. According to National Institute of Public Finance and Policy, to achieve that level of penetration, India will need a substantial 58 million fixed broadband subscribers (compared to 13.5 million expected in 2018).  But clearly, with competition, data tariffs are expected to fall dramatically as in mobile, but this, again, will require a lot of fibre connectivity. 

What is even more attractive, experts say, is the large scale adoption of data by small and medium scale enterprises, a market that both the Rajan-TPG combine and Jio will go for. And there is potential for new businesses which are opening up – driverless cars will need uninterrupted reliable connectivity, as will the Internet of Things. Experts say that new technologies like virtual and augmented reality, which are slowly catching up, will need a lot of data at the consumer end too. 

Year 2018, thus, is poised for a new battle in the fibre space, but for consumers it could not have been a better time to enjoy the joys of high data speeds at rock-bottom tariffs.   

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