Scale matters. Especially when one is talking about Mukesh Ambani and his flagship Reliance Industries (RIL).
Telecom will be no exception, as RIL’s top executive Manoj Modi and chief financial officer Alok Agarwal told analysts on Saturday that their total investment, including the acquisition of 95 per cent of Infotel Broadband, would come to around Rs 22,000 crore. The initial capital expenditure on physical infrastructure for rolling out broadband services will be over Rs 4,500 crore, the executives added. RIL will also pay Rs 12,872 crore to the government as licence fee for spectrum bagged by Infotel, which will now become a RIL subsidiary.
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Modi also said "RIL will not be acquiring any 2G (second generation) player," putting to rest market speculation that it is eyeing Venugopal Dhoot’s telecom venture Videocon Telecom.
But for the first time, RIL executives publicly admitted that they are open to sharing infrastructure with Anil Ambani’s Reliance Communication (RCom). RCom had expressed similar sentiments while welcoming RIL's re-entry into telecom on Friday.
In less than a fortnight of agreeing on a truce by scrapping most non compete agreements and giving each other business flexibility, hostility is history. For Mukesh and Anil Ambani and their business empires, this seems to be the era of partnerships.
The intention to explore possible areas of partnerships is no longer theoretical. There is clear action on the ground.
Mukesh begins talks with Anil on tele-infra sharing
According to investment bankers privy to these developments, both sides have deputed senior representatives to take the issue forward in a more concrete way. And quickly.
Manoj Modi, a director in Reliance Retail, has been given the mandate to lead the dialogue on behalf of RIL. For Anil Dhirubhai Ambani Group (ADAG) which, ever since the 2006 demerger, runs RCom, the talks will be spearheaded by Satish Seth, group managing director of ADAG, said these bankers.
Both Modi and Seth are key lieutenants of the two Ambani brothers, Mukesh and Anil, respectively and have worked together very closely on a number of projects, especially Reliance Infocomm in the late 1990’s. Modi also leads all new RIL initiatives and Seth is still hands on when it comes to overseeing Anil’s telecom, infrastructure and power verticals.
"It would be logical to assume that both Modi and Seth have been regularly in touch for the last one week or so, as the broadband wireless access (BWA) auctions gathered momentum," said one of the bankers.
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The very fact that RCom withdrew from the auctions mid way, but announced its move after the auction process actually closed is a clear indication that both sides were working in perfect sync, the bankers added.
Even though no executive from the two groups will confirm, Reliance watchers said, such synchronized moves probably point to the fact that both groups shared strategic inputs and information, like bid strategy and even the acquisition of Infotel Broadband.
To begin with, the possible partnership will be based on two main areas of infrastructure sharing in the form of fibre optic cables and towers to save costs and time. RCom inherited its pan India fibre optic base and towers from Infocomm, and has subsequently built on it. Today, it has close to 50,000 towers in its portfolio; around 190,000 kms of fibre optic connecting over 1 million buildings across 44 cities with over 1.4 million access lines, and nine data centres with data storage space of over 6.5 lakh sq ft. With such a backbone, its that much easier for them to offer IPTV or fixed broadband phones.
"Along with Mukesh Ambani, Manoj Modi and Satish Seth had been responsible for the national rollout of tower and fribre optic infrastructure, first as the combined Reliance Infocomm and then RCom, so there's a reason why these two are now once again leading the talks…they know the game inside out," said the bankers.
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The fibre optic strength will be critical as RIL will be eyeing the lucrative data market that is growing 70 per cent every year.
Revenue wise, data currently generates only 11 per cent, thanks to mainly short message service (sms) while in developed markets that figure is almost 35 per cent. So the market potential is immense.
"Data is close to RIL's heart, that's their BWA objective. So think of applications like IPTV on that platform, which can handle both data and video to start with," said a telecom analyst from a foreign brokerage firm.
The option for RIL will be either to build that infrastructure or to lease. To build a national network from scratch at this point, RIL will have to pump in at least $10 billion. It will also take at least 4-5 years. Keeping in mind that RIL is aiming 100 million subscribers in five years and would like to become the cheapest service provider, the lease option is clearly the preferred route. That, said telecom analysts, will mean at least a $4 billion savings for a national level rollout for RIL.
For RCom, which is saddled with high debt and low average revenues per user (Arpu), getting RIL as a new tenant means additional revenues, savings in operating expenses in the form of tower, energy and operation and maintenance costs.
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"Elder brother has wireless broadband, aggressive plans and a point to prove but no fibre optic or tower. The younger brother may have huge debt, but he has infrastructure, 3G and 2G spectrum and a CDMA technology. This is a perfect and logical environment for collaboration, a likely combo that can shake up any competitor today," said a banker.
Does that mean going forward it will be an exclusive arrangement between the two? Unlikely. Both parties are still in talks and a final plan is still being chalked out, but the tie-ups will happen as and when there is a strong business and commercial case.
Both Modi and Agarwal made it clear that infrastructure could be shared with any of the existing players.
They also said arrangements with existing players will also be made to ensure that even laptop and notepad users get total access to the entire service offerings. But RCom, with towers connected to the fibre optic network, will surely remain a strong contender.
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"Increasingly, you will see RIL opt for technology off the shelf and marry some key strategic partners for infrastructure. They will unleash a new revolution. Mind you they have won nationwide 20 MHz spectrum at one third the value of 3G. That gives them tremendous cost and time advantage," said the national head of telecom practice at an international research firm.
Both RIL and RCom also said they are endorsing the same fourth generation radio technology: LTE or Long Term Evolution Technology, which is patented by Qualcomm and is aimed at providing better speed and capacity.