Sistema bidding for stronger presence in India

 The current customer base of SSTL operating in India under the MTS India brand exceeds 14 million subscribers. Source: Press Photo.

The current customer base of SSTL operating in India under the MTS India brand exceeds 14 million subscribers. Source: Press Photo.

The Russian telecom giant is looking for more business in India despite shutting down its services in 10 states. Analysts see bright prospects for Sistema after it retrieves its licenses during March spectrum auctions.

Having invested more than $3.1 billion in India, Sistema Shyam TeleServices Limited (SSTL), subsidiary of Russian giant Sistema, finally announced plans to participate in upcoming CDMA 800 MHz auction to secure its investments.  This decision comes in the wake of the Supreme Court of India dismissing the curative petition against SSTL’s license cancellation.  The new auctions have become the only way for the company to continue business in India.  The current licenses of SSTL have been recently extended by Supreme Court till March 11, when the next auctions for 2G and CDMA spectrums begin.

The current customer base of SSTL operating in India under the MTS India brand exceeds 14 million subscribers. The company was operating in 22 circles in India with a high-speed data network in more than 300 Indian cities, covering 83 percent of the potential data market, until 21 out of 22 licenses were revoked by the Supreme Court in February 2012.

According to yesterday’s SSTL statement, the Government of India has confirmed that the company will be able to set off previous license costs against the new auction prices. In 2007, SSTL paid approximately $600 million for CDMA licenses.

“We are in the process of drawing an optimal strategy for the auctions based on several factors including spectrum pricing, levels of competition etc. The intent is to now look at life beyond all the uncertainties and build an even stronger MTS brand in India. The go forward plan includes continuing with the company’s focus on its data centric-voice enabled strategy in select circles,” said Vsevolod Rozanov, President & CEO, Sistema Shyam TeleServices Ltd.

Well-earned offer

In 2012, the Indian government set the reserve price for 5 megahertz (MHz) of pan-India 1800MHz bandwidth at $2.5 billion and 5MHz of 800MHz bandwidth was at $3.3 billion. Later in January 2013, the Empowered Group of Ministers (EGoM) recommended reducing minimum price of 800 MHz spectrum by 30 - 50 percent in new auctions scheduled for March. Thus the new reserve price has dropped significantly.

“Previous auctions for 800 MHz spectrum held in November 2012 were ignored by most of the players, however, new specifications as well as reduction of the  price will become a good drive for potential bidders”, says Anna Zaitseva, analyst of FINAM Management. “At this point of time the participation of SSTL in new auctions looks reasonable, considering that talks with Aircel were suspended. Earlier the company denied to pay the charges for securing its position in the market and was aggressively defending its investments in the court. Now SSTL can get the better offer,” she adds.

Investcafe analyst Ilya Rachenkov believes that the $1.6 billion price for CDMA spectrum in all 22 circles is too high, even if government will allow SSTL to set off previous license costs against the new auction prices.

“It is possible that the new price will be too much for the company. At present it’s not advisable for Sistema to bare additional expenses related to its international business. Sistema perhaps is already seeing losses because of the licensing issue in India and legal process in Uzbekistan. For this Sistema has already allocated $500 million. Thus altogether the monetary losses of Sistema’s international telecom businesses may account at $1,5 billion in 2013,” Ilya Rachenkov told RIR.

Cutting the burden

Despite decrease of the spectrum price, SSTL decided to roll up its services in 10 circles (Assam, Andhra Pradesh, Bihar, Himachal Pradesh, Haryana, Jammu & Kashmir, Madhya Pradesh, North East, Orissa and Punjab).  Experts believe that abandoning almost half of the circles is a way to achieve reasonable payback period for SSTL considering that Sistema was expecting SSTL to reach OIBDA break-even in 2014.

“In some of the circles the subscription base was not more than 1000 connections, so abandoning the license for those circles won’t affect SSTL business much. I consider the total subscription base in those 10 circles where SSTL will discontinue the services is 2.3 million connections. It is significant in terms of SSTL’s business volumes but is tolerable and cannot become the reason of dip revenue,” Rachenkov added.

A Mumbai-based telecom analyst told RIR on condition of anonymity that discontinuing services in these particular regions was very surprising for the industry. “These regions are the fastest growing the country; we have seen very aggressive bidding for these circles during latest auctions. It just becomes clear that SSTL is not interested in developing voice services and will focus only on data, and data-wise these regions grow slowly and are expected to pick up later.”

Competing for data

While GSM technology is currently dominating the Indian market, industry players believe that CDMA still has a lot of potential, especially if the government will offer operators sufficient spectrum. As the demand for low cost broadband connectivity in India is still to be addressed, while the 3G ecosystem is just at work in progress stage and 4G deployment will take years to reach mass consumer market, CDMA will continue bringing good revenues from data services. 

Focusing on data rather than voice, though the latter is still brining almost 80 percent of revenue to telecom operators, will become the strategy not only for pure CDMA players such as SSTL and Tata Teleservices, but even for GSM and LTE operators.

 “There is nothing stopping Indian operators from launching data card-based LTE services. Indeed, Bharti is already doing so and RIL (Reliance Industries) may follow suit. The data card business not only adds an incremental revenue stream for the operators, it should allow them to compete directly with CDMA players who have enjoyed an early mover advantage in this segment,” notes Rajiv Sharma, analyst, HSBC Securities and Capital Markets.

Expert believes Indian LTE players will restrict 4G services to data cards in the near to medium term as the mobile data volume growth overtakes voice traffic.

“4G will be used predominantly for data and multimedia services although some operators may offer voice depending on whether they have access to 3G/2G networks and regulatory restrictions,” says Bharat Bhargava from Ernst & Young. He adds that given the lack of wireless broadband networks and the limited availability of 3G spectrum with operators in India, 4G is likely to gain traction starting not earlier than 2014.

3G and 4G players a threat for SSTL?

Affordability of tariffs and devices could be the answer to the question. Bharti Airtel, the only operator having established LTE network in 3 circles - Kolkata, Bangalore and Pune, is offering LTE- compatible multi-mode USB dongles priced at $92, double of average price for 3G dongles available in the market. 

“Limited ecosystem, high price and limited coverage have acted against the adoption of 3G services. With time, increased competition, affordable devices and services and reduced pricing would help in increased adoption. It might continue to be a premium service for the next 2 years,” says Abhishek Chauhan, Senior Consultant, ICT Practice, Frost & Sullivan.

“It’s too early to say about competition between CDMA and3G or 4G as the penetration of eve voice services is still low in India. Moreover, CDMA allows providing both voice services data transferring with quite decent speed,” Ilya Rachenkov adds.

However, auctions for 700 MHz BWA spectrum planned for 2014 can definitely endanger the data business of CDMA operators as 700 MHz spectrum is a cost-effective solution to build LTE network and currently is eyed by two major players in this segment, Bharti and Reliance.

Beyond CDMA

Till date SSTL has not expressed its interest in any other spectrum in India rather than CDMA. Anna Zaitseva from FINAM believes that in case of successful auctions and further positive development of SSTL business in India, the company can even look at developing 4G network here. “Indian telecom market has a huge growth potential and remains very promising and attractive from investments point of view. Theoretically, expansion in India can be interesting for other telco and players of VoIP market, too,” says Zaitseva.

Despite significant uncertainty in the sector caused by lack of clarity in sector’s regulation, the Indian telecom market with a large portion of the population yet to have access to telecom services, tele-density still being at 67.7 percent, has huge untapped growth potential, a Maravedi report says.

Ilya Rachenkov believes that other segments of Indian telecom market would not be interesting for Sistema as it has entered Indian telecom market at the early stage and though the market still has growth potential, for comfort investment climate the competition is too much, and the number of players is too big. “Moreover, the licenses are overpriced,” Rachenkov adds. Indian analysts agree that it may be too late to bid for other spectrums as most of them are in the firm grip of local players.

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