Sistema looks to put license imbroglio behind

The licenses cancellation saga of Sistema Shyam TeleServices (SSTL), the Indian unit of Russian Sistema JSFC, ended for the telecom operator in a rather positive way, even though the company had to reduce its operations from 22 to 9 circles.  

In recent CDMA auctions, SSTL won 8 circles including Delhi, Kolkata, Gujarat, Karnataka, Tamil Nadu, Kerala, Uttar Pradesh (West), West Bengal skipping Mumbai, Maharashtra and UP East circles probably due to higher pricing and overall higher competition levels in these circles. SSTL will continue operations in Rajasthan too as the license for this circle was not affected by the February 2012 Supreme Court order.

SSTL considered various factors while bidding for the spectrum, from price and competition level to number of carrier slots available and future data potential in the circles. “Given the range of variables we have considered and the spectrum cost for 800 MHz, it was a big challenge to arrive at a core list of 8 circles and to bid accordingly,” said Vsevolod Rozanov, President & CEO of SSTL.

Commenting on the auction, Prashant Singhal, partner in member firm of Ernst & Young Global, said the Indian Government should relook into the spectrum’s reserve price evaluation methodology in the future in order to encourage more participation as in the recent 800 MHz auction SSTL remained the sole bidder. That was an advantage for the Russian company as it got the licenses at the start price.

SSTL will have to pay a total of about $665 million for a license period of 20 years for 8 circles. The terms include payment of 25 percent, about $92 million within first 10 days. The rest will be paid in 10 equal annual installments starting from March 2016.  Moreover, Sistema confirmed that the Indian Government allowed SSTL to set off the previous license cost of about $297 million against the new spectrum cost.

“Overall auction results are contradictory. On the one hand, according to TRAI, SSTL, lost about 27 percent subscription base and thus may lose in revenues. On the one other hand, the company could minimize additional payment for the spectrum till $368 million by paying the minimum set price and further reducing the license cost by adjusting the amount paid earlier,” says Ilya Rachenkov, telecom analyst of independent research company Investcafe. 

Focused approach

Having 8 circles with three carrier slots of 1.25 Mhz each and 9th circle Rajasthan SSTL's final footprint will service about 10.45 million customers against 16.0 million subscriber base piled up by mid-2012. The three affected circles for which the company did not bid account for 13 percent of SSTL customer base and about 15 percent of the company’s employees.

The company is going to uncover a detailed operational plan on the new footprint and future strategy before Sistema's annual results on April 16.  SSTL’s CEO Vsevolod Rozanov believes that with Rajasthan as part of MTS India’s footprint, the company would be able to service 40 percent of country’s population, addressing over 60 percent of data business potential and safeguarding 75 percent of SSTL current revenues. “Our go forward plan includes building an even stronger MTS brand in the country by focusing on our data centric-voice enabled strategy,”said Rozanov.

Industry experts believe MTS’s approach is wise and goes in line with the view that smaller operators should not try be national players but to selectively play in certain regions where they have some strength.

Way to profitability

While the main result of passing through CDMA auctions is that SSTL now can put the uncertainty that they lived with for one year behind, the roadmap for SSTL profitability is another important outcome.

“Crucially, this outcome results in no upfront cash license cost, substantially reduced operating losses and a clearer roadmap for SSTL's profitability,” Mikhail Shamolin, President and CEO of Sistema said.

Slava Bunkov, telecom analyst at ATON, the Moscow-based independent investment group, believes SSTL took a right decision to continue operations in most profitable circles only. “In the end of the day it may increase the profitability of Indian operations. Though I don’t think we will see immediate effect of this decision, in the long run the company would be able to focus on thinner market that will allow investing more precisely. Finally it may improve SSTL positions in these particular areas,” Bunkov told RIR.

Sistema’s owner Vladimir Yevtushenko earlier announced that holding may sell a controlling stake in SSTL to Russia's Mobile TeleSystems (MTS), also controlled by Sistema, once the Indian company's subscriber base reaches 150 million users.

“Reduced geographical coverage and overall the fact that SSTL subscriber base now is only 10.45 million makes it clear that reaching the target will take significant time”, says Ilya Rachenkov. However, he believes there can be other options to sell Sistema’s Indian asset or even new target markers for SSTL to be incorporated into MTS. “Sistema is planning to transform MTS into a global player with 200-300 million subscribers. The growing Indian market with large subscription base could contribute to this process,” Rachenkov adds.

Challenging LTE

Experts fear that in the future CDMA will face challenges from emerging next generation technologies. “The CDMA segment will continue to be good for mobile data. CDMA in terms of voice subscribers using handsets is still fine but its long terms future is questionable while the ecosystem for CDMA handsets declines,” says Mohammad Chowdhury, Partner and Telecoms Industry Leader, PWC India.

Kamlesh Bhatia, Research Director with Gartner, agrees: “Data based services are catching up. The demand is growing while penetration is still not enough.  Given the lack of wired broadband infrastructure in the country, access to data is going to be through wireless networks. At the same time market is moving towards better technology and therefore SSTL operating in CDMA segment may face challenges from operators with new 4G technology.”

According to SSTL, having technologically neutral spectrum that is valid for 20 years in 8 circles provides an opportunity to roll out the LTE network in the future.

“Even earlier Sistema announced its plans for developing LTE networks on acquired spectrum. MTS Russia, Sistema’s Russian subsidiary, started deploying LTE network in 2012 after securing TD-LTE spectrum in auctions along with three other operators. The auction conditions require each player to invest not less than $500 million in deployment of LTE networks”, Slava Bunkov said.

Ilya Rachenkov agrees that Indian subsidiary of Sistema may also look at entering the LTE segment as it will help increasing the company’s profitability: “SSTL operates in quite a prospective segment. The segment of mobile internet is just in the initial stage and if SSTL will focus its capital investment in this segment in particular circles has all chances to gain substantial market share in these areas”.

Kamlesh Bhatia presumes SSTL could enter the LTE segment as India is moving to a single licensing policy and a company with any spectrum will be able to deploy LTE services.  “But considering what SSTL has as of now and what other players who are already investing in LTE have, SSTL is behind the competition,” he expert believes.

Having a presence in 9 circles, SSTL will have to limit its LTE operation only to these areas or else to buy an existing player having BWA spectrum or bid for the new spectrum in the next auctions.

Though it is not yet clear whether the 700 MHz BWA spectrum auctions scheduled for 2014 will really happen, industry experts forecast that operators that have not acquired 2300 MHz spectrum earlier, such as Vodafone and Idea, may opt for 700 MHz spectrum considered to be more attractive as it allows low-cost deployment of LTE networks.

Some experts also believe that 700 MHz band will be eyed by two majors already having BWA spectrum, Bharti Airtel and Mukesh Ambani’s Reliance Jio Infocomm (RJI).

The level of competition in the not-yet-established LTE segment is already high with more than six operators already having 4G licenses secured in the 2010 auction for 2300 MHz spectrum. Bharti having the advantage of pan-India 2G and 3G networks has already established an LTE network in 3 circles while Reliance is in the testing phase. Several other operators with BWA licenses also announced plans to launch 4G services in next 2 years. Aircel owning BWA spectrum in 8 circles, Mumbai-based operator Tikona Digital with 5 circles, Videocon with 6 circles are among them.

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