The Wiring Of India

Private companies are racing to cash in on telecom deregulation

For years, Prime Minister Atal Bihari Vajpayee had been hearing a cavalcade of complaints from telecom executives lobbying for deregulation. Long-distance telephone service was a creaky government monopoly and a roadblock to India's technological progress. So on July 15, he suddenly took action. He announced an end to the state's monopoly on domestic long-distance phone service as well as transmissions via undersea cable. Private players--including foreign companies--would be allowed in starting Aug. 15.

With that move, Vajpayee removed the single biggest hurdle to wiring India for the Internet age. New Delhi says it will let in any company willing to pay a $25 million fee and share a portion of its revenues with the government. Although telecom unions are protesting and the change still needs Cabinet approval, foreign and local companies that have been laying fiber-optic cable for their cellular and local land-line operations are preparing to leap into the fray. The players range from such local giants as $4.6 billion petrochemical producer Reliance Industries Ltd. to Houston power producer Enron Corp. to local cellular operator Bharati Telecom. Even India's state-owned monopolies are transforming themselves. "Nobody wants to lose out in this race," says Sumit Dayal, head of credit at Bank of America (India), a specialist in local telecom deals.

SPOILSPORTS. The result could be competitive chaos, but it is likely to ease a shortage of telecom capacity. Phone lines are often jammed, and logging on to the Internet is difficult. There are only 2.6 phone lines for every 100 Indians, way below the world average of 15 per 100. And India has a bandwidth capacity of just 3.2 gigabytes per second, just 60% of current demand.

Now, India could add much more bandwidth over the next 18 months than Malaysia did over five years for its highly hyped Multimedia Super Corridor, according to Dewang Mehta, president of Nasscom, the Indian software association. What's more, since Indian networks will deploy the latest technologies, they'll be able to handle up to 40 gigabytes of Net traffic per second, compared with the current 10 in Malaysia.

Not everyone is enthusiastic, however. Spoilsports to India's Internet revolution include organized labor. The 400,000-worker telecom unions oppose deregulation of long-distance service on the grounds that it will force price cuts, which they fear will prompt layoffs. The unions are threatening to strike if new players get licenses, even though the $5 billion state phone company--the domestic long-distance monopoly run by the Department of Telecommunications --enjoys an enormous lead over the upstarts. Videsh Sanchar Nigam Ltd. (VSNL), which handles India's overseas telephone traffic, also has a head start.

But while these state-owned companies plan to double their optical-fiber capacity within four years, analysts predict they will be surpassed quickly by more aggressive private rivals. These include the Indian joint ventures of Western multinationals such as AT&T and British Telecommunications PLC. New Delhi is considering allowing 100% foreign ownership of their operations, up from 49% currently. Enron, which is making a push into telecoms in the U.S. and has hit snags with its power-generation investment in India, is now linking up with Indian state power companies to spend $500 million laying cables to carry data along their electricity delivery routes.

EARLY TRAIN. Indian companies such as Reliance are using broadband ventures to move into the Internet era. The old-line petrochemical producer is spending $3.2 billion--more than its investment in its core businesses--to lay cables through 25 states. Cable operator Zee Telefilms Ltd. also has been signing right-of-way agreements with state governments. Likewise, the $8 billion Tata group, whose holdings range from steel to autos, plans to spend $1.45 billion on telecom infrastructure. It expects to lay 20,000 kilometers of fiber across India in the next two years to provide telecom services. Even Indian Railways, which has huge unused fiber capacity, wants a piece of the action.

Perhaps the most formidable player will be $380 million Bharati Telecom. Over the past two years, New Delhi's Bharati has become India's leading cellular operator by acquiring smaller providers in central and southern India. It wants to be the leading national carrier of voice, data, and Internet traffic. It is investing $500 million in fiber-optic cable reaching from Himachal Pradesh in the north to Tamil Nadu in the south. Bangalore cellular player BPL Telecom is following suit. In the past six months, it has laid 680 km of fiber-optic cable in its home state of Karnataka and plans to add 500 km more so it can offer mobile Internet service.

The latest move is a result of New Delhi's opening of the Internet to private players two years ago. That helped boost the online population from just 500,000 in 1998 to 5 million this year. By 2015, the Net population is expected to reach 70 million. All these new surfers are looking for bandwidth. Plus, broadband capacity could greatly expand India's role as a global center for software development and customer-service call centers for multinationals. Already, information-technology services is a $1.5 billion industry in India that is growing at a 55% annual clip. "I can find ways around India's infrastructure problems," says Pradeep Singh, CEO of Kirkland (Wash.)-based Talisma, which offers customer services such as e-mail responses for U.S. companies from a facility in Bangalore. "All I need from India is bandwidth."

LOOMING SHAKEOUT. With so many heavyweights throwing vast sums into telecom, a shakeout is inevitable. But for now, few are worrying. With demand for bandwidth growing by 350% a year in India, says BPL Chairman Rajeev Chandrasekhar, the investments unveiled so far won't be sufficient for long. "The next two years will see more fiber infrastructure being developed in India than any other part of Asia," says Chandrasekhar, who was one of the telecom execs to lobby the Prime Minister.

In August, for example, online stock trading will be allowed for the first time. National Stock Exchange Managing Director Ravi Naraian predicts investor demand could be so heavy that, in online trading volume, India will become second only to South Korea, where roughly half of all stock transactions are over the Net.

Now all that's left to dismantle is the international long-distance monopoly, VSNL--but there's no telling how many years of lobbying will cause Vajpayee to do that. So far, he's headed in the right direction. And if the telecom bottleneck can be solved, India's propulsion into the Internet Age will get an even stronger push.

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