GETTING READY FOR TITANIC OF TELECOMMUNICATIONS

Infratel - Indus merge to form a tower giant

A BIG news in Telecom Industry finally made public by AIRTEL - Merger between Bharti Infratel Ltd. and Indus Towers Ltd. by arrangements/business combination in formation of a Titanic Passive Infrastructure Company (PICO), making the merged entity as the world’s second largest Telecom Tower company.

Merger & Acquisitions take place in corporate world to become Bigger/Gigantic. The mergers produce synergies by expansion viz. increasing scale of operations and economies by cutting prices. Will this step of such merger have the synergy of merger that time only will decide and tell?

Airtel has earlier gone through Horizontal integration by acquiring Qualcom, Augere Wireless, Telenor (India), Tikona Digital, Tata Teleservices and more in India. Airtel already has established presence by spreading its wings out of India in highly developing continent AFRICA and South Asian Countries and other opportunities of profitability, thus spreading the business risk as well.    

This merger may virtually enhance the valuation of Operator Companies – (OPCOs) due to consolidation of investment in vertical integration, with heavy asset base of PICOs coming under control. The industry is getting back into olden period of owning the PICOs. It may not be good for PICOs getting under direct control of customers dictating contractual Revenue stream and losing competitive edge between entities. Prima facie, if we look at “Revenue on Capital Employed (RoCE)” and “Revenue per Tower” of the joint entity, this will fall. Will this step affect the profitability and valuation of PICOs in long run?

This is well understood that the main customers of PICOs are OPCOs only with no other companies / business avenues, which is very much in nature of monopoly. In other words, the rates are indirectly dictated and controlled by OPCOs. The PICOs have to strive for profitability, free cash flows for sustenance only through revenue as MSA with OPCOs, innovative means of Business re-engineering and cost controls measures. This is a kind of close loop centrally controlled - Cuban Economy. 

The synergy may be visible in such mergers, if the shareholding is hived off at a better pricing to external investors, which in turn will depend on the valuation and profitability of PICOs.

This is the era of ….Data, Data and Data under Next Generation evolving technologies of 3G/4G/5G/6G. The entry of Reliance Jio has thrown fresh challenges and shift of focus of Industry and consumers from voice call to data & digital world, giving a flip to smart phone devices business, the platform for digital transformation. 

To reap the real benefit of business valuations of key business activities of Telecommunication OPCOs and India looking to leap into 5G technology, following measures may be taken –

1)           It should remain as an investor and keep separate the business segment of PICOs and create a new segment Active Infra Company (AICO) on sharing. OPCOs can control the extent of stakes and management in such entities as an investor and earn profits in the form of dividends & warding off investments risks of technological obsolescence. OPCOs should have periodic Investments & Maintenance Management Contract Governance with AICO and PICO with strict Business SLAs.

2)           The Telecommunication– (OPCOs) should focus on network quality & speed (the factors which make difference and provide competitive edge in the market) and strategically work to free up the funds by creation of new business line/ model. The OPCOs can entrust transmission assets, OFC (Optical Fiber Cable laying) to separate independent companies to invest and maintain Active Infra Company (AICOs) on sharing, like it did in past by forming PICO based on costs sharing mantra.

3)           The two major costs and constraints are Energy and space, followed by networking costs of maintenance. Technology with cost effective assets, space savings & energy efficient infrastructure and doing away with capital intensive bulky, ugly looking towers should continuously be explored. With fast evolving technologies, the day is not far when geographically spread Towers network will be required any more in telecommunication. This will spare money to focus on core business of bandwidth ownership and optimum utilization with new business development avenues.

4)       The Telecoms OPCOs in India should innovate and create / partner with focus on domains of cloud-and-network integration. The most talked rising stars of the day – the disruptive technologies, Artificial Intelligence (AI), Robotics, Internet of Things (IoT), Enterprise Internet of Things (EIoT) for all the devices used in business and corporate settings, blockchain (DLT), cloud computing and storage enabling the network of uniquely identifiable physical devices, vehicles, home appliances and other items embedded with electronics, software, sensors, actuators and connectivity which enables these objects to be sensed or controlled remotely, connect and exchange data to inter-operate across the existing Internet infrastructure.

5)       The OPCOs should focus on technology making it as an instance of general class of cyber-physical systems encompassing industry needs and technologies evolve etc. Technologies solutions such as energy management through smart grids, virtual power plants, smart homes, intelligent transportation and smart cities, have huge business opportunities for more direct integration of the physical world into Digital-based systems resulting in improved efficiency, accuracy and economic benefit in addition to reduced human intervention. In brief the OPCOs should provide strong and secured networking platform for the reality of fast evolving and changing technologies.

6)       It will be better to business partner – a sharing model, in formation of Innovative Technology Companies to develop innovative products and solutions using Telecommunication Network Platform services, by aligning strategies, combining strengths and complementing advantages to accelerate the subscriber base growth and service monetization. 

The business model can divide the customers into two domains –

a) Institutional which is industry needs for technologies and applications requirements, cloud-and-network integration, Big Data, Artificial Intelligence (AI), Robotics and network infrastructure enabler. Institutional can be subdivided into two Sectors - (i) Government  (ii) Private. The key players are manufacturing, transportation, logistics and other services of data sciences, farming.

b) Retail which is 3G/4G/5G/6G, Smart Home, IPTV services, IoT, Banking, e-commerce, showcasing the real-scenario services like Video conferencing, GPRS, Security Solutions and Socialization etc. 

Now with major changes in Telecom Industry due to new entrant Reliance Jio, mergers and acquisition of operators (Telenor & Tata Teleservices with Airtel; Shyam Sistema with R.Com; Idea and Vodafone; rest other small OPCOs Videocon, Aircel, Uninor etc. either merged /waiting to merge / lying in peace) in both OPCOs and PICOs, and shift of focus from Voice to Data & Digital, so far IUC (Interconnection Usage Charges) paid by the call originating OPCO to other OPCOs for call carrier / termination in their network, basis the usage of active infra has witnessed a massive shrinkage in IUC revenue of OPCOs. That was the era of 2G - Voice call system with multiple Telecom players now shrunk to major three, Voda-Idea, Airtel, Reliance Jio. Despite stiff competition, the revenue of OPCOs should start looking up with improved Average Revenue Per User (ARPU) due to higher average spend by users on under the bundled packages of voice free with data,(which are comparatively higher than earlier voice call packages).    

The AICOs so created may have semi variable revenue structure, Fixed Rental charges plus the infra usage charges as per the mutual understanding through Master Service Agreement between OPCOs and AICOs.

In this way the Telecos may free itself from high costs of maintaining old assets inventories of obsolete technology and investing heavily in New technology compliant Fixed Assets, training people, execution in upgrading and switching to fast changing Technology platforms of New Gen.

The TELECOMs OPCOs should think of new potential business revenues generating avenues like –

1)       Development of various real-scenario services and Mobile Apps increasing the dependency on mobile internet and hence data usage, briefly IoT.       

2)       Moving from Net Neutrality to charging companies offering services or apps using technology.

3)       Intelligent secured transportation solutions. Speak to Government, Railways & Automobile companies for mobile based GPS tool to be essential equipment in Railways, All Automotive vehicles be it Truck, buses, cars or motorcycles, which should help Vehicle owners and associates in knowing 24x7 status of vehicle, Govt. Agencies in various law and order monitoring activities like the speed of vehicles, violations of traffic rules etc. which in turn will help to curb accidents. 

4)       24x7 Security of family members through GPS connectivity.

5)      GPS equipment tools to be mandatorily monitored periodically for its proper functioning.  

6)      Internet & Network security solutions & enhancement – the upcoming thrust & biggest concern on increased security in adopting and making IoT & EIoT successful.

7)       Energy Management solutions of mass production, distribution by Public sector domain to end consumption points.

On the lines of Automobile Industry- cars, trucks manufacturing companies, the Indian telecom should think creating JVs in development and manufacturing of telecommunication hardware electronics based equipments, differential, innovative products and solutions that will offer users information and communication services – a kind of vertical integration with better Supply Chain Management cost efficiencies and effectiveness. Traditional products being Routers, Modems, Switches, Bridges, Gateways storages, servers, applications, firewalls, Automatic Protection Switching (APs), facilities, Gigabit Passive Optical Network (GPON), eLTE, camera, IP phones, and videoconferencing devices etc. are being sourced from China who is currently the leader in manufacturing and supply of such products.

Considering preceding points above in the views, the in-depth analytics of the two strategies on Ownership vs. lease should further help in deciding and optimizing investment mix strategy. More news awaited in telecom space in times ahead.

The servicing costs of OPCOs can majorly come down only by sharing methodology on leased assets and not the ownership. The innovative technology may help in improving Financial Inclusion.