In March of this year the Russian government made its first investment in telecommunications abroad. True the business in question, India’s Sistema, is a subsidiary of Russia’s AFK. Since 2008 Sistema Shyam Teleservices Ltd. (SSTL) has operated under the brand MTS India. How will SSTL use Russia’s $600 million investment? How does Indian business differ from Russian business? Will SSTL’s acquisition of Indian frequencies cause a scandal? Vsevolod Rozanov, president and CEO of Sistema Shyam Teleservices Ltd., spoke to Oleg Salmanov of Vedomosti about these and other questions.
Sistema is the only Russian company to date to have successfully exported its consumer business to India. How did you do it?
It’s true. Inside of two and a half years we were able to create virtually from scratch a cell network that encompasses almost all of India and serves more than 10 million subscribers. Going into India was definitely the right step because it is one of the few countries in the world where enormous goodwill towards Russia has always existed. The people we hire want to associate themselves with MTS, one of the world’s top 100 brands. And although few people believed that a Russian company could be successful in the consumer sector outside Russian-speaking territories, we managed to make a real breakthrough.
How does the Indian market differ from the Russian?
In the level of competition, certainly. India has 14 [mobile phone] operators. Not all of them serve all of India, but in any one region there are at least nine operators, and 10 to 12 on average.
Has that led to price wars?
The height of the price wars was in late 2009 and, thank God, in 2010 the situation more or less stabilized. ARPU (average revenue per user) is still going down, but smoothly and predictably. The situation does not look the way it did in 2009 when new operators — Sistema, Tata DoCoMo, Uninor (a subsidiary of Telenor), and others — all launched and a price war began between the top two players. During that period tariffs fell by 40% in one quarter alone.
Both for voice and data transfer services?
No, in data transfer the situation is different. Until recently there were only three players and the market was more or less stable because the two players who were there before us — Tata and Reliance — focused mainly on post-paid and the corporate sector. The market for mobile broadband access for mass consumers practically did not exist. MTS India is essentially creating that market. Now the ordinary person can walk into one of our stores and buy an affordable pre-paid product. We control around 60% of the mobile broadband market. We have more than 600,000 Internet subscribers. The market is still small, but it has huge prospects.
Why are you so sure of that?
Several years ago the Indian government set itself the task of substantially broadening the penetration of voice communications. Today India, with a population of more that 1.2 billion people, has around 800 million subscribers. Now the government has set itself the task of reaching some 140 million broadband subscribers within three years. And it’s absolutely clear that in a country like India where penetration of fixed communications is very low, it’s unlikely that broadband access will develop along the same lines as fixed communications. Except perhaps in large cities like Mumbai, Delhi or Bangalore. But overall we are absolutely certain that broadband access will be primarily mobile, and in that market we are now in third place. We expect to remain in the top three in future because, as one of the first to enter this market, we are the only ones focusing our efforts just on it.
Originally we were aiming at mass coverage with voice services so as to become OIBDA (operating income before depreciation and amortisation) positive as soon as possible. In 2009 we corrected our strategy to emphasize broadband access since it had become clear that it would be very hard to achieve a large cash flow with only voice services. Data transfer and additional services played a positive role: ARPU in data transfer is fairly high, and our brand has been effectively differentiated from the competition.
Now our revenue share from data transfer and additional services is more than 25%, that’s the highest index on the Indian market. For us, mobile broadband access is a steadily growing business. Every month we sell from 60,000 to 70,000 modems, and we launch services in new cities and regions where there’s gradually appearing a demand.
It seems that data is the CDMA operator’s karma. But SSTL didn’t initially plan to focus on data. Why did you choose a CDMA-based technology? South America, for instance, has rejected CDMA.
South America, or rather, countries in the Caribbean basin, is the only market to have rejected CDMA (code division multiple access). In all other markets CDMA is developing fairly rapidly. Verizon in the United States is one of the leaders in the number of hook-ups. The world’s leading CDMA operator is China Telecom with 3 million hook-ups every month. And many of them already have Rev.A technology, rather than 1x. So I wouldn’t say that it’s karma. It’s a matter of markets that have a strong GSM segment, and CDMA as a second technology — in Russia, for example, in India, in Ukraine, in Poland where the CDMA operators focus mainly on data transfer. But in markets where the scale of business is large — in China, Korea, the United States, and to a certain degree in Indonesia — CDMA exists in all segments and is successfully developing.
Our decision to build a CDMA-standard network was a function of the fact that when the conditions for acquiring licenses were announced, it was clear that the affordable technologies were either GSM-1800 or CDMA-850. A GSM-1800 network is very expensive to build, since for construction in India you would need roughly three times as many base stations. Also GSM-1800 is mainly voice services.
Even now, even though 3G services have appeared on the market, we feel that our business will develop steadily because most Indian subscribers are convinced that in the current conditions data transfer using CDMA networks provides better quality than GSM networks or even 3G. In the near future, most likely of all, the market will not be re-divided in any major way, it will simply expand.
Is it true that in India there is a completely different attitude toward the use of mobile communications and that people manage to relay information to each other without paying?
Yes. For example, a shop owner wants some tea. He calls the little boy who brings it and lets the phone ring four times. The little boy doesn’t pick up, but he knows to deliver four cups of tea. People agree on certain code signals. For example, a man is leaving to see a doctor in another city and tells his family: if I call and let the phone ring three times, that means “come and get me”, four rings means “I’ll be home today”, five means “I’ll be home tomorrow”. Indians are exceptionally resourceful people.
In late March 2011 the Russian government concluded a deal giving it a 17.4% stake in SSTL. This is the government’s first such deal abroad. How will it change the way the company is managed?
We assume that representatives of Russian state organs will join our board of directors. And we will expand the board to comply with Indian law, which says that a majority of the board members must be Indian citizens. It doesn’t matter who nominates them (in our case they may be proposed by Sistema), they must be Indian citizens.
To what use will the $600 million received from the deal with the Russian government be put?
First of all, it will go to implement a business plan. We aren’t planning any radical changes — we’ll continue to focus on broadband access, expanding our presence in cities where we aren’t yet operating with EV-DO (Rev.A) technologies. We’re already offering mobile broadband services in more than 130 cities (where some 250 million people live) and are planning to substantially increase our presence in the near future. We also plan to develop our mono-brand store chain. It’s a very successful project — we already have around 1,000 stores. I think that by the end of the year we should have as many as 1,500. The money will also go to support operations.
At one point the possibility of an IPO (initial public offer) was under active discussion. What are the prospects?
I estimate that we will complete the preparations for an IPO by the end of the year. But to be honest, although we are sure of our business model and its prospects, the general impression among India’s telecom-market investors today is not the best. The stocks of the three public operators are low, and many investors refuse to invest in India’s telecom market on principle. It will be very difficult for us to combat that bias. In order to receive a fair offer at an IPO, the sense of the Indian telecom market has to change among investors. That will happen only when the regulatory system has stabilized and the rules for consolidation have become more flexible. We won’t put together an IPO for the sake of an IPO. We are in agreement about this with our minority shareholders. The necessary documents should be ready by the end of the year. After that we’ll decide [how to proceed] depending on the state of the market.
Is there a minimum share that one must sell for an IPO?
Indian law requires that the share of new stockholders be no less than 25%.
In Russia many people are talking about fourth generation (4G) mobile communications called LTE. Is there any talk in India of switching to 4G?
Let me remind you that in India there was a 3G auction only last year. The government is currently developing a new telecommunications policy. In India it is the custom for the minister of communications to hold a sort of round table once a quarter with the heads of operators to discuss various tasks. Now at these meetings there is more and more discussion about the vagueness of India’s telecom policy. Everyone says that the current policy is obsolescent, while a new one has yet to be worked out. In the last three years not one operator has acquired additional frequencies, despite the fact that the subscriber base has swelled to hundreds of millions. We are in line to acquire additional frequencies in a number of regions where we’re successfully developing, but we don’t know how to acquire them since according to the old rules the regulator doesn’t issue frequencies, and there are still no new rules.
The new minister of communications has promised that a new policy will be drafted by the end of the year and then presented for discussion to the government. I imagine that it will also mention the matter of 4G.
Is the situation different in Russia?
I actually am always holding up the Russian market as an example to my Indian colleagues because it is fairly balanced and substantially more transparent. On the one hand, the level of margin is fairly high, investments are being made and dividends paid; on the other hand, there is a lot of competition, consumer tariffs are among the lowest in the world, services are affordable for broad swathes of the population. The coverage and quality are constantly improving. In short, the communications ecosystem in Russia is healthy.
This is not true in India. In India, operators are constantly being pressed to lower their prices. On the one hand, the Indian government rightly says that we need to go into the villages where there is no infrastructure, that this is a social mission; on the other hand, they support such fierce competition that there are no resources left over for development in regions where solvent demand is relatively small.
Now this situation has changed. The Indian leadership realizes that serious investments need to be made in communications, while no investments will stimulate the current ecosystem with its 14 operators, except perhaps in the richest regions. That is why new operators begin building their networks from the south — from Tamilnad, Karnatak, Andra-Pradesh, and megapolises like Delhi and Mumbai — and no one is focusing on the less developed regions. In certain districts today we are the only ones offering mobile broadband access. At the same time, we can’t lease passive infrastructure from other operators because in remote regions there is no infrastructure. We have to build it ourselves. And again we are helped out by CDMA technology: a GSM operator would have a very hard time developing given the situation now with tariffs.
We expect that the new telecom policy will cover (in addition to plans and aims for the future) the subject of a soft regulatory system of consolidation.
Are M&A deals forbidden now in India?
They’re technically possible, but in case of consolidation the operator must return the frequency band. What’s more you can’t own more than two operators in one region.
One of the problems with the Indian market is the narrowness of a band: it’s very difficult to acquire a broadband frequency for data transfer. Voice services also suffer — the quality of connections in India is not very high. Therefore we are actively raising the question of issuing new frequency waves.
The question of using the existing waves more effectively is also on the agenda. The Finance Ministry, which possesses great authority in India, also has a keen interest in the proposals of operators: the revenue which the government received from the 3G auction exceeded all expectations.
But didn’t the issuance of frequencies in 2008 cause a scandal that led to the minister’s replacement?
Those frequencies could probably have been sold for a higher price, but the government had an entirely different aim which it clearly articulated at all levels: to drive prices down. To make prices fall sharply, the government decided to increase the competition and issue frequencies to new players. Any questions should be addressed to the organs that made those decisions because the operators were simply playing by the rules they had been offered. Now the change in those rules is being reviewed after the fact. But we and many other players have already invested billions of dollars in developing networks!
How did that scandal affect SSTL?
In his report the general auditor and controller had no complaints about SSTL. Instead he referred to the shortcomings of the process and to the fact that it had been violated by a number of the players. This primarily concerned the so-called new operators, whereas Shyam Telelink (SSTL) was operating on the Indian market before it acquired a pan-India license.
I should also say that we were the only operator to bid for the one package of CDMA frequencies. Some thirty operators wanted to acquire GSM, whereas no one but us was interested in CDMA, so there was no competition.
What complaints are there about SSTL now? Have you received any letters from the regulator?
The situation right now is this: in all regions we have complied with all requirements, but in some regions our compliance came into force a little after the prescribed deadline. This largely resembles the Russian situation. Not one cell operator has ever managed to fulfill all the requirements of his license on time.
We have paid all the fines imposed on us, but we are currently disputing the size of those fines since we do not agree in every case with how they were calculated. Nevertheless, the question, in our view, is settled, so long as it does return to the political plane.
Is there any danger of the licenses being revoked?
We have been notified that we must explain our delay in launching networks in three districts; if we don’t, our licenses may be recalled. We are preparing the answer on the basis of which the Indian regulator will make his decision. We are counting on a positive outcome: in those three districts we have more than 1.7 million subscribers.
How may the situation turn out for the market?
The new minister of communications is taking steps to regularize the issuance of frequencies and to clarify the circumstances of their issuance ahead of time. I hope that there will be no actions entailing serious consequences for our business. Especially since they may shake foreign investors’ faith in India. And India is very sensitive about its investment climate.
CDMA telecom player Sistema Shyam Tele Services Ltd (SSTL), a joint venture between Sistema of Russia and the Shyam Group of India, has been reeling under losses and has close to '5,570-crore consolidated debt from banks and financial institutions. The company, which operates under the MTS brand, says it is confident of clearing the accumulated losses by 2015. In an interview, SSTL president and Chief Executive Officer Vsevolod Rozanov shares with K Rajani Kanth the company's strategy to become OIBDA (operating income before depreciation and amortisation) positive and issues such as the showcause notice served by the telecom regulator and investment plans. Edited excerpts:
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