Cris Infac, the industry information service division of Credit Rating Information Services of India Limited (CRISIL), recently came out with a report on "DLD Telecommunications". The report is based on the experiencesof several countries which introduced competition in the DLD market. Based on these precedents, the report tries to analyse what would be the economics of DLD projects in India and what would be the strategies adopted by the new entrants.

According to the report the "tariffs are expected to decline to Rs 1.5-2.5 per minute in the next 10-15 years, a drop of 70-75 per cent from the tariffs in October 2000."

The report however, is optimistic on the profitability of DLD projects adding that the tarffic and therefore the total revenues will increase faster than the decline in tariffs.

The Indian DLD market is expected to increase substantially on the back of the increase in the voice communications market along with the increase in the demand for leased lines and data services.

According to the report, voice services which constitute 90 per cent of the existing Rs 12,600 crore DLD market will continue to grow at a compounded annual growth rate of 14 per cent in value terms by 2005, backed by an expected 31 drop in Subscriber Trunk Dialled (STD) tariffs.

The new DLD service providers will be expected to target the corporate customers in large cities and STD PCOs in all the centres, due to the skew in calling patterns and the expected tariff rebalancing.

"Approximately 2.7 per cent of the toatl subscribers of Bharat Sanchar Nigam Limited (BSNL) account for over 46 per cent of its total call revenues," says the report. The public call offices (PCOs) with STD facilities account for 1.2 per cent of the total telephone lines but are estimated to account for 23 per cent of all STD call revenues.

Expecting uncertainity regarding the growth rate from non-voice services, the report expects the demand for DLD services from broadband services (such as video conferencing, webcasting etc) to increase significantly only after 2005.

"During the 2000 to 2003 period, the market for data services and leased lines is not expected to be significant. Hence, for new DLD projects capacity utilisation levels could be low in the first five years. In addition, the reduction in tariffs is expected to reduce profitatbility, and hence increase the payback period for DLD projects," observes the report.

Since the investment requirements of an optical fibre cable network are very high, typically Rs 7-8 lakh per kilometre and Rs 6600 crore for a nation-wide network of 85,000 route kms, the new service providers will try to improve the utilisation of their facilities by targeting the leased lines and data services market.

As a result, though BSNL will aggressively increase its network coverage nad upgrade its network transmission speeds, the incumbent might not be able to retain share in the leased line and data services market.

However, the report cautions that the DLD market itself is limited for new entrants, since the DLD policy prevents the DLD service to carry long distance calls originating and terminating within the same circle (intra-circle calls).

As a result, the new DLD service providers are expected to align with existing access providers. An integration of long distance and access (fixed or mobile) services will provide many synergies to the players by lowering incremental investment for setting up inter-circle transmission network and also target the inter as well as intra-circle long distance traffic.

Apart from these, an integrated player would also be able increase its market share by bundling access (to the telephone network and Internet) along long distance services. Further, an integrated service provider would not only have greater control over the reliability of service, but would also be impacted to a lesser degree by the tariff rebalancing. An integrtated service provider while losing on STD revenues will gain from the increased rentals and local calls.

The market in any case will not support more than four players. "Internal rate of return on DLD projects would be higher than the cost of capital if there are a maximum of four players, including BSNL. Each player then is expected to corner a 15-20 per cent share in the voice market within five years of creating a national network," observes the report.