It all began with VSNL. About a month ago, the network carrier, integrated with units like Tata Indicom Enterprise Business Unit (TIEBU), VSNL International, Teleglobe and Cipris under the umbrella of Tata Communications, announcing that it was looking to spend over $2 billion to fuel its global expansion activities.
The move was significant. Here was a large amount of money being pledged by the company for investment in undersea cable systems, rollout of Wimax and expansion of its network. Why was the company doing this? Was it because competitive pressures were pushing the company to make such a big announcement or was it because of some other reasons?
Interestingly, the Tatas weren?t the only ones to make an announcement of this nature. Rival Anil Ambani, chairman of Reliance Communications, had a few things to say too.
The key was an investment commitment of $2 billion for global expansion by Reliance Globalcom, a new division of Reliance Communications, which brings together the latter?s voice, data, ethernet, managed networks and fibre optic businesses. This again was a significant announcement. But why now?
Though competitive pressures have nudged these companies into action, the fact remains that it is the growing opportunity in data services that has prompted this kind of an investment from them. Voice has been the key revenue generator for most network carriers, but with tariffs falling quarter on quarter, the need to find allied sources of revenue has been on the rise. The Big Three?Tata, Reliance and Bharti?have responded to this new challenge by diversifying quickly into data-related activities over the last few years.
The acquisition of YIPES, the US-based provider of managed Ethernet and application delivery services by Reliance in 2007, for instance, was a step in this direction to strengthen its portfolio of data services. The scenario is no different with Tata Communications and Bharti, who have been working on their suite of data products over the last few years.
The 2007 launch of Cipris, a unit devoted to offering communication solutions to mid-sized companies internationally, for instance, demonstrated Tata Communications? commitment to take its data agenda forward. This was one among a series of initiatives it undertook to strengthen its portfolio of data services. Bharti also has been investing heavily in the business, says Rajan Swaroop, executive director, global network services, Airtel Enterprise Services, and is likely to continue with it in the near future. But for all this there is no denying the fact that more needs to be done as India sits at the cusp of a data boom. Data services at the moment constitute about 25-30% of a network carrier?s business. Players are looking to take this figure upwards as the market for data services looks set to grow in the coming years.
In fact, according to Gartner Research, the market for data services in the country will go up to about Rs 11,085 crore by 2011 from Rs 8,515 crore right now. This is a growth of about 30% in the next four years, which is fairly significant. Gartner says that the buildup to this has been happening over the last few years with the market moving from Rs 6,204 crore in 2005 to Rs 7,403 crore in 2006 and Rs 8,515 crore in 2007. By the end of the current year, the market will be about Rs 9,418 crore, moving up to about Rs 10,130 crore in 2009 to Rs 10,616 crore in 2010. This kind of growth cannot be ignored by any account, which is why network carriersare are making investment to strengthen their data operations, say analysts.
The cause for this boom can be attributed to the emergence of India as an outsourcing hub and an important destination for multinational companies. Says Neha Gupta, analyst, Gartner India, ?India is becoming a big data centre, so the opportunities it presents are many.? Also, Indian companies are expanding their operations abroad, increasing intercommunication between offices. Managing all of this requires a fair bit of expertise, which is where network carriers step in to provide value-added services such as multiprotocol label switching networks, virtual private networks, internet protocol-led services, data hosting and content delivery. What is drawing carriers to the business is the high margin they derive from these operations, which is in stark contrast to traditional voice-related activities undertaken by them, which is more or less a commodity business.
The need for volumes on the voice front is driving down tariffs to such an extent that margins are being hit substantially. As a Mumbai-based telecom analyst says, ?The return on capital employed, if you take into account the voice business of network carriers, is merely 12-15%.?
With business booming at the enterprise end, it makes ample sense for players to be there and improve overall prospects of their business. As Arpita Pal Agrawal, associate director, PricewaterhouseCoopers, explains, ?The enterprise segment is growing at over 20% per annum.? No wonder the attention of network carriers is focussed on this segment and the need to address requirements there seems to be paramount at this point of time for them. For instance, Reliance Globalcom?s $2 billion investment will go into expansion of its global Ethernet footprint, value-added services, data centres and submarine cable systems. ?From nine data centres, we will take the tally to 14 in the next few years,? says Punit Garg, president, Reliance Globalcom.
Srinivasa Addepalli, senior vice-president, corporate strategy, Tata Communications, says, ?Much of the investment that we have earmarked will go into enhancing our capabilities in data.? This, according to Adepalli, will involve data-centre expansion and rollout of managed services including value-added, hosted and customised solutions. In fact, managed service is something that network carriers are taking very seriously as the play in data increasingly moves to this area in the coming years. ?That is where the action will be going forward,? says Swaroop of Bharti.
Managed services involve the delivery and management of network-based services, applications and equipment to enterprises and allied service providers. The prospects of this business are so exciting that Tata Communications is said to be eyeing acquisitions in the managed services space in both developing and developed markets to improve its capabilities and scale up quickly. Reliance and Bharti also have their sights on the business. As Garg of Reliance Globalcom says, ?It is a new vertical for us. But we are focussing on it aggressively.?
This movement to managed services, however, will be impossible without getting the underlying infrastructure in place. That is where the investment in undersea cable systems by network carriers comes in, which, according to Sourabh Kaushal, industry manager, ICT Practice, Frost & Sullivan, is in anticipation of the boom in the market. Data services require a fair bit of bandwidth. Despite its price being fairly steep at the moment in the country, a greater need for it in the coming years is likely to bring down its price substantially. Says Kaushal, ?Bandwidth prices have been falling by 10-15% every year. But as the need for more bandwidth grows, prices should fall even more.? That, by some estimates, should be to the extent of at least 20%, increasing penetration in the process. Total bandwidth in India at the moment is over 20 terra bytes, with lit-up capacity at over 700 gigabytes. As usage of it grows, these figures should only go up.