Executive Summary

India is the fastest growing telecom market in the world. Reliance Communications (referred to as RCL henceforth) entry in 2002 marks a watershed moment in the history of Indian Telecom sector. This paper looks at how RCL broke through the stronghold of established players in an industry that intrinsically provides a huge first mover advantage to previous incumbents. The competitive interplays and strategic moves by various selected players (such as Tata Teleservices, MTNL, Bharti Airtel and Hutch) are also analyzed with a special eye towards how Bharti sustained its competitive advantage despite relentless pressure from RCL on all fronts. I observed several strategies employed by the Indian telecom players such as diversification, globalization, market entry, sustaining competitive advantage, etc. The players such as Reliance Communications and Bharti have met with tremendous success whereas the verdict is mixed for other players such as Tata Teleservices and MTNL. Conclusion RCL particularly has revolutionized the way we use mobile telephony, with their vision of making a phone call cheaper than a postcard. All the players analyzed in this report are still very much in the fray. Analysis of their past strategic moves may provide insights on future course of the industry and individual players profitability. Overall, the market is on the threshold for another round of explosive growth and Reliance Communications seems set to challenge Bharti for the throne of the Indian Telecom King. Dhirubhais Dream "Growth has no limit. I keep revising my vision. Only when you dream it, you can do it." -Dhirubhai H. Ambani: Dhirubhai Ambani, the head of the largest business empire of India, had a dream to make telephone calls cheaper than a post card. His son, Mukesh Ambani eventually fulfilled Dhirubhais (who passed away on July 6, 2002) dream when Reliance Infocomm (which later became RCL) was launched amidst much fanfare on 28 Dec, 2002.

Indian Telecom Industry

Mobile telephony in India was born on May 13th, 1994, when the government invited private players to submit bids to provide mobile telephony services. It was a widely cracked joke that one should not discuss his telecom strategy in a restaurant, or he may leak out his plans to at least 4 competitors. The government however, approved licenses for only 2 players to operate in each of the 4 circles open for bidding (metros-Bombay, Delhi, Calcutta and Madras). In the second round, the government opened up 18 more circles for bidding. These circles were divided into 3 categories, A, B and C with A having the highest revenue generating potential and C the least. The players were evaluated initially on their overall financials, telecom experience etc, and later on speed at which the network could be rolled out, rural coverage, license fee bid amount, etc. Things brightened up after the National telecom policy in 1999, when the government loosened its control on the sector. This is when there was a spike in competition, drop in rates and increase in penetration. It was during this churn that RCL was launched. Highlights 1997: Telecom Regulatory Authority of India (TRAI), the nations first independent telecom regulator was set up. 1999: National telecom policy (NTP): introduction of a revenue sharing arrangement to replace the licensing arrangement. The main features of the NTP were revenue sharing model, launch of BSNL and MTNL as 3rd operators in all circles, increase in number of private operators, etc. 2000: The corporatization of the DOT and the creation of a new state-owned telecom company, Bharat Sanchar Nigam Ltd (BSNL). The opening up of Indias internal long-distance market and the subsequent drop in long-distance rates as part of TRAIs tariff rebalancing exercise 2002: VSNLs monopoly over international traffic was terminated and the company was privatized (Tata picked up 25% stake and management control) 2003: Unified Licensing Regime: Allowed any telecom player to offer any service.

Reliance Communications Limited

Reliance Communications Limited, a company incorporated under the provisions of the

Companies Act, 1956 and having its registered office situated at H Block,1st Floor, Dhirubhai Ambani Knowledge City, Navi Mumbai-400710 India. Indian broadband and telecommunications company headquartered in Navi Mumbai, India. It is the 16th largest operator in the world with more than 136 million subscribers. RCOM, founded by Dhirubhai H Ambani (19322002), is the flagship company of the Reliance Group. The company has five segments: Wireless segment includes wireless operations of the

company; broadband segment includes broadband operations of the company; Global segment include national long distance and international long distance operations of the company and the wholesale operations of its subsidiaries; Investment segment includes investment activities of the Group companies, and Other segment is consists of the customer care activities and direct-tohome(DTH) activities. Reliance communications ltd was incorporated on the 15th July, 2004 under the companies act 1956 under the name Reliance Infrastructure Developers Pvt Ltd with effect from 25th July 2005 the company was converted into a public limited company and the word private was deleted from the name of the company. Subsequently the name of Reliance Infrastructure Developers ltd was changed to Reliance communication ventures ltd with effect from 3rd August 2005 and further the name was changed to its present name i.e. Reliance Communication ltd with effect from 7th June 2006. Reliance Communications is the flagship company of the Anil Dhirubhai Ambani Group (ADAG) of companies. Listed on the National Stock Exchange and the Bombay Stock Exchange, it is Indias leading integrated telecommunication company with over 35 million customers. Its business encompasses a complete range of telecom services covering mobile and fixed line telephony. It includes broadband, national and international long distance services and data services along with an exhaustive range of value-added services and applications. Its constant endeavor is to achieve customer delight by enhancing the productivity of the enterprises
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and individuals we serve. Reliance Telecom Limited (RTL) is a subsidiary of Reliance Communication Limited that provides cellular mobile services in India. The company engaged in offering mobile telecommunication services to its customers in East and North-East India. The company is licence to operate cellular services in 13 states including Assam, Bihar, Himachal Pradesh, Madhya Pradesh, the Northeast regions, Orissa, and West Bengal. RTL owns its network, which is based on GSM technology. The company operates under the brand Reliance Smart GSM after acquiring USHA Phone. Currently, it serves more than 14 million subscribers. The company is headquartered in Mumbai, India. Main Subsidiaries Reliance Telecommunication Limited (RTL) In July 2007, the company announced it was buying US-based managed ethernet and application delivery services company Yipes Enterprise Services for a cash amount of 1200 crore (the equivalent of US$300 million). The deal was announced of the overseas acquisition, the Reliance group has amalgamated the United States-based Flag Telecom for $210 million (roughly 950 crore). RTL operates in Madhya Pradesh, West Bengal, Himachal Pradesh, Orissa, Bihar, Assam, Kolkata and Northeast, offering GSM services. Reliance Globalcom RGL owns the worlds largest private undersea cable system spanning 65,000 km seamlessly integrated with Reliance Communications. Over 110,000 km of domestic optic fiber provides a robust Global Service Delivery Platform, connecting 40 key business markets in India, the Middle East, Asia, Europe, and the U.S. Relaince Internet Data Center (RIDC) RIDC provides Internet Data Center (IDC) services located in Mumbai, Bangalore, Hyderabad and Chennai. Spread across 650,000 sq ft (60,000 m2) of hosting space, it offers IT infrastructure management services to large, medium and small enterprises. It is one of the leading data center service provider in India and provides services like colocation, managed server hosting, virtual private server and data security. It has launched cloud computing services, offering product under its infrastructure as a server (Iaas) and software as a service (Saas) portfolio, which enables
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enterprises, mainly small and medium, a cost-effective IT infrastructure and application on payper-user model. Reliance Digital TV Main article: Big TV Reliance Big TV launched in August 2008 and thereafter acquired 1 million subscribers within 90 days of launch, the fastest ramp-up ever achieved by any DTH operator in the world. Reliance Big TV offers its 1.7 million customers DVD-quality pictures on over 200 channels using MPEG-4 technology.

External Environment
Porters Five Forces Analysis Barriers to Entry 1. Regulatory pressures: The government tightly regulated entry of players by allocating spectrum and licenses through bidding. For all calls made by a subscriber to another subscriber, the DOT did not allow sharing of networks. The operators had to use the DOT network and had to pay hefty sums for the same[ix]. The DOT also required submission of rental rates and tariffs while bidding. Highest license fees and lowest tariffs and rentals were preferred. 2. Huge capital requirements: Telecom requires huge infrastructure setup costs. This acted as a significant barrier to entry. Moreover, operators had to pay steep telecom license fees to the government. Capital investments were inversely proportional to the spectrum allocated. The higher the spectrum allocated the lower the company had to invest in equipment, and spectrum was allotted miserly, hence leading to a catch 22 situation. Threat of Substitutes The Pager was launched in 1995 in India, and was essentially a messaging device, providing the much needed mobility to the Indian middle class. The pager market peaked in 1998 when the subscriber base peaked to touch 2 million subscribers[x]. Pagers were a threat to mobile phones as they provided the same benefit mobility, at a much reduced cost, but since the pager was a one sided messaging system, it did not prove to be a grave threat to mobile telephony. Bargaining power of Customers Consumers of mobile telephony held little bargaining power in front of operators. The average waiting period for a fixed land line phone was about 4 years in 1992[xi]. Consumers therefore saw mobile telephony as an improvement over other communication devices, with the added advantage of mobility. The competition was low back in late 90s so the customers did not have too many choices. Moreover as Indian telecom sector doesnt yet have the option of number

portability, the switching cost is high in terms of emotional attachment and the social pressure of having to inform the new number to all contacts. Overall customers had low bargaining power. Bargaining power of Suppliers The key suppliers for telecom players were (still are) Handset manufacturers: in the nineties, when mobile services were predominantly GSM based, handset manufacturers (major ones were Ericson, Motorola and Nokia) did not really exert any pressure on operators. After CDMA was launched, the pressure was more on the handset manufacturers like LG, who depended on the CDMA operators for most of their revenues. Telecom infrastructure players: These consisted of companies that owned telecom towers or network infrastructure such as Ericsson, Cisco, etc and fiber optic cable manufacturers. Traditionally, In India, many telecom operators backward integrated by invested in setting up towers for their telecom services. Hence there was not much pressure from that front. Government for spectrum and connection: The government was perhaps the most important supplier to the telecom operators because they controlled spectrum allocation. The government auctioned spectrum in phases, to limited number of operators. In the 90s, spectrum was allocated along with the license that was awarded to the first, second and third operators. Another important way in which the government exerted considerable pressure on the operators was through connection charges. Till the national telecom policy of 1999, operators had to pay a hefty fee to the government to connect to another network. This charge exerted a lot of pressure on the operators as it squeezed their margins and impacted profitability. Rivalry 33 licenses were issued to 7 basic service providers as on March, 2003 (exhibit 15). Thus number of competitors was very low and players had high ARPUs (which declined gradually, check exhibit 12, 13 and 18). The market was growing and there was a large share of the pie for everyone. Thus rivalry was not very intense. Major competitors were Airtel, Spice, and Hutch.

Internal Environment
The internal capabilities of a company will determine the stage in the value chain. Using the Mckinsey generic value chain, we have the following stages: Technology Development - Product design Manufacturing Marketing Distribution - Service Technology development: This can also be referred to as Research and Development. Reliance communications places a lot of importance on this because the company has achieved economies of scale with this. The technology and infrastructure platform is replicated in all the countries of operation, it is known that sharing fixed costs across all countries of operation can contribute to cheaper operations. Setting up a service centre in India is which is central to the group operations also helped in achieving economies of scale. Product Design: Reliance communications products are technology based and so product design is linked to technology development. The fact that the company designs their products ensures that they determine the functionalities, characteristics, aesthetics and quality. Manufacturing / Distribution: This can be closely linked to Reliance communications supply chain. Network construction and maintenance is outsourced particularly in emerging markets like China and India. Purchase of equipment, software and handsets are centralized and economies of scale has been achieved through this because the company strikes direct deals with the manufacturers of the various products. Reliance communications sits at a pivotal position in the supply chain linking the end consumer with a complex pyramid of supply. The company sources equipment for networks and handsets from third party manufacturers, source components and assembled products from other suppliers. Marketing / Service: Reliance Communications advertises through TV, billboards, other media outlets, stores, press releases etc and global audiences are attracted through this various means. The global brand of Vodafone provides economies in advertising and brand development across borders. The company therefore has a sales force that has studied the products and have a good understanding of them. Vodafone therefore packages, brands, prices, advertise, markets and sells their products to the consumers.
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It can be seen from the above that the value chain of Reliance communications is purely focused on achieving economies of scale in its global operations. This model has proven to be quite efficient in achieving economies of scale for the company. Reliance communications Financials From the numbers above, it can be seen that Reliance communications performance was on the decline between 2005 and 2007 but there was a pick up from 2008 and this has been consistent up to 2009. The decline was largely due to the roll out of the international strategy and huge payout for licenses which did not catch up immediately. The pickup in 2008 came about due to focus on the expansion into emerging markets like India and African countries, increased influence in technology development and presence in the corporate market and increase in mobile data revenue. There was also a huge emphasis on the optimization of economies of scale. Strategies of Reliance Communications Overall, Telecom was medium attractive industry due to the barriers to entry and low profitability of companies. RCLs Initial Launching strategy RCL adopted a selective new game strategy. We will analyze their moves in 3 dimensions: Scope of Competition (where): Selective RCL chose to attack a niche area where the competition didnt have any footprint: CDMA Moreover, RCL primarily targeted B and C circles where volumes were achievable. RCL correctly foresaw that the growth is going to be in rural market. Since ARPUs would come down, it will be a volume game and RCL gained due to this strategy. It would have been difficult for RCL to gain foothold in the GSM market effectively. Hence it avoided direct competition by going after CDMA technology. The technology fit in to RCLs strategy and added to their differentiation. CDMA has a higher capacity to transmit data than GSM so this helped in offering R World. The CDMA technology has a SIM lock-in feature which allowed RCL to provide high-end handsets at affordable prices. The subscribers couldnt
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change the SIM cards and were tied. The price of the handset was recovered over a period of 2-3 years, with monthly installments. Mode of Competition (How): New game RCL redefined the rules of the game, restructuring the business itself to match RCLs strengths. They also redefined the market in that they expanded the user base hugely due to low pricing. Some of their game changing moves were: Distribution: In terms of distribution, they set up Web-world outlets, which were RCL specific stores which wasnt the market practice. Through Dhirubhai Ambani Entrepreneurship program RCL roped in students, housewives and many others to sell RCL connections. This was a first in Indian telecom space. Overall RCL had a strong mix of internal and external channels including direct sales, agents, retailers, webworlds, and webworld expresses. R World: Another unique innovation by RCL wherein several partnerships with NSE, Indian Airlines, Microsoft, etc have resulted in a whole gamut of value added services (VAS) for the users thus helping to differentiate RCL. Due to low ARPUs, the B and C circles and rural population was not targeted by incumbent players. RCL exploited this subscriber base that was never considered important by the competitors. As with most selective new game strategies, RCL changed the way some customer groups looked at telecom service. It redefined the rules of the game, combining low cost, high quality and innovative product differentiation. Marketing: RCL initiated a huge advertizing campaign banking on famous celebrities such as Virendar Sehwag, a mass icon. Thus, Relcom positioned itself firmly in the minds of the masses. Pricing: Relcom applied penetration pricing when they initially launched the mobile phones. RCL launched at a tariff of 40 paise per minute with 400 minutes of free outgoing calls for a three year subscription of Rs. 14,400 and a free handset. Timing of competition (When): Timing RCL, through a subsidiary, Reliance Telecom, already had GSM licenses in few C circles. But with CDMA licenses being approved and UAL passed, they decided to jump full throttle. We

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will later see in this report that they eventually moved across the board with their strategy, offering GSM services after success in CDMA (56.71% CDMA market share as on 31/3/08). Competitive Reactions Tariff war Expectedly, RCLs launch threatened the dominant GSM players which had high rates and wide subscriber base. RCL launched its services with a 60 second rate of 40 p, with a rental of Rs 249 per month. Tata Teleservices had a pulse rate of 3 minutes @ Rs. 1.2, with a rental of Rs. 295 per month. TATA was offering similar tariffs to RCL, the only difference being, TATA had a 3 minute pulse. Consumers saw the RCL offering as a more cost effective offering as a call duration of 1 minute would be charged @ 40 p in the RCL network whereas TATA would charge Rs 1.2 on RCLs launch, TATA responded by modifying its pulse rate. Other GSM operators were charging a rate much higher than that of RCL. RCL also offered STD services at 40 paise per minute. This was in direct completion to the newly launched long distance services provided by GSM players. GSM players like Bharti and Hutch (now Vodafone) responded by slashing their tariffs by more than 2/3rds from Rs. 9 per minute to Rs. 2.99 per minute.. RCL played the role of a price leader and all other competitors followed what RCL did. In response to RCLs R world services, many operators included internet services in their packages. Industry Evolution and subsequent strategic moves The Indian telecom industry changed rapidly over next few years. The mobile sector grew from about 10 million subscribers in 2002 to about 400 million as on 31st March, 2009, representing a growth of approx 70% year on year. However, with time, the industry forces have changed the industry structure to reduce its attractiveness. The changes have also come in multiple dimensions: wireless, broadband, DTH, IPTV, WiMax, Value Added Services (VAS), etc and also geographically. Overall, the changes may be characterized as creative change. The core assets of the telecom industry in terms of technology such as GSM or CDMA may become obsolete rapidly with emergence of new technologies such as 3G. However, the activities of the industry players such as providing value added services are growth drivers of the future. Lets analyze what strategies the players have adopted to cope with the changes.
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Strategy Development
Reliance Communications From the very beginning, RCL pursued a diversification strategy and offer a full gamut of services to reduce obsolescence risks and to try to win the game. The components of diversification strategy were globalization and technologically integrated game play. Some of its major acquisitions were: Flag Telecom which had 200 global carrier customers and service providers in 28 countries, made it possible for RCL to offer international long distance services; Yipes Holdings which is strongly positioned in Metro Ethernet based high growth enterprise service market; WiMAX operator eWave, a major player in 4G WiMax sector; Uganda-based Anupam Globalsoft(U) Limited, marking their entry in Uganda, etc. It also established a joint venture with US-French telecom equipment supplier Alcatel-Lucent to provide network services to telecommunications operators. The acquisitions and other diversification moves by RCL can be considered under the context of the three essential profitability tests proposed by Michael Porter. Attractiveness test: Clearly data segment holds big value to all telecom players. The market for VPN and Ethernet solutions business is over Rs. 160,000 crores or USD $32 billion. Yipes acquisition gave Reliance entry to the lucrative Rs 400,000 crore ($ 100 B) global enterprise data market. The market for mobile value-added services is estimated at Rs 380 crore, and it is expected to grow to around 3,500 crore by 2010. Notably, all these businesses are high EBITDA businesses and source of most of the growth in RCLs income statement. Number of broadband and internet subscribers is also growing at a frenetic pace. Cost of entry test: The acquisitions clearly portray a pattern. RCL invests in high quality companies in poor financial positions, thus getting them cheap but giving it a global footprint and access to emerging high growth technologies. At its peak, Flag Telecom had a market cap of $7 B, but
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RCL bought it for $207 M. Vanco once had a market cap of $750 million, so the $76.9 million price-tag reflects RCLs astuteness. Yipes Holdings, a pioneers of Carrier Ethernet services, was acquired for around $300 million a few years after it came out of bankruptcy filing in 2002. Better off test: The global segments contribution to RCLs revenues was nearly 25% in FY09. RCLs move into GSM also deserves special mention. This move gave them huge economies of scope. At the end of March-09, RCLs wireless subscribers market share went up to 18.8% from 17.9% in Dec-08 whereas Airtel lost its subscriber market share from 25% to 24.3%. RCL leveraged its CDMA network to rapidly expand GSM footprint with just the incremental cost in record time of 11 months from receiving spectrum in January 2008 to launching services in December 2008. Globalization strategy: RCLs Yipes acquisition was necessitated by Airtels investment with SingTel in the i2i cable from India to Singapore. Apart from actively hunting for companies to acquire, Bharti has also expanded its footprint globally by acquiring licenses in countries such as Seychelles, Channel Islands, Jersey Islands and Sri Lanka. Diversification: Just as the ARPU from basic telecom services has declined steadily through the last decade so Airtel continuously diversified into newer territories. It acquired National long distance and International Long distance licenses in January 2002 and July 2002 respectively. It partnered with Cisco to launch IPTV services in 2008. In the same year, they launched DTH services under the Bharti Airtel brand name. Recently, in 2009, Bharti launched 16 mbps broadband services in key markets in India. It also introduced many value added services (VAS) such as Electronic recharge, Hello tunes, Airtel live, Portfolio manager, Song catcher, Easy music, Blackberry handsets, M-cheque facility. Outsourcing: In 2005, Bharti adopted a game-changing outsourcing strategy. It made a lumpy commitment to enter into agreements worth around Rs 1000 crore with Hinduja TMT (HTMT), IBM Daksh, Emphasis, TeleTech Services and Nortel to outsource its call centre operations and most internal technology infrastructure.

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Marketing and Matchbox strategy - Bharti followed an aggressive marketing strategy wherein it outspent the competition in terms of advertising.[4] Bharti accentuated focus on distribution by adopting a unique Matchbox strategy, wherein they made it a point that Bharti recharge cards were available wherever a matchbox is available. This ensured maximum reach. Sustaining superior performance: Bharti has successfully deterred imitation by virtue of its first mover advantage as discussed. RCL tried to undermine Bhartis first mover advantage by substitution, attempting to change consumers preferences (through CDMA and diversified offerings). Bharti has countered that through the lumpy choice of outsourcing. Moreover, by outsourcing to several parties at a time, it dissipated holdup risks. It has also avoided slack by commitment to quality standards: it is now the largest Indian ISO 27001:2005 certified organization. It also recently restructured the top management. Implications It may be concluded that RCL has established the following competitive advantages: 1. Reliance brand name: The biggest advantage is the Reliance Anil Dhirubhai Ambani Group (ADAG) backing. When RCL was launched, under the undivided Reliance Group, the group was the biggest industry house in India. Reliance - ADAG, an offshoot this group, ranks among Indias top three private sector business houses in terms of net worth. Thus RCL has almost unlimited access to capital under the shelter of stretchy Reliance brand name. 2. Strong execution capabilities: It recently led an unconventional and innovative GSM launch strategy that gave it nationwide success by using the concept of air time minutes as currency. RCLs NLD network, whose span is almost twice of next largest private NLD service provider, has crossed 190,000 km of ducted fiber optic cable on 31st March, 2009. 3. Low cost leadership: Its pan India network and large subscriber base reduces network cost, giving it bargaining power with vendors.RCL successfully gained competitive advantage through economy of scale in procuring equipments at prices about 50% lower than that of any other operator in India. This structural advantage enabled it to offer competitive tariffs and ramp up a subscriber base of 5m from virtually nothing within 10 months of initial launch.[xxxviii] RCL is
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also the only private service provider with a multi-terabit capacity from India to Europe at low cost since most of the build was financed through pre-sales of capacity on the global network.. 4. Superior distribution and infrastructure reach: RCL now has network in all states in India providing coverage to over 90% of Indias population. It also has the largest private submarine cable system in the world, directly connecting 40 countries from the East coast of the United States, to Europe, the Middle East, India, South and East Asia, through to Japan[xl]. Its GSM distribution has also gained traction from the strategy of enlisting franchisees, rather than exclusively through its Web World stores. Franchisees are reported to be more eager to take up GSM than CDMA, plus Bharti and Vodafone, the other two hot franchises, are supposed to be saturated in the major cities. 5. Integrated model: The diversified offerings have given RCL a huge economy of scope. In the last few months, RCL used its towers for both CDMA and GSM to provide dual network offering on a pan India basis. All the above resources continue to add value for RCL despite the creative changes in the Telecom industry. Each activity reinforces the other, creating a complex system of intertwined factors. It is very difficult for other firms to imitate (either through duplication or substitution) any of the above factors (let alone the combination) due to the huge cost disadvantage it gives to the followers. With RCLs new moves such as Reliance Big TV bearing fruit coupled with its GSM foray, the game can change in RCLs favour in the near future. Bhartis growth has slowed in broadband while RCL has gained 60% share of Indian data card internet access market; this poses worrying signs for Bharti. Thus, even though RCL has not yet won the game in Indian telecom market, it looks set to pose a very serious threat to Bharti. Time will tell whether Dhirubhais dream of unlimited growth will hold true for Reliance Communications.

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