Bulk customers once waited outside VSNL offices with demand drafts to renew contracts. Privatised and renamed, the company is now chasing customers all over the globe.
Narasimhan SrinathWhen Narasimhan Srinath was the head of Tata Internet Services, the employees once gave him a certificate conferring on him the Slave Driver of the Year award. Now the managing director and chief executive officer of Tata Communications Ltd (TCL), which until five months ago went by the distinctly public sector name of Videsh Sanchar Nigam Ltd, Srinath is driving himself hard to live up to that badge.
So when he is not in flight, which he is 20 days in a month, Srinath is working almost 24x7 in his Mumbai office. The view from his sparsely furnished office is breathtaking, but the 46-year-old Tata Administrative Service officer hardly has the time to admire the stunning Mahim bay and the unfinished Bandra-Worli sea link.
The positive side of keeping his nose buried in work is that he won’t miss much — not the scenery outside his office, anyway — when TCL moves to a new office at the Bandra Kurla Complex in a couple of months. The present building — all 100,000 square feet of it — will become a data centre, the heart of a telecom services company. It’s in addition to the one million square feet data centre space that the company already has worldwide. In another couple of years, the space will go up to 1.5 million square feet.
That’s just one part of the frenetic expansion plan of the company, which was taken over by the Tatas from the government just six years ago. Since then, TCL has extended its reach to over 90 countries from around 10 in the pre-privatisation days. In that period, its market capitalisation has grown over 150 per cent from Rs 4,795 crore on February 5, 2002, when the ownership changed hands to over Rs 12,000 crore now.
Last month alone, TCL made five mega announcements: it tied up with Etisalat to deliver services in the United Arab Emirates, expanded connectivity to Africa, broadened global virtual private network services to China, acquired a majority stake in South Africa’s second largest operator Neotel, and launched Telepresence (a high definition conferencing facility) worldwide.
Scaling up
So what is TCL, once a sleepy, state-owned company that thrived in its monopoly over international long-distance telephony, up to? “Global customers earlier demanded multiple touch-points within a continent. That changed to within a country; now it is within a city. This is adrenalin-driving work. We have to pamper the customer who now has a short memory and a shorter loyalty span,” says Srinath.
To achieve its objective of circling the globe in terms of its assets, TCL is now looking at creating a new world of communications anchored in its strength in emerging markets. “We are positioning ourselves as much to serve prospering Indians and other emerging market clients seeking to expand their reach into Europe and North America as we are wooing clients in the developed markets who need connectivity into emerging markets,” says Srinath.
The strategy is clear: build up scale and focus more on value-added services that bring in the margins. Just selling bandwidth will take you nowhere.
The first part of the transformation — building up scale — is being achieved as if there is no tomorrow. TCL is the number one player in the world in global wholesale voice traffic (over 20 billion minutes of traffic annually), and submarine cable capacity (20-plus terabit and 200,000 route km network). The company is also the number one player in India in international long distance services, enterprise data and internet services.
The earlier acquisitions of Tyco, Teleglobe and Neotel ensured that the company graduated to the global stage. The process is being bolstered with a further $2 billion expansion plan, linking Mumbai directly with Paris, London, and Madrid via Egypt, and another submarine cable linking Singapore, Hong Kong, and Japan with an additional connection to the Philippines.
Over voice
But scale is just the starting point. The second part of the strategy is to introduce more value-added services that bring in profitability. So while voice still remains the company’s mainstay accounting for 60 per cent of the revenue, the company wants to move to data more and more as that’s where the real money is. Srinath is working to reverse the ratio in the near future — 60 per cent from enterprise data and retail and 40 per cent from voice. That’s the only way the EBITDA margin (or earnings before interest, tax, depreciation and amortisation, the health benchmark for long-gestation businesses) can improve in view of the falling voice tariffs.
That explains the company’s big-ticket foray into managed network services. Offering basic bandwidth to a company for connecting its offices is a plain vanilla service. But when a telecom company starts offering connectivity along with bells and whistles like bandwidth on demand, a basic assurance on the quality of service, and alarms for systemic problems — it is called a managed network service, which is growing fast.
The move from voice to data makes ample sense as the demand is growing, driven by data and bandwidth applications like internet protocol television, or IPTV.
Not that voice is being ignored totally; it still brings steady revenues. Srinath says obituaries have already been written about the voice business, but it continues to be the most “alive dead” business.
The last piece of the jigsaw puzzle is the retail market and TCL is spending close to $500 million to roll out wireless services in 30 cities, starting with Bangalore, Mumbai and Delhi. Since last-mile linkage is a huge problem, Wimax is the route TCL has chosen. Srinath expects it to have 40 per cent market share in another five years on the back of its first-mover advantage. If it does that, the EBITDA margin will improve faster than expected.
All this has meant taking customer-focus as the religion. The company had just 30 people in its marketing department six years back. Now, over 30 per cent of its over 5,000 employees are directly involved in marketing. Earlier, even bulk customers had to wait outside a section head’s office with a demand draft to renew their contract. Now, Srinath himself leads the chase for customers.
Innovation is happening in other areas of service integration too — even with competitors. For its managed security services, for instance, the company is competing with IBM, but it is also licensing the IBM ISS technology to build an information platform. Srinath calls it co-opetition, a happy combination of competition and cooperation.
“I have to improve customers’ stickiness and the only glue can be a move from a pure bandwidth provider to an integrated value-added service provider,” Srinath says.
That’s a sound strategy for a company that is trying hard to make up for lost time and two blows from the government. While taking over the company, the government had committed that the company would get to keep its monopoly in carrying international long-distance (ILD) calls to and from India for five years. But within a year, the promise was broken as the ILD business was thrown open to its competitors.
Srinath, who was the operations director at that time, was thus left with pipes that transported calls from overseas into India, and a workforce in whose lexicon the word marketing didn’t exist.
But not everyone is impressed as while expansions have gathered speed, the profits and EBITDA margins have also been dipping at almost the same rate. The huge fall in voice tariffs is putting further pressure on profitability. Rajiv Sharma, an analyst at HSBC Securities, and Tucker Grinnan, an analyst with HSBC, say the company’s limited access to the Indian domestic telecom growth story has been made worse by the Tata Group’s delay in creating an integrated operator.
“Financial markets globally attach more value to integrated operators”, Sharma and Grinnan say, while advocating a merger of Tata Teleservices, which is a wireless operator, and Tata Sky with TCL.
There are other problems as well. Gartner’s senior research analyst Naresh Singh says the telecom sector has seen the stiffest competition from players like IBM, Accenture, Bharti and Reliance Communications, but TCL has been lacking aggression on many counts. The last mile connectivity has been a problem for long and the company has taken its own sweet time to wake up to the issue.
TCL has probably missed out on the huge opportunity it had as an incumbent as far as providing broadband services is concerned, Singh says. For instance, even public sector players like BSNL and MTNL have been able to capture a major slice of the market, Singh says.
Or, look at Reliance Communication’s quick moves on the IPTV project. Bharti has also been building its network aggressively. TCL’s response to all this has been a bit late in the day.
Also, profitability will continue to be under pressure as the company has not been able to get its act together as far as integrated operations are concerned. “TCL might collaborate with group company Tata Consultancy Services, but it means that they have to share the revenue as well,” an analyst said. The competitors have a distinct advantage on this account.
Srinath agrees profitability is a concern but says the company is in an investment mode and the returns will come in soon.
A consolidation of the group companies has been talked about in the past, but there isn’t any urgency on this account as the synergies are exploited fully so that customers get to work with a “virtual single entity”. A team in Tata Communications has a sales team that pitches for corporate business and then draws on expertise from group companies like Tata Teleservices for mobility-related issues and TCS for system integration.
Srinath says TCL has a strong story to tell: from India-centric to India enabled. Hopefully, his customers would agree to that.
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