Business - Telecom;CDMA or GSM

Suveen K Sinha

CDMA wireless leader RCom will soon have two networks, as will Tata Tele. There is a method in the duplication, and little time to celebrate GSM’s triumph.

Anil AmbaniAt Reliance Communications’ annual general meeting in Mumbai on September 30, an elderly woman shareholder pointed out that chairman Anil Ambani was wearing the same suit that he wore at the Reliance Power AGM a few days earlier. A middle-aged man praised Dhirubhai Ambani and said his spirit lived on in son Anil and “another person I will not name because you will not like it”. Another one, a little more intrepid, urged the chairman to stop fighting with brother Mukesh and, instead, give him a jadu ki jhappi (a hug).

Ambani, displaying the forbearance of one not new to these things, remained reasonable. To the one who did not want to name Mukesh, he said: “I like everyone.” There was just one question that Ambani appeared reluctant to take head on. A wrinkled little man, referring to RCom’s new mobile phone service based on the GSM technology, said he already owned its CDMA phone. If he also bought the GSM phone and had one in each pocket, which of the two will be better? “We will provide both the services. It is up to the consumers to choose,” said Ambani.

Ambani, who at the AGM had a phone that could access RCom’s GSM signals, said a soft launch of the new network had already taken place in Delhi and Mumbai and the rollout would be complete by the middle of the next year. However, the question that made him appear defensive may be posed to him many more times in the near future. It may be worded differently, such as, why have two separate networks for a service that is more of less identical. CDMA is said to be more efficient in data transmission, but data is only 7 per cent of the total mobile traffic in India, of which a large part is SMS.

Second, but for Reliance, which has become enamoured of GSM, there would have been very little footprint of CDMA in India. In 1995, Reliance obtained a fixed-line licence. As technology changed rapidly, it first became possible to offer limited mobility and then full mobility on the fixed-line network by using the CDMA technology. Since the licence was for fixed-line telephony, Reliance’s service enjoyed favourable interconnection terms with other fixed-line operators.

The GSM lobby rose in a vociferous protest, saying Reliance was getting to provide mobile services without having to pay for the licence. That triggered bitter battles in Telecom Disputes Settlement & Appellate Tribunal (TDSAT) and various courts that eventually saw the NDA government — Arun Shourie was the communications minister — modify the policy. Reliance obtained a universal service licence by paying Rs 1,651 crore, which was what the fourth cellular licensees had paid a few years earlier, and a penalty to dispel the shadow cast most tellingly by the TDSAT chairman’s statement that the service was illegal.

As one saga came to a close, another started. Anil Ambani, who received Reliance’s telecom business in the settlement with his estranged elder brother, announced within months of the split that he would take RCom into GSM. A war of words and letters broke out again, but eventually, RCom got the pan-India GSM spectrum by paying another Rs 1,651 crore.

Ratan TataOn both occasions, Tata Teleservices, part of the salt-to-software conglomerate Tata Group, followed in Reliance’s wake: first into CDMA-based mobile and then into GSM. Apart from these two, Shyam Sistema, a joint venture of Shyam Telelinks, which earlier sold its Rajasthan GSM operations to Bharti Airtel, has obtained nation-wide CDMA spectrum and applied for GSM spectrum.

The battle is over
The GSM players are claiming victory, saying they always knew that all the talk about CDMA being the superior technology — often debated during the legal battles — was not valid. One large GSM player, which was given extensive presentations by vendors on the ostensible superiority of CDMA, says it always knew there was no magic in the technology.

“Globally 80 per cent of new subscribers are choosing GSM. The debate about CDMA versus GSM has ended. The market has decided,” says T V Ramachandran, director-general, Cellular Operators Association of India (COAI), the grouping of GSM operators.

Despite India’s two biggest corporate houses betting on CDMA, 70 per cent of the market in the country is with GSM, which enjoys distinct advantages. It is the more widespread technology in the world, enabling seamless roaming. Secondly, research has shown that consumers first like to choose their handset and then the service provider. This behaviour suits GSM, which works on an easy-to-change chip placed inside the phone. The CDMA phone, on the other hand, is tied to the network. Third, CDMA is proprietary technology and entails royalty for Qualcomm, founded in 1985 by San Diego professor Irwin Jacobs.

It is not surprising that while CDMA loyalists are now wooing GSM, no GSM operator is looking to replicate his network with CDMA.

Victor beware
Sometime in the first half of the 1990s, when it seemed imminent that the government would open up telecom to the private sector, a top management consultancy firm made a presentation to the top executives of Reliance. The gist of it was that the company should stay away from telecom. It involved retail and consumer interface, which was not the company’s forte.

When the time came to bid for the first round of mobile telephone licences, late patriarch Dhirubhai Ambani was already taken in by the idea of cheap mobile services (which morphed later into a-call-for-the-cost-of-a-postcard concept) and told his people to divide the bid amounts by 10 and submit. The result was that Reliance’s bids were at the bottom in most circles. It ended up bagging six — Bihar, Orissa, West Bengal, Kolkata, Madhya Pradesh and the North-East — many of which did not hold much interest for other bidders.

At that time, the group’s telecom business was with Anil Ambani, who, realising the difficulty in recovering bills from the subscribers in his circles, introduced the concept of pre-paid connections in 1996. Sometime in 1998-99, his brother Mukesh took charge of the group’s telecom business and began the march into CDMA.

Those who agree and sympathise with RCom say Anil Ambani was always a GSM man. Had Reliance’s telecom business stayed with him, there would not have been this affair with CDMA. The company therefore may not be too perturbed by GSM’s victory claims. “Instead of rubbing their hands in glee, the GSM operators should be careful. RCom is coming. So far it had no presence in 70 per cent of the market that is with GSM. That will change.”

Back into telecom, Anil Ambani has moved fast to set the house in order (see: Fast off the blocks). In three years, he has turned around the company, financially and operationally. He has been helped by the boom in telecom subscribers, but has done well to be number two behind AirTel with over 55 million subscribers, compared with 10 million three years ago.

The foray into GSM will give RCom access to customers who have so far shunned it. For all the virtues of CDMA, it has given RCom largely the low-end customer. The average revenue per user (ARPU) for CDMA operators is about Rs 100 lower than that of GSM operators. Given the low ARPUs in the country, that difference works out to over 50 per cent.

“RCom’s CDMA network has a large number of users, but from a revenue point of view, its quality of customers is low. It has low ARPUs because the large majority of its customers is at the low end. That must hurt Mr Anil Ambani,” says Mahesh Uppal, director, Com First India.

The other incentive to get into GSM is spectrum, the radio frequency on which mobile signals travel. It is a valuable and scarce resource. “GSM gets more spectrum than CDMA for the same price (for start-up, it’s 4.4 MHz for GSM and 2.5 MHz for CDMA). Since GSM spectrum has a great demand, there is no risk. Besides, it is significantly underpriced,” says Uppal.

UAE-based Etisalat recently bought 45 per cent of Swan Telecom, which has paid about Rs 1,500 crore for GSM licences in 13 circles, valuing the Indian company at just under Rs 10,000 crore.

A new battle
Bharti Airtel and Vodafone-Essar are the leaders in GSM, but their spectrum is stretched. If Reliance gets its GSM network up and running fast, it can hope to attract several of their customers. RCom will be able to leverage its existing assets — 60,000 route kilometers of pan-India fibre optic backbone, 18,000 cellular sites and towers, outlets all over the country — to bring down the cost of setting up the new network.

Says A G Rao, the chief technology officer of Tata Teleservices: “The transmission network is neutral to technologies. The same infrastructure can be used for all the technologies. It will give us more efficiency in economics and skill-set building.”

According to estimates, 60-70 per cent of the existing CDMA infrastructure can be used for the GSM network. Since RCom has already spun off the towers into a separate company, the cost of the new towers will not show on RCom’s books. The 18,000 towers can accommodate 18 million subscribers. Each of those can be acquired at an estimated cost of only $35-40, compared with about $100 that a new entrant will have to spend on acquiring each subscriber.

“In our six existing dual network circles, we have been garnering a market share of close to 30 per cent of subscriber additions. With the rollout of our dual services on a nation-wide basis, we are likely to acquire a far higher market share than the existing 18 per cent,” says Ambani.

Chances are that RCom will leverage content from its group siblings, which produce entertainment and related content, to push its new mobile services. Its phones can show movie trailers. If the user wants to see the whole film, he can use the phone to buy tickets in any of the multiplexes owned by the group. With content, newer possibilities can always open up. And yes, RCom’s people can be expected to take further its belief in affordable telephony.

It will not be a cakewalk for RCom, though. Globally, companies operating both GSM and CDMA are not doing well. China Unicom, the state-owned company, used to be on CDMA only. Its only rival, China Mobile, is on GSM. Some time ago, China Unicom made a foray into GSM, but the experience has not been a happy one.

Under a state-sponsored restructuring of China’s telecom industry, fixed-line operator China Telecom is buying China Unicom’s CDMA wireless network. China Unicom, which retains its GSM wireless network, is merging with the nation’s other big fixed-line operator, China Netcom. COAI’s Ramachandran points out that globally those companies do well who are in either GSM or CDMA.

However, those who agree with RCom’s move say that its CDMA network — fully depreciated — already has the critical mass. In future, the majority of its resources may be ploughed into the GSM service. A clear strategy will emerge after a year or so, depending on the consumer behaviour — whether a lot of them migrate from CDMA to GSM or whether a loyal CDMA clientele remains intact. However, for migration to happen, number portability, still not allowed, will be critical.

The wrinkled little gentleman at the AGM, if he reads this article, may feel that his question remains unanswered. Or, maybe he would get his answer if he read carefully.