Blossoming telecom partnerships

With Virgin Mobile’s controversial entry into the Indian mobile market and the news on Temasek, Singapore, leading the race for picking up stake in Tata Communications (erstwhile VSNL), the Indian telecom industry is buzzing with M&As and partnerships. It is important to look at the strategic objectives behind these partnerships for a better understanding. High sunk costs, rapid technological advances, high obsolescence and intense competition are some of the reasons for some of the mega deals and consolidation in the industry. ‘Market access’ is one of the prime motives for such partnerships. By buying out Hutchison for $11.1 billion, Vodafone entered into the high growth Indian market and hedged it against the saturating European markets. This move has proved well for Sarin as the Indian arm is now contributing to about 40% of mobile usage volume of Vodafone. Same holds good for the Malaysian operator Maxis Communications which acquired stake in Aircel for $1 billion to enter into the Indian market. Virgin Mobile, the Mobile Virtual Network Operator in the UK, US, and other countries has plans to enter the Indian market through partnership with Tata Teleservices. Indian telcos are also expanding their footprint in other emerging markets by forging alliances and partnerships. Tata Communications entered South Africa by acquiring 26% in Neotel; RCOM recently acquired Yipes for $300 million to enter into the US data communication market; VSNL acquired Teleglobe for $239 million to get access to wholesale voice and data market in North America; Bharti will soon be launching 3G services in Sri Lanka with expertise from its partner Singtel; Botnia Hightech Oy in Finland was acquired by Bangalore-based Sasken Communication Technologies to be nearer to the European market. After getting market access, firms enter the second phase of building partnerships to achieve complimentary synergies and develop a more comprehensive product/service set. To achieve “economies of scale and scope”, firms acquire networks and customers from existing service providers for expanding their operations. By acquiring Skycell in Chennai, Hexacom in Rajasthan, JT Mobile in Karnataka among others, Bharti Airtel expanded its footprint across India. This enabled Bharti not only to have ready access to existing subscriber base of acquired operators but also to build synergy in its pan-India network operations. Same holds good for Idea Cellular and Vodafone Essar as well. The third major factor for the partnerships in telecom is for companies to have “control over emerging technologies”. Bharti’s mega deals of outsourcing of its entire network management and operations to Nokia Siemens and Ericsson is an example of this kind. By partnering with equipment vendors using a managed capacity model, Bharti Airtel is able to control the planning, deployment and management of leading edge technologies and services for its business. Vodafone Essar and Idea followed suit. Realising that apart from connectivity, customers also need security especially for data services, Bharti Airtel signed partnership with US-based Verisign for bundling information security products and services with its broadband services. Tech firms with niche specialisation such as Subex Systems, which specialises in advanced telecom fraud management products, Geodesic the developer of the famous Mundu Instant Messenger for mobiles, OnMobile incubated by Infosys specialising in mobile software products might well be likely targets for acquisitions by handset vendors and service providers to enable them to have control over various relevant technologies. While we have been witnessing the above partnerships, the fourth dimension to the partnerships is emerging. Technology-intensive companies are pursuing partnerships with “hedging” as the main value objective. Companies are getting stake in technologies unrelated to the core business that holds promise for the future. The search engine giant Google formed the Unity consortium with major telcos around the world to build US-Japan sub-sea cable system operating at multi-terabit speed, possibly to push searchable virtual reality snippets across the continents; Reliance Communications acquired stake in Adlabs the films production company, to possibly distribute digital films to theatres and to individuals across the country through its broadband networks. It is expected that broadcasters such as Zee, Star and Sun will soon be bidding for Mobile TV licence (for which Trai has released recommendations) in collaboration with mobile network operators to possibly broadcast their contents on to our mobile handsets. This euphoria over emerging technologies and associated businesses is similar to the ones witnessed during the dotcom era in mid-’90s. Some of the partnerships did not work too well. Notable ones being the disastrous MCI-WorldCom’s merger for $37 and the suicidal take over of AOL by Time Warner for $160 billion. We can only hope that some of the above recent partnerships blossom and bring in the intended benefit of providing advanced telecom services at lower prices