The country's top telecom company, Bharat Sanchar Nigam Limited (BSNL) has been having a rough run for some time. For each step forward, it has been pushed back two steps. Just when it thought it had cleared the air on its scaleddown 23 million line GSM tender, Bharti Airtel delivered it a fresh blow. In August this year, the private operator unceremoniously unseated BSNL from its leadership position as the largest integrated telecom operator in the country (in subscriber terms), pushing ahead with 78.7 million subscribers against BSNL's 77.2 million.

That must hurt. For the one-time monopoly service provider, and the largest telecom company in terms of both subscriber numbers (mobile, fixed and internet and broadband) and revenues, the upstaging by Airtel has somewhat bruised its image. Though it is still the largest operator in revenue terms, its slow growth is worrying –­ a point also noted by communications and IT minister A. Raja recently.

This is not to say that BSNL is not a canny operator. But as a state-run entity, it finds its hands tied when it comes to taking decisions. Its operations are subjected to bureaucratic delays, interference and controversy. Every issue needs to pass through multiple levels before it is cleared. This is time-consuming and certainly not the best way to deal with competition.

The government's latest intention of merging loss-making equipment maker ITI with BSNL is a case in point. Analysts say this is not a "smart move at all". On the one hand, the government has expressly asked the Department of Telecommunications (DoT) to work out a strategy to restore BSNL's market position, and on the other, it is suggesting a merger with a loss-making entity, which will only impact BSNL's financial health further.

As it is, the company's financials have been slipping over the years. Though on a strong wicket compared to other operators, in financial year 2007-08, BSNL's revenue (provisional) dropped to Rs 370 billion from Rs 397.15 billion in the previous year. Its profit after tax (PAT) too slipped, from Rs 78.06 billion to Rs 45 billion during the same period. Therefore, in the event of a merger, ITI's accumulated losses of Rs 25 billion would only put an additional burden on BSNL's financials.

"This would be the last straw on the camel's back," points out Sridhar Pai, CEO of consulting firm Tonse Telecom. "This should not be allowed at any cost. The world is now in a different mode and operators have a full-time job in building their brand and managing subscriber expectations. Why burden them with an ailing equipment vendor that has been surviving on subsidies and handouts from the centre?"

BSNL couldn't agree more. It has reportedly informed Raja that a merger with ITI does not bring any synergies to the table. "BSNL is a service provider and ITI is a manufacturing company. And no service provider is manufacturing its own equipment because it wants to source the best equipment at the best prices by exploring various options. Tying up with only one equipment manufacturer or manufacturing only one particular equipment may not be commercially producing the best out of BSNL," says Kuldeep Goyal, CMD, BSNL.

Goyal, who took over the helm in 2007, finds his hands very full. BSNL's previously dominant position in all areas of operation, except rural telephony, internet and broadband, is being threatened by unrelenting competition. It is certainly more vulnerable than it was even two years ago.

In 2002, when BSNL launched mobile services, it took the market by storm, giving the older, private operators a run for their money. It matched their service offerings and competitive tariffs and soon became a contender for the top slot. By early 2006, it had 20 million customers and 25 per cent market share.

Then the slide began. The company was faced with a huge capacity crunch with the last major network expansion having been undertaken in 2005. By late 2006, subscriber additions had hit an all-time low. Subsequent expansion plans were either stalled or delayed. Its mobile business, operating on a highly overburdened network, ran to the ground.

Today, BSNL, with 38.49 million mobile subscribers, trails way behind private telecom majors such as Bharti Airtel (75 million subscribers as of August 2008), Reliance Communications (RCOM) (54.29 million) and Vodafone Essar (52.76 million).

In the wireline segment too, BSNL has been losing subscribers –­ though that is true of all landline operators. However, BSNL being the largest operator with over 80 per cent market share is probably the most impacted. What's worse is that this slide is expected to continue.

Meanwhile, the company has been hit by the phasing out of access deficit charges, a revenue share it received from other operators. The regulator is also talking about a downward revision in termination charges, which will bring down BSNL's revenues further as most calls terminate on its networks.

Strategy for change
To restore the company's confidence, Goyal is looking to shake off the old ways of doing business. He is also conscious of the imperative need to plug the "single biggest concern" of the company –­ the severe capacity crunch that has been crippling BSNL's mobile business for the past two years. Says Goyal, "A decrease in the market share of an incumbent is natural when any sector opens up to competition. However, during the past couple of years, mobile capacity constraints have prevented us from reversing this trend. Network expansion is now at the final stage of integration. BSNL is trying to stabilise and then increase its market share through a number of measures."

The "pull-up" strategy is multi-directional. BSNL has set a target of achieving a 30 per cent share of the mobile market by 2010 from 13 per cent at present. As a first step towards this, it plans to get a 93 million mobile line order –­ the world's largest telecom equipment order. This will help the company extend its GSM coverage to all villages with a population of more than 1,000.

The estimated cost of the project is $10 billion, which will be spread over a period of three years. The 93 million line order is being split into three parts of 25 million each for the north, south and west zones, and 18 million for the east zone.

Taking care to not repeat its past mistakes, the bidding conditions have been made much clearer. No single company will be awarded more than two zones; the maximum order that any equipment major can thus get will not exceed 50 million lines. Also unlike the earlier tenders, BSNL has allowed telecom vendors who do not have a manufacturing facility in India to participate in the bidding, thereby clearing the way for the participation of Chinese vendors ZTE and Huawei.

Recently, six international telecom network majors –­ Ericsson, Nokia Siemens Networks, Alcatel-Lucent, Huawei, ZTE and Nortel Networks –­ submitted their bids. Motorola, however, refrained from doing so, perhaps still smarting from the earlier BSNL tender fiasco when it was disqualified on technical grounds.

Meanwhile, BSNL intends to add 33.5 million wireless lines by March 2009. Of this, orders have already been placed for 17 million GSM lines and 2 million CDMA lines (BSNL received permission to offer CDMA services under the dual technology platform in 2007, like RCOM and Tata Teleservices Limited [TTSL]). As of April 2008, BSNL had a capacity of 36 million GSM lines and 5.5 million CDMA lines. The capacity enhancement will thus give a significant fillip to BSNL's operations.

Creating capacity is only one aspect of the growth strategy. The company is also banking heavily on 3G and has announced plans to introduce these services by early 2009. According to analysts, this could be BSNL's lucky break, as it will gain an earlymover advantage over private players. The advantage of being a state-run organisation is that government policies are often crafted to take care of their interests. In this instance, BSNL has already received 3G radio frequencies, while private players have to wait out the bidding process.

BSNL plans to hook up all district headquarters on the country's telecom map to 3G by the end of the year. For this it is looking at an investment of Rs 25 billion. BSNL is already running trials in Pune, which will enable 2 Mbps data connectivity to 2,000 BSNL post-paid mobile subscribers. Also on the anvil are plans to introduce the BlackBerry and iPhone. This will help BSNL take on rivals like Bharti, Vodafone, RCOM and TTSL in the high-end services bracket.

"It is clear that both BSNL and Mahanagar Telephone Nigam Limited (MTNL) will use the launch of 3G and subsequently, the iPhone to popularise their cellular services. This is the first time that public sector units (PSUs) are going the whole hog after a product that has been developed privately," comments a senior official from a competing company.

Significantly, the company seems to have revived its plans to launch its IPO, through which it intends to divest about 10 per cent stake. But this is contingent on government approvals and the buy-in of its labour unions. As of now, BSNL's employees seem to be favourably inclined towards the listing, but there is no final decision yet.

If the IPO does go through as speculated, market sources believe BSNL could get valued at $100 billion. A 10 per cent equity dilution could fetch the company Rs 400 billion. While this is mostly speculation, Raja recently indicated that BSNL may list on the bourses in a price range of Rs 300 to Rs 400 per share. The ministry is proposing to offer the company's 350,000 employees 500 shares each at Rs 10 as ESOPs. However, Pankaj Agrawal, associate director of research firm BDA India, says that "given the liquidity crunch in the market, it may not be the right time to go to the market".

The other potential revenue earning area for BSNL is hiving off its telecom tower business, as other mobile companies have done. It will save the company operating costs and capital expenditure. "We are examining this," says Goyal. "We have no decisions yet. All we have is 32,000 GSM towers and 7,000 CDMA towers. Let us see how we go about it." BSNL is already in talks with international consultants to advise it on how to go about the process. According to the preliminary talks, the tower company will, in all likelihood, be a 100 per cent subsidiary of BSNL, which would be listed later and, according to speculation, could command a valuation of $6-8 billion.

Expert opinion
At the moment, the company does seem to be getting its act together. Goyal has immense confidence in the company's fundamental strengths. "BSNL has always been the leader in telecom. It will take years for any of the private operators to catch up with our strength of network and operations," he states. Besides, he points out, telecom is a liberalised sector with stiff competition, and BSNL is adapting much better than expected to the new realities. It is a trusted telecom brand and has a significant presence across the country.

No doubt, the company has brought in many changes in the way it conducts business. Says telecom analyst Mahesh Uppal, "Anyone can see how competitive BSNL has become and how innovative its services are becoming. It is no longer the typical boring old government company that would do things after the world has stopped doing them."

In its favour is its ubiquitous reach. It has the largest fixed line network and an extensive mobile network. It is also the only player that has such widespread rural coverage and last mile connectivity. "It is larger and broader than most of its competitors and its networks are technically as high on quality as any other," adds Uppal. This is undoubtedly a big advantage for BSNL.

That said, the company has its share of weaknesses as well. For instance, though BSNL has tremendous experience in the telecom business, according to analysts, it could probably compete better if it hired professionals and was not dependent on internal resources for leadership, which may not necessarily be up to the mark. "BSNL needs market facing, streetsmart management to kill its old hum-haw ways and learn a few new tricks of the trade. And DoT should be asked to keep off and not interfere," says Pai.

Moreover, private operators have a huge advantage of speed in implementing ideas and strategies while BSNL is bogged down by long tendering processes. With telecom being an extremely dynamic industry, this is a very significant disadvantage.

The company also has to deal with a huge workforce, which further slows it down compared to its leaner private sector rivals, which are far more agile and nimble-footed. "BSNL's planned IPO can only help to a certain extent," points out Kunal Bajaj, director, BDA India. Adds Uppal, "It will require political will to see BSNL's IPO through. Besides, unless you have an IPO that reduces the government's stake by more than half, it only has a limited impact on the government's decision-making power. And I don't think this is going to happen."

On 3G too, analysts say that though BSNL will have the first-mover advantage as it has got the spectrum, it has to be seen how much of its subscriber base will migrate to 3G. "It will depend largely on the type and quality of service that BSNL will be able to offer through its 3G network. It still remains a technology-focused company rather than a customer-friendly, market-driven one like private operators," says Bajaj.

Indeed, the common perception is that BSNL needs to improve its customer interface. Though BSNL is focusing on enhancing its distribution channel and improving its marketing and branding strategies, it does get branded as "sarkari".

Focus areas
Goyal is well aware of this and has started, what he calls, "multi-pronged" action to bring in change. "Service quality would get a fillip as we remove congestion in the network completely by optimising our network. Trials have already been done for the mobile network. For points of interconnections, we have started a drive to remove congestion from our point to other operators' points and vice versa. Towards that end, we have also appointed an outside agency for benchmarking our network visa-vis that of other operators to see where we stand. For customer care, our people will now directly get in touch with our customers. Apart from a normal call centre, our staff will have one-on-one interaction with our customers. We are also setting up zone-wise call centres for our wireline and broadband customers. These are likely to be operational by the end of 2008-09."

Broadband is a key thrust area. BSNL offers one of the fastest growing and cheapest broadband services in the country. Of a total broadband customer base of 4.73 million, BSNL accounts for more than 2.57 million connections. Going forward, it has set a target of achieving 50 per cent of the national target of 20 million broadband connections by 2010.

IPTV is another area that the company is keen on. Its trial runs in many areas have been successful. This will also help strengthen its wireline segment. The company will eventually look to bundle IPTV and broadband services along with fixed line services, thereby putting its extensive fixed line infrastructure to effective use.

As far as rural initiative is concerned, BSNL services 99 per cent of this market. It plans to bring all districts and blocks of the country under high speed internet connectivity by March 2009. According to DoT, the additional spectrum allotted to BSNL will help the company achieve its targets.

To implement its ambitious plans, the company envisages a three-year investment of Rs 600 billion, a large chunk of which will go towards adding 3 million mobile subscribers a month. The PSU is also planning to invest about Rs 20 billion on a CDMA network rollout. With the government allowing dual technology use by operators, the two telecom PSUs, BSNL and MTNL, are keen to offer CDMA services in the country. In the initial stage, BSNL is looking to limit its CDMA offerings to the top 500 towns and cities.

Significantly, for the first time in its history, BSNL has decided to expand overseas. It has a cash surplus of over $10 billion, which it plans to use for its overseas foray. In fact, BSNL has set its sights on becoming the largest telecom service provider in Southeast Asia with 120 million connections by 2010.

Bit by bit, the company's plans seem to be falling into place. Its aim clearly is to reclaim its leadership position and restore some of its lost lustre.

Company snapshot

Mobile subscriber base/market share: 39.16 million/13 per cent (September 2008)
Fixed line subscriber base/market share: 30.87 million/80 per cent (June 2008) Internet subscriber base/market share: 5.94 million/50.96 per cent (June 2008)
Broadband subscriber base/market share: 2.32 million/53.15 per cent (June 2008)
Presence: 21 circles
Rural coverage: BSNL, has the largest share of the rural mobile market. The operator is rolling out the major part of the network under the first phase of the USO Fund's rural project, and has recently been asked by the government to cover villages with less than 100 people under the village public telephone scheme (under the Bharat Nirman Programme). Besides, BSNL will extend its broadband facilities to as many as 30,500 villages.
On the cards: Capacity expansion; zone-wise call centres for wireline and broadband customers to strengthen the customer grievance redressal system; improving the quality of services by fixing the congestion points; upgrading the skills of the technical and managerial staff and providing them with adequate training; an infrastructure sharing policy which will focus on renting towers to new, greenfield and existing operators; overseas forays; the much-talkedabout IPO; and launching 3G and Wi-Max services, for which spectrum has already been allocated by the government.

Recent tenders and contracts

• BSNL floated a tender for 93 million GSM (2G and 3G) lines in all regions –­ north, south, west and east –­ in September 2008. The operator has received bids from six international vendors, Ericsson, Nokia Siemens Networks, Alcatel-Lucent, Huawei, ZTE and Nortel Networks.
• BSNL's tender for a Rs 40 billion project for providing billing and software solutions has received about 10 bids from IT companies. These include HCL, Tata Consultancy Services, Tech Mahindra, Wipro, Infosys, Satyam and Prithvi Communications.
• BSNL has placed a Rs 240 million optic fibre cable order with Sterlite Technologies. Under the contract, Sterlite will supply its high density ribbon optic fibre cable which BSNL will install in about 100 city sites across the country.
• Bids have been invited by BSNL for 1 million next-generation network switches. These will be used to offer full-fledged internet telephony services to the company's 31 million landline subscribers in the country.
• In September 2008, BSNL floated a tender for 1,000 base transceiver stations (BTSs). It expects to set up 500 BTSs by March 2009.
• BSNL placed orders for 17 million GSM lines and 2 million CDMA lines in the second quarter of 2008.
• In the beginning of 2008, BSNL tied up with Soma Networks for Wi-Max deployment in the Gujarat, Maharashtra and Andhra Pradesh circles. It is soon likely to launch an expression of interest for Wi-Max services in another 16 circles.

Key initiatives

• In October 2008, BSNL tied up with BT to access the latter's global MPLS network and managed service expertise, including network integration, managed security, managed data centre, hosted contact centre and remote infrastructure management.
• BSNL signed a memorandum of understanding with Cable & Wireless (C&W) for sharing of networks and other telecom infrastructure. Under the agreement, C&W will offer support to BSNL for network expansion, while the Indian operator will allow C&W to leverage its extensive infrastructure in the country.
• Under a network-sharing deal, BSNL has allowed Swan Telecom to use its network. Swan will be charged Re 0.52 per minute for outgoing calls. The rates will be revised every six months.
• BSNL has selected China-based Haier Mobile to provide CDMA handsets for a bundled scheme which will be launched by the end of 2008.
• In September 2008, BSNL extended telecom connectivity to the remote Gnathang village in east Sikkim. It has provided a village pubic telephone and public call offices in the village and is planning to extend mobile connectivity by March 2009.
• BSNL has tied up with Tata Communications to roll out the on demand hosted contact service for its enterprise customers.