Business Today

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"I Don't Think Telecom Valuations Are Stretched In India" 

Print Edition: August 12, 2007

"I Don't Think Telecom Valuations Are Stretched In India" 
Randall L. Stephenson's first brush with the telecoms industry was as a 'tape monkey'. This was back in the late 70s when he was still a college student and working part-time at the IT department of Southwestern Bell, loading tapes on mainframe computers. Today, Stephenson, 47, is the Chairman and CEO of America's largest telecoms company, AT&T Inc., created out of a series of mergers orchestrated by his mentor and telecoms entrepreneur Edward E. Whitacre. Just a little over a month into his new job (he took over as Chairman & CEO on June 3, 2007), Stephenson, whose elder brother still works as an installation technician for AT&T in their home state of Oklahoma, has his job cut out. In the short term, he must deliver on the financial and operational synergies that were promised to shareholders of AT&T and BellSouth, when the two companies (besides Cingular) merged last year. More importantly, the $117-billion (Rs 4,79,700 crore) AT&T must prove that it can offer a more competitive bundle of services-ranging from landline to wireless to TV-than its competitors such as Verizon. Finally, Stephenson, who has declared wireless as being the core of the new AT&T, must build presence in fast-growing telecoms markets such as India and China. In India recently on his maiden visit as the CEO, Stephenson spoke with Business Today's R. Sridharan and Amit Mukherjee on AT&T's plans in India and the challenges in the US market. Excerpts:

Randall L. Stephenson
Randall L. Stephenson
It's just a little over a month since you took over as the CEO and you are already here in India. Can we take that as a sign of your interest in the market?

If you start with our enterprise business market and if you look at our customers-General Motors and the IBM-they have a need to deliver traffic all over the world, but the fastest growing place where they need to deliver traffic is India. So we started this process some time ago and we were the first to receive a licence from the India government to be a facility-based provider here in India. We received that licence late last year and by April we were operational, and we are delivering services in India. We are doing very well and we are up 40 per cent year-on-year. A couple of other facilities are already in exhaust. So, you will see our investment plans accelerate.

What are AT&T's plans in India as far as the wireless market is concerned?

Well, we all sit back in the United States and we note the statistics; we know the growth rate, the population and everything. But when you come here and see the energy in this marketplace, you see the depth of talent in human resources in this market-not just cheaper labour but skilled labour. It's just not 8 per cent growth in the next five years-this is a long-term growth opportunity in this country and for the people who come and provide goods and services. So we want to be here.

Now we are talking about the main place we will enter-the global enterprise business space. But if you watch AT&T from back when we were SBC (Southwestern Bell Corporation) the time we are started-every time we enter a market, we come in one segment, we penetrate that market and then we move to the other segment as we have success. And you will see that happen here and I fully expect it. So as we have success in the enterprise business for global multinational corporations you will see us move from there to India-based corporations, and then to small and medium business. I hope some day we offer consumer services.

Would you like to put a time frame to that?

I would like to see it happen next week (laughs)…

You have been meeting regulators as well as authorities. Was better understanding of the Indian regulation a reason behind this?

We understand the regulations today and I would tell you they are very open regulatory environment and we are doing very well. What I want to understand is where this thing (the regulations) is going in the wireless market. The government has indicated that they are going to make more 3G spectrum available. But how will they make it available? Who will be able to bid on that spectrum? So, I am trying to understand all that.

So what have you gathered so far?

Well, if everything works out I think we will be able to participate in it.

So you want to enter as a new entrant and not necessarily as someone who might acquire a company here and then subsequently get spectrum?

Either scenario is possible. The market is open to both.

Is getting into 3G the sole reason why you are looking at acquiring smaller regional players like Idea and Spice?

We have not indicated that we are looking at acquiring any new company.

The government has already made it clear that unless and until you are an existing player you will not be able to get 3G licences. So what's your take on this?

What I understand the rules are-in fact, this is how the rules were described to me by authorities this morning-to bid on this spectrum or to participate in this auction you will have to be a licensed wireless carrier. It does not mean you will have to be a current provider of services. So there is a difference. So, could we be a licensed carrier and then be allowed to bid? Then that would be an interesting scenario. So, we have to obtain a licence first then we can probably bid according to the authorities.

Valuations in the telecoms market seem a bit stretched in view of revenue not keeping pace with growth.

Randall L. Stephenson

People keep missing this market. They keep evaluating the market using old traditional ways of valuing the cellular business. We come from the us and in the western culture and we are accustomed to these $30 (Rs 1,230), $40 (Rs 1,640), $50 (Rs 2,050) revenue per subscriber numbers. Who would have ever thought that you can make money at $8 (Rs 328) or $9 (Rs 369) per subscriber? So, here is a market where I would have never forecasted that companies coming here and are making 30 to 40 per cent profit at $8 revenue per subscriber. The model's very different here. The cost structures are very different here. They are engineering the networks very differently here.

I guess what I am suggesting is, looking at the numbers, you've got to look at India differently. This market is about 17 per cent penetrated with wireless. So, can you penetrate the rest? I suspect you probably can. But you need to look at what model would the government put in place to get infrastructure out there. So, with just 17 per cent penetration the market is just getting started.

How do you see a company like AT&T, which operates out of the US, operating in India with, if I could say, an Indian model and cost structure?

"The entire Indian market is under one regulatory authority. It gives you a lot of confidence to invest"

Oh, we have to. If you couldn't you wouldn't come here, right? And when I see six operators are surviving here, I got to believe it's sustainable. In fact, watching this market I think it can get better.

Do you think that the US market is less competitive than the Indian market? It's often described a duopoly of AT&T and Verizon.

Certainly not. There are four large players-AT&T, Verizon, Sprint and T-Mobile. All have broad nationwide networks with 2G and 3G capabilities. And so we are all investing aggressively in those networks. As opposed to the Indian market, where people buy hand- sets, in the US we subsidise them heavily because it is so competitive. The US market is just as competitive as the Indian market though the condition may be a bit different.

Your deal with Apple for the iPhone has come under a lot of criticism and it is being described as the 'Hotel California' deal for the lock-in until 2012 and the exit fee of $175 (Rs 7,175).

Well, it's a free market. Other carriers could have had the opportunity to try to acquire this, but AT&T was the most aggressive. And Verizon has an exclusive deal on the Motorola Q. Is that unfair? We had an exclusive at one time on the (Motorola) Razr. So, is that unfair? No, it's just the way the market develops. This phone took us two-and-a-half years to develop and make it compatible with our network-that's not an easy thing to do.

For AT&T, is India a better market than China?

Yes. The entire Indian market is under one regulatory authority which is very important. It's also very unique. I think (operators) will be hard-pressed to find a market like this. You have one billion people under one comprehensive set of regulation. So, you can put together an investment plan to come in and address that size of the market under one regulatory regime. That's important and it gives you a lot of confidence to come into a market like this and invest.

In retrospect, was it a bad idea to exit from Idea Cellular?

Randall L. Stephenson
Of course, it was. It kind of seems obvious, doesn't it (laughs)?

AT&T had acquired a national long distance licence last year. How aggressively are you pursuing this business?

We got the licence in October and six months later by April we were up and operational, selling services and we are having a lot of success in this marketplace. We had a number of nodes where we had to augment new capacity. We have already added two more nodes this year and I think we would accelerate some of these investments as well. Through this we are offering IP-based services delivering data and voice globally. So we started with multinational corporations headquartered out of the US that have traffic in India and now we are looking at Indian corporations that have traffic needs outside of India. We are looking at a 40 per cent growth on a year-to-year basis.

Are you looking at India in a big way for product development?

We have a number of areas where product development is going on. USinternetworking-they are the application hosting company that we just bought last year. Product development for that company is going on in India. Sterling Commerce our b2b company-a big one in the US-product development for this is also on in India. We are doing a lot of product development for our legacy businesses back in the United States right here using Tech Mahindra and Infosys. So, we are using that it infrastructure here a lot. Besides, we are looking at how we can take advantage of the intellectual capital. Things get done here fast, there are some really good thought processes here. So, we will do a lot of thinking on this.

"I think a 50 per cent penetration with a $7 (Rs 287)-revenue per user is achievable in India"

Do you think the current rate of growth in telecoms in India is sustainable?

Absolutely. Considering the fast economic growth of India and the intellectual capital, I think achieving a 50 per cent penetration with a $7 (Rs 287)-revenue per user seems very achievable. I have no doubts that number is achievable. I have seen it play itself out far too many times.

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