RIL: In the broadband game

With large money bags, the company is likely to dominate the attractive broadband space.

The entry of cash-rich Reliance Industries (RIL) into the broadband wireless access (BWA) space could well unleash a new wave of competition. The company has aggressive customer-acquisition plans and is targeting 100 million subscribers five years from the launch (currently Infotel has 500,000 subscribers), as it rolls out services through the more efficient long-term evolution (LTE) technology. It expects to break even in three years after the launch and is aiming for an asset light business model by sharing existing infrastructure.

The BWA market seems to be an attractive proposition, as it is a serious challenger to the present broadband services, which have just about nine million subscribers due to last mile connectivity problem, say analysts. Moreover, there is a strong correlation between broadband adoption rate and gross domestic product (GDP) for various countries. According to a World Bank report, a 10 per cent increase in broadband penetration resulted in 1.38 per cent increase in per capita GDP growth in developing economies, say analysts at Edelweiss. This is higher than the impact of mobile telephony. Also, the impact of broadband was 15 per cent higher in the developing than in the developed countries, they added.

Operationally, analysts expect it will first focus on acquiring higher margin corporate subscribers and will then target individual and retail customers only over the medium term (two-four years from launch), given the higher enabling infrastructure requirements. The revenue outlook for the sector continues to be depressed, with no indication of any fillip for earnings in the tightly-contested arena. The only mild relief from the pressure on voice tariffs is RCom’s stretched balance sheet, which translates to lower inclination to push down the recently set floor further. The spectrum auctions have taken out whatever air was left, believe analysts, and companies will hopefully focus on 3G rollouts now. RIL’s entry, however, means a more competitive data tariff outlook as well.

Earnings outlook is further impinged by the prospect of rising cost of debt over FY11 and FY12, given that most players have taken short-term debt to cover their spectrum payout obligations. Most analysts expect be the triggers in future will be consolidation and the three year lock-in period for new entrants that runs out in January 2011.