"There are thousands in the phone booth/Thousands at the gate/ Everybody wants to make a long-distance call/ But you know they're just gonna have to wait." 

When Bob Dylan crooned these lines from 'Long Distance Operator', he could well have been singing about the average Indian's experience with the erstwhile PSU, Videsh Sanchar Nigam (VSNL), not long ago. Both Dylan and the Indian public had the same feelings: they were desperate to make a phone call. The sluggish VSNL just could not deliver. In the span of a few years, VSNL has changed rapidly, especially since being taken over by Tata Group. The extent of that change could be seen in October 2004, when VSNL bought Tyco's undersea submarine cable system, called Tyco Global Network (TGN).

The network is the largest of its kind and its cables snake around the Atlantic and the Pacific Oceans for 60,000 kms. Over the next year, VSNL will need to wade through a maze of regulations and country permissions. Till then, the company needs to maintain an arms length relationship with TGN, its 200 employees and global clients. But once it acquires control, TGN will leap-frog VSNL from an India-centric telecommunications company to a global one. Says chairman Ratan Tata: "We plan to be a global end-to-end supplier of communication solutions."

That is a pretty grandiose statement for a company that, till 2002, was an over-staffed PSU with little to show except a declining international long-distance (ILD) business, a dial-up Internet subscriber base and a basic suite of bandwidth offerings. To really leverage this new infrastructre backbone, VSNL needs to transform its business model to offer services ranging from sophisticated corporate data to the consumer-centric retail broadband.

If all goes well, VSNL hopes that its topline - which has been crashing as of late - will come back to the FY 2003 level of Rs 4,500 crore in the next few years. On paper, the strategy is smart. VSNL owns the bandwidth capacity through TGN and now needs to manage its through-put. Some traffic will be generated by VSNL itself and the rest of the capacity will be sold to clients as raw bandwidth. VSNL's management fig-ures that they have the required skills to utilise this asset. Says N. Srinath, director (operations), VSNL: "We already are a telecom services company. This is what we do day and night - sell bandwidth." 

In reality, filling up cables that encircle the globe will not be an easy job. If things don't go as planned, TGN is going to hang heavy on VSNL's bottomline. On the face of it, VSNL got the asset at trough rates. Built at the peak of the Internet boom, TGN's cables cost almost $2.5 billion to build. At $130 million, the asset cost for VSNL is peanuts - 5 cents to the dollar - on par with the $211 million and 6 cents to the dollar that Reliance Infocomm paid for Flag Telecom early this year. So obviously, TGN was a great deal - but was it a good buy?

The catch is that the cost of operating and maintaining TGN is stiff. It ran-ges from 2 per cent to 3 per cent of the original, $2.5 billion asset cost year-on-year. VSNL must generate more business to make this up. Reliance has the same challenge, but Flag is not nearly as extensive as TGN. Also, over the past few years the submarine cable system business has been battered due to excess capacity. According to TeleGeography, a submarine cable research firm, trans-Atlantic capacity increased 14-fold since 1999 and trans-Pacific capacity increased 24-fold. As a result, prices have crashed and bankruptcies bloomed.

Lease prices are one of the best indicators of the business: an average New York to London STM-1 circuit price declined from $6,039 per month in Q1 of 2004 to $4,461 in Q4. The median price of a link between Los Angeles and Tokyo fell 56 per cent in 2003. A TeleGeography press release after the acquisition is cautious: "VSNL is taking a long-term view in this acquisition, since there's currently little profit to be made in the hyper-competitive subsea capacity market." In the long-term, VSNL is betting on bandwidth requirements going up sharply, thereby stablising the market. 

It is not alone in any of this. Reliance Infocomm's plan for Flag mirrors VSNL's business model. Bharti Televentures has launched a broadband service, and sees itself as a corporate service provider. Co-mpanies like BSNL and Hathway have ambitious broadband plans. Satyam Infoway has a very successful business in managed services like virtual private networks (VPNs) in India, exactly the kind of offerings VSNL is planning. That's not all. 

Globally, most major telecom carriers are trying to build themselves into integrated communication providers. For VSNL, the trick will lie in the execution. "It all depends on how well VSNL manages to pull together and connect the various pieces of this strategy," warns K.A. Chaukar, managing director, Tata Industries. 

The Evolution
Not long ago, the company was feeling the pinch of falling settlement rates. Since April 2002, when ILD was opened up, its operating income has been declining each successive quarter. VSNL had to increase wholesale traffic volumes to make up for the losses. One way to do so was to aggressively grow its share in the national long-distance (NLD) traffic, for which you need to get two things right - capturing the traffic and having the network. Outside of BSNL, Reliance has the most extensive NLD network so far, but VSNL is trying to close the gap.

It has already pum-ped in about Rs 300 crore to set up its network. In April 2004 it inked a Rs 500-crore deal with Bharti for 1,00,000 km of fibre on its NLD backbone, which gave coverage over 200 calling areas and kept it ahead of roll-out obligations. But will the extra capacity be used? For one, carriers like BSNL, Bharti and Reliance won't give VSNL their originating traffic - they have their own NLD networks. Tata Teleservices would have been the perfect vehicle for routing traffic, but the company does not have any mass customer-base worth counting on and is still struggling to get its mobile services off the ground. That leaves the private non-aligned parties like Idea Cellular to compete for traffic.

Also, over the past few months, VSNL has set up voice pops (data aggregating points) in the major aggregating countries like the US. This will help cut out middlemen. For instance, in the US, if the traffic originates with a Verizon, the carrier hands over the call to an international carrier that gives him the best deal, like MCI or AT&T. These carriers, in turn, come to India and hand over the traffic to a VSNL or Bharti. A local presence cuts out intermediaries like MCI and AT&T. Says Srinath: "This way I can pick up traffic from those home countries.

It gets me directly to the source." That allows them greater leverage over pricing and margins. Yet, growing wholesale traffic was not going to be enough. Although it adds to the topline, it barely contributes to the EBIDTA. Some other concerns worried management as well. In the de-regulated environment, nothing could stop an AT&T or an MCI from coming into India and acquiring their own ILD licenses for a piffling $25 million, instead of handing traffic over to VSNL or Bharti.

Brainstorming at Bombay House and VSNL in the second half of 2003 inititally resulted in a model where VSNL would be a regional supplier of communications and bandwidth. Its bandwidth reach in Asia was already pretty impressive. All its bandwidth availability was in and around India - Europe to India, Asean to India, but it never had anything on the Atlantic routes. But that would not have been eentirely tenable. For example, a company like Microoosoft would have connection needs globally, and not just regionally. It was with such clients in mind that VSNL decided to go all out.

Says Sandeep Mathur, president (corporate division): "The fact of the matter is that if we remain an India-centric player, we have organisations which have world-wide requirements. The idea is to have a greater control on that." Fortunately, the demand and supply situation for bandwidth supported its ambitions. Surfing websites accounts for a majority of bandwidth usage in submarine systems, and this has been surging recently thanks to the explosion of broadband in countries like the US, Korea and Japan. 

Analysts expect that the capacity of lit bandwidth (which means ready for use) could run out by 2007 on major routes. In India, the gro-wth of the BPO and IT industries have led to bandwidth requirements booming. Nasscom figures that the demand for international bandwidth will grow six-fold in the next five years. With this in mind, VSNL commissioned a pipe between Chennai and Singapore, which, incidentally, Tyco built. But that still left the question of having global pipes. When the team was doing the math of whether to lease or buy their required capacity, TGN came into the market.

VSNL was up against Singapore Technologies - which had bought a competing network called Global Crossing a few months ago - and Pivotal Equity Fund, a private equity fund. VSNL prevailed and finally snapped TGN up for $130 million. Says a Bombay House official: "It would have cost us more or less the same to lease versus buying that much capacity." TGN is also a perfect fit, if one lays the TGN map over what VSNL already has. When their Chennai-Singapore pipe connects to Tyco's cables, VSNL will have a truly world-wide network.

The Reinvention Continues
But success lies in whether VSNL can leverage this global infrastructure backbone well. It's still making the transition from a PSU mindset, as Madhumati Lele, head (customer service) can attest. She joined from BPL Mobile to build quality call centres, and says: "Customer service had to be built from scratch." Vinod Kumar, executive director (international business group), acknowledges the challenges. "The people and the positions need to deliver," he says.

Kumar typifies the changes that are ocurring in the VSNL system. The international business group did not exist till six months ago. Had TGN not happen-ed, Kumar's team would have had to patch together a global network by leasing bits piece by piece. With TGN in the bag, Kumar's team is rolling out data services in eight key global markets. This will be the most difficult and competitive part of its strategy, as competitors are close on its heels. Reliance Infocomm launched its enterprise data services earlier, and Reliance claims it already has 15,000 customers.

However, sources say that the company is still fine-tuning the offering. Says Dhariya: "Data services are the most varied, complex and jargon-rich element of a telecom company's business." They include anything from simple leased lines to virtual private networks, and can blur the line between software consultants and telecom carriers. But Srinath figures that capabilities within the Tata group like Tata Consultancy Services, can help VSNL access this market and aid in designing corporate data solutions. 

The third piece of VSNL's changed business model is about providing retail broadband, currently in a soft launch mode in Mumbai. Its biggest advantage here is its 800,000 to a million Internet dial-up customer base. To increase that market, VSNL tied up with AMD on a personal communicator device that functions like a personal computer but is much cheaper. It can be attached to a monitor and functions like a normal PC. This move is meant to do away with the shortage of personal computers.

Here too, VSNL is likely to be up against stiff competition. Bharti has the advantage of its fixed-line subscriber base. Reliance has been talking of a product offering for a while, but is not close to launching. Reliance was not available for comment. But a source told Businessworld that in its usual style of functioning, Reliance is lining up a big-bang launch and is busy creating content. Plus, there is the pesky issue of last mile access, which is an expensive nightmare to sort out.

Using wireless technology could significantly lower the costs. But Srinath points out: "For triple play broadband there are two access technologies available. You have a copper wire coming into your home and a cable connection. Wireless technologies don't support this kind of bandwidth on a commercial basis. It is at least two years away." He feels that with wireless, he would have to restrict his suite of broadband offerings to basic stuff, and the current content plan is far more ambitious. 

In the absence of local loop unbundling, companies with broadband plans have to build the last mile themselves. The key is to do it at a cost which will allow the company to service the consumer at a sub-Rs 1,000 level. This is the price level that VSNL believes will work in the market for a retail offering.

A month ago, VSNL placed a Rs 500-crore ethernet order for eight cities with Cisco, the largest of its kind in the world. Sources indicate that a week later, Reliance Infocomm placed a similar order with Cisco. By next year, this network will be extended into 22 cities. This will allow VSNL to carry traffic within half a kilometre of the subscriber. From there on? "Our last mile strategy differs between cities," states Shashi Kalathil, head (broadband business). "All over Mumbai, we are tying up with various cable operators. In Bangalore we have tie-ups with data connect operators."

The execution of this strategy is dependent on how quickly Srinath and his top management can get the organisation to respond dynamically. He feels that things are well on their way to working out. The first years were tough, but Srinath says "it's getting better now". Is it? Says one function head: "The whole organisation needs to speak the same language. We need to bind together and move ahead." Plus, there are the vagaries of the telecom market to deal with. The world is certainly VSNL's competitive oyster, but the creation of the pearl is still in question.