RCVL’s GSM foray- Thinking behind the thought

The indication from Reliance Communication (RCVL) that it is mulling with the launch of GSM network in Mumbai and Delhi, has made flurry in the telecom sector globally from India to the US and forced Mr Paul Jacobs (Head Of Qualcomm) to pay a quick visit to India or may be it’s a coincidence!!!. It made us, the analysts, wonder as to what could be the thinking behind this thought?

RCVL runs both CDMA and GSM technologies in India. While its CDMA network covers most parts of India, its GSM network operates in 8 circles with little more than 2 mn subscribers. This news flow we all know.

Not let’s think why RCVL is thinking of GSM foray in the markets where it operates on CDMA, and would it be positive move at all? Will it cannibalize its own CDMA service or able to gain larger pie? (Let me put a point here that in Kolkata RCVL operates both its network)

The following are my quick arguments which support RCVL possible foray:

Before jumping to the operating and financial analysis lets talk on the psychological front, I feel RCVL’s CDMA telephony is now more associated with price sensitive or users who can compromise on quality for cost or lower strata (lower and lower middle class) people as it offers the lowest price services compromising on quality. It hardly has any corporate clients what Bharti or Hutch have in Mumbai and Delhi. And image makeover is very difficult/ expensive if not impossible. So RCVL is opting for the GSM way.

Now on call quality, CDMA network tries to accommodate more callers in its given bandwidth and provide different code to different set of callers so that other callers in the same bandwidth do not get disturbed. If you are in Germany you will not understand German language so your conversation with fellow Indian in Hindi would not get hindered but you will face lot of clutter ness and disturbance if Germans in your proximity are talking to each other. Same happens in the CDMA network in busy/ high usage areas like Nariman Point, Mumbai and Connaught Place, Delhi. Network disturbance, call drops etc. lead to frustration among the user of CDMA networks.

Spectrum issue, another point to make is that CDMA gets only 1 unit of extra bandwidth if GSM gets 2. So network constraint in CDMA could also be another factor behind this thought. Telecom authority says that RCVL has approached for seeking radio band in GSM space in these two cities.

If you cannot beat them join them, and RCVL would be thinking the same to compete against the GSM operators. Subscribers who want to be in the GSM network only, would not opt for RCVL’s CDMA so it leads to loss of opportunity for RCVL to tap any dejected GSM customer. 80% of Indian mobile market is served by GSM operators in which RCVL has a negligible market share. So, RCVL wants to enter the bandwagon to exploit the GSM market rather than let it go, after flagging its leadership with huge margin in the CDMA space. Telefonica Moviles did the same in Mexico and moved from CDMA to GSM starting from late 2002 and did very well, as 90% of the market was served by GSM operators which include the biggies and my favorite America Movil (AMX).

CDMA is a low cost operator- Myth or reality

If numbers say everything, the above statement is a myth. Look at some data pertaining to global mobile operators. The EBITDA Margins of GSM operators in Europe like of Vodafone, T-Mobile, TIM, Telefonica Moviles average at around 48% as compared to CDMA biggies Verizon’s and Sprint’s (US CDMA operators) of 42%.

While CDMA is cheaper in opex terms but costs higher in capex terms. Network upgrade of CDMA is also costlier as compared to GSM upgrade. And CDMA2000 (2G version of CDMA) can be upgraded to WCDMA (3G version of GSM) as WCDMA also shares CDMA platform. W-CDMA is based on the Direct Spread CDMA technique. In fact Verizon also thought of udgrading itself to WCDMA fromits then CDMA2000 during 2001. SK Telecom of South Korea migrated from CDMA2000 to W-CDMA. Because QUALCOMM’s WCDMA solutions are built on established CDMA experience delivering fully tested, completely integrated technology development costs can be minimized as one moves toward WCDMA 3G networks. So, RCVL would not required to scrap its CDMA network if it wants to upgrade to 3G.

So, to conclude I would say RCVL with its financial muscle is doing the right thing by entering into the GSM space in metros to start with (if at all it comes true) to get an opportunity to exploit the GSM market. Simple fundamental of Economics applies. Positive marginal revenues are always welcome as long as it is higher or equal to marginal cost. RCVL will save up to 40% of its capex and distribution cost while rolling out its GSM service.