Reliance Industries’ BWA move – success or flop?

October 3, 2010

(Tony Worthington is Global Head for Telecoms, Media & Technology, Standard Chartered Bank. The views expressed in this column are his own and do not represent those of Reuters.)

By Tony Worthington

Many eyebrows, including those of this author, were raised at the culmination of India’s Broadband Wireless Access (BWA) auction earlier this year.

The final price of a pan-India BWA licence exceeded all expectations, coming in at 128,480 million rupees ($2,793 million).

Then, momentarily, was the drama of a mystery bidder, Infotel Broadband. All was revealed though once Reliance Industries Limited (RIL) announced the acquisition of a 95 percent stake in this company at the end of the BWA auction process.

RIL’s outlay on a national BWA licence and the associated funding is substantial. The company is banking on the fact that there will be widespread demand for affordable internet access all over India.

Is it an inspired move or will it result in billions of dollars of value destruction similar to what we have seen throughout Europe and America over the past decade in 3G licence auctions?

Let’s start by looking at the fundamentals. BWA will enable the provision of wireless broadband services in India at transmission speeds in excess of 7Mbps.

Today 98 percent of India’s broadband subscribers have to cope with speeds of 2Mbps or less.

Competing technology 3G will also enable broadband but this will be mobile rather than wireless. In other words, 3G will enable users to stay connected when moving around the country whereas BWA will require the user to stay within a certain radius of the base station.

Driving RIL’s move on BWA is the fact that India has one of the lowest internet penetration rates in the world and thus future demand for broadband will be high.

India had around 16 million internet subscribers in March 2010, equivalent to penetration rate of 1.4 percent.

Broadband subscribers at the same time totalled around 9 million, a penetration rate of 0.7 percent.

Compare this rate with some of India’s international peers. China’s broadband penetration rate is in excess of 8 percent, Singapore’s is 22 percent and the UK’s is 30 percent.

So the potential demand for broadband is there. Whether RIL’s move will be a success or a flop is dependent on one word. Affordability.

To connect to the internet via BWA a subscriber faces three costs — a PC or laptop, a modem (often built in to the PC) and an airtime charge for usage.

The good news is that PC and modem charges have fallen consistently over the past few decades. If RIL can market a basic sub 5,000 rupees ($110) laptop/modem the demand could be huge.

But on top of these costs is the airtime charge and pricing this service will be very important.

Most subscribers will be on a pre-paid package. RIL’s sales and marketing team must be burning many midnight hours ensuring that airtime tariff packages will be affordable so as to encourage usage.

The tariff package must also compare favourably with both competing technologies 3G and fixed broadband.

3G can also offer voice and fixed broadband can often offer faster transmission speeds. Bharti, for example, is already offering a 50Mbps broadband access speed in some areas.

If RIL manages to package its BWA service offering correctly then demand could be substantial.

If it misprices and badly markets the service offering, then the value destruction would be considerable.

Given the educational and socio-economic upside for India of mass internet access, I for one hope that RIL’s BWA move pays off.

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