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A new call on the world

Surajeet Das Gupta | March 13, 2004

By next month making an international call from India should be between 20 per cent and 25 per cent cheaper.

That's the bottomline for customers, as small scrappy outsider Data Access triggers another battle in the telecom industry.

Data Access has a reputation as a maverick in the telecom industry. And this week it has lived up to its reputation.

When India's giant phone company, BSNL floated a 'carriage and settlement' tender for its international outbound business, Data Access replied with an offer that was tough to refuse.

In its offer Data Access slashed charges for carriage and settlement to almost a quarter of what BSNL is currently charged by Tata Group company VSNL.

Data Access isn't the only newcomer which is threatening to spoil the party for VSNL which currently handles all BSNL's international outbound calls.

Also, waiting on the sidelines with new rate cards at the ready, are companies like Reliance Infocomm which has offered ultra-cheap rates for outbound calls to south east Asia.

BSNL's international business is a giant opportunity for international long distance (ILD) operators. BSNL has 40 million customers who together make around 80 million minutes of outbound international calls every month. Calls to UK, US, Canada and west Asia constitute 63 per cent of the total traffic.

Data Access has quoted carriage and settlement rates of only Rs 1.69 per minute as compared to Rs 6 which BSNL currently pays VSNL.

Data Access says it should get 40 per cent of the outbound international traffic from BSNL.

VSNL is now offering carriage and settlement rates of Rs 2.20 per minute to the US -- that's one-third of what it currently charges.

VSNL is arguing that Data Access offers lower quality voice since it uses satellite and IP protocol instead of undersea cable.

ILD operators are accusing Data Access of indulging in predatory pricing by offering rates where there are no margins.

Data Access says it can offer better rates because it has switches in UK and US and saves on middlemen margins.

So what was the Data Access offer? On outbound calls to the US, UK and Canada, it has quoted a carriage and settlement rate of only Rs 1.69 per minute. Currently, BSNL pays Rs 6 to VSNL for carriage and settlement.

What are carriage and settlement rates? Explained simply, BSNL has to pay Indian ILD operators a fee to carry its outbound calls to an international location. That's the carriage fee.

ILD operators must also pay international long distance carriers (like Worldcom) to carry the call to the customer's phone at the other end. That's the settlement rate.

In the old days of government monopolies, VSNL was the country's only ILD operator. As part of the deal when the company was privatised, BSNL offered VSNL preferred status for two years on all outgoing international calls.

That agreement ended on February 13. So VSNL's monopoly on outbound calls is now over and the market will be open to all-comers.

One new contender in the ILD business is BSNL itself, which now has a licence to enter the field. But there's one problem: BSNL doesn't have the gateways and other equipment needed to route international calls out of the country.

So BSNL has struck a deal (a one-year contract initially) under which it will use VSNL's infrastructure from April 1. BSNL will, pay VSNL a carriage fee (of Rs 1 per minute) to use the infrastructure.

But there's a two-week interregnum before that deal comes in to force. And BSNL's tender was aimed at covering that period. Also, BSNL knows that there may be delays ahead so the tender stated the agreement might be extended to April 30.

The Data Access offer has, of course, thrown the cat amongst the pigeons. But VSNL isn't about to take it lying down. For a start, it has countered Data Access's offer and slashed rates.

VSNL is now offering carriage and settlement rates of Rs 2.20 per minute to the US -- that's one-third of what it currently charges. However, that's still much higher than the Data Access offer.

Says Siddharth Ray, managing director, Data Access: "They have been overcharging. And now we have forced the rates down. I expect to get 40 per cent of the outbound international traffic from BSNL as I am the cheapest."

But the aggressive rate war has also led to a nasty war of words. Data Access says it has figures which show that VSNL has overcharged BSNL by around Rs 860 crore (Rs 8.60 billion). What's more, it says that VSNL has only cut charges because it was forced to.

Obviously, the implications of the latest tender offer will last long beyond March 31. Industry insiders say the offer is certain to jeopardise BSNL's agreement with VSNL for carriage after April 1.

Says a senior executive of an ILD company: "Why should you pay Rs 1 per minute as carriage fee when someone is offering you carriage and settlement rates at 1.69. VSNL will have to bring down rates."

That pressure is already mounting. Top BSNL officials say they would be happy to continue with VSNL -- if it can match prices. They also insist that international bandwidth prices are falling and therefore, there's scope for price cutting.

Says a BSNL official: " Though we have signed an MOU to use their infrastructure from April 1 we will review the decision if someone else offers us a better rate."

But VSNL executives are hitting back. The company's official spokesperson declined to comment but sources close to the company say that its top brass are already in Delhi for talks with BSNL.

VSNL executives are stressing in talks, that their company offers better voice quality and reliable service.

Says a source close to the company: "You have to compare apples to apples. Then you will realise that our rates are realistic."

VSNL is arguing that Data Access offers cheaper rates because it uses satellite and IP protocol -- where voice quality is more unpredictable -- instead of undersea cable to carry calls.

At another level, sources close to VSNL point out that the BSNL infrastructure deal has already been signed and there is no clause for any immediate review of carriage rates in April (though they are clauses for review later).

Says a source: "It a valid contract and we have no reason to think it will not be honoured."

Insiders concede that VSNL's bottomlines will take a hit in the current situation. But they say that figures like Rs 400 crore (Rs 4 billion) that are being bandied about are way off the mark.

Says a source close to VSNL: "We expect the fall to be partly made up by lower ILD rates and therefore higher growth in traffic volumes. But it will not be near Rs 400 crore (Rs 4 billion)."

Inevitably, sources close to VSNL say that Data Access's bid isn't sustainable. Other telecom companies also back that view.

Says Badri Aggarwal, president, Bharti Infotel, which also bid for the tender: "The lowest settlement rates in the UK are Rs 2.50 to Rs 3.50 a minute. It beats me how some companies can offer carriage as well as settlement rates even below this rate without losing money, unless they want to make a loss or create an impression."

Several ILD operators are furious about Data Access's latest move. Says an ILD operator: "Data Access has indulged in predatory pricing by offering rates where there are no margins. It has been made with an eye to their proposed IPO and spoiling the market for serious players." Ray says he can offer better rates because he has switches in UK and US and saves on middlemen margins.

What about the charge that VSNL has been overcharging? VSNL defends itself on several points. For a start, it says that before being awarded the contract it had to match the lowest rates offered by other competing ILD operators.

Says a source: "So then how can anyone say we were overcharging." VSNL was offered two-year preferred partner status but at competitive rates.

Also, the rates were negotiated for a one-year period -- in the telecom industry nowadays most contracts are for shorter periods. Sources close to VSNL says it wouldn't have been compensated if rates had gone up.

"If our input costs would have gone up surely BSNL would not have paid us more. Fortunately it went down and we benefited from the upside like in any commercial deal. So is that criminal."

Thirdly, even the outgo to BSNL due to the difference between the new and old rates offered by VSNL is nowhere near the figure which competitors allege it is. Insiders say it is not more than Rs 280 crore (Rs 2.80 billion) for a two-year period.

Clearly, VSNL is confident that it will continue to carry BSNL's outbound calls as it did earlier. But says a senior telecom analyst: "The tender was used by BSNL primarily to browbeat them on price. The question is who will blink first."

But Ray is equally vehement that he will get a part of the BSNL outbound call cake. Who will win this round is anybody's guess.

Additional reporting: Thomas K Thomas



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