Tata Communications has grown extremely quickly in recent years, developing from a minor player into one of the top providers of global connectivity. Although the company in its current form did not exist 10 years ago, its history as an international wholesale business can be traced back almost that far.
The foundations of the company were provided by Videsh Sanchar Nigam Limited (VSNL) International, which had the monopoly on the Indian international long-distance (ILD) market until Tata Group acquired the operation in 2002, taking advantage of the Indian government’s divestment programme. Some 98% of VSNL’s revenues came from voice. “For the first month, the business had one product, in one country – international voice out of India,” recalls Michel Guyot, the president of global voice solutions at Tata Communications, who joined Tata when VSNL acquired Canadian international carrier Teleglobe in 2005.
Just two months later, Tata Group’s plans were turned upside down when VSNL’s stranglehold on international long-distance telecoms services ended abruptly. This development had been anticipated to be two years away. “Everyone entered the market. We lost 60% of our revenue within a year,” Guyot says. VSNL had no choice but to advance plans to pursue new and higher-margin revenue streams, to offset the downward spiral in voice prices and inevitable market share shrinkage.
“We decided to expand, both by market and product,” Guyot says. The company followed a path many other carriers were pursuing – the provision of lucrative data services. Geographically, VSNL pursued international opportunities, particularly in emerging markets.
Strategic acquisitions
Repositioning and growing the business required further strategic acquisitions, most notably Tyco Global Network (TGN) in 2004 and Teleglobe in 2005. “The Tyco acquisition was an important milestone, as for around $130 million we became the owner of a global infrastructure,” says Guyot. Tyco provided a subsea cable system connecting north America, Asia and Europe. “We then needed services to put on it, so we bought Teleglobe, the former monopoly in Canada,” he continues. As a provider of international wholesale voice and data services, Teleglobe, purchased for $239 million, rounded out the portfolio.
To ensure a global feel to its operations, VSNL based its international headquarters outside India, in Singapore. A further development was the formation in 2004 of the Tata Indicom Enterprise Business Unit (TIEBU), which provides IP MPLS data services to large enterprises in India.
A single brand
In February 2008, Tata consolidated the combined assets of VSNL International, TGN, Teleglobe and the TIEBU under the single global brand, Tata Communications.
“The integration of these companies under a single brand enabled the company to put better offers together,” comments Fernanda Mello Veiga, senior analyst at Ovum. “By combining the assets of VSNL International, Teleglobe and TGN, Tata Communications has achieved the traffic volumes and efficiencies necessary to be a credible low-cost provider,” she notes. “Its network includes submarine cable, terrestrial fibre and satellite capacity.”
After originally deriving 98% of its revenues from voice, Tata Communications now offers a comprehensive suite of voice, data and mobile services, provided through a variety of network options including submarine cable, switching gateways, IP PoPs and 50 earth stations.
“The acquisitions were really the beginning of our global wholesale journey,” Guyot says. “In the last three years we have invested some $2 billion capex in new services, upgrading our infrastructure and becoming what we are today. We’re now the number one wholesale voice provider in the world, we have the largest signalling network for mobile, one of the world’s largest private subsea cable networks and represent around 6% to 8% of global internet traffic.”
Stable voice business
Ovum believes Tata Communications needs to continue increasing its wholesale data revenue to compensate for the price pressure on wholesale voice (which still represents 45% to 50% of the company’s revenues, according to Guyot). Guyot is quick to point out that the company’s voice business is still “very profitable”. “In 2000, people were saying that voice was dead, but we generate a very healthy cash flow,” he says, attributing this to Tata’s scale, scope and focus in voice. “We carry 36 billion minutes a year of pure wholesale voice traffic. We manage this activity and we invest capex in it. Many carriers don’t make money from wholesale voice because they build it as an add-on to their retail activities. We pay close attention to what we’re doing, and control the detail.”
Take number portability, as an example. “To make money in voice at a global level, you need number portability, but this needs sophisticated software; you need to know where calls terminate,” Guyot explains. “That’s no mean feat when you’re handling 70 million transactions a day. But you have to control costs too.”
Tata’s main achievement with voice, Guyot adds, is that it has managed to transform voice from a volatile “spot” business, to a stable source of income. “Around a year ago, we signed a five-year voice deal with BT, where they outsource the termination of their international traffic to us,” he says, by way of example. “Rather than build out their infrastructure so they can terminate to Zimbabwe, for example, we do it for them. It’s an evolved, managed service. We provide BT with full visibility of their traffic. I believe we’ll see more of this kind of arrangement as there is more consolidation in the market.”
Wholesale portfolio
Tata Communications CEO Vinod Kumar spoke to Capacity a few months ago about the company’s evolving data strategy, explaining that the focus is and will remain emerging markets where growth in data volumes looks likely to be steepest. He cited plans to invest $200 million over two years in the Middle East, where the TGN Gulf cable system is being established with help from Tyco and a consortium of five regional operators: the Bahrain Internet Exchange, Oman’s Nawras, Qatar’s QTel, Saudi Arabia’s Mobily and UAE’s Etisalat.
Kumar also spoke of the TGN-IA intra-Asia cable that connects Singapore, the Philippines, Hong Kong, Japan and Vietnam, and of plans to extend Tata’s stake in Russian telecoms. A terrestrial link into China is almost ready for business, while on the east and west coasts of Africa it has investments with the Seacom and WACS subsea cable systems. Closer to home, Tata has terrestrial fibre links with Pakistan and plans for connectivity with Bangladesh and Sri Lanka.
On the data side of the business, Tata preaches a message of integration – that by coming to Tata as a wholesale provider, service providers can benefit from a one-stop shop and cost-effective bundle for data, voice and mobile. “We can white-label and sell these solutions to targeted enterprise segments, too,” Guyot says, noting that the company is currently working on cloud propositions. In addition to its robust infrastructure, its own capacity extending from the Atlantic to the Pacific and Gulf regions and various IP services, Tata Communications has extensive international data centre operations, provided by over 40 facilities.
The company keeps adding new services to its wholesale portfolio. “It has the financial resources to invest in new network roll-out and has been doing so,” Ovum’s Veiga says, noting that Tata was one of the first carriers to offer wholesale CDN solutions. “In 2008, Tata Communications signed a partnership agreement with Bitgravity, and has installed a CDN platform in Europe, Asia and India which are owned and operated by Tata Communications, but equipped with Bitgravity technology.”
Guyot is particularly enthusiastic about opportunities in the mobile space, believing that Tata’s “integrated wholesale” message leads the way here. Earlier this year, the company launched IP Exchange (IPX), a solution designed to provide universal service interoperability for mobile network operators over a single connection, enabling them to protect margins on roaming and international traffic termination.
“Eventually, a big portion of the market will need this type of integrated service,” Guyot says. “They can benefit from our efficiencies and economies of scale, a single platform and a single provider, which will make it much easier and more cost-effective for operators to exploit new opportunities and develop new offerings.”
Well positioned
By remaining focussed, despite its huge reach and scale, Tata Communications is poised to face its next challenges. “Consolidation of the market continues,” says Guyot, “but we are well positioned to take advantage of this. Deals like the one with BT will become more common, as players focus more regionally. There will be fewer global players, but if there is one last man standing, it will be us.” Sustaining and improving its current market position will require continual fine-tuning, though. “Customer service is key,” Guyot notes. “This is demanding more and more investment, even at a wholesale level. Now there are demands for stringent SLAs.”
The market hasn’t stopped moving, either, he says. “Over the last four to five years, we’ve seen the shift from fixed to mobile, and now we’ve got Google and Skype. The challenge is to stay awake and be in advance of the market.”
Ovum’s Veiga feels Tata needs to continue to work at its margins, too. “It needs to focus on cost reduction to achieve greater profitability. Rates stood at 13% in the first half year of 2009/10. Tata aims to reach 20% EBITDA by financial year 2011/12,” she notes. “It seems that cost savings from the aggregation of companies under Tata Communications have not yet been achieved.”
Yet Guyot is keenly aware of continued price erosion across the board, noting that the important thing is “to focus on the profit margin, rather than the top line”. New technology will help here, he says. “We now have a next-generation network for voice, which means we can carry more traffic at less cost. This is especially important as business continues to get more complex. We do 100,000 routing changes every day. System software is critical to maximising efficiency, as is retaining talented people and investing in new employees. We wouldn’t have a business without them.”
The Tata global network |
Today, Tata Communications operates one of the most advanced and largest submarine cable networks; a Tier 1 IP network, with connectivity to more than 200 countries across 400 PoPs; and nearly one million square feet of data centre and co-location space worldwide Its reach in emerging markets includes leadership in Indian enterprise data services; leadership in global international voice; and strategic investments in operators in South Africa (Neotel), Sri Lanka (Tata Communications Lanka Limited), Nepal (United Telecom Limited), and – subject to approval by the Chinese government – China (China Enterprise Communications) The company has more than 1,000Gbps of peering capacity with other carriers Tata Communications today serves over 1,600 wholesale customers, 10,000 enterprise customers and more than 600 mobile operators, including over 100 service providers in Russia and the CIS, serviced from the Moscow office Tata Communications is estimated to hold around 39% market share of the international long-distance incoming and 26% market share of ILD outgoing wholesale voice services in India. |
