Reliance Dabbling With Dual Networks

Reliance Communications Ventures (RCoVL) , India’s largest CDMA operator, has caused a stir by applying for GSM spectrum -- raising speculation as to the future of its CDMA buildout.

Reliance has 19.5 million mobile subscribers on its nationwide CDMA network, but it also runs a regional GSM service with 2.2 million subscribers in Northeast India through its Reliance Telecom subsidiary. GSM is the dominant mobile technology in India, accounting for 75.29 million of the country’s 101.17 mobile subscribers.

According to a note from analysts at Lehman Brothers , “following a conference call yesterday, management confirmed that it is looking to expand its GSM footprint and potentially pursue a dual network strategy.” Management also told Lehman that the application covers spectrum in Mumbai, New Delhi, and “several other circles” or regions. “Based on the ‘several circles comment,’ ” Lehman reckons, “Reliance is aiming for a full-blown GSM network.”

The carrier is at the early stages of planning and weighing its options but, at least for now, intends to keep its CDMA network. By operating both networks, Reliance will be able to make use of its standing wireless infrastructure, while picking up additional subscribers and GSM roaming traffic from international visitors to India.

The growth of mobile subscribers at a rate of more than 4 million every month has caused a spectrum crunch for India’s mobile operators, a dilemma that has been exacerbated by a delay in spectrum policy and “may have forced Reliance's hand,” says the Lehman team. “Historically, regional CDMA operators have had difficulty acquiring spectrum versus their GSM counterparts, and therefore the carrier's license request may suggest a strategy to improve its spectrum holdings and position the carrier for upcoming 3G licenses.”

The move could come at the expense of Reliance’s CDMA operations -- and its CDMA equipment suppliers -- since the company says it has no plans to increase its overall spending. “Reliance also maintained its capex guidance of $1.4B (including $900M for wireless) and expects to finance all incremental GSM rollouts within this capex budget, reallocating where feasible… This implies that Reliance is likely to shift planned spending for CDMA to the new GSM rollout.”

Reliance’s suppliers include Lucent Technologies Inc. (NYSE: LU), Motorola Inc. (NYSE: MOT), and Ericsson AB (Nasdaq: ERIC) for infrastructure equipment, and LG Electronics Inc. (London: LGLD; Korea: 6657.KS) , Samsung Electronics Co. Ltd. (Korea: SEC), and Nokia Corp. (NYSE: NOK) for handsets. On the flipside, “The shift to a GSM may provide some additional opportunities for leading regional GSM vendors Nokia and Motorola as well as chipset vendor Texas Instruments,” notes Lehman. “…the company may lever its relationship with Ericsson for a supply swap out if in fact it moves to [GSM].”

Industry watchers are particularly focused on the potential fallout for Qualcomm Inc. (Nasdaq: QCOM), which collects royalties from its CDMA patents. Reliance dominates the CDMA market in India, holding a 70 percent share with Tata Teleservices Ltd. , Bharat Sanchar Nigam Ltd. (BSNL) , and Mahanagar Telephone Nigam Ltd. (MTNL) rounding out the other 30 percent. It accounts for 8 percent of the global CDMA subscriber base and around 3 percent of Qualcomm’s revenues.

According to local media reports, Qualcomm executives are heading to India to meet with Reliance over its plans and will likely stop off for a chat with officials in India’s Department of Telecommunications, who’ve indicated they will put pressure on Qualcomm to lower its royalty charges. Qualcomm charges 7 percent for handsets sold in India, compared with 2 percent in China.

At this week’s meeting of the GSM Association in New Delhi, telecom minister Dayanidhi Maran reportedly said that GSM has flourished in India because CDMA operators are held back by the higher cost of handsets.

Reliance’s move into GSM could give it leverage as carriers look to expand in rural India -- where cheaper handsets are essential. Earlier this year BSNL, Reliance, and Tata Teleservices were awarded a government project to provide 8 million phones in rural areas by 2007. Both BSNL and Tata will be using CDMA technology, and Tata has recently awarded equipment contracts to ZTE and Alcatel. (See India Leery of Foreigners, ZTE and Tata Expands With Alcatel.)

— Nicole Willing, Reporter, Light Reading