VSNL Combats Falling Voice Margins

International data connectivity provider Videsh Sanchar Nigam Ltd. (VSNL) (NYSE: VSL) is feeling the pinch from falling profit margins in its wholesale voice business, and upcoming reforms to bandwidth pricing at home in India threaten to increase the pressure.

In its financial results for the year ended March 31, the India-based operator reports that its wholesale voice revenues were up from 21.62 billion rupees (US$528.99 million) to INR22.16 billion ($542.21 million), but the segment result (operating profit) fell from INR4.6 billion ($112.55 million) to INR4.23 billion ($103.5 million).

The company's consolidated revenues grew 84.6 percent to INR88.56 billion ($2.17 billion), while pre-tax profit rose by less than $1 million -- from INR27.77 billion ($679.47 million) to INR28.1 billion ($687.55 million).

Formerly India's monopoly provider of international long-distance services, VSNL has positioned itself as a major player in the global connectivity market by picking up the beleaguered Tyco Global Network and Teleglobe for bargain basement prices.

Its international infrastructure now in place, VSNL is focused on increasing its share of global voice traffic to push down its operating costs. Since acquiring Teleglobe in late 2005, the carrier has grown from handling 13 billion voice minutes a year to 20 billion.

But with wholesale voice prices continuing to fall, the operator is working to diversify its services into enterprise and managed IT services. (See VSNL: Beyond Connectivity.)

Operating profit from its enterprise data business grew 10.7 percent to INR11.34 billion ($277.47 million) last year, growing 70.1 percent to INR1.46 billion ($35.72 million) from services categorized as "other," which include TV uplinking, transponder leasing services, retail Internet access, and satellite services.

VSNL has announced several deals in recent weeks that reflect its move into new services. It's among several operators in Asia to sign a bilateral WiFi roaming agreement with Quiconnect Ltd. (See Quiconnect Takes WiFi to Asia.) It has a contract with Skype Ltd. to terminate calls from the SkypeOut VOIP-to-PSTN service. (See Skype Uses Teleglobe.) In April it teamed with Microsoft Corp. (Nasdaq: MSFT) to launch the white-label ReadyAccess business messaging service for mobile operators, for which it's signed up Thai mobile operator Advanced Info Service plc (AIS) as a customer.

In a report on VSNL's subsidiary, VSNL International Pte. Ltd. , Ovum Ltd. analyst Fernanda Mello Veiga writes that "VSNLI has moved spectacularly quickly from the back of the pack to being one of the top providers of global connectivity. Achieving this for the wholesale market is relatively straightforward; making it work for global enterprises is a challenge of a different order of magnitude." VSNL, Veiga notes, "will need to demonstrate not just that it can drive the economic benefits from this formidable scale but combine this with the flexibility that customers are increasingly demanding from their communications providers."

At the same time, it's trying to maintain its leadership in the Indian wholesale market in the face of stiff competition. Liberalization of the long-distance service sector has led to a flood of new entrants, including international players like BT Group plc (NYSE: BT; London: BTA) and AT&T Inc. (NYSE: T) attracted by India's fast-growing demand for enterprise data services. (See BT Forms JV in India and AT&T Goes Long Distance in India.)

Now the Telecom Regulatory Authority of India (TRAI) is preparing to announce reforms to cable landing station regulations that are expected to trigger a 15 to 20 percent reduction in bandwidth charges.

The TRAI put out a consultation paper and draft regulation last month that would require submarine cable landing stations in India to be opened up for sharing with competitors, a proposal that puts incumbent VSNL at odds with the alternative operators. VSNL has already resisted giving access to its landing stations to rival FLAG Telecom Ltd. (a dispute that reached the courts) and maintains that colocation should be "voluntary." (See VSNL-FLAG Battle Escalates.)

India's bandwidth-hungry IT services and outsourcing industry has been pushing for cuts in prices, which it says are artificially high due to VSNL's dominance. The new long-distance entrants, which have previously partnered with VSNL to serve customers in India, are eager to gain access to the operator's cable facilities to offer their own services.

— Nicole Willing, Reporter, Light Reading

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